This article has been written by Ms. Ritika Goel, a 2nd year LLB student from Faculty of Law- Delhi University.
INTRODUCTION-
Incorporation of a company is very important for the commencement of business and to have a separate legal entity. The doctrine of the lifting of the corporate veil plays an important role in identifying the offenders who do these crimes and hide behind the curtains of the company. The doctrine of a separate legal entity plays the same role as that of the lifting of the corporate veil but in a much broader sense. The concept of a separate legal entity itself is the cause of action or reason behind the members of any given company or an organization commit the crimes and hide behind the curtains of the company. This notion of hiding behind the walls of the company was removed and the true meaning of a separate legal entity was seen in many historical cases, which led to the establishment of new laws and acts. This article concentrates on what is the meaning of separate legal entity, corporate veil, and lifting of the corporate veil. The article also focuses on what circumstances the corporate veil was lifted with relevant case laws, what are the statutory provisions and judicial interpretation of the corporate veil (grounds under which corporate veil is lifted).
This doctrine of separate legal entity has always been exploited by the offenders. The lifting of the corporate veil is the provision available to the court, authorities, etc. to identify the offenders and also to find the true persons who control the daily affairs of the company.
MEANING AND DEFINITION OF COMPANY-
Company under section 2(20) means a company incorporated under the Companies Act, 2013 or under any previous Companies Act. Company is generally a legal entity represented by a set of members or association of people, with specific objectives. The line of business structure of the company can be corporation, partnership, or proprietorship. These are the basic structure and types which decide the ownership of the company.
MEANING OF LIFTING OF CORPORATE VEIL-
The advantages of incorporation of a Company like Perpetual Succession, Transferable Shares, Capacity to Sue, Flexibility, Limited Liability and lastly the company being accorded the status of a Separate Legal Entity are by no means inconsiderable, under no circumstance can these advantages be overlooked and, as compared with them, the disadvantages are, indeed very few.
Yet some of them, which are immensely complicated deserve to be pointed out. The corporate veil protects the members and the shareholders from the ill-effects of the acts done in the name of the company. Let’s say a director of a company defaults in the name of the company, the liability will be incurred by the company and not a member of the company who had defaulted. If the company incurs any debts or contravenes any laws, the concept of Corporate Veil implies that the members of the company should not be held liable for these errors.
COMPANY: A SEPARATE LEGAL ENTITY (CORPORATE PERSONALITY)
Corporate personality is the reality expressed by the law that a company is perceived as a legal entity distinct from its members. A company with such recognition and personality will be considered as a separate legal entity having an independent legal existence from the members of the company. A company is known by its own name and has its own right, duties, obligations, and liabilities. Therefore, there is a clear difference between the company and its members, this is commonly called a Corporate Veil as discussed above.
The separate legal entity is the basic feature on which company law is premised. Establishing how a company comes into existence and how it is managed and functioned all depends on the legal entity of the company. The concept of a separate legal entity is not new and contrastingly there are many cases and litigation on this topic and on its jurisdiction. There are two very important judgments on separate legal entity one of them is Salomon vs Salomon and Lee vs Lee, both cases are foreign but are applicable and accepted universally.
DEVELOPMENT OF CONCEPT OF CORPORATE VEIL
Once a company is incorporated, it becomes a separate legal identity. An incorporated company, unlike a partnership firm which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members.
The companies can thus own properties in their names, become signatories to contracts etc. According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of incorporation, the subscribers to the memorandum and other persons, who may from time to time be the members of the company, shall be a body corporate capable of exercising all the functions of an incorporated company having perpetual succession. Thus, the company becomes a body corporate which is capable of immediately functioning as an incorporated individual. The central focal point of Incorporation which overshadows all others is a distinct legal entity of the corporate organisation.
Solomon v Solomon
What the milestone case Solomon v Solomon lays down is that “in inquiries of property and limitations of acts done and rights procured or liabilities accepted along these lines… the characters of the common people who are the organization’s employees is to be disregarded”.
Lee v Lee’s Air Farming Ltd
In Lee v Lee’s Air Farming Ltd., Lee fused an organization which he was overseeing executive. In that limit he named himself as a pilot/head of the organization. While on the matter of the organization he was lost in a flying mishap. His widow asked for remuneration under the Workmen’s Compensation Act. At times, the court dismisses the status of an organization as a different lawful entity if the individuals from the organization attempt to exploit this status. The aims of the people behind the cover are totally uncovered. They are made to obligate for utilizing the organization as a vehicle for unfortunate purposes.
Life insurance corporation of India v Escorts Ltd.
“It is neither fundamental nor alluring to count the classes of situations where lifting the veil is admissible, since that must essentially rely upon the significant statutory or different arrangements, an outcome which is tried to be achieved, the poor conduct, the element of public interest, the impact on parties who may be affected by the decision, and so forth.”
