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. The Courts are also empowered to lift the corporate veil if they are of the opinion that such companies are sham or hoax. [11], Statutory Provisions in support of Lifting the Corporate Veil. Lifting te corporate veil means disregarding the corporate personality and looking behind the real person who are in the control of the company. The capital is employed in some trade or business, the members share the profits and losses arsing from such business. [4] CORPORATE VEIL: meaning in the Cambridge English Dictionary, Cambridge Dictionary, https://dictionary.cambridge.org/dictionary/english/corporate-veil (last visited Dec 18, 2020). All shareholders held shares of UK pound 1 each. Lee died while piloting the aircraft during the course of aerial top-dressing. unless it is duly paid by the company. During the First World War, the English company commenced an action for recovery of Trade debt. [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). In Florida, one must typically show two things in order to pierce the corporate veil: 1. Salomon being the principal was made liable to pay the unsecured creditors. It was held that the company was formed only with an intention to evade tax and the company was nothing but the assessee himself. 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. [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. Cas. Sub-section (4) is the penalty clause. Sections 307 and 308- Section 307 applies to every director and every deemed director. 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] Salomon v Salomon – Case Summary, Law Teacher (2018), https://www.lawteacher.net/cases/salomon-v-salomon.php (last visited Dec 18, 2020). Under Article a company also has the right to life and personal liberty as a person. 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… Article 21 of the Constitution of India, says that: No person shall be deprived of his life and personal liberty except according to procedure established by law. In such cases, the Courts adopt the test of control. The shareholders are not liable to creditors for the debts of the company. 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. In other words, where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to … Liabilities should therefore, be attached to the whole group as companies aim to reach a single economic goal. The human ingenuity however started using the veil of corporate personality blatantly as a cloak for fraud or improper conduct. [1] Corporate Veil Definition: Protecting the Corporate Veil, The Strategic CFO (2019), https://strategiccfo.com/corporate-veil/ (last visited Dec 18, 2020). The courts from time to time implemented this rule and also brought in a few changes suitable for the situations and for future reference. 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. This argument for lifting the veil is targeted at companies within a corporate group. 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. Thereafter, the film at the time of release was refused by the Board of Trade to register it as a British film because the British company acted merely as an agent of an American company. Adelman.[viii]. Lifting the Corporate Veil. It states: ‘a company means a company formed and registered under this Act or an existing company as defined in section 3 (1) (ii).’ The company must be registered under the Companies Act for it to become an incorporated association. 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. But the theory cannot be pushed to unnatural limits. Salomon was running a business of boot making and leather merchant as a sole proprietorship and transferred his business to Salomon Ltd, incorporated with members comprising of his own family and himself. Lifting Of The Corporate Veil ABSTRACT From the juristic point of view, a company is a legal person distinct from its members [Salomon v. Salomon and Co. Ltd. (1897) A.C 22].This principle may be referred to as the ‘Veil of incorporation’. Lifting or Piercing the Corporate Veil The company, in the contemplation of law, is a person distinct from the shareholders. lifting of the corporate veil, the court stated that the correct test in relation to groups of companies was whether the company had been used as a "mere façade concealing the true facts" applying this test Slade J. said that the "motives of the perpetrator may be highly material" in both the The concept of lifting the corporate veil is a very dynamic concept. That the relevant corporation is only the alter ego or mere instrumentality of the parent corporation or its shareholder(s) 2. As a consequence of the lifting of the corporate veil, the company as a separate legal entity is disregarded and the people behind the act are identified irrespective of the personality of the company. Establishing how a company comes into existence and how it is managed and functioned all depends on the legal entity of the company. 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. Read … 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. This fiction is created by a veil and is called the Corporate veil. In Popular Bank Ltd., In re[x] it was held that section 542 appears to make the directors liable in disregard of principles of limited liability. 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”. This concept is in serious conflict with the doctrine of lifting the veil as both these do not co-exist which is discussed by us in the paper in detail. CRITICAL ANALYSIS OF LIFTING OF THE CORPORATE VEIL: IN LIGHT OF COMPANIES ACT, 2013. This lifting of the curtain is called a Lifting of the Corporate veil. In any contravention to this effect, the director will be punishable with imprisonment or/and fine as prescribed. 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 shareholders do not own the property of the company. 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. By this doctrine, a shareholder can only lose what he or she has contributed as shares to the corporate entity and nothing more. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. IBC Suspension: Too Much To Chew On For The Banks? For example, in Vodafone the Bombay High Court did not consider lifting the corporate veil to impose taxation in case of indirect transfers. Subscribe to our mailing list and get interesting stories handpicked for you. Section 159 r/w 156- It is the duty of every existing director to intimate his Director Identification Number to the company or all companies wherein he is a director within one month of the receipt of the same from the Central Government. As a result, there are two main ways through which a company becomes liable in company or corporate law: firstly through direct liability (for direct infringement) and secondly through secondary liability (for acts of its human agents acting in the course of their employment). 