Analysis Of Doctrine Of Lifting Of Corporate Veil
Author: LawSphereX
Category: Corporate & Insolvency
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ANALYSIS OF DOCTRINE OF LIFTING OF CORPORATE
VEIL
Srishti, BBA LLB, Christ Academy Institute of Law, Bengaluru
ABSTRACT
The incorporation of a company under corporate law establishes it as a separate legal entity distinct from its directors, shareholders, and members, a principle firmly established by the landmark case Salomon v Salomon in
1897. This separation, often referred to as the corporate veil, provides
shareholders with limited liability, shielding them from personal responsibility for the company's debts. However, this protective barrier can be lifted by courts in cases of misuse, such as fraud or evasion of legal obligations, to hold shareholders accountable. This study investigates the relevance and practical application of the corporate veil doctrine, focusing on its implementation in India and the United Kingdom. By exploring the legal foundations and judicial interpretations in both jurisdictions, the research aims to identify the circumstances under which the veil is pierced and the real actors behind corporate activities are exposed. The analysis is based on secondary data, judicial precedents, and comparative case studies.
INTRODUCTION:
A company when established is considered a separate entity from its directors, shareholders,
and members which makes such kind of business organization a preferable one. One of the fundamental concepts of corporate law is that when a company is incorporated under the Companies Act, it becomes a different legal entity from its members. In Saloman v Saloman, the House of Lords declared in unmistakable words in 1897 that a business is a separate legal body and distinct from its members. Even though Saloman owns the majority of the company's stock, he is not personally liable for its debts. It upheld the idea that Limited Liability Companies are distinct from their members. The decision in this case is regarded as a landmark decision and is one of the pillars of current corporate law. The activities of a corporation are done in the name of a corporation for the benefit of the individuals.
The companies are separate legal entity by virtue of fiction theory but in reality, it is an association of individuals. This concept brings up the corporate veil. A corporate veil, as the name implies, is an iron curtain that separates the company from its members, allowing the company to rest in front of the curtain while its members sit behind it. This intangible iron barrier limits the possibility of anyone peeking behind the firm, supporting the impression that the members and the company are not the same. The corporate veil, on the other hand, can be exploited and utilised to hide shareholders from the possible consequences of their actions. In this case, the courts may lift the corporate veil and hold the shareholders personally accountable for the activities of the firm.
RELEVANCE OF THE STUDY
The government instituted the corporate veil to assist the corporation and its members in defending themselves against numerous challenges. We discovered that the importance of this research is to examine the issues and reality of the corporate veil. It will determine the actual applicability of the doctrine in India and a comparison with the United Kingdom. This research will concentrate on deducing the reasons behind the lifting of the corporate veil.
LITERATURE REVIEW:
1. C.A. Sandeepkanoi1: In contrast to the individuals who comprise it, the legal personality
conferred on a corporation by laws is without a doubt the most fundamental concept in
1 C.A. Sandeepkanoi, 2017
company law and acts as a critical building block of our economic and legal institutions. However, the concept is not absolute: courts have used their authority to disregard the company's unique identity in order to treat it as if it were a part of the entity under their jurisdiction. The foundation and scope of this jurisdiction have rarely been specified by the higher courts.
2. Piercing the corporate veil: Focussing the inquiry2
In contrast to the individuals who comprise it, the legal personality conferred on a corporation by laws is without a doubt the most fundamental concept in company law and acts as a critical building block of our economic and legal institutions. However, the concept is not absolute: courts have used their authority to disregard the company's unique identity in order to treat it as if it were a part of the entity under their jurisdiction. The foundation and scope of this jurisdiction have rarely been specified by the higher courts.
OBJECTIVES:
1. To study the concept of the corporate veil.
2. To analyze the Doctrine of the corporate veil
3. To determine the difference between the application of the doctrine in UK nad India.
HYPOTHESIS:
The lifting of the corporate veil is done to know the real identity working in the name of the company. This doctrine is used only when required and deemed fit by the court which cause disparities in its application.
