Introduction
Legal fiction is one of the terms which is used in the present time, because of this law gets easily set off from the truth (applying to any things) it is done even if there is no sufficient cause for some or may not. In this, the law has to get understood some facts which may be against the actual expression. In some circumstances, the law uses the fictio juris or legal fiction from which it depends on truth and considers something else. As the company has a separate legal identity apart from its members and corporate is also identified as a legal fiction.
Factually, the company is an association of persons who are gathered for a common object, who actually performs the activities, and the law has given them both identities as an independent association of its members which can be called separate personality and other one is individual personality. The company is an artificial person who exists only in the form of law.
As incorporation has its advantages it also has its disadvantages as like, in this major or prominent one can be seen as an example for the lifting of the corporate veil.
Origin of Doctrine of Corporate Veil
The concept of a separate legal entity of the company came to be known from the case of Saloman v. saloman and Co. Ltd. The concept of a separate legal entity of corporate personality formed by its independent members, there is also a limitation on liability of them/members. The corporate legal personality confers perpetual succession, entitles the company to enter into a contract, to buy and sell property in its own name. It also makes the company competent to file a suit and to be sued.
As the advantages are given in Soloman’s case, it empowers the company to have and exercise limited liability, as because peoples behind the name of the corporation should do activities which are under an obligation of the company. The doctrine of Lifting of the Corporate Veil can be acknowledged through a comprehensive understanding.
Meaning of term Lifting of the Corporate Veil
The term Corporate Veil can be said as a barrier which separates the company from directors and owners. Even, the main benefit of incorporation is of having a separate legal entity of the company and having limited liability. But in reality, it is the association of persons who conducts business activity on behalf of the company.
There are some examples of activities that arise out of this which are fraudulent or illegal and it is illegal as the company is an artificial person incapable of doing this. For identifying the real persons who are guilty for illegal acts, the front wall or facade of the company has to be removed. This principle under the case of Soloman is known as ‘Lifting of Corporate Veil’ which is done for knowing the acts done under the corporate veil. Even this is contrary to the statements in the case of Saloman, it is not invalid. This doctrine shows the existence of a corporate identity, which can be lifted in certain circumstances for the interests of the public or members, and for imposing liability on the persons who misuse the advantages given to them.
The lifting of the corporate veil is to look beyond the company structure and making persons behind this liable shows that the shield given to them can be taken back for such fraudulent activities.
Importance and Need of Doctrine of Lifting of the Corporate Veil
(a) Whenever unscrupulous people start doing fraud in the company by using the veil of the corporate, then it becomes necessary to uplift the corporate veil and finding the people behind such illegal activities.
(b) The corporation has been termed as a separate legal entity, so anything which is done under the name of the company by the members or directors of the company is illegal, and using the name for such fraudulent acts for their own benefit doesn’t fit under this doctrine and also the company will not liable for such acts, as the company being a separate legal entity.
Statutory provisions for the lifting of corporate veil
The corporate veil can be lifted and there are some instances where it is clearly given within the statutes which are enabling the court to do the same.
In Cotton Corporation of India Ltd. V. G. C. Odusumath laid down the rule that the courts can uplift corporate veil only when provisions for it is expressly provided under the statute book or only when there are some reasons which are giving sufficient cause to do it.
The Companies Act, 2013 provides the following provisions which can empower courts to lift the corporate veil-
Section 7(7) of the Act provides that, where the incorporation of a company is effectuated by way of furnishing false information, the court can fix liability for them and because of this the corporate veil can be lifted.
Section 251(1) is the penal provision, under the Act it is provided that, there should be an application for removal of the name of the company from the registrar of companies if anyone makes fraud application can be fixed with liability under this section.
Section 34 and 35 of the Act empowers the court to lift the veil of incorporation to fix liability. When the prospectus has included misrepresentation, the court can impose compensatory liability upon the person who has done it.
The Companies Act provides, in cases of issue of shares to the public, when the company is not receiving the minimum subscription in 30 days of issuance of the prospectus, the company is bound to return the application money. There is a penalty imposed under section 39, on failure to do this within 15 days of the time period.
The investigations can be done, by the concerned authority or the government may have to look towards the affairs of a company for the purpose of evaluating whether it is bogus and the realities under its corporation veil.
Section 216 provides the provision to carry out this purpose, for releasing it, the court can lift the veil and same. It will be protected. Ivies also provided under section 219 of the Act.
During the winding-up of the company the chances of fraud or illegal activities increase. This is provided under section 339. So the prospectus can be enumerated and the veil may be lifted.
Section 464 of the Act provides for penal provisions on members and directors of the corporation when the requirements of the company are not observed. The law imposes some preconditions on its enjoyment in the form of statutory compliances and not following it can attract liability. Therefore the facts of the statement of same may be investigated and for this, the veil may be lifted.
A company being an artificial person cannot be an enemy or friend, but in war-like situations, it may become necessary to lift the veil to know whether the actions of the company are of a friend or an enemy.
This determination of enemy principle came into force in Daimler Co. Ltd. v. Continental Tyre and Rubber Co.
Why Corporate Veil shall be lifted
The corporate veil is a primary and most important aspect of the company and its statutes. The doctrine of Lifting of Corporate Veil protects the people’s whole are existing behind the veil. There are two exceptions to the separate legal entity principle given by Pickering that a company cannot be treated as an ordinary person at all times and circumstances.
As the company has not the wrong intention or knowledge for doing a crime by itself, so whenever there are some hints of crime or crime is being done under the name of the company by its directors or members, the court has to lift the corporate veil to start an investigation into such matter and to take out the truth. So, if the exception was not there of separate legal entity principle, anyone being the directors or members will be able to do any illegal acts under the shield of limited liability. Therefore it is necessary to have the doctrine of the lifting of the corporate veil.
Case Laws relating to the Doctrine of Lifting of the Corporate Veil
The Supreme Court in Tata Engineering Locomotive Co. Ltd v. State of Bihar and Ors. Stated that, “The corporation in law is equal to a natural person and has a legal entity of its own. The entity of the corporation is entirely separate from that of its shareholders; it bears its own names and has a seal of its own; its assets are separate and distinct from those of its members; the liability of the members of the shareholders is limited to the capital invested by them; similarly, the creditors of the members have no right to the assets of the corporation”.
So in some cases, the court has shown its power to lift the corporate veil without any questions.
Conclusion
Therefore, whenever the men or directors of the company are doing any activity, which is against the provisions of the company or carry illegal activities under the wall of corporate veil of the company, misuses the advantage/privileges given to them. Then the court can look forward to the veil and uplift the corporate veil, under certain circumstances.
This Article is Authored by Magaonkar Revati Umashankar, 5th Year BSL Student at Dayanand College of Law.
