Doctrine of Corporate Veil and Lifting of Corporate Veil

In the realm of corporate law, the principle of a company as a separate legal entity stands as a cornerstone. This concept, established in the landmark case of Salomon v. Salomon & Co. Ltd. (1897), asserts that upon incorporation, a company acquires an identity distinct from its shareholders and directors. This separation grants the company rights and obligations independent of its members, enabling it to own property, incur debts, and initiate or face legal proceedings in its own name. However, this legal distinction can sometimes be misused to shield individuals from liability, leading to the invocation of the doctrine of “lifting” or “piercing” the corporate veil. This doctrine allows courts to look beyond the company’s separate personality to hold its controllers accountable for wrongful acts.

The company, once incorporated, holds a separate legal entity in the eyes of law. The company can act under its own name, have a seal of its own, can enter into contracts, purchase or sell property, have a bank account and sue or get sued in the same manner as an individual. Thus, a company is a juristic person different from the persons who constitute it. The Corporate Veil is a shield that protects the members from the action of the company. In simple terms, if a company violates any law or incurs any liability, then the members cannot be held liable. Thus, shareholders enjoy protection from the acts of the company.

The notion of a company’s independent legal personality is the one that serves as the foundation and a fundamental principle of corporate law in modern legal systems around the world. This idea provides the corporation with an identity that is distinct from its owners, members, or founders, granting the company the status of an artificial or a juristic person. Let us discuss more about Doctrine of Corporate Veil and Lifting of Corporate Veil.

Evolution and Rationale of the Doctrine

The doctrine of lifting the corporate veil emerged as a judicial response to prevent the misuse of the corporate structure. While the separate legal entity concept promotes entrepreneurship and limits personal liability, it can be exploited for fraudulent purposes, tax evasion, or to circumvent legal obligations. Recognizing this, courts developed the veil-lifting doctrine to ensure that the corporate form is not used as a facade to perpetrate injustice or evade responsibilities.

Statutory Provisions in the Companies Act, 2013

The Companies Act, 2013, incorporates several provisions that empower authorities and courts to lift the corporate veil in specific circumstances:

Misstatement in Prospectus (Section 34 and 35): If a company’s prospectus contains false or misleading statements, those responsible can be held personally liable for any loss or damage incurred by investors. This ensures accountability for transparent and truthful disclosures.
Fraudulent Conduct (Section 339): In cases where company affairs have been conducted with intent to defraud creditors or for any fraudulent purpose, individuals involved can be held personally liable for the company’s debts. This provision deters fraudulent business practices.
Failure to Repay Deposits (Section 75): If a company fails to repay deposits or interests thereon, directors can be held personally accountable, emphasizing the importance of fulfilling financial commitments.
Reduction of Membership (Section 45): When a company’s membership falls below the statutory minimum and it continues to operate for more than six months, members aware of this fact can be held personally liable for the company’s debts incurred during that period. This ensures adherence to statutory membership requirements.

Judicial Interpretations and Grounds for Veil Lifting

Indian courts have identified various scenarios where lifting the corporate veil is justified:

Fraud or Improper Conduct: When the corporate entity is used to perpetrate fraud or engage in improper conduct, courts may disregard the separate legal personality to hold the real actors accountable.
Evasion of Statutory Obligations: If the corporate form is employed to evade compliance with legal duties or statutory provisions, the veil can be lifted to enforce adherence.
Tax Evasion: Utilizing the corporate structure to unlawfully evade taxes can prompt courts to pierce the veil, ensuring that tax obligations are met.
Agency Relationship: When a company is effectively acting as an agent or alter ego of its shareholders or another company, the distinction between entities may be disregarded to attribute liability appropriately.

Landmark Case Laws

Several judicial pronouncements have shaped the application of the corporate veil doctrine in India:

Singer India Ltd. v. Chander Mohan Chadha (2004): The Supreme Court held that the corporate veil could be lifted if it is established that the company was formed for fraudulent purposes or to evade legal obligations.
State of Rajasthan v. Gotan Lime Stone Khanji Udyog Pvt. Ltd. (2016): The court pierced the corporate veil upon finding that the transfer of mining leases to a newly formed company was a sham transaction intended to circumvent statutory provisions.

Conclusion

The doctrine of lifting the corporate veil serves as a critical mechanism to prevent and redress the misuse of the corporate form. By allowing courts and statutory authorities to look beyond the company’s separate legal personality, this doctrine ensures that individuals cannot exploit corporate structures to shield themselves from liability or to engage in unlawful activities. The Companies Act, 2013, through its various provisions, reinforces this principle by holding individuals accountable in specific situations where the corporate veil is misused. As corporate practices evolve, the vigilant application of this doctrine remains essential to uphold the integrity and accountability within the corporate sector.