RESEARCH QUESTION
1. Discuss the concept of Lifting the corporate veil.
2. Whether the concept of the lifting of the corporate veil prevalent in India?
2 Cathy S. Krendl & James R. Krendl, Piercing the Corporate Veil: Focusing the Inquiry, 55 Denv. L.J. 1 (1978).
3. Whether the doctrine has different applications in UK and India, how it is different?
RESEARCH METHODOLOGY
The study conducted is descriptive and analytical in nature. The study has been done with help of secondary data and judicial precedents. The secondary sources included articles, papers,case laws, and so on. A. Discuss the concept of Lifting the corporate veil.
In comparison to the proprietor, the company enjoys an unexpected position. It is a fake, yet it is nonetheless a person under the law. When this company's position is mishandled, problems arise. The company is unreasonable, but it cannot follow up on its own. For a company to function, some human institution must be involved. The social request is not altered when this human body works with the profit of the corporation to achieve the legal aims. Regardless, when this operational environment becomes contaminated, containment emerges. This authority is more akin to slugs being fired from someone else's weapon. When the corporation's chief or person accountable for the corporation submits extortion, illegal behaviour, or exercises beyond the extent of the company's item/article, the principle of dismissal of lawful personality begins.
When examining behind the scenes, the corporate personality of the company is neglected in order to uncover who is the true perpetrator of the violation. As a result, whenever this company's personality is embraced with the purpose of performing illegal demonstrations or deceiving others, the court disregards the company's personality and the denial of lawful personality to ensure that equity is done. This is known as Lifting of corporate veil. According to the definition of the Black Law Dictionary," piercing the corporate veil is the judicial act of imposing liability on otherwise immune corporate officers, Directors and shareholders for the corporation's wrongful acts.
" Aristotle said, “when one talks of lifting the status of an entity's corporate veil, one has in mind of a process whereby the corporate is disregarded and the incorporation conferred by statute is overridden other than the corporate entity an act of the entity. ” There are two ways to lift up the corporate veil: judicial and statutory ways are there.
B. Whether the concept of the lifting of the corporate veil prevalent in India?
The matter and activities of a company is governed by Indian Companies Act 2013. The corporate veil concept derived from Saloman v Saloman3 where the House of Lords concluded that a corporation is a distinct legal entity from its members. Even though Saloman owns the majority of the company's stock, he is not personally liable for its debts. It upheld the idea that Limited Liability Companies are distinct from their members. The decision in this case is regarded a landmark decision and one of the pillars of current corporate law. When dealing with cases involving a company's unique and legal entity, judges frequently resort to this case. 2 In the eyes of the law, all businesses are equal. Because a company is an artificial person, it must conduct business via natural persons, and it has the right to sue and be sued. In Lee v Lee's Air Farming Ltd4.
, Lee merged an organisation for which he was the executive in charge. In that limit, he identified himself as a pilot head. He was lost in a flying disaster while discussing the organisation. His widow filed a claim under the Workmen's Compensation Act. If individuals from the organisation attempt to exploit this position, the court may dismiss the organization's standing as a different lawful entity. The true intentions of those behind the cover are revealed. They are obligated to use the organisation as a vehicle for malicious goals. This concept of lifting the corporate veil emerged in India with the introduction of company registration under the Companies Act and when the business began abusing its particular attribute of being a separate entity. Statutory provision:
1. Section 5 of the Companies Act,2013-This section provides a list of officials who may
face discipline or penalty under the definition 'official who is in default,' which includes an overseeing executive or an entire time head.
2. Section 45 of the Companies Act 2013- This section provides Reduction of
membership beneath statutory limit.
3. Section 147 Misdicription of name
3 Salomon v A Salomon and Co Ltd [1897] AC 22
4 Lee v. Lee Air Farming ltd [1961] UKPC 33, [1961] AC 12
4. Section 314 The purpose of this clause is to prevent a director or anybody linked with
him from engaging in any business that pays compensation if the firm supports it.
