Public Policy and Lifting the Corporate Veil

This article has been written by Prithiv Raj Sahu, a student of KIIT School of Law, Bhubaneswar (4th year). He can be reached on his LinkedIn account (https://www.linkedin.com/in/prithiv-raj-sahu-4b6994192) or mobile phone (8249588448)

Public Policy

Public policy is the principled guide to action taken by the administrative executive branches of the state with regard to a class of issues, in a manner consistent with law and institutional customs.

Features of Public Policy

  1. Policy is solution to issue or problem (policy demands) that is brought on agenda of government and requires attention
  2. Policy may be in form of law, or regulation, plan, program, schemes, guidelines, codes or combinations of these
  3. Policy what government actually does, not just what it intend to do
  4. Policy is sustained course of actions taken over time not discrete decisions
  5. Policy output vs. outcome
  6. Output – measurable physically results of policy
  7. Outcome – policy’s consequences on target group/society

Who makes Public Policy?

Legislature, executives (govt.),and judiciary make policies

  1. Legislature policy – Energy conservation Act 2001; reservation quota for disadvantaged groups, Aadhar Act, etc.
  2. Executive policies – MANREGA, Ayushman Bharat Mission, Mid-Day Meal, DBT, etc.
  3. Policies emanating from judiciary – creamy layer policy in reservation, policy of judges appointment, auction of natural resources.

Types of Public Policy

  1. Arena of policy making – legislative vs. administrative vs. judicial
  2. Substantive vs. procedural – Ex: substantive: reservation quota in jobs; Procedural: Administrative reforms
  3. Policy issues – education, foreign, defence, economic, environmental, etc.
  4. Distributive and re-distributive – Ex: distributive: universal basic income; re distributive: land reforms
  5. Regulatory and self-regulatory – Ex: regulatory: RERA, pollution control acts; self-regulation: press council, medical council
  6. Material vs. symbolic – Ex: farm loan waiver; symbolic: national anthem in cinema hall
  7. Policies involving public goods vs. private goods – Ex: public good: nationalization of banks; private good: privatization policies.

Corporate Veil

A company has a separate district legal entity from the persons who constitute it. Thus, a company in legal terms is a totally different person called as an artificial or legal person. Thus, it a concept which segregates the liability of company from its makers and protects them from being personally liable.

Origin of Corporate Veil Doctrine

The doctrine of Lifting the Corporate Veil owes its origin to the concepts of Separate Legal Entity and Limited Liability. The company is an entity different from its shareholders. Therefore, the shareholders’ liability is limited to their contribution in the shares of the company. But when the corporate veil is lifted the shareholders become personally liable, and the liability of the shareholders becomes unlimited for the liabilities of the company.

The concept of Limited Liability was developed in the 17th century in England. Before that, people were afraid of investing in companies as they believed that it may land them into unlimited liabilities for the acts of their partners as well. With the passage of time investment requirements increased but people were reluctant to invest due to high risk. So, to boost the investment the concept of limited liability was introduced.

With the inception of the principle of limited liability and separate legal entity the position of the investors became safer but the risk for creditors increased. The creditors could recover their loan amount from the assets of the company only, and they could not hold the shareholders liable for their debts. This has the probable effect of covering the shareholder’s risk while, consequently, their chance for gain is unconditional. Evidently, corporations exist mainly to protect their shareholders from personal liabilities for the debts of the company.

The shareholders widely misused this advantage. To protect the creditors from fraudulent activities of the shareholders the doctrine of Lifting the Corporate Veil was developed.

Concept of Lifting the Corporate Veil

One of the main characteristic features of a company is that the company is a separate legal entity distinct from its members. The most illustrative case in this regard is the case decided by House of Lords

Salomon v Salomon

FACTS: Salomon transferred his business of boot making, initially run as a sole proprietorship, to a company (Salomon Ltd.), incorporated with members comprising of himself and his family. The price for such transfer was paid to Salomon by way of shares, and debentures having a floating charge (security against debt) on the assets of the company. Later, when the company’s business failed and it went into liquidation, Salomon’s right of recovery (secured through floating charge) against the debentures stood a prior to the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds. The liquidator sought to overlook the separate personality of Salomon Ltd., distinct from its member Salomon, so as to make Salomon personally liable for the company’s debt as if he continued to conduct the business as a sole trader.

ISSUE: Whether, regardless of the separate legal identity of a company, a shareholder/controller could be held liable for its debt, over and above the capital contribution, so as to expose such member to unlimited personal liability?

JUDGMENT:  A company is a separate legal entity distinct from its members and so insulating Mr Salomon, the founder of A. Salomon and Company, Ltd., from personal liability to the creditors of the company he founded. The court also upheld firmly the doctrine of corporate personality, as set out in the Companies Act 1862, so that creditors of an insolvent company could not sue the company’s shareholders to pay up outstanding debts.

The court has been extremely protective of the Salomon principle, and it is only in extreme circumstances that they will consider the veil.

Further inLee v. Lee’s Air Farming Ltd, it was held that there was a valid contract of service between Lee and the Company, and Lee was therefore a worker within the meaning of the Act. It was a logical consequence of the decision in Salomon’s case that one person may function in the dual capacity both as director and employee of the same company.

The circumstances under which corporate veil may be lifted can be categorized broadly into two following heads

Judicial Provisions

  1. Fraud or improper conduct
  2. For benefit of revenue
  3. Enemy character
  4. Company avoiding legal obligations
  5. Single economy entity
  6. Agency or trust
  7. Public Interest

Statutory Provisions

  1. Reduction of number of members
  2. Fraudulent trading
  3. Misdescription of the company  
  4. Holding and subsidiary companies

Conclusion

Public policy represents a decision, made by a publicly elected or designated body, which is deemed to be in the public interest. Policy development involves the selection of choices about the most appropriate means to be desired end. A policy decision is the result of a method, which in theory at least, considers a range of options and the potential impact of each.

As a result of incorporation an incorporated company the corporate veil an essential while evaluating the company’s character. The defacto control of the company cannot vest in an enemy character. Enemy character of a company is against public policy. However, this principle as a judicial ground for lifting the corporate veil is seldom used or applied for it has the prerequisite scenario war.

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