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. 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 […] Circumstances must occur which compel the Court to identify a company with its members. Lifting the veil doctrine exists as a … The corporate veil may be ignored if the company is formed merely to evade tax. 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. CONCEPT• In the eyes of law, a company is a legal person with a separate entity distinct from its members of shareholders. 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. [11] Sir Dinshaw Manockji Petit v Commissioner of Income-tax on 29 November 1926 – Judgement – LawyerServices, The Tech Solution, https://www.lawyerservices.in/Sir-Dinshaw-Manockji-Petit-Versus-Commissioner-of-Income-tax-1926-11-29 (last visited Dec 18, 2020). Incorporation of a company is very important for the commencement of business and to have a separate legal entity. By a fiction of law, a company is seen as a distinct entity separated from its members, but in reality, it is an association of persons who in fact the beneficial owners of the company and its corporate property. Section 299- This Section gives effect to the following recommendation of the Company Law Committee: “It is necessary to provide that the general notice which a director is entitled to give to the company of his interest in a particular company or firm under the proviso to sub-section (1) of section 91-A should be given at a meeting of the directors or take reasonable steps to secure that it is brought up and read at the next meeting of the Board after it is given. This has a number of implications. 50,000 in respect of each of those companies after the first twenty. The veil of corporate personality, even though not lifted sometimes, is becoming more and more a transparent form of ensuring smooth business practices in modern jurisprudence. The separate personality of a company is a statutory privilege and it must be used for a legitimate purpose only. 257 (SC), [2000] 3 SCC 312, [xxvii] ‘Lifting the corporate veil for tax purposes’ by V. Umakanth. Second, it is not clear from the judgment itself whether the tax authorities advanced the argument regarding lifting the corporate veil. The separate legal entity is the basic feature on which company law is premised. 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. Further in Lee v. Lee’s Air Farming Ltd.[iii], it was held that there was a valid contract of service between Lee and the Company, and Lee was therefore a worker within the meaning of the Act. When lifting the corporate veil, the company losses its liability protections. By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. LIFTING OF THECORPORATE VEIL BY: Amandeep Kaur BBA Sem. By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. It was held that D-3 being a housewife had little role to play and therefore could not be made liable. 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. [ix] The section applies to all public as well as private companies. By S. Chaitanya Shashank, Kaushalya T. Madhavan, KIIT School Of Law, KIIT University. The company entered into many contracts with other companies, insurance agencies, etc for insurance of its employees. 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. 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. 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. 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. The legislature and the courts have in many cases now allowed the corporate veil to be lifted. 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. If any director of a company contravenes, such director shall be punishable with imprisonment or with fine under Section 159. 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. So D-1 and D-2 were both personally liable. The line of business structure of the company can be corporation, partnership, or proprietorship. The corporate veil in the UK is, however, capable of being "lifted", so that the people who run the company are treated as being liable for its debts, or can benefit from its rights, in a very limited number of circumstances defined by the courts. The most illustrative case in this regard is the case decided by House of Lords- Salomon v. A Salomon & Co. Ltd[i]. [7], It was held that the decision was valid in the view of the fact that the British company acted merely as a nominee of the American company. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. 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. 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. There are certain circumstances when the lifting of corporate veil becomes necessary. He made all the decisions in relation to the contracts of the company. It is up to the court to decide on which theory to apply or make a combination of the two doctrines. It should be noted that the principle of Salomon v. A. Salomon & Co. Ltd.[xxviii] is still the rule and the instances of piercing the veil are the exceptions to this rule. An incorporated company, unlike a partnership firm which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members. The companies can thus own properties in their names, become signatories to contracts etc. 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. Gilford did not have any legal restraints against Horne’s company, only Horne himself. According to Justice Marshall, “a company is an artificial person, has no physical existence. [9] Connors Bros. Ltd. And Others v. Bernard Connors, CaseMine, https://www.casemine.com/judgement/in/56b49627607dba348f0170e6 (last visited Dec 18, 2020). It exists only in contemplation of law”. This doctrine of separate legal entity has always been exploited by the offenders. Section 194- This section puts a prohibition in forward dealings of securities of the company, its subsidiaries or in its holding or associate company by a director of such company. D-2 was running the business in the name of the company. Thus when “Tata Company” or “German Company” or “Government Company” is referred to, we look behind the smoke-screen of the company and find the individual who can be identified with the company. 