5. Section 542 provides that, if during the course of the company's dissolution, it appears
that any business of the company has been carried on with the intent of defrauding the company's creditors or some other individual, or for any other deceptive reason, the people who were intentionally aware of this and still agreed to the carrying on of the business, in the manner previously mentioned, will be liable on a personal level without incurring the company's liabilities, and will be liable in a manner as the court may direct. This is evidenced by the following judicial decisions: In LIC of India v. Escorts Ltd5, Justice O. Chinnapa Reddy emphasised that the corporate veil should be lifted where the associated firms are so intimately linked that they are effectively part of the same concern. Following the Bhopal gas leak disaster, the uncovering of corporate veil has been accelerated. Furthermore, in State of UP v.
Renusagar Power Company6, the Supreme Court pierced the veil and decided that Hindalco's holding company and its subsidiary, Renusagar, must be recognized as Hindalco's own source of generation, and Hindalco would be obliged to pay electric duty on that basis. The supreme court stated " The veil of corporate personality is once in a while not uncovered in current corporate law. It is becoming increasingly transparent. " After the decision of Renusager case, the doctrine has been considered in several cases. In Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others7, the Supreme Court stated that "the corporation in law is equal to a natural person and has its own legal entity.
" The corporation's entity is entirely separate from that of its shareholders; it bears its own names and has its own seal; its assets are separate and distinct from those of its members; the liability of the members of the shareholders is limited to the capital invested by them; similarly, creditors of the members have no right to the corporation's assets. "
5 LIC of India v. Escorts Ltd, 1986 AIR 1370, 1985 SCR Supl. (3) 909
6 State of UP v. Renusagar Power Company, 1988 AIR 1737, 1988 SCR Supl. (1) 627
7 Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others,1965 AIR 40, 1964 SCR (6) 885
Courts in India have faced various situations to apply this doctrine and the application of this lifting of the corporate veil is prevailing as the companies are increasing with the modernization of industry. The Supreme Court's decision in India's Life Insurance Corporation vs. Escort Limited8 determines when the curtain will rise. However, it has been thoroughly settled after the Salomon incident. including constraints, a firm can lift the curtain on its history and its employees can be recognized as pioneers in a variety of exceptional circumstances, including persons who are employees of the company. It was decided to have another independent and real personality. In modern corporation law, whether or not a company's uniqueness is revealed, it might become increasingly apparent. In the expansion of the current legal horizon.
The time has come to reiterate that the denial of legitimate individuality is permissible and has no limit, but it must rest heavily on the truth. C. Whether the doctrine has different applications in UK and India, how it is different?
Most Indian company law provisions were borrowed from English law, and it closely follows English law. Since the decisions of the doctrine of Indian company cases, the Salomon's case has been the authority. The precedent are of saloman case and various others. There are different criterias which can be evolved from such precedents of judicial interpretations. The lifting of Corporate Veil under Judicial Interpretation:
1) Determination of Character
In times of war, the courts have pierced the corporate curtain to assess the enemy nature of a firm. The court will uncover the veil in order to determine who controls the company's business, and if the company's affairs are proven to be managed by hostile aliens, it will adopt the enemy character. As in Daimler Co Ltd v Continental Tire and Rubber Co Ltd9 the court found that a German-based corporation was established in the United Kingdom to sell tires. Germany produces goods. Regardless, the German company had the majority of the bids in the British company. With the outbreak of the First World War, British corporations began to look for ways to recover their business debt. The House of Lords has decided to suit the plaintiff, claiming that the firm is a legal entity rather than an actual person, and cannot be a friend or enemy.
8 supra.
9 [1916] 2 AC 307
2) Determination of Residence for Tax Purposes
The designation of a company's residence is also significant for tax purposes because the assessment is normally determined based on its residential status. A firm is frequently thought to reside in the location of its core administration and control. The court may raise the veil to determine the location of its central management and control, which is typically the location of Board of Directors meetings. According to S.6 (3) of the Indian Income Tax Act, 1961, a company is said to be resident in India in any previous year if: (i) It is an Indian Company, or (ii) During that year, the control and management of its affairs are situated wholly in India. For this purpose, the expression “control and management” means de facto control and management and the place of the control and management of the affairs of a company is the place where the meetings of the directors are held.
