INTRODUCTION
A Company is not an ‘individual’ in the layman’s language. It is an association made by a gathering of people who meet up with the end goal of building a business. It is subsequently the representation of gathering or arrangement of people making it a lawful individual. Under the provision of law, a partnership is dressed with an unmistakable character. An organization being an artificial individual, doesn’t have a brain and therefore can’t follow up on its own, it can just act through the people who are running it or the individuals who are a part of it. The business is carried on by a legal person, and to profit, a few people, i.e. some people are the genuine beneficiaries of the corporate focal points.
Corporate veil:
A legal postulate that isolates the personality of an enterprise from the personalities of its investors, and shields them from being personally liable for the organization’s debts and various commitments.
Now and again it might happen that the corporate character of the organization is utilized to submit fakes and ill-advised or illicit acts. Since a fake individual will not be able to do anything illegal or fake, the façade of corporate character must be eliminated to recognize the people who are truly blameworthy. This is known as ‘lifting the corporate veil’.
It points towards the circumstance where an investor is held accountable for its organization’s obligations regardless of the limited liability and/or separate personality. The doctrine is adduced when investors obscure the difference between the enterprise and the investors. An organization or partnership can only act through human individuals that create it. Thus, there are two primary ways through which an organization is held guilty under company or corporate law: firstly, through direct accountability (for direct encroachment) and furthermore through secondary liability (for the demonstrations of its individuals acting over the span of their work).
The manner in which the veil may be lifted can be put broadly into two categories-
- Statutory Provisions
- Judicial Provisions
A. Statutory Provisions:
What are the sections mentioned in the Companies Act, 2013 to deal with the offences-
If person ‘A’ has a company where he/she invites applications from people then any matter which involves the various other parties should be disclosed to the directors, shareholders and all the other persons involved. The objective of the company also needs to be satisfied.
Section 2(60)[1] of the Act points out the person referred to as “officer who is in default” is liable for illegal and improper activity which includes all people in key positions (directors, managers) also liable.
1. Misstatement of Prospectus:
Under Section 26 (9), Section 34 and Section 35[2] of the Act, it is made culpable to give fraudulent or untrue information in the company’s prospectus. Through giving prospectus, organizations offer protections which are available for purchase. Prospectus gave under Section 26 contains featured discussions of the organization, for example, subtleties of offers and debentures, names of chiefs, primary items and present business of the organization.
2. Failure to return application money:
Section 39(3)[3] of the Act states provisions against allotment of securities in the event that the expressed minimum sum has not been bought in and the total payable on application isn’t gotten inside a time of thirty days from the date of issue of the outline, at that point such officials in default are to be fined with a measure of 1,000 rupees for every day during which such default proceeds or one lakh rupees, whichever is less.
3. For investigation of ownership of company:
Under Section 216[4] of the Act, the Central Government is approved to name investigators to examine and write about issues identifying with the organization, and its participation to decide the genuine people who are monetarily interested by the achievement or disappointment of the organization; or who can control or to really impact the strategies of the organization.
4. Fraudulent Conduct:
Under Section 339 of the Act, in case of winding up of a company, it is discovered that organization’s name was being utilized for completing a deceitful action, the Court is enabled to hold any such individual in contempt for such unlawful exercises, be it chief, administrator, or some other official of the organization.
In Delhi Development Authority vs. Skipper Construction Company[5] the court stated that “where, hence, the corporate character is utilized to submit lawlessness or for cheating others, the court would overlook the corporate character and will take a gander at the truth behind the corporate shroud to empower it to pass fitting requests to do justice between the opposite parties.
5. Repeated Defaults:
Under Section 449[6] of the Act, if an organization or an official of an organization submits an offense culpable either with fine or with detainment and this offense is being dedicated again within a period of 3 years, then such organization and official are to take care of double the payment of the fine of that offense notwithstanding any detainment accommodated that offense.
6. Furnishing False Statements:
Under Section 448 of the Act, if in any return, report, endorsement, fiscal summary, prospectus, explanation or other record required, any individual offers bogus or false statements, or hides any applicable or material truth, at that point he is guilty under Section 447 of the Act.
B. Judicial Provisions:
Despite the fact that at first courts utilizing the guideline and the idea of distinct element and a region corporate personality would not lift the corporate veil, nonetheless, with the development of enterprises and the expanding struggle among organizations and its different partners, courts have received a logical methodology and lifting the corporate veil.
It is extremely hard to enroll every single decision of the courts in which they have lifting the corporate veil, nonetheless, the accompanying passages attempt to give a thought as to what are the various conditions under which the façade of corporate character can be taken out and people behind the corporate elements might be distinguished and punished.
1. Prevention of Fraud and Improper Conduct:
In Gilford Motor Company v Horne[7], Horne had been employed by the organization under an arrangement that he will not solicit the clients of the organization or contend with it for a certain timeframe in the wake of leaving its business. Subsequent to stopping to be employed by the offended party, Horne found an organization which carried on a contending business and issued the entirety of its shares to his wife and an employee of his company who was delegated to be its chiefs. It was held that since the respondent, i.e. Horne indeed controlled the organization, its development was a simple shroud or trick empowering him to break his prior agreement with the offended party. Appropriately, an order was passed against him and against the organization he had found stopping them from soliciting the offended party’s clients
2. Formation of subsidiary to act as its agents:
In State of U.P. v. Renusagar Power Co[8]. the Supreme Court held that where the holding organization holds 100% shares in an auxiliary organization and it is made distinctly with the end goal of the holding company, corporate veil can be lifted.
