Lifting of the Corporate Veil

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This article is written by Mahenoor Khan, a student of Rizvi Law College

Background

Before getting into details of what lifting of the corporate veil is we shall know what is the company, For a better understanding of application doctrine in the corporate world, 

Thus, The word ‘Company’ is derived from the Latin word ‘Com’ meaning “with or together” and ‘Pains’ meaning “bread, however  Under Companies Act, 1956, a company is a corporation registered under the Act  Thus, a company comes into existence only by registration under the Company Law Act or under the company law in India.  It can be concluded that a company is an organization of persons who have come together or who have provided money for some common individuals and who have incorporated themselves into a different legal entity in the form of a company for that purpose.

History

The Doctrine of the lifting of the corporate veil was first propounded in the year 1897 within the distinguished English case of Salomon v A Salomon & Co Ltd. [1] 

This case firmly ascertained that upon incorporation, a new and separate artificial entity appears and according to law, a corporation is a distinct person with its personality separate from and autonomous of the individuals who established it, who invest money in it, and who direct and manage its operation independent of the corporate existence of a registered company, The case, however, is the recognition that a company is a separate legal entity in its own right is the organization of modern corporate law and gave basis to the doctrine ” lifting of the corporate veil” which means that whenever any wrong is committed by the corporation its members cannot be held liable for those wrongs, it further helps to determine when the shareholders of the company are liable for the obligations of the companies.

What is Lifting of Corporate Veil?

The doctrine of “Lifting of Corporate veil ” is the most essential Principle of Company Law which establishes a company as an entity that is completely distinct from its shareholders, advocates, managers and directors: Thus, when a company is incorporated, a legal entity gets created, which is separate from its members, employees, shareholders, directors, and promoters etc.

In simple terms, it divides the personality of a corporation from the personalities of its shareholders and other individuals and protects them from being personally liable for the company’s debts and other obligations and is the mythical boundary that separates the company from those that organize it and from those that acquire it.

The objective of establishing this Doctrine was to provide business potency and convenience hence, the main goal behind the formation of a  company is the limited liability which is offered to its shareholders and because of this limited liability, the liability of each shareholder is restricted to only what he or she has provided as shares to the corporation, however, this protection is not invulnerable or sealed, Where a court determines that a company’s business was not conducted by the provisions of corporate legislation.

Frequently, it is seen that shareholders of the company commit frauds and unlawful acts which leads to removal of the corporation in most cases Thus, the doctrine of the lifting of corporate veil is used, when a shareholder is held responsible for its company’s debts despite the rule of limited liability( The liability of the members of the company is limited to contribution to the assets of the company up to the face value of shares held by him) and separate personality. (The significance of associating a legal personality to a company is that it is a distinct entity from its members)

In the Doctrine of ‘Lifting the Corporate Veil’, the law goes behind the veil of incorporation to determine the group of people behind the company who defrauded and cheated. It is thus used as a means to stop fraud, improper conduct or where the protection of public interest is of important concern, it is to be noted that the corporation is regarded as an organization of persons rather than a legal entity when the very exact legal entity is used to defeat public convenience and justify wrong or to defend crime. 

The Concept of “Lifting of Veil in India”

The Doctrine of Lifting the Corporate Veil is not cited expressly in any of the  Indian Company Law, but it could be interpreted from various provisions moreover, The doctrine has now become of precedential value after being mentioned in many cases.

The Companies Act, 2013 provides for the subsequent provisions facilitating courts to lift the company veil Frequently the courts lift the corporate veil to repair liability and punish the members of the administrators of the company. 

Section 7(7) of the Act empowers one such provision. Whither the incorporation of a corporation is effectuated the way of furnishing false information, the court may fix liability and for this purpose, the veil could also be lifted.

Section 251(1) may be a corrective provision. The Act asks for the submission of a petition for the removal of the term corporate from the clerk of the businesses. Anyone who creates a deceitful application is overhauled with liability, Moreover

Section 34 and 35 of the act also enable the judiciaries to lift the veil of incorporation to repair liability. When a report comprises misrepresentation, the court may impose a compensatory penalty upon the one who has misrepresented.

Under Statutory provisions

  1. Reduction of membership (section 45)
  2. Misrepresentation in the prospectus (Section 62)
  3.  Holding Subsidiary companies (Section 212)
  4.  For enabling the task of an inspector to examine the affairs of the company (Section 239)
  5.   Improper use of Name (Section 147(4)]
  6. Fraudulent conduct (Section 542)
  7. Failure to refund application money (Section 69(5))
  8.  Liability for ultra vires acts

Under Judicial Interpretations

  1.  Protection of revenue.
  2. Prevention of fraud or improper conduct 
  3. Determination of the enemy character of a company
  4.  Where a company acts as a deputy for its shareholders
  5.  In case of economic offences
  6.  Where Company is a sham or cloak

CONCLUSION

The concept of the corporate veil contemplates a corporation as a separate legal entity from its founders and shareholders and courts can employ the action of “lifting the corporate veil to ensure that corporations are not used to injure civil rights, the corporate law and its responsibilities to creditors.

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