AN OVERVIEW: LIFTING OF CORPORATE VEIL

AN OVERVIEW: LIFTING OF CORPORATE VEIL

16 Jan, 2023

AN OVERVIEW: LIFTING OF CORPORATE VEIL

Author – Aishwarya Deshpande, Student of Jindal Global Law School, Sonipat.

INTRODUCTION-

Every time a company is marking its presence, it is considered to be a separate legal entity from its own management, owners and shareholders. Under company law, a company is a person in the eyes of the law even if it is artificial in origin. The doctrine of Corporate veil says, when a corporation is mismanaged, its owners, shareholders, or members are kept apart from its corporate personality. This theory is exclusively based on company law. However, the courts have faced difficulties in analysing and putting a distinction between the company’s separate legal entity from its members.[1] The company needs a physical organisation to operate the business in order to succeed, by removing the corporate veil, which is used when owners, shareholders, or members of a corporation misrepresent the nature of the business, the real owners, shareholders, or members of the business can be identified. The “lifting the corporate veil” concept, the single economic entity doctrine, and what is recognised as a separate “Legal Personality” are the most argued topics of company law.[2]

As firmly concluded in the landmark judgement of Solomon vs Solomon: the ruling by the House of Lords, companies are independent legal entities with their own names and common seals. The member’s responsibility is capped at the amount of money they invested. If there is an issue about the property, activities performed, rights gained, or liabilities guaranteed, it is necessary to disregard the personalities of the natural people who are the company’s corporators[3] The idea of corporate personality permits another firm to “own” another one in a manner similar to how a person might “own” a business and be distinct from it.

LIFTING OF CORPORATE VEIL-

The exception to the rule of limited liability of a company is “Lifting of Corporate Veil”. Lifting or piercing of Corporate Veil is the most popular doctrine in corporate law for determining when a shareholder or shareholders may be held accountable for the corporation’s debts is called “piercing the veil.” It continues to be one of the corporation law’s most disputed and debated notions.[4] The existence of the piercing the veil regulation serves as a safeguard against the general rule that investor stockholders should not be held accountable for the debts of their firm in excess of the value of their investment. The court will do this by piercing the corporation veil and applying the “lifting or piercing through the corporate veil” principle. And while a company is a separate entity under the law, in reality it is a group of people who are the true proprietors of all of the corporate property.[5]

When the court disregards the company and is only concerned with the members or the management, the evil of the company is said to have been lifted. “It is impossible to identify the variables that are driving corporate insulation to deteriorate.” It will be determined by “the underlying social, economic, and moral elements as they operate in and through the organisation,” which is effectively left to the judge’s discretion in this case.[6] There are some grounds for lifting the Corporate Veil. Statutory provisions and Judicial provisions are among the provisions. One of the most important justifications is when the company’s members or shareholders have engaged in some type of fraud or mismanagement. [7]

Another reason could be tax evasion where the corporate veil is used either to evade taxes to escape any sort of tax liability or to obtain any kind of Benefit in the Revenue. In the case of an Agency contract, the shareholders are authorised to act on behalf of the company being its agent. When anyscam or fraud is committed by the company over time of the Agency agreement of the shareholder, then the corporate veil can be lifted[8].

Statutory Provisions for Lifting of Corporate Veil-

     Sections 7(7), 251(1), and 339 of the Companies Act of 2013 themselves have measures to lift the corporate veil and reveal the true driving forces behind an activity[9].

  • Sections 7(7) address the penalties for incorporating a business with false information.
  • Section 251(1) throws light on Committing fraud to have the business’ name removed from the register of companies.
  • Section 339 talks about engaging in fraudulent commercial activity while a business is being wound up.

Relevance in today’s business-

The Salomon case’s idea served as the foundation for several business-oriented laws[10]. However, the empirical investigation shows that the independent legal entity principle is not always respected. This is consistent with the idea associated with the principle established in the Salomon case, namely, the concept’s ephemeral and fluctuating reliability.[11] Limited liability, perpetual succession, transferability of shares, purchase of a real estate in the company’s name over which the shareholders would have no authority, and the ability to bring and bring claims against third parties are all in the businesses’ favour. The idea is not perfect because the firm can more easily evade legal duties by creating a distinct legal entity with limited accountability[12] and serves as a perfect means of fraud, limits the shareholders’ ability to file a lawsuit on the company’s behalf and limits the shareholders’ participation in management.

