Before dealing with the Doctrine of lifting the corporate veil, it will be appropriate to define the term company and the meaning of the corporate veil first. Section 3(1)(i) of the Companies Act attempts to provide the appropriate meaning of the word company; it states that a ‘company’ means any company formed and registered under the Companies Act for it to become an incorporated association. If it is not registered, it becomes an illegal association. The term corporate veil is a legal concept that separates the personality of a corporation from the personalities of its shareholders and protects them from being personally liable for the company’s debts and other obligations.
Sometimes, there’s a possibility that the corporate personality of the company is used to commit fraud and improper or illegal acts. Since the company is a legal entity, it’s impractical to commit anything illegal or fraudulent. To identify the guilty person and dismissing the corporate personality. This is known as the lifting of corporate veil. The principle of a corporation having a separate legal entity was firmly established in the landmark cases of Salomon v. Salomon & Co. Ltd.
Lifting the corporate veil refers to the probability of looking behind the company’s separate personality to make the members liable; as a difference to the rule that they are normally shielded by the corporate shell i.e. they are normally not liable to outsiders at all either as principles or as agents or in any other form and are already normally liable to pay the company what they agreed to pay by way of share purchase price or guarantee, nothing more.[2] When the corporate body of the company under any circumstances will be compromised and the corporate veil is lifted, the individual shareholder may be treated as liable for its acts.
“It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc.”. This was iterated by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.[3] The circumstances under which the corporate veil can be lifted:
- Statutory provision
- Judicial interpretation
Statutory Provision
1. Section 45 of the Companies Act, when the membership is reduced:
In the case of the public company, if the members of a company are reduced below seven and in the case of the private company where it comes down below two and the company still carry on the business more than six months, while the number is so reduced, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time.
2. Section 147(4) of the Companies Act, Improper use of Name:
If an officer of a company who signs any bill of exchange wherein the name of the company is not stated in the prescribed manner, such an officer can be held personally liable to the holder of the bill of exchange, etc unless it is justly paid by the company.
3. Section 239 of the Companies Act, For facilitating the task of an inspector to investigate the affairs of the company:
It provides the necessary measures to the appointed inspector for the completion of the task to investigate the affairs of the company for the alleged mismanagement, or oppressive policy towards its members, he may investigate into the affairs of another related company in the same management or group.
4. Sections 307 and 308 of Companies Act
Section 307 applies to every director and every deemed director. Not only the name, description and amount of shareholding of each of the persons mentioned but also the nature and extent of interest or right in or over any shares or debentures of such person must be shown in the register of shareholders.[4]
5. Section 542- Fraudulent conduct:
If in the way of dissolving the company, it appears that any business of the company has been sustained on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct.
Judicial Interpretations
In comparison with the limited and careful statutory directions to lift the veil, judicial invasions into the principle of separate personalities are more diverse. For example, the protection of revenue, prevention of fraud or improper conduct, determination of the enemy character of a company, where a company acts as an agent for its shareholders, in case of economic offenses, where Company is a fake or cloak.
References
2] See Sealy’s Cases and Materials in Company Law,9th edn., Len Sealy, Sarah Worthington;Oxford,Pg 53
[3] https://indiankanoon.org/doc/730804/ Last visited on 25th June 2020.
[4] https://www.lawctopus.com/academike/corporate-veil/#:~:text=This%20is%20known%20as%20’lifting,the%20corporation%20and%20the%20shareholders. Last visited on 25th June 2020.
This article is authored by Aarti Tiwari, Third-Year, B.A. LL.B student at Ramaiah Institute of Legal Studies, Bangalore
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