Doctrine of Corporate Veil and Lifting of Corporate Veil

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Doctrine of Corporate Veil and Lifting of Corporate Veil

The notion of a company’s independent legal personality is the one that serves as the foundation and a fundamental principle of corporate law in modern legal systems around the world. This idea provides the corporation with an identity that is distinct from its owners, members, or founders, granting the company the status of an artificial or a juristic person. Let us discuss more about Doctrine of Corporate Veil and Lifting of Corporate Veil.

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Key Abstract

There is a lot of discourse about how a company is a “person” from the perspective of the law. A firm is handled as if it were a human being in its own right. It is mandatory to supply several types of information, such as meeting minutes, the number of directors, and so on. However, it is only a person in the eyes of the law. It is a juristic person, not a real person, and is subject to a different level of examination. This artificiality of the corporation is, in fact, an addition to the company’s personality. 

The personality of the firm differs from that of its directors, promoters, and other members. The relationship between the personality of the company and the personality of its members is the additional protection that the former provides to the latter. The company’s personality serves as a curtain to conceal the faces of its members, which is sometimes gets exploit to do unlawful crimes. As a result, the purpose of this study is to define, investigate, and establish the many components of the idea of lifting the corporate veil. A doctrine is a tool in the hands of the judiciary, which may disregard this corporate personality in order to discover the true criminal and hold him guilty rather than holding the corporation liable.

Let us discuss Company before we discuss the Doctrine of Veil.

Company

The name “company” comes from the Latin term “companis.” We can break this phrase into ‘com’, which means ‘together,’ and ‘panis,’ which means ‘bread.’ As a result, the term companies refer to a group of people who dine together. However, this was the ancient way, in which people formed communities only for the sake of satisfying their appetites. Nowadays, a ‘business’ is defined as a group of people who work together to carry out commercial or industrial activity.

A “company incorporated under this Act or under any previous company law” is acting as a company, according to Section 2 (20) of The Companies Act, 2013 (hereinafter referred to as “The Act”).

Evolution of the Doctrine of Corporate Veil and Lifting of Corporate Veil

The lifting of the Corporate Veil has statutory recognition, as various provisions of the Companies Act 2013, the Income Tax Act, 1961, and the Foreign Exchange Regulation Act, 1973 enumerate the circumstances in which the concept of a distinct entity may ignore in order to reach the real forces of action. The following parts of the Companies Act deal with this concept:

  • Section 12 : Misrepresentation of a Person’s Name
  • Sections 34 and 35 : Prospectus Misstatements
  • Section 39 : Non-return of application funds
  • The Section 76A : Penalties for violating sections 73/76
  • Section 219: To make it easier for an inspector appointed under section 210/212 to do his or her job.
  • Section 339 : Fraudulent Conduct 

Several court statements and interpretations have contributed to the enrichment of its jurisprudence while also exposing various problems.

The case of Dinshaw Maneckjee Petit is an important example of court interpretation of the idea of breaching the corporate veil, in which a company’s facade suddenly takes place to commit tax evasion. The foundation of the corporation in Gilford Motor Company v Horne was merely a “cloak or masquerade” to avoid a non-compete provision, which becomes fraudulent.

Any type of economic crime, like syphoning company funds or determining the enemy character of the company if it is carry out by officials from other countries, or forming subsidiaries to act as an agent, or incorporating to avoid certain welfare legislation, compel the courts to look behind the veil. As declared in Santanu Ray v Union of India, or in situations where the company is used for some illegal or improper purpose, such as syphoning company funds or determining the enemy character of the company.

The Doctrine of Corporate Veil and Lifting of Corporate Veil

If it comes to light that members are abusing the statutory privilege, the individuals involved will no longer be able to hide behind the corporate identity. The Court will pierce the corporate veil by applying the principle/doctrine known as “lifting of or piercing the corporate veil.”

Cases in which the court has ordered the veil to be lifted

  • If the business commits a fraud.
  • It is only on instruments where the corporation does not have a physical presence.
  • If the corporation has an antagonistic personality due to its ties to a hostile country.
  • If the company’s name is being used to conceal unlawful activity.

Lifting Mechanism of Corporate Veil 

The corporate veil can be lifted by:

  • Statutory Lifting
  • Judicial Lifting.

