LIFTING OF CORPORATE VEIL
This article is written by Sristhi Sharma, a Third Year B.A. LL.B (Hons.) Student at Ideal Institute of Management and Technology (GGSIPU), Delhi.
The “corporate veil” metaphorically represents the qualification between the organization as a different legitimate substance and the investors who own the offers in the organization. The impact of ‘lifting’ or ‘penetrating’ the corporate cover is that the investors, as opposed to the organization, are viewed as the pertinent entertainers on whom risk of the commitments of the organization are set. This article aims to introduce to the readers the concept of “Veil of incorporation”, the meaning of the terminology ‘Lifting of the Corporate Veil’, while discussing the judicial and statutory provisions with the help of various case-laws.
Introduction
Before managing the lifting of corporate cover it is relevant to characterize what the importance of an organization is. An organization has no specific definition. However section 3(1) (I) of the Companies Act endeavours to give the significance of the word in setting of the arrangements and for the utilization of this demonstration. It expresses, “an organization implies an organization shaped and enlisted under this Act or a current organization as characterized in area 3 (1) (ii).” The organization must be enrolled under the Companies Act for it to turn into a fused affiliation. In the event that it isn’t enrolled it turns into an unlawful affiliation. This paper would manage the lifting of corporate cover and its viewpoints with the legal choices.
Lifting of Corporate Veil:
The corporate character of the organization is utilized to submit fakes and ill-advised or illicit acts. Since a fake individual isn’t able to do or fake, the façade of corporate character may be expelled to distinguish the people who are extremely blameworthy. This is known as ‘lifting of corporate cover’.
Development of the Concept
One of the fundamental trademark highlights of an organization is that the organization is a different lawful substance unmistakable from its individuals. The most illustrative case in such manner is the situation chosen by House of Lords-Salomon v. A Salomon and Co. Ltd.[1]
Mr. Solomon had the matter of shoe and boots made. ‘A Salomon and Co. Ltd.’ was fused by Solomon with seven supporters Himself, his better half, a little girl and four children. All investors held portions of UK pound 1 each. The organization bought the matter of Salomon for 39000 pounds, the buy thought was paid as far as 10000 pounds debentures presenting charge on the organization’s advantages, 20000 pounds in completely paid 1 pound share each and the parity in real money.
The organization under one year ran into troubles and liquidation procedures started. The benefits of the organization were not even adequate to release the debentures (held completely by Salomon itself) and nothing was left to the protected banks. The House of Lords consistently held that the organization had been legitimately established, since the Act just required seven individuals holding in any event one offer each and that Salomon is independent from Salomon and Co. Ltd.
Lifting the Corporate Veil
“It is neither vital nor alluring to list the classes of situations where lifting the cloak is admissible, since that must essentially rely upon the pertinent legal or different arrangements, the item looked to be accomplished, the criticized lead, the association of the component of open intrigue, the impact on parties who might be influenced, and so on.” was held in Life Insurance Corporation of India v. Escorts Ltd[2]. Corporate veil may be lifted into the following heads:
Statutory Provision
a) Non-compliance of requirements of incorporation [Sec. 464] – The purpose of the provision is to withdraw the advantages of incorporation when the conditions of incorporation are not maintained. Personal liability follows.
b) Mis-description of name [Sec. 147] – Where in any act or contract of a company its name is not fully or properly indicated as required by Section 12, those who have actually done the act or made the contract shall be personally liable for it. In Hendon v. Adelman[3], the directors were held personally liable on a cheque signed by them in the name of a company stating the company’s name as “LR Agencies Ltd.”
But the real name being “L&R Agencies Ltd.”.
c) Fraudulent conduct of business [Sec. 339] – According to this section, if in the course of winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company, in the discretion of the tribunal, can be made personally liable for all or any of the debts of the company.
Judicial Interpretation
Besides statutory provisions for lifting the corporate veil, courts also lift the corporate veil to see the real state of affairs. Some cases are:
Tata Engineering and Locomotive Co. Ltd. v. State of Bihar[4]– In this case it was stated that a company is also not allowed to lay claim on fundamental rights on the basis of its being an aggregation of citizens. Once a company is formed, its business is the business of an incorporated body thus formed and not of the citizens and the rights of such body must be judged on that footing and cannot be judged on the assumption that they are the rights attributable to the business of the individual citizens.
Shri Ambica Mills Ltd. v. State of Gujarat[5]– It was held that the petitioners were as good as parties to the proceedings, though their names were not expressly mentioned as persons filing the petitions on behalf of the company. The managing director in their individual capacities may not be parties to such proceedings but in the official capacity as managing directors and as officers of the company, they could certainly be said to represent the company in such proceedings.
Conclusion
Whenever the members of a company violates any provision of law or carries any undesirable or detrimental activity under the blanket of ‘Corporate Veil’, such members are generally misusing such privilege and the courts are bound and entitled to look beyond the corporate veil and witness the larger picture at hand. Such an act is known as ‘Lifting of Corporate Veil’. Therefore it is crystal clear that corporations does not clear any individual or any personality liability in any time or circumstance.
[1] (1897) AC 22 (House of Lords)
[2] 1986) 59 Comp. Case 548
[3] Hendon v. Adelamn [1973] New Delhi LR 637
[4] Tata Engineering and Locomotive Co. Ltd. v. State of Bihar (1964) 34 Comp. Cas. 458 (SC), AIR 1965 SC 40
[5] Shri Ambica Mills Ltd. v. State of Gujarat (1986) 59 Comp. Cas. 368 (Guj