In JR Exports Ltd, v. BSES Rajdhani Power Ltd[9] the litigant No. 1’s organization gained the entire share capital of litigant No. 2’s organization, which was an enlisted customer of the electrical company allowed at its plant premises and on finding that power was being devoured by litigant No. 1, the Electricity Board passed an impugned order requesting sub-letting charges from appealing party No. 2. The Court held that by applying the rule of piercing of corporate veil, the two organizations had all the earmarks of being same substance and, hence, there was no doubt of sub-letting.
3. Protection of Revenue:
In Sir Dinshaw Maneckjee Petite vs unknown[10] the assesses was a mogul obtaining enormous amounts of money by the method of profit and interest. He shaped four privately owned businesses and moved his speculations to every one of the organizations in return of their offers. The profits and interest were received by Sir Dinshaw as an imagined loan. It was held that the organization was shaped by the assesses absolutely and basically as a method for evading tax and the company was simply the assesses himself. It did no business, yet was made basically as a lawful element to apparently get the profits and interest and to hand them over to the assesses as pretended advances.
4. Economic Offences:
In Santanu Ray v. Association of India[11], it was asserted that the organization had disregarded segment 11(a) of the Central Excises and Salt Act, 1944. The Court held that the veil of the corporate organization could be lifted by adjudicating specialists to decide regarding which of the chiefs was bothered about the avoidance of the excise tax by reason of fraud, concealment of realities or negation of the provisions of the Act and the principles made there under.
5. Company avoiding welfare legislations:
Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd[12] the Supreme Court held that where the sole reason for the development of the new organization was to use it as a device to decrease the bonus to be rewarded to the laborers, the Court can legitimately pierce of the veil to take a gander at the genuine transaction.
6. Company used for illegal/improper purpose:
In PNB Finance Limited v. Shital Prasad Jain[13]as per a solicitation made by S’, the financial advisor of a financing public limited organization, allowed a credit of Rs. 50 lakhs to ‘S’ on his portrayal that he would use the said sum for the acquisition of enduring immovable property in Delhi, finding no discrepancies the overseers of the plaintiff organization authorized the advance, depending on the prerequisite that the credit would be made sure about by the title deeds of the property. S additionally executed a promissory note. Nonetheless, he didn’t pay a penny on the credit or its interest.
All things considered, he redirected the measure of the credit to three public limited organizations floated by him and his son. He indeed in the garb of the organizations utilized the credit sum for buying immovable properties at New Delhi. The inquiry that emerged was whether the litigants could be limited from estranging the properties bought. The court conceded help to the offended party by piercing the corporate veil and limiting the litigants from any estrangement, move, removal or hampering of the properties being referred to.
7. Company Acts as mere sham or a cloak:
Delhi Development Authority v. Skipper Construction Company[14] the supreme court stated that held that the directors and members from the family creating a few corporate bodies does not keep the court from regarding every one of them as one entity belonging to and constrained by the director and his family on the off chance that it is discovered that these corporate bodies were simple cloaks and that the devise of incorporation was actually a ploy adopted for committing fraud or potentially to swindle authorities.
CONCLUSION
As a result of consolidation, an incorporated organization wears a “lifting the corporate veil” and accordingly gets the ‘corporate character’, behind which there are investors/individuals who have built the organization. Despite the fact that in law the organization has a free personality, it is a fake individual and thus, behind the corporate drape, there are regular people, for example investors. This corporate character might be disclosed in certain circumstances where it is utilized for illicit or deceitful exercises, and the investors or the chiefs behind it could be considered culpable.
Despite the fact that the legislature and the courts have not allowed for lifting the corporate veil to be lifted in a number of cases, it should be noticed that the doctrine of lifting the corporate veil of corporation, i.e., isolated legal presence of an organization, is still the standard and the cases of the piercing of lifting the corporate veil cloak are the exemptions for this rule.
[1] Section 2 clause 60 of the Companies Act, 2013
[2] Section 26 clause 9, section 34 and section 35 of the Companies Act, 2013
[3] Section 39 clause 3 of the Companies Act, 2013
[4] Section 216 of the Companies Act, 2013
[5] Section 339 of the Companies Act, 2013
[6] Section 446 of the Companies Act,2013
[7] 1962] 1 All. ER 442
[8] 1991 70 comp case 27
[9] (2007173 SCL 133 (Delhi)
[10] Re AIR 1927 Bom. 37Khe
[11] [1989] 65 Comp Cas. 196 (Delhi)
[12] [1986] 59 Comp. Cas. 1341
[13] PNB Finance Limited v. Shital Prasad Jain
[14] 1996 4 SCALE 202
This Article is Authored by Aditya Ojha, 3rd Year, B.A.LLB Student at Ajeenkya D.Y Patil University.
