An American company financed the production of a film in India in the name of a Britain company. Lifting of Corporate Veil under the Companies Act, 2013, Centre for Civil Society’s Austrian Economics Seminar | 6,13,20 & 27 Feb 2021, MNLU Mumbai’s One Week Certificate Course on Trademark, Copyright & Design Protection; 18-23 Jan, Internship Alert: Journal for Law Students and Researchers (25 Jan – 25 Feb), Call For Blogs: Centre ICT Law (CICTL), MNLU Mumbai: Accepting Rolling Submissions. [5] Salomon v Salomon – Case Summary, Law Teacher (2018), https://www.lawteacher.net/cases/salomon-v-salomon.php (last visited Dec 18, 2020). [1] Corporate Veil Definition: Protecting the Corporate Veil, The Strategic CFO (2019), https://strategiccfo.com/corporate-veil/ (last visited Dec 18, 2020). It was held that the company is a real and legal company, fulfilling all legal requirements. India being one of the top three emerging economies, has been longing for strong and cogent corporate laws that will enable the country’s international trade to conduct its affairs on a par with the western industrialized nations. In course of time, the doctrine that a company has a separate and legal entity of its own has been subjected to certain exceptions by the application of the fiction that the veil of the corporation can be lifted and its face examined in substance. Cases and Articles have been used to set out the main principles in which the law is based. The protection of a company is not ironclad or impenetrable. Salomon’s right of recovery secured through floating charge against debentures stood at a priority against the creditors of the company, they contended that Salomon and his company “Salomon Company” are one and the same. IBC Suspension: Too Much To Chew On For The Banks? It was held that D-3 being a housewife had little role to play and therefore could not be made liable. The plaintiff was sought to be defrauded under the cloak of a corporate entity of D-1 and, therefore, the corporate veil was lifted taking into consideration that D-1 was only a family arrangement of the remaining defendants. So, a corporation can own and sell properties, sue or be sued, or commit a criminal offence because a corporation is made up of and run by people, acting as agents of the company. It leaves the Court with discretion to make a declaration of liability, in relation to ‘all or any of the debts or other liabilities of the company’. If any director of a company contravenes, such director shall be punishable with imprisonment or with fine under Section 159. Any director in violation of these duties will be punishable with a fine of not less that Rs 1 lakh and not more than Rs 5 lakhs. 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. Lifting of corporate veil shall apply where the company fails to distinguish between the funds and assets of the shareholder and the company. Adelman.[viii]. The principle was applied against the managing director who made use of his position to contrary to the public policy. At times it may happen that the corporate personality of the company is used to commit frauds and improper or illegal acts. Strictly, a company has no particular definition but section 3(1) (i) of the Companies Act attempts to provide the meaning of the word in context of the provisions and for the use of this act. Cas. 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). There are two existing theories for the lifting of the corporate veil. When the true legal position of a company and the circumstances under which its entity as a corporate body will be ignored and the corporate veil is lifted, the individual shareholder may be treated as liable for its acts. The legislature and the courts have in many cases now allowed the corporate veil to be lifted. The concept of lifting of corporate veil scrutinizes, the human agency behind the scenes of the Company, to determine the real culprit committing such offences. He formed 4 companies and agreed with each other to hold a block of investment as an agent for it. 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. 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. One of the main characteristic features of a company is that the company is a separate legal entity distinct from its members. It is invisible and intangible. In other words, where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to … This is not an absolute right the court depending on the facts of the case can take the decision whether the shareholder is liable or not. Let us first discuss the exact meaning of corporate veil and lifting of corporate veil with limited liability concept. The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented. This argument was advanced successfully in the 1976 case of DHN Food Distributors v Tower Hamlets wher… The High Court of Karnataka held that the Petitioner should reply to the show-cause notice issued by the Tax department and urge all their contentions before it. This measure will allow companies to follow transparency at every move they initiate. As Salomon was the major shareholder of the company, he was made personally liable for the company’s debt. Besides the statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. There are certain circumstances when the lifting of corporate veil becomes necessary. So, this principle is also called “disregarding the corporate entity”. In this case the acts done by the members of the company led the court to lift the corporate veil to punish the offenders as the company had been formed to accomplish an act that is against the public policy. The company entered into many contracts with other companies, insurance agencies, etc for insurance of its employees. Section 279 provides for a punishment with fine which may extend to Rs. The human ingenuity however started using the veil of corporate personality blatantly as a cloak for fraud or improper conduct. The separate personality of a company is a statutory privilege and it must be used for a legitimate purpose only. Establishing how a company comes into existence and how it is managed and functioned all depends on the legal entity of the company. It did not do any business, except for helping the assessee to evade tax and to have a separate legal entity to superficially receive the dividends and interest and then to hand it to them to the assessee as pretended loans. 