Lifting of Corporate Veil | Company Law - CLAT PG PDF Download

Corporate Personality: A Legal Perspective

• Separate Identity: A company is viewed as separate from its owners, similar to a person in the eyes of the law.
• Human Agency: While a company is an artificial entity, it requires human involvement to operate and achieve its goals legally.
• Corporate Veil: The corporate veil can be lifted to reveal individuals behind the company's actions, especially in cases of fraud or illegal activities.

When the Corporate Veil is Lifted

• Fraud and Illegality: If directors engage in fraud, illegal acts, or actions beyond the company's objectives, the corporate veil may be disregarded.
• Judicial Authority: Courts can ignore the corporate identity to identify the real wrongdoer and ensure justice.
• Cautious Approach: The judiciary is careful when lifting the corporate veil, aiming to balance legal principles with justice.

Legal Precedents

• United States v. Milwaukee Refrigerator Transit Company: A corporation is generally seen as a legal entity, but when used for wrongful purposes, it is viewed as a group of individuals.
• Tata Engineering and Locomotive Co. Ltd. vs. State of Bihar & Ors: The Supreme Court of India emphasized that lifting the corporate veil prevents misuse of corporate identity for indirect benefits.

When can the veil be lifted?

The doctrine of lifting the corporate veil is widely used by Courts, but it does not operate on a strict rule. Over time, Courts and Legislatures worldwide have attempted to define the scope and applicability of this doctrine under two main categories: Statutory Provisions and Judicial Pronouncements.

Statutory Provisions

The Companies Act, 2013 includes provisions that identify individuals responsible for improper or illegal activities within a company. These individuals, often referred to as "officers in default," include directors and key managerial personnel. Here are some instances where the veil may be lifted:

• Misstatement in Prospectus: Sections 26 (9), 34, and 35 of the Act impose penalties for providing false or misleading information in a company's prospectus. The prospectus contains crucial information about the company, and individuals found guilty of making untrue statements may face penalties or imprisonment.
• Failure to Return Application Money: Under Section 39 (3), if the minimum subscription amount is not received within thirty days from the date of the prospectus, officers in default may be fined for each day of default, subject to a maximum limit.
• Misdescription of Company’s Name: The company's name, approved under Section 4 and printed under Section 12, is vital for entering into legally binding contracts. If representatives provide incorrect details about the company’s name, they may be held personally liable.
• Investigation of Company Ownership: Section 216 allows the Central Government to appoint inspectors to investigate and report on matters related to the company's membership and ownership.
• Fraudulent Conduct: Section 339 empowers the Court to hold individuals liable for fraudulent activities in cases of company winding up. The Court can disregard the corporate structure to address injustices.
• Inducing Investments: Section 36 deals with false or misleading statements made to induce individuals into agreements related to securities or credit facilities. In such cases, the corporate personality may be ignored to hold the real culprit accountable.
• Furnishing False Statements: Under Section 448, making false statements in documents required by the Act can lead to liability under Section 447.
• Repeated Defaults: Section 449 mandates higher penalties for repeated offences committed within three years.

Judicial Pronouncements

Judicial Pronouncements refer to the decisions and interpretations made by the judiciary regarding the application and implications of law. In the context of corporate veil lifting, the judiciary plays a crucial role in ensuring that legal entities are not misused for fraudulent or unlawful purposes. Here are some key scenarios where the court may lift the corporate veil:

A. Tax Evasion

• Tax evasion involves unlawfully avoiding tax obligations. When a company is used to evade taxes, the court may intervene.
• An example is the case of Dinshaw Maneckjee Petit, where the founder created sham companies to avoid super-tax by disguising income as loans.

B. Prevention of Fraud/Improper Conduct

• The court can lift the corporate veil to prevent fraud or improper conduct by individuals behind the company.
• In Gilford Motor Co Ltd vs. Home, the court deemed a competing company set up by Home as a sham to breach his covenant against solicitation.

C. Determination of Enemy Character

• Companies may assume enemy character based on the residency of those controlling it, affecting legal claims during wartime.
• Dailmer Co Ltd vs. Continental Tyres & Rubber Co Ltd illustrates this, where a German company in England was affected by wartime claims.

D. Liability for Ultra-Vires Acts

• Actions beyond a company's constitutional documents or legal scope are ultra-vires and can lead to penalties.
• The case Ashbury Railway Carriage & Iron Company Ltd v. Hector Riche established this principle when a contract outside the memorandum was deemed null and void.

E. Public Interest/Public Policy

• Courts can lift the corporate veil to hold individuals accountable when a company's actions conflict with public interest or policy.
• In Jyoti Limited vs. Kanwaljit Kaur Bhasin & Anr., the court ignored corporate veils due to contempt of court by company representatives.

F. Agency Companies

• Corporate veil can be disregarded to identify principal and agent in cases of improper actions, regardless of ownership percentage.
• Bharat Steel Tubes Ltd vs IFCI and New Tiruper Area Development Corporation Ltd vs. State of Tamil Nadu illustrate this where government involvement was key.

G. Negligent Activities

• Holding companies can be liable for subsidiary actions, especially in cases of negligence or breach of duty.
• Chandler vs Cape Pic set precedence where a holding company was held responsible for health and safety failures in its subsidiary.

H. Sham Companies

• Court can lift veil if companies are deemed sham or hoax, revealing the real parties behind.
• Gilford Motor Co Ltd vs. Home is an example where a new company was considered a sham to evade legal obligations.

I. Companies Intentionally Avoiding Legal Obligations

• Court can disregard a company's legal personality if it's found to be avoiding legal obligations through incorporation.
• Liabilities can be imposed directly on individuals involved, bypassing the corporate entity.