Bibliography

K R Chandratre, Company Secretarial Practice Manual
Singer India Ltd. v. Chander Mohan Chadha (2004)
State of Rajasthan v. Gotan Lime Stone Khanji Udyog Pvt. Ltd. (2016)
The Companies Act, 2013

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How a company is a “person” from the perspective of the law. A firm is handled as if it were a human being in its own right. It is mandatory to supply several types of information, such as meeting minutes, the number of directors, and so on. However, it is only a person in the eyes of the law. It is a juristic person, not a real person, and is subject to a different level of examination. This artificiality of the corporation is, in fact, an addition to the company’s personality.

The personality of the firm differs from that of its directors, promoters, and other members. The relationship between the personality of the company and the personality of its members is the additional protection that the former provides to the latter. The company’s personality serves as a curtain to conceal the faces of its members, which is sometimes gets exploit to do unlawful crimes. As a result, the purpose of this study is to define, investigate, and establish the many components of the idea of lifting the corporate veil. A doctrine is a tool in the hands of the judiciary, which may disregard this corporate personality in order to discover the true criminal and hold him guilty rather than holding the corporation liable

Company

The name “company” comes from the Latin term “companis.” We can break this phrase into ‘com’, which means ‘together,’ and ‘panis,’ which means ‘bread.’ As a result, the term companies refer to a group of people who dine together. However, this was the ancient way, in which people formed communities only for the sake of satisfying their appetites. Nowadays, a ‘business’ is defined as a group of people who work together to carry out commercial or industrial activity.

A “company incorporated under this Act or under any previous company law” is acting as a company, according to Section 2 (20) of The Companies Act, 2013 (hereinafter referred to as “The Act”).

The Doctrine of Corporate Veil and Lifting of Corporate Veil

If it comes to light that members are abusing the statutory privilege, the individuals involved will no longer be able to hide behind the corporate identity. The Court will pierce the corporate veil by applying the principle/doctrine known as “lifting of or piercing the corporate veil.”

Cases in which the court has ordered the veil to be lifted

If the business commits a fraud.
It is only on instruments where the corporation does not have a physical presence.
If the corporation has an antagonistic personality due to its ties to a hostile country.
If the company’s name is being used to conceal unlawful activity.

Evolution of the Doctrine of Corporate Veil and Lifting of Corporate Veil

The lifting of the Corporate Veil has statutory recognition, as various provisions of the Companies Act 2013, the Income Tax Act, 1961, and the Foreign Exchange Regulation Act, 1973 enumerate the circumstances in which the concept of a distinct entity may ignore in order to reach the real forces of action. The following parts of the Companies Act deal with this concept:

Section 12 : Misrepresentation of a Person’s Name
Sections 34 and 35 : Prospectus Misstatements
Section 39 : Non-return of application funds
The Section 76A : Penalties for violating sections 73/76
Section 219: To make it easier for an inspector appointed under section 210/212 to do his or her job.
Section 339 : Fraudulent Conduct

Several court statements and interpretations have contributed to the enrichment of its jurisprudence while also exposing various problems.

Case Law: Salomon vs. Salomon and Co Ltd
Fact of the case: In this case, Salomon incorporated a company named “Salomon & Co. Ltd.”, with seven subscribers consisting of himself, his wife, four sons and one daughter. Salomon was a shareholder as well as a secured creditor. There were other unsecured creditors as well. Later on, the company incurred losses and decides to wind up. At the time of winding up, the unsecured creditors claimed that they should be paid before Salomon (as a secured creditor) as it was his company.

Held: This case clearly established that company has its own existence and as a result, a shareholder cannot be held liable for the acts of the company even though he holds virtually the entire share capital. The whole law of a corporation is in fact based on the principle of the separate legal entity.

The separate legal entity of a company is a statutory privilege that must be used for legitimate purposes only but with advantages comes the disadvantages as well. Thus, the Doctrine of lifting up of or piercing of Corporate Veil was introduced to hold the members liable in case of fraudulent or dishonest use of the separate legal entity.