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. The shareholders do not own the property of the company. He made all the decisions in relation to the contracts of the company. The appropriate authority will break this shell of the company and sue the individuals who have done or committed such a crime or offence. [5], It was held by the court that Lee was a separate person from the company he formed and his widow wife is entitled to get the compensation. By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. Sub-section (4) is the penalty clause. Lifting of corporate veil 1. This fiction is created by a veil and is called the Corporate veil. The High Court also emphasized that the fact-finding authority (Tax Department) may lift the corporate veil to look into the real nature of the transaction to ascertain the vital facts. 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). Section 45– Reduction of membership below statutory minimum: This section provides that if the members of a company is reduced below seven in the case of a public company and below two in the case of a private company (given in Section 12) and the company continues to carry on the business for 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. Section 542- Fraudulent conduct: If in the course of the winding up of the company, it appears that any business of the company has been carried 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. whom the company is dealing. The separate legal entity is the basic feature on which company law is premised. This was iterated by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.[vi]. It continues to be one of the most litigated and most discussed doctrines in all of corporate … Section 147- Misdescription of name: Under sub-section (4) of this section, an officer of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the company is not mentioned is the prescribed manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. By this doctrine, a shareholder can only lose what he or she has contributed as shares to the corporate entity and nothing more. For collaborations contact [email protected]. The main aim of Doctrine of Lifting of Corporate Veil is to ensure that corporate personality is used for legal purposes and not for fraud, misuse or illegal activity. Section 127- A director of a company is punishable with imprisonment or fine if a dividend which is declared has not been paid or a warrant which in respect thereof has not been posted within 30 days of the date of declaration. The Courts are also empowered to lift the corporate veil if they are of the opinion that such companies are sham or hoax. One of the main motives for forming a corporation or company is the limited liability that it offers to its shareholders. The company purchased the business of Salomon for 39000 pounds, the purchase consideration was paid in terms of 10000 pounds debentures conferring charge on the company’s assets, 20000 pounds in fully paid 1 pound share each and the balance in cash. In Jyoti Limited vs Kanwaljit Kaur Bhasin And Anr., the Delhi High Court held that corporate veil can be lifted if the representative of the company commits contempt of the Court. A corporation is a legal entity that is separate from its shareholders. Grounds under which Corporate veil is Lifted, 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 aspect that deserves greater attention is that the Karnataka High Court demonstrates a keen interest in lifting the corporate veil. CONCEPT• In the eyes of law, a company is a legal person with a separate entity distinct from its members of shareholders. Income revived was credited in the accounts of the company but the company handed back the amount to him as a pretended loan, like this, he divided his income into 4 parts so that he can easily escape the tax liability. In essence it means that there is a veil or curtain separating the legal entity of the company from its members or shareholders.• The basis of this argument is that despite the separate legal personalities of the companies within the group, they in fact constitute a single unit for economic purposes and should therefore be seen as one legal unit. Lifting the veil doctrine exists as a … This lifting of the curtain is called a Lifting of the Corporate veil. 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. Non Performing Assets Against The Backdrop of Quid…, Implementation of Work From Home Policy in India in…, http://www.business-standard.com/india/news/industry-welcomes-companies-bill/458638/, Nature of Continental Shelf Rights under International Law, Aruna Ramchandra Shanbaug v. Union Of India: Case Analysis. Company under section 2(20) means a company incorporated under the Companies Act, 2013 or under any previous Companies Act. 50,000 in respect of each of those companies after the first twenty. The business was failed and was incurring losses. The proposals in the Bill are expected to act as a catalyst to fostering the growth of the economy. [2] Company Law, excellentcareersolution, http://excellentcareersolution.com/images/note/Company Law BCOP-302.pdf (last visited Dec 18, 2020). He exercised unrestricted power to control the affairs of the company. In any contravention to this effect, the director will be punishable with imprisonment or/and fine as prescribed. A company is known by its own name and has its own right, duties, obligations, and liabilities. [10] Shashi Aggarwal, DAIMLER CO LTD V CONTINENTAL TYRE RUBBER CO LTD COMPANY LAW (2019), https://www.gargshashi.com/2019/08/daimler-co-ltd-v-continental-tyre.html (last visited Dec 18, 2020). shareholders who have associated themselves into a company. In Florida, one must typically show two things in order to pierce the corporate veil: 1. In other words, the company alone is liable for all the acts done and the debts incurred by it and not the directors or the shareholders who are in fact the beneficial owners of the company. Section 239– Power of inspector to investigate affairs of another company in same group or management: It provides that if it is necessary for the satisfactory completion of the task of an inspector appointed 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. 2- Day Webinar Series On “Debating And Mooting” [Fee: 60/-] By JLSR : Register Now! The company established by Horne has lower price tags than that of Gilford’s company. 