CONCLUSION –

The goal to have a doctrine like this is to monitor the functioning of the companies and refrain the management from committing any fraud[13], sham or façade under the umbrella of Limited Liability of a company. Even today, the separate legal entity principle is undoubtedly helpful for businesses, but the court must see that the truth is revealed in every fraud case and that the company’s financial situation is carefully examined before the case is decided to ensure that the creditors receive justice.

Owing to the Provisions of the Lifting of Corporate Veil, any individuals who benefit from the company must ensure that their financial structure is appropriate for their benefit. The company must ensure that its financial structure is appropriate for its company’s size. Management or shareholders are not permitted to take corporate assets out of the company or combine their personal accounts with corporate ones. The bottom line can be said that the courts have the sole discretion of lifting the corporate veil if the company faces the grave abuse of the corporate form and not otherwise.

BIBLIOGRAPHY

  1. A Murray, “The Company as a Separate Legal Entity.” The Modern Law Review 31, no. 5 (1968): 481–511. Pg no 481
  2. Thompson Robert B, “Piercing the Corporate Veil: An Empirical Study” Cornell law review, Vol 76 Art 2(1991)
  3. Salomon v Salomon [1897] AC 22
  4. Saluja A, “A Descriptive Study on the Lifting and Piercing of Corporate Veil” (2020) 21 Supremo Amicus [783]
  5. OREGON LAW REVIEW Spring 1999 – Volume 78, Number 1 (Cite as: 78 or. L. Rev. 347) pg no 1.
  6. Tata Engineering Locomotive Co v. State of Bihar AIR 1965 SC 40
  7. Saluja A, “A Descriptive Study on the Lifting and Piercing of Corporate Veil”  (2020) 21 Supremo Amicus [784]
  8. ibid
  9. The companies Act 2013 Bill No. 121-C of 2011 (30th August 2013)
  10. Ojosu O, “THE SALOMON PRINCIPLE: OF WHAT RELEVANCE IN TODAY’S BUSINESS WORLD?” (2017)
  11. Dignam A, Peter B Oh, “Disregarding the Salomon Principle: An Empirical Analysis,” 1885–2014, Oxford Journal of Legal Studies, Volume 39, Issue 1, Spring 2019, Pages 16–49,
  12. Kahn‐Freund O, “Some Reflections on Company Law Reform” (January 18, 2011)
  13. Bakshi, P. M, “LIFTING THE CORPORATE VEIL” Journal of the Indian Law Institute, (1994) 36(3), 383–384

[1] Pickering, Murray A. “The Company as a Separate Legal Entity.” The Modern Law Review 31, no. 5 (1968): 481–511. http://www.jstor.org/stable/1093759. Pg no 481

[2] Robert B. Thompson, “Piercing the Corporate Veil: An Empirical Study” Cornell law review,Vol 76 Art 2(1991)

[3] Salomon v Salomon [1897] AC 22

[4] Aakarsh Saluja, “A Descriptive Study on the Lifting and Piercing of Corporate Veil” (2020) 21 Supremo Amicus [783]

[5] OREGON LAW REVIEW Spring 1999 – Volume 78, Number 1 (Cite as: 78 or. L. Rev. 347) pg no 1.

[6] Tata Engineering Locomotive Co v. State of Bihar AIR 1965 SC 40

[7] Aakarsh Saluja,“A Descriptive Study on the Lifting and Piercing of Corporate Veil”  (2020) 21 Supremo Amicus [784]

[8] ibid

[9] The companies Act 2013 Bill No. 121-C of 2011 (30th August, 2013)

[10] Ojosu O, “THE SALOMON PRINCIPLE: OF WHAT RELEVANCE IN TODAY’S BUSINESS WORLD?”

< https://www.academia.edu/36433646/ >

[11] Alan Dignam, Peter B Oh, “Disregarding the Salomon Principle: An Empirical Analysis,” 1885–2014, Oxford Journal of Legal Studies, Volume 39, Issue 1, Spring 2019, Pages 16–49,

< https://doi.org/10.1093/ojls/gqy027 >

[12] Kahn‐Freund O, “Some Reflections on Company Law Reform” (January 18, 2011)

< https://onlinelibrary.wiley.com/doi/abs/10.1111/j.1468-2230.1944.tb00969 >

[13] Bakshi, P. M , “LIFTING THE CORPORATE VEIL” Journal of the Indian Law Institute, (1994) 36(3), 383–384. http://www.jstor.org/stable/43952353

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