Statutory Lifting: The Companies Act, 2013 has a number of clauses that aim to identify the individual who is responsible for any inappropriate or unlawful activity. These individuals are most commonly act as “officers who are in default” under Section 2(60) of the Act, which covers directors and senior management roles. The following are a few examples of such frameworks:-

  • Misstatement in Prospectus: It is illegal to make incorrect or false assertions in a company’s prospectus, according to Sections 26 (9), 34, and 35 of the Act. Companies offer securities for sale by releasing prospectuses. The company’s major notes, such as descriptions of shares and debentures, names of directors, principal objects, and current activities, are all present in the prospectus under Section 26.
  • Refusal to refund application funds: If the minimum amount has not been subject to subscription and the sum payable on the application has not been receiving within thirty days from the date of issue of the prospectus, under Section 39 (3) of the Act, such officers in default are subject to a fine of one thousand rupees for each day such default continues or one lakh rupees, whichever is less, against allotment of securities.
  • Misrepresentation of the company’s name: The company’s name is extremely essential. The corporation can enter into contracts and make them legally binding if it uses an approved name. This authorization of name should take place in advance under Section 4 and be present in accordance with Section 12 of the Act. As a result, any corporate representative who collects invoices or signs on behalf of the firm and enters inaccurate company information may be personally accountable.
  • For investigation of ownership of the company: Under Section 216 of the Act, the Central Government has the power to appoint inspectors to investigate and report on matters relating to the company, and its membership for the purpose of determining the true persons who have a financial interest in the success or failure of the company; or who are able to control or to materially influence the policies of the company.
  • Fraudulent behaviour: Under Section 339 of the Act, if it comes to light that during the winding up of a business the person is using the company’s name for fraudulent conduct, the Court has the authority to hold any such individual, whether a director, manager or other officials of the company, responsible for such unlawful acts. “Where, therefore, the corporate character is used for the purpose of committing illegality or defrauding others, the court will ignore the corporate character and will look at the reality behind the corporate veil so that it can pass appropriate orders to do justice between the parties concerned,” it was stated in the case Delhi Development Authority vs. Skipper Construction Company.

Judicial Lifting: Though the Legislature has endeavoured to include several measures in the Act to ensure that the guilty individual is identified; when the veil is penetrated, there have been times where the Judiciary has done a better job of ensuring that; no guilty person goes free due to a technicality. The following are examples of situations where the court may lift the corporate veil:-

  • Evasion of taxes: It is the responsibility of every earner to file their Income Tax Return. In the perspective of the law, a corporation is no different from a person. Anyone who tries to escape this obligation in an illegal manner is considered to be committing an offence.
  • Fraud/improper behaviour prevention: It goes without saying that no business can conduct fraud on its own. To perform such crimes, there must be a human agent engaging in the act. As a result, the company may take measures to avoid future scams.
  • Characterization of the enemy: The goal of forming a business is to make money. A firm will not intentionally try to do good for society. It may, however, choose to bring harm instead.
  • Acts of Ultra-Vires are punishable by law: Every company is under obligation to operate in accordance with its Articles of Association, Memorandum of Association, and the Companies Act, 2013. Any activity outside of either’s purview is “Ultra-Vires,” or outside the limit of either’s legal authority. The court may impose Penalties if the company’s operations are illegal.
  • Public Policy/Public Interest: When a company’s actions are in violation of public policy or the public interest; courts have the authority to pierce the veil and hold those responsible personally accountable. The right premise for elevating the corporate personality is to preserve the public policy.

Opinion of Judiciary

The following are the case laws that represent the opinion of the judiciary:

  • Case Law: Re Sir Dinshaw Maneckji Petit Bari, AIR 1927 Bom.371 

The facts of the case: Sir Dinshaw Manckjee Petit, the assessee, was a wealthy man who earned a lot of money through dividends and interest. He established four private companies and promised to hold a portion of the investment as an agent for them. He credited his earnings to the firms’ accounts and then withdrew them back in the form of a fictitious loan. The plan was to divide his income into four pieces in order to lower his tax bill.

Held: The assessee founded the company to avoid paying taxes, and the corporation was nothing more than the assessee himself. It did not conduct any business; rather, it only takes the form of a legal company to apparently earn profits and interest and pass them to the assessee as loans.

  • Case Law: Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr.

Held: The corporate veil may be lifted if business officials commit contempt of court, allowing for penalties to be imposed.

  • Case Law: Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd.

The facts led to the formation of a German business in England to sell tyres manufactured in Germany. The German firm, on the other hand, owned the majority of the stock in this English firm. The English corporation began an attempt to collect trade debt when World War I broke out. The matter was taken to the House of Lords, which ruled against the claimant; holding that because a business is a legal organisation rather than a person, it cannot be a friend or enemy. It may, however, take on an enemy personality if the people in charge of its business are de facto inhabitants of enemy territory. As a result, the claim was denied.

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Endnote

To summarise, the idea of removing the corporate veil is a versatile weapon that aids in the administration of justice since it elaborates on one of the principles of law. Further, it states that a person cannot profit from their own wrongdoings. The inclusion of a veil is essential to the existence of each business since it serves as its basic foundation. But its removal is occasionally necessary to guarantee that no wrongdoing has taken place under the guise of a body corporate. There is a need for stricter application and the establishment of objective criteria to minimise any judicial discretionary doubt.

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