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. On the one hand, courts understand the fact that the corporate form is supposed to be a juridical entity with the characteristic of legal “personhood.” As such courts acknowledge that their equitable authority to pierce the corporate veil is to be exercised […] During the First World War, the English company commenced an action for recovery of Trade debt. All rights reserved. This Judgement is very important with respect to Indian companies act as it lays the precedent that a company has a separate legal entity and it can enter into contracts with its own members. Scenarios under which the Courts consider piercing or lifting the corporate veil are as below, 1] To Determine the Character of the Company There are cases where the Courts need to understand if the company is an enemy or friend. [7] Gilford Motor Co Ltd v Horne [1933] Ch 935, Law Case Summaries (2019), https://lawcasesummaries.com/knowledge-base/gilford-motor-co-ltd-v-horne-1933-ch-935/ (last visited Dec 18, 2020). This paper would deal with the lifting of corporate veil and its aspects with the judicial decisions. It refers to the situation where a shareholder is held liable for its corporation’s debts despite the rule of limited liability and/of separate personality. According to Justice James, “a company is an Association of persons united for a common object”. The doctrine of "Lifting of Corporate veil " is the most essential Principle of Company Law which establishes a company as an entity that is completely distinct from its shareholders, advocates, managers and directors: Thus, when a company is incorporated, a legal entity gets created, which is separate from its members, employees, shareholders, directors, and promoters etc. It had an identity different from its members and therefore, the unsecured creditors were to be paid at priority from the secured debentures. Such companies are mere cloaks and their personalities can be ignored in order to identify the real culprit. Gilford filed or commenced proceedings against Horne individually, claiming that Horne’s company was an attempt to evade legal obligations through soliciting customers. In The King v Portus; ex parte Federated Clerks Union of Australia[iv], where Latham CJ while deciding whether or not employees of a company owned by the Federal Government were not employed by the Federal Government ruled that the company is a distinct person from its shareholders. Subscribe to our mailing list and get interesting stories handpicked for you. His widow wife claimed compensation under the New Zealand Workers’ Compensation Act, 1992 for the death of her husband in the course of his employment. The concept of lifting the corporate veil describes a legal decision where a person of a company is held personally liable for the liabilities of the company despite the general principle that those persons are immune from suits in or that otherwise would hold only the company liable. In this case, Mr. Solomon had the business of shoe and boots manufacture. A corporate veil is a legal concept that separates the acts done by the companies and organizations from the actions of the shareholders. 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. This is known as ‘lifting of corporate veil’. Third, the Karnataka High Court appears to have readily permitted lifting the corporate veil without at all alluding to the jurisprudence on the subject matter. D-4 denied the liability on the ground that it had nothing to do with the transaction in question as he was neither a director nor a shareholder of the company so it was held that he had no locus in the company and hence not liable. According to Justice Marshall, “a company is an artificial person, has no physical existence. Although in law the company has an independent personality, it is an artificial person and hence, behind the corporate curtain, there are natural persons, i.e. This phenomenon which is applied by the courts and which is also provided now in many statutes is called “lifting of the corporate veil”. “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.”. The common stock so contributed is money is called Capital of the company, the persons who contributed the capital are called as Members of the company. The Court held that the formation of the new company was a mere cloak or sham to enable him to breach the agreement with the plaintiff. Lee died while piloting the aircraft during the course of aerial top-dressing. Judiciary is empowered to lift the corporate veil if the conduct of a company is in conflict with the public interest. Signup for our newsletter and get notified when we publish new articles for free! But in reality, it is the persons who form the association that carry out the business on behalf of the incorporated corporation. ‘lifting the corporate veil’ has been regarded by the courts and jurists. 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. Circumstances under which Court may Lift the Corporate Veil Fraud or Improper Conduct A company is an artificial person and so it cannot act on its own. In the case of Madan lal v. Himatlal & Co.[vii] the respondent filed suit against a private limited company and its directors for recovery of dues. This means that the shareholders cannot be held liable for any debts of the business. According to the Cambridge Dictionary, “shareholders may hide behind the corporate veil, assured that their liability does not extend beyond the value of their shares”. The essay analyses and scrutinises under which circumstances the corporate veil can be disregarded in the UK. It is under the ‘seal of the company’ that the members or shareholders commit fraud or such acts and therefore the company should also be liable as it also a person which is accorded fundamental rights under Article 21 of the Constitution of India. Generally, courts defer to the sanctity of the corporate form as a separate legal personality and are slow to lift the corporate veil, as evidenced by Adams v. Cape Industries[xxvi], unless one of the established grounds exist.[xxvii]. 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. The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. With the growing economy and trends in the corporate sector, the corporate sector has faced many frauds, insider trading, and false claims, etc. Incorporation of a company is very important for the commencement of business and to have a separate legal entity. 