Lifting Mechanism of Corporate Veil

Statutory Lifting: If the company violates the Companies Act, 2013 and the act provides for the lifting of the veil for the same, then it is termed to be Statutory Lifting.he following are a few examples of such frameworks:-

Misstatement in Prospectus: It is illegal to make incorrect or false assertions in a company’s prospectus, according to Sections 26 (9), 34, and 35 of the Act. Companies offer securities for sale by releasing prospectuses. The company’s major notes, such as descriptions of shares and debentures, names of directors, principal objects, and current activities, are all present in the prospectus under Section 26.

Refusal to refund application funds: If the minimum amount has not been subject to subscription and the sum payable on the application has not been receiving within thirty days from the date of issue of the prospectus, under Section 39 (3) of the Act, such officers in default are subject to a fine of one thousand rupees for each day such default continues or one lakh rupees, whichever is less, against allotment of securities.

Misrepresentation of the company’s name: The company’s name is extremely essential. The corporation can enter into contracts and make them legally binding if it uses an approved name. This authorization of name should take place in advance under Section 4 and be present in accordance with Section 12 of the Act. As a result, any corporate representative who collects invoices or signs on behalf of the firm and enters inaccurate company information may be personally accountable.

For investigation of ownership of the company: Under Section 216 of the Act, the Central Government has the power to appoint inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons who have a financial interest in the success or failure of the company; or who are able to control or to materially influence the policies of the company.

Fraudulent behaviour: Under Section 339 of the Act, if it comes to light that during the winding up of a business the person is using the company’s name for fraudulent conduct, the Court has the authority to hold any such individual, whether a director, manager or other officials of the company, responsible for such unlawful acts. “Where, therefore, the corporate character is used for the purpose of committing illegality or defrauding others, the court will ignore the corporate character and will look at the reality behind the corporate veil so that it can pass appropriate orders to do justice between the parties concerned,” it was stated in the case Delhi Development Authority vs. Skipper Construction Company.

Judicial Lifting: If the company violates the Companies Act, 2013 and the act does not provide for the lifting of the veil then the judges can order the lifting of the veil which is known as Judicial Lifting.The following are examples of situations where the court may lift the corporate veil:-

Evasion of taxes: It is the responsibility of every earner to file their Income Tax Return. In the perspective of the law, a corporation is no different from a person. Anyone who tries to escape this obligation in an illegal manner is considered to be committing an offence.

Fraud/improper behaviour prevention: It goes without saying that no business can conduct fraud on its own. To perform such crimes, there must be a human agent engaging in the act. As a result, the company may take measures to avoid future scams.

Characterization of the enemy: The goal of forming a business is to make money. A firm will not intentionally try to do good for society. It may, however, choose to bring harm instead.

Acts of Ultra-Vires are punishable by law: Every company is under obligation to operate in accordance with its Articles of Association, Memorandum of Association, and the Companies Act, 2013. Any activity outside of either’s purview is “Ultra-Vires,” or outside the limit of either’s legal authority. The court may impose Penalties if the company’s operations are illegal.

Public Policy/Public Interest: When a company’s actions are in violation of public policy or the public interest; courts have the authority to pierce the veil and hold those responsible personally accountable. The right premise for elevating the corporate personality is to preserve the public policy.

Case Law: Re Sir Dinshaw Maneckji Petit Bari, AIR 1927 Bom.371

The fact of the case: The assessee, Sir Dinshaw Manckjee Petit, was a wealthy man enjoying huge income from dividends and interests. He formed four private companies and agreed with each to hold a block of the investment as an agent for it. He credited the income received by him in the accounts of the companies and took it back in the form of a pretended loan. The whole idea was to split his income into four parts with a view to reduce the tax liability.
Held: The company was formed by the assessee with an intention to evade tax and the company was nothing more than the assessee himself. It did undertake any business but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans. Thus, the corporate veil was lifted and the member behind the veil was held liable.

FAQ's on Corporate Veil

Q: What is the doctrine of corporate veil?

The doctrine of corporate veil is a legal principle that treats a corporation as a separate legal entity from its shareholders. It shields the personal assets of shareholders from the company’s liabilities.

Q: What are the benefits of the corporate veil for shareholders?

Shareholders enjoy limited liability, meaning their personal assets are generally protected from the company’s debts and legal obligations.

Q: Under what circumstances can the corporate veil be lifted?

The corporate veil may be lifted in cases of fraud, improper conduct, evasion of legal obligations, or when the company is used as a mere façade to conceal the true facts.

Q: What does "lifting the corporate veil" mean?

Lifting the corporate veil refers to the judicial act of disregarding the separation between a company and its shareholders, exposing the shareholders to personal liability for the company’s actions.

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