OBJECTIVES OF THE STUDY :
- To understand the meaning and evolution of concept „Lifting of Corporate Veil‟.
- Jurisprudence and Judicial Precedents with regard to Corporate Veil.
- Statutory and Judicial grounds under which the Corporate Veil is unveiled.
MEANING:
According to Justice James, “A Company is an Association of persons united for a common object”. After the incorporation, a company becomes legal person, separate and distinct from its members. It has a corporate personality of its own with rights, duties, and liabilities separate from those of its individual members. In order to protect themselves from liabilities of the company, its members often take shelter of the corporate veil. Sometimes this corporate veil is used as a vehicle of fraud or evasion of tax and statutory provisions. In lifting of corporate veil the law goes behind the mask or veil of incorporation to determine the real person or group of people behind the fictitious act committed.
HISTORY AND EVOLUTION:
The company as separate legal entity was first established in the case of Salmon Vs. Salmon Company Ltd. Salmon who was a sole trader sold his manufacturing boot business to the Salmon company Ltd, in which his wife and his five children’s were the subscribers of memorandum and each took one share. The business was collapsed subsequently and went into liquidation. It was argued by the liquidator that the company and salmon are one another the same that is business was carried on behalf of Salmon, as the maximum shareholders are from his family. The house of lords on appeal held that Salmon and company Ltd was not a same and the debts of the company are not the debts of Salmon because they were two separate entities and once an artificial person has been established they must be treated like an independent person.
The Privy Council in Lee v. Lee‟s Air Farming the doctrine of separate legal entity of a corporation was further supported wherein it held that Lee, could be an employee of the company as a separate and distinct entity from the company which he controlled, so that Lee‟s wife could claim workers‟ compensation following her husband‟s death.
JUDICIAL GROUNDS FOR LIFTING CORPORATE VEIL:
INTENTION OF FRUAD – In the case Gilford Motor Company Ltd v. Horne, Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this, he incorporated a limited company in his wife‟s name and solicited the customers of the company. The company brought an action against him. In this case it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus the Court of appeal regarded it as a mere sham to cloak his wrongdoings.
FOR THE PURPOSE OF REVENUE – The Court has the power to disregard corporate entity if it is used for tax evasion or to circumvent tax obligations. In Dinshaw Maneckjee Petit case, the assesse formed four private companies and agreed with each to hold a block of investment as an agent for it. This way he divided his income into four parts in a bid to reduce his tax liability. It was held that, “the company was formed by the assessee purely and simply as a means of avoiding super tax and the company was nothing more than the assessee himself.
ENEMITY BETWEEN COUNTRIES– If the company is in the enemy country then there is a chance of disregarding the company by considering the clashes between the countries. In Daimler Co.Ltd V. Continental Tyre and Rubber Co.Ltd, A company was incorporated in England for the purpose of selling in England, tyres made in Germany by a German company which held the bulk of shares in the English company. During the First World War, the English company commenced action for recovery of a trade debt. Held, the company was an alien company and the payment of debt to it would amount to trading with the enemy, and therefore, the company was not allowed to proceed with the action.
ACTING AS AN AGENCY/TRUST– In the case of F.G. Films ltd, An American company financed the production of a film in India in the name of a British company. The president of the American company held 90 per cent of the capital of the British company. The Board of trade of Great Britain refused to register the film as a British film. Held, the decision was valid in view of the fact that British company acted merely as he nominee of the American Company.
Apart from these, court will consider that a company must adhere to the legislations made its country, trying to defraud by not using single economic entity and shall not proceed against public policy.
STATUTORY PROVISIONS –
REDUCTION OF MEMBERS – Under Section 45 of the Indian companies act, 1956, Herein after referred as (ICA) if a company carries on business for more than six months after the number of its members has been reduced to seven in case of a public company and two in case of a private company, the persons who continued by knowing that fact becomes liable with the company for the payment of debts contracted after six months.
MISDESCRIPTION OF THE COMPANY– Section 147 (4) of ICA, provides that if any officer of the company or other person acting on its behalf signs or authorizes to be signed on behalf of the company in which the companies name is not mentioned in legible letters, he is liable to fine.
PREMATURE TRADING – Under Section 117 (8) of The English Companies Act, A public limited company newly incorporated as such must not “do business or exercise any borrowing power” until it has obtained from the registrar of companies a certificate.
TRADING FRAUDULENTLY – Under Section 542 of ICA, if any business of a company is carried on with the intent to defraud creditors of the company is liable to imprisonment or fine or both.
FAILURE TO REFUND APPLICATION MONEY– According to Section 69(5) of ICA, the directors of a company are jointly and severally liable to repay the application money with interest if the company fails to refund the money within 130 days of the date of issue of prospectus.
CONCLUSION:
To prevent unjust and fraudulent acts, it becomes necessary to lift the veil or disregard the corporate personality to look into the realities behind the legal façade.