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). Thus it became necessary for the Courts to break through or lift the corporate veil and look at the persons behind the company who are the real beneficiaries of the corporate fiction.Lifting of the corporate veil means disregarding That the relevant corporation is only the alter ego or mere instrumentality of the parent corporation or its shareholder(s) 2. The company in less than one year ran into difficulties and liquidation proceedings commenced. Lifting the Corporate Veil. [12] THE COMPANIES ACT, 2013, mca.gov.in, https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last visited Dec 18, 2020). unless it is duly paid by the company. It protects the shareholders from being liable for the actions done by the company. 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 person… Introduction When carrying on business, seeking an appropriate corporate structure which accommodates to the needs of the intended business and … Lifting the Corporate Veil UK Law. The company had no business other than its registered office and it had no staff also. The courts in general consider themselves bound by this principle. The first is the “alter-ego” or other self theory, and the other is the “instrumentality” theory. The concept of lifting of corporate veil says that a company will be regarded as having enemy character if the persons having de facto control of the company are resident of enemy country or whenever they are acting on instruction of enemy, therefore there should be a lifting of corporate veil. First, the Richter Holding Case extends even further the scope of the principles laid down in the Vodafone Case. Since an artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate personality might have to be removed to identify the persons who are really guilty. In simple words, the liquidator disregarded the separate personality of Salomon Ltd., particularly from its members making him liable personally for the acts of the company. 1st National Online Debate Competition By Jus Corpus & JLSR [Fee : 70/-] : Register Now! The capital is employed in some trade or business, the members share the profits and losses arsing from such business. The Income Tax Department contended that as per section 195 of the Act, the Petitioner is liable to deduct tax at source in respect of payment made for the purchase of the capital asset. The House of Lords unanimously held that the company had been validly constituted, since the Act only required seven members holding at least one share each and that Salomon is separate from Salomon & Co. Ltd. The Court may lift the veil if the company concerned is ‘using’ the veil to avoid fulfilling legal obligations. 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.[8]. The value paid to Salomon for such exchange (transfer) was made with the assistance of shares and debentures having a floating charge on the resources of the company. CRITICAL ANALYSIS OF LIFTING OF THE CORPORATE VEIL: IN LIGHT OF COMPANIES ACT, 2013. The other side of this coin can be that, as the company is privileged to have its own right to life and personal liberty, how can its fundamental right be taken away by disregarding its corporate entity for the wrongs committed by its members and not the company itself. 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. For example, in Vodafone the Bombay High Court did not consider lifting the corporate veil to impose taxation in case of indirect transfers. The concept of the corporation, as a commercial body and one of the most beneficial types of the company organization, is founded on multiple definitions – the nature of the most relevant as a “separate legal agency”. The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. The companies can thus own properties in their names, become signatories to contracts etc. Circumstances in … The assets of the company were not even sufficient to discharge the debentures (held entirely by Salomon itself) and nothing was left to the insured creditors. The Courts according to Gower’s common dictum would lift the veil when the corporate personality of the company is being blatantly being used as a means to commit fraud, improper conduct or where the protection The corporate veil is the term given to the imaginary barrier that separates the company from those who direct it and from those who own it. Gilford did not have any legal restraints against Horne’s company, only Horne himself. All shareholders held shares of UK pound 1 each. Section 166- Under this section various duties of a director are enumerated such as the duty of good faith, of due and reasonable care, to act in accordance with the articles of association etc. One of the main highlights of this Bill is that it proposes a mechanism for vigilance that will reward whistle blowers. The line of business structure of the company can be corporation, partnership, or proprietorship. LIFTING OF THE CORPORATE VEIL: Lifting or piercing the veil is corporate law‟s most widely used doctrine to decide when a shareholder or shareholders will be held liable for obligations of the corporation. D-2 was running the business in the name of the company. 4 2. That the alleged parent company or shareholder(s) also engaged in improper conduct Corporate personality is the reality expressed by the law that a company is perceived as a legal entity distinct from its members. Circumstances must occur which compel the Court to identify a company with its members. Copyright © 2020 Lawctopus. Mr. Horne was fired from his position and job. Courts have authority to ignore the corporate character and remove the veil against any person hiding behind the name of the Company, for fraud committed. Lee was the director of the company also. The directors resisted the suit on the ground that at no point of time the company did carry on business with members below the legal minimum and therefore, the directors could not be made severally liable for the debt in question. Statutory Provisions relating to lifting of corporate veil. The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders. So if this corporate personality is uncovered or unveiled, the shareholders or the directors mostly are found to be behind the veil. 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