This article has been written by Ms Kamakshi, a 4th year BBALLB student from REVA university
Every established organization has its own legal identity, separate from the employee identity. It is clear that the corporation itself is not a living organism, so various members come together to act in the name of the corporation and live under the shadow/veil. This is simply called the “corporate veil”. In certain urgent cases and circumstances, the corporate veil is removed, known as a “corporate veil piercing”, allowing the company to verify misconduct by its members. The corporate veil is a legalized concept that separates the actions of an organization from those of its shareholders.
It also prevents shareholders from guilt in the actions of the company. Courts have the right to determine guilt. This method used by the courts is known as “entering the corporate veil” and allows the courts to directly indict the company’s investors as responsible for debt or fraud, removing limited liability for shareholders. The effectiveness of breaking the corporate veil can be observed especially in closed small companies with limited shareholders and assets. However, it is more convenient not to lift this veil unless there are serious violations in matters or cheating. Corporate liability protection is very important, but unfortunately not always absolute. Breaking through the corporate veil removes the distinction between owner and corporation and removes the distinction. An owner or partner working for a company is personally responsible for the company’s financial situation as if the company were a sole proprietorship. Breaking the corporate veil usually occurs when someone, such as a creditor or a person affected by the company, takes legal action. He would argue that company owners must be held personally responsible if money is involved or they are defrauded. Since the overall purpose of creating the veil is to protect the owner and allow the company to operate on its own and independently, courts simply agree to break the company’s veil in random circumstances. No. But when an owner, director, or shareholder commits fraud, fails to follow corporate procedures, or behaves improperly, courts break through the corporate veil.
Solomon Vs. Solomon And Co. Ltd. In this case, Salomon set up a company called “Salomon and Co. Ltd.” himself, his wife, with four sons daughter. Salomon was both a creditor and shareholder of the company. There were other unsecured creditors. After some time, the company made a loss and decided to dissolve. During the liquidation process, the unsecured creditor demanded to be paid before Salomon (as a secured creditor) because Salomon was his company.
Factors that determine the penetration of the corporate veil
Fraud Against Third Parties – Fraud and other fraudulent activities require breaking the corporate veil. Inability to create separate identities between companies – Certain mishaps can occur when different small companies work under one big company. In such cases, the law allows courts to carefully examine the relationship between the parent company and its subsidiaries. Not in compliance with company policy – It is essential to follow company rules and policies, and failure to do so may result in the loss of limited liability protections for shareholders.
Inability to maintain a separate identity from shareholders – This occurs when the company’s name merges with the names of its shareholders or owners.
Failing to capitalize the economy well – If the company is found to be under capitalized, the court may examine the company’s assets to determine whether creditors are making a fair distribution of the assets.
Existence of fraudulent or fraudulent activity against third parties One of the biggest factors that courts accuse is the existence of fraud or misconduct against third parties. In this case, the court breaks through the corporate veil. Inability to maintain separate identities between companies A common situation that may lead to scrutiny is when multiple affiliates are operated under his single corporate umbrella and separate corporate identities are not maintained. Failure to maintain a company’s distinct identity to its owners or shareholders. This is a merger of a company name and a company owner or shareholder. undervalue a company’s capital The court examines the company’s assets to determine whether the company’s assets available to creditors are fair and under capitalized. Disagree with company procedures Another red flag that can break a company’s veil is non-compliance with company procedures. If the procedures are not complied with, the court ruled that shareholder liability protections could be lifted and owners’ private assets bound.
Legal Basis for Unveiling a Company:
As unveiling a company is an evolving concept, there is no pre-defined exhaustive list of reasons or grounds on which the veil may be broken. However, piercing has certain legal and judicial bases. However, there are certain legal and judicial grounds for violating the corporate veil.
Misinformation in the prospectus: If a company prospectus is misrepresented, the company, and its directors, promoters, and other persons authorizing the issuance of such prospectus, will be liable for the loss of any person who believed that the stock had submitted false information. is obliged to compensate for In addition, these persons could be punished with at least six months’ imprisonment. This period he can extend for up to 10 years. The company and the people involved will also be fined. The fine cannot be less than the fraud amount, but can be up to three times his fraud amount.
wrong name Company: Regulations 2014 require the company name to be printed on all official documents (handis, promissory note, BOE and other documents) that may be mentioned. Therefore, if an officer of a company signs a contract, BOE, Hundi, promissory note or check, or money order on behalf of the company, that person is liable to the owner for failing to properly mention the company name. be responsible for
Cheating: In the case of liquidation of a company, any person who is found to have carried on business for the purpose of defrauding creditors or other persons or for any unlawful purpose, if the arbitrate tribunal finds it appropriate. or any liability or other obligation of the Company that is found to have been made personally, including without limitation, obligations to If it turns out that our business has been misleading creditors, we may be held liable for fraud.
Ultra-Vires Act:s Company directors and other officers are responsible for all actions they perform on behalf of the company.
Failure to return the application fee For public issuance:, if the minimum subscription specified in the prospectus is not received within 30 days of issuance or any other period specified, the subscription amount will be refunded within 15 days of publication by the Publisher. . close. However, please assume that the application fee is not returned within this period. In this case, the directors/management of the company are jointly and severally liable for the payment of this monies at a rate of 15% per annum. Further, the violating company and its officers shall be liable for a fine of Rs 1000/day or Rs 100,000, whichever is less, for the duration of such violation.
Under judicial interpretation.
Although the court initially refused to lift the veil of corporate he governance, based on the principle of separate legal entity and local corporate personality, the rise of the corporation and the constant conflict between the corporation and its various legal entities Due to conflict, the court refused. It adopted a more pragmatic strategy and lifted the veil of corporate governance. It is not easy to record every judgment that has been unveiled. However, there are various situations in which the veil of corporate character is removed and the individuals behind the corporate entity may be identified and punished. Improper Behavior and Fraud Prevention. Established a subsidiary as a representative. economic crime revenue protection The company used it for illegal purposes. The company ignores social laws. The company is trading just a scam.
Therefore Corporate deveiling under the Companies Act 2013 [1] helps ensure that corporate person hood is used for legitimate purposes and not for fraudulent or illegal activities.
Refrences: Solomon Vs. Solomon And Co. Ltd