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Lifting the Corporate Veil by Mayurakshi Sarkar

 Lifting the Corporate Veil

Meaning and Definition of Corporate Veil

A corporate veil is a legal concept that separates the acts done by the companies and organizations from the actions of the shareholders. It protects the shareholders from being liable for the actions done by 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. 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”

 Company: A Separate Legal Entity (Corporate Personality)

Corporate personality is the reality expressed by the law that a company is perceived as a legal entity distinct from its members. A company with such recognition and personality will be considered as a separate legal entity having an independent legal existence from the members of the company. A company is known by its own name and has its own right, duties, obligations, and liabilities. Therefore, there is a clear difference between the company and its members, this is commonly called a Corporate Veil as discussed above.

The separate legal entity is the basic feature on which company law is premised. 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 is not new and contrastingly there are many cases and litigation on this topic and on its jurisdiction. 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.

Statutory Provisions in support of Lifting the Corporate Veil 

  1. Reduction of number of members below the statutory minimum: If at any time the minimum number of members of a company falls below two, in case of Private company or below seven, in case of Public company; then the company can carry on the business for a period of six months while the number is so reduced, every person who is a member of the company during the time that it still continues to carry on the business, knowing the fact that the minimum number of members is reduced and the grace period of six months is also finished, then as the case may be, the company and its members will be held liable and can sue an amount which they made during those six months or else the company may be severally sued, therefore.

  2. Failure to refund application fee: The directors of the company shall be jointly and severally liable to repay the money (application money) with an interest of six percent per annum from the date of expiry of one hundred and thirtieth day if they fail to repay the application money without interest within one hundred and twenty days when the company fails to allot shares.

  1. Misdescription of company’s name: An officer of an organization (company) who signs any bill of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the recommended way, such official can be held personally liable to the holder of the bill of trade, hundi, etc. except if it is properly paid by the company. 

  1. Fraudulent trading: Under section 339 of the Companies Act, 2013, If in the course of the 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 or any other persons or for any fraudulent purpose, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any 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 Tribunal may direct. Every person who had the knowledge of such fraud will be punishable with imprisonment for a term which may extend to two years or with a fine which can extend up to fifty thousand or with both. 

  1. For investigating company’s ownership: Under section 216 of the Companies Act, 2013, the Central Government may appoint Inspectors to investigate and report on the membership of the company for the purpose of determining the true individuals who are financially interested in the company and who control its policy. Thus, the Central Government may ignore the Corporate veil.

Conclusion

A company has a legal personality just like all other natural individuals, the only difference between the two is that a company even with its legal personality cannot run or conduct its affairs as a natural person does. 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 courts from time to time implemented this rule and also brought in a few changes suitable for the situations and for future reference.

 


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