LIFTING OF CORPORATE VEIL (PIERCING OF CORPORATE VEIL)
By a fiction of law, a company is seen as a distinct entity separated from its members, but in reality, it is an association of persons who in fact the beneficial owners of the company and its corporate property. This fiction is created by a veil and is called the corporate veil. Lifting or piercing of corporate veil means ignoring the fact that a company is a separate legal entity and has a separate identity (Corporate personality). This concept disregards the separate identity of the company and looks behind the true owners or real persons who are in control of the company.
The separate personality of a company is a statutory privilege and it must be used for a legitimate purpose only. Whenever and wherever a fraudulent or dishonest use is made of the legal entity, the individuals will not be allowed to hide behind the curtain of corporate personality. The appropriate authority will break this shell of the company and sue the individuals who have done or committed such a crime or offence. This lifting of the curtain is called a Lifting of the Corporate veil.
GROUNDS UNDER WHICH CORPORATE VEIL IS LIFTED
- Where the Company is a Sham (Fraud): Gilford Motor Company vs Horne (1933)
Mr. Horne was a former Managing Director of Gilford Motor Home Company Ltd. His employment contract stipulated a condition that he should not solicit customers of the company once he leaves his job. Mr. Horne was fired from his position and job. Thereafter, he established a competing company with his wife, himself, and one of his friends, who were the sole shareholders. The company established by Horne has lower price tags than that of Gilford’s company. The shareholders started soliciting the customers of Gilford Motor Company. Gilford did not have any legal restraints against Horne’s company, only Horne himself. Gilford filed or commenced proceedings against Horne individually, claiming that Horne’s company was an attempt to evade legal obligations through soliciting customers.
It was held that the company was set up to evade Horne’s contractual obligations and was used as an instrument of fraud to conceal Mr. Horne’s illegitimate actions. The court pierced the corporate veil and ordered an injunction against Horne.
- Invocation of the principal of agency: RG Films Ltd (1953)
In this case it was held that the decision was valid in the view of the fact that the British company acted merely as a nominee of the American company. In this case, the corporate veil was lifted and declared that the doctrine of separate legal entity does not mean that the company will act as a mere agent of the shareholders.
- Public Policy: Connors Bros vs Connors (1940)
The House of Lords determined the character of the company as an enemy company because the persons who were de facto who were residents of Germany, which was at war with the British during that time. The alien company was not allowed to proceed with the action, which was directly or indirectly meant giving money to the enemy, thus was considered against the public policy.
- Determining True Character of the Company: Daimler Co. Ltd vs Continental Tyre and Rubber Co. Ltd (1916)
In this case The House of Lord held that the company was an enemy company for the purpose of trading because its effective control or the management was in the hands of Germans. So, the court held that it would against public policy if there is a trade among them and hence it was decided that the company will not be allowed to proceed with the action.
- Protection of Revenue (Tax Evasion): CIT vs Meenakshi Mills Ltd
The corporate veil may be ignored if the company is formed merely to evade tax. In Income Tax Commissioner, Madras vs Sri Meenakshi Mills, Madurai, the Supreme Court held that the Income Tax authorities have a right in this case to lift the corporate veil.
STATUTORY PROVISION IN SUPPORT OF LIFTING OF CORPORATE VEIL
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- Reduction of number of members below the statutory minimum: If at any time the minimum number of members of a company falls below two, in case of Private company or below seven, in case of Public company; then the company can carry on the business for a period of six months while the number is so reduced, every person who is a member of the company during the time that it still continues to carry on the business, knowing the fact that the minimum number of members is reduced and the grace period of six months is also finished, then as the case may be, the company and its members will be held liable and can sue an amount which they made during those six months or else the company may be severally sued, therefore.
- Failure to refund application fee: The directors of the company shall be jointly and severally liable to repay the money (application money) with an interest of six percent per annum from the date of expiry of one hundred and thirtieth day if they fail to repay the application money without interest within one hundred and twenty days when the company fails to allot shares.
- Misdescription of company’s name: An officer of an organization (company) who signs any bill of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the recommended way, such official can be held personally liable to the holder of the bill of trade, hundi, etc. except if it is properly paid by the company.
CONCLUSION
A company has a legal personality just like all other natural individuals, the only difference between the two is that a company even with its legal personality cannot run or conduct its affairs as a natural person does. The company acts on the concept of the corporate veil, this veil when misused for fraudulent acts will reveal the true nature and real beneficiaries of the company, thus, called the lifting of the corporate veil. The courts from time to time implemented this rule and also brought in a few changes suitable for the situations and for future reference.
REFERENCES
- Corporate Veil Definition: Protecting the Corporate Veil, The Strategic CFO (2019), https://strategiccfo.com/corporate-veil
- Company Law, excellentcareersolution
- Legalsearch.com
- Indian kanoon.com
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