1st National Online Debate Competition By Jus Corpus & JLSR [Fee : 70/-] : Register Now! The concept of a separate legal entity is not new and contrastingly there are many cases and litigation on this topic and on its jurisdiction. The company in less than one year ran into difficulties and liquidation proceedings commenced. Gilford filed or commenced proceedings against Horne individually, claiming that Horne’s company was an attempt to evade legal obligations through soliciting customers. Section 279 provides for a punishment with fine which may extend to Rs. The chief advantage of incorporation is, of course, the separate legal entity of the company and limited liability. 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. Although it was in their name, he was the main controller of the business and the business solicited customers of the previous company. [12] THE COMPANIES ACT, 2013, mca.gov.in, https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf (last visited Dec 18, 2020). Lifting of corporate veil shall apply where the company fails to distinguish between the funds and assets of the shareholder and the company. This paper would deal with the lifting of corporate veil and its aspects with the judicial decisions. 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. The business was failed and was incurring losses. This notion of hiding behind the walls of the company was removed and the true meaning of a separate legal entity was seen in many historical cases, which led to the establishment of new laws and acts. Lee apart from being the director of the company was also a pilot. So, this principle is also called “disregarding the corporate entity”. It continues to be one of the most litigated and most discussed doctrines in all of corporate … 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. “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 company established by Horne has lower price tags than that of Gilford’s company. If it is not registered it becomes an illegal association. 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. 2999 shares out of 3000 shares were owned by Lee himself. So if this corporate personality is uncovered or unveiled, the shareholders or the directors mostly are found to be behind the veil. The principle that a company has its own separate legal personality of its own finds an important place in the Constitution of India as well. 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. 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. At times it may happen that the corporate personality of the company is used to commit frauds and improper or illegal acts. [3] Kashish G, Joint Stock Company: Definition, Features, Advantages and Disadvantages Essays, Research Papers and Articles on Business Management (2018), https://www.businessmanagementideas.com/joint-stock-company/joint-stock-company-definition-features-advantages-and-disadvantages/18068 (last visited Dec 18, 2020). [9], The court held that it would against public policy if there is a trade among them and hence it was decided that the company will not be allowed to proceed with the action.[10]. 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. 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. 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]. The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are distinct and separate from those of its members; it can sue and be sued exclusively for its purpose; liability of the members are limited to the capital invested by them.[ii]. It generally only happens when there is wrongdoing by the people/person in control. The company had no business other than its registered office and it had no staff also. 2- Day Webinar Series On “Debating And Mooting” [Fee: 60/-] By JLSR : Register Now! 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. The company claimed that Lee was the owner of the company and had the maximum number of shares in the company so his wife is not entitled to compensation. This concept disregards the separate identity of the company and looks behind the true owners or real persons who are in control of the company. 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. He formed 4 companies and agreed with each other to hold a block of investment as an agent for it. It was held that the company is a real and legal company, fulfilling all legal requirements. The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders. 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. INTRODUCTION. 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. Once a company is incorporated, it becomes a separate legal identity. The proportion of capital to which each member is entitled is called as his share, the shares are always transferable although the right to transfer is often more or less restricted”. A company or corporation can only act through human agents that compose it. The company acts on the concept of the corporate veil, this veil when misused for fraudulent acts will reveal the true nature and real beneficiaries of the company, thus, called the lifting of the corporate veil. The shareholders started soliciting the customers of Gilford Motor Company. Section 184- This section imposes a duty upon a director of a company to disclose his concern or interest, including shareholding, in any company or companies, or bodies corporate, companies, firms, or other associations of individuals or if he is a party to any contract or agreement with a body corporate in which such director holds more than 2% shareholding or otherwise as mentioned or any firm in which such director is a partner or owner etc. One of the main highlights of this Bill is that it proposes a mechanism for vigilance that will reward whistle blowers. 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. "Lifting the corporate veil" is the term used to describe veil piercing in England. 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. Lee was a qualified pilot and formed a company named Lee’s Air Farming Ltd. for the purpose of carrying the business of aerial top-dressing with 3000 shares, 1 Euro each forming the share capital of the company. But in reality, it is the persons who form the association that carry out the business on behalf of the incorporated corporation. [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). ‘A Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers-Himself, his wife, a daughter and four sons. Piercing or lifting 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. ” or other self theory, and lifting of corporate veil of the principles laid down in the name of shares. Incorporated in England for the debts of the company was nothing but the assessee himself as companies aim to a... Only Horne himself courts are also empowered to lift the corporate veil ) by Lee himself statutory privilege it! 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