3) Fraud and Evasion of Contractual Obligation
The corporate existence cannot be exploited to commit fraud. Where the corporate presence is utilized for dishonest purposes, such as defrauding creditors or avoiding legal obligations, the courts will uncover the corporate veil to reveal the realities behind it and invalidate the transaction. Commissioner of Inland Revenue v His Grace the Duke of Westminster and WT Ramsay v Inland Revenue Commissioner which concluded that if the taxpayer has used colorable devices or resorted to dubious methods to minimize tax then the revenue authorities have every right to lift the corporate veil. In Sir Dinshaw Maneckjee Petit, Re10. the assessee was a wealthy man who reaped enormous profit and intrigue pay. He established four privately held enterprises and agreed to serve as an operator for each of them.
Although his pay was acknowledged in the organization's records, the organization returned the cash to him as an assumed advance. In addition, he divided his pay into four pieces in an attempt to reduce his assessment due. It was held that the assessee created the organization entirely and only to keep a strategic distance from super-charge, and that the organization was nothing more than the assessee himself. It did not do business, but it was created primarily as a legal substance to allegedly benefit from. The court lifted up the corporate veil.
4) Formation of Subsidiary to act as Agents:
If Company A forms an auxiliary B to do its function, there is no distinction between the two
10 Sir Dinshaw Maneckjee Petit, Re, AIR 1927 Bom 371, (1927) 29 BomLR 447
organizations because they provide a comparable purpose. In such instances, the court has the authority to override the disavowal of legitimate persons and impose sanctions on the substance. Merchandise Transport Limited v. English Transport11 Commission required the transporter to permit the vehicle from him, but only if he described it under his own name. As a result, we established an auxiliary and asked for a permission for the auxiliary's benefit. The car was supposed to be moved to an auxiliary vehicle. The parent and auxiliary companies were both held under the doctrine of lifting the corporate veil.
5) Evasion of Statutory Provision
Inference of Agency to prevent it when a company acts as an agent for its shareholders, the shareholders are accountable for the firm's actions. In each scenario, whether the company is functioning as an agent for its shareholders is a question of fact. There may be an express agreement to this effect, or it may be implied by the facts of each individual situation. In the case of F.G. Films Ltd., Re12, 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 the British company acted merely as the nominee of the American Company.
6) Trustees
In general, a corporation does not keep its property in trust for its members or another corporation, but in some extraordinary cases, it does. In other situations, the court deviated from the normal rule and held a corporation acting as a trustee for its members or another corporation. As a result, the concept of trust has also been employed by courts to pierce the corporate veil. Comparison Even though both countries use common law, there are changes in viewpoint when comparing the case in the UK to the case in India.
11 Merchandise Transport limited VS. British Transport commission (1982)
12 F.G. Films Ltd., Re,[1953] 1 All ER 615 (Ch D)
The Indian Company Law evolved in the United Kingdom. The Companies Act of 1956 marked the beginning of Company Law in our country. Many changes have occurred in the business sector since then, and as a result of these changes, the Companies Act, 2013, was enacted. In India, the Saloman concept is regarded as a fundamental principle of corporate law. This measure also incorporates the corporate veil doctrine. Because the introduction of the corporate veil theory has far-reaching implications, it was thought necessary to limit its extent. This was done to fit the corporate structure's complexity. The doctrine was restricted by modifying the Saloman principle. The corporate veil was decided to be pierced in specific instances, and the shareholders or directors of the corporation might be held liable and asked to share the firm's responsibilities.
Indian courts have relied on this principle and has decided on each facts.
CONCLUSION:
It is very obvious that forming a corporation does not always and in every case eliminate personal accountability. The purity of a corporate body can only be maintained if it follows the fundamental principles that give it life. The theory of lifting the corporate veil expands on the legal principle that a person cannot profit from their own wrongdoings and is a versatile tool that aids in justice delivery. The incorporation of a veil is vital to the survival of every company because it forms the basis of the same, but its lifting is also required on occasion to ensure that no wrongdoings are taking place under the cover of a corporate body. Despite the fact that the courts have sought to improve this idea strict application of some regulations to prevent any confusion regarding judiciary direction.