DOCTRINE OF LIFTING OF CORPORATE VEIL In the eyes of law, a company is a legal person with a separate entity distinct from its members of shareholders. In essence it means that there is a veil or curtain curtain separating the legal entity of the company from its members or shareholders. But in reality there is no such separation between the economic interests of the company and its members. The members are shareholders are the beneficial beneficial owners of the property of the company and as such they’re economic interest are identical with those of the company. The theory of corporate entity is still the basic principle on which the whole law of corporations is based. But as the separate personality of the company its statutory privilege, it must be used for legitimate business purposes only. When fraudulent and dishonest use is made of the legal entity, entity, the individuals concerned will will not be allowed to take shelter behind the corporate corporate personality. The Courts will break through through the corporate shell and apply the principle of lifting lifting or piercing the corporate veil. The Court will look look behind the corporate entity and take action as though no entity separate from the members existed and make the members or the controlling persons liable fro debts and obligations of the company. • Ordinarily, the Courts recognize the separate legal entity of the company and consider themselves bound by the principle laid down in the case of Salomon Vs. Salomon & Co. Ltd. They do not lift or pierce the veil of corporate entity to look at the economic realities realities behind the legal veil. But in exceptional cases, the courts courts may disregard the concept of corporate entity to look at the persons (members or shareholders) behind the company. They may, so to say lift the corporate veil to probe into the economic realities behind the •
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scene. This is known as the “lifting or or piercing the corporate corporate veil.’
In Salomon Vs. Salomon & Co. Ltd it was decided that a company has an independent and legal personality distinct from the individuals who are its members, it has since been held that the corporate veil may be lifted, the corporate personality may be ignored and the individual members recognized for who they are in certain exceptional circumstances. circumstances. The doctrine of the lifting lifting of the veil thus marks a change in the attitude that law had originally adopted towards the concept of the separate entity or personality of the corporation. In general the Courts have made a departure from the principle of corporate entity when there was reason to suspect that the veil of corporate personality had been used to conceal fraudulent or improper conduct or for doing things against public policy po licy or public interest. • In an American case Re Clarks`s Will Stone J has said: •
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Many cases present avowed disregard of corporate entity…but they all come to just this- courts simply will not let interposition of corporate corporate entity or action prevent a judgment otherwise otherwise required. Corporate presence and action no more than those of a individual will will bar a remedy demanded by law in application to facts. Hence, the process is not accurately termed one of disregarding disregarding corporate entity. It is rather and only a refusal to permit its presence and action to divert the judicial judicial course of applying law to ascertained facts. The method neither pierces any veil nor goes behind any obstruction save for its refusal to let one fact bar judgment, which the whole sum of facts requires. •
But it would not be possible to evolve a rational, consistent and inflexible principle which can be invoked in determining the question as to whether the veil veil of the corporation should be lifted or not. Broadly stated, where fraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of a corporation is lifted by judicial decisions and the shareholders are held to be the p ersons who actually work for the corporation.
Exceptions to the Doctrine •
Some of the exceptional cases necessitating the lifting of the corporate veil may briefly be indicated below: -
1. FOR DETERM DETERMININ INING G THE CHARAC CHARACTER TER OF THE THE COMPANY COMPANY
Where there is reason to suspect that the persons in real control of a company are enemy agents or are residents of an enemy country, the Courts may disregard the corporate fiction and examine the character of the persons behind the company to determine whether it is an enemy company (In re Daimler Co. Ltd Vs. Continental Tyre & Rubber Co Ltd)
2. COMPANY COMPANY CANNOT CANNOT ACT ACT AS AGENT AGENT OF SHAREHOL SHAREHOLDERS DERS
Where a company is acting as the agent of the shareholders under an express or implied agreement, the corporate entity of the company will be disregarded and shareholders will be held liable for the acts of the company. Shareholders cannot be the principals for the company but if so, it should be proved that the company was their agent in one or more transactions.
The court would refuse to resort to the doctrine of lifting the corporate veil when it would defeat, instead of promoting, the aims of a statutory enactment. CASE EXAMPLE Re RG Films Ltd.
In this case, the court refused to compel the board of film censors to register a film as an English film, which was in fact produced by a powerful American film company in the name of a company, registered in England in order to avoid certain technical technical difficulties. The English company was created with a nominal capital of $100 only, consisting of 100 shares of which 90 were held by the American president of the company. Two out of three directors were British British and all the funds were to be provided by the American Company. Company. The court held that the real producer was the American Company and that it would be a travesty of facts to h old that the American Company and American president were merely agents of the English company for producing the film. 3. FOR CHECK CHECKING ING FRAUD FRAUD OR IMPRO IMPROPER PER CONDU CONDUCT CT
Where it appears that the company has been formed for some fraudulent purpose or to conceal the real identity of the owners, the Courts will lift the corporate veil to find out the real owners of the company. CASE EXAMPLE Re: Gilford Motor Co.
In this case, a former employee of the company company contracted not to solicit its customers. customers. He formed a separate company, which resorted to solicitation solicitation in violation of the contract. contract. The court restrained the company. Re : Jones Vs. Lipman
In the particular case, a person agreed to sell certain certain land to another person. But pending completion of the formalities of the sale he transferred the land to a company of which he and his clerk were the only shareholders and directors. This was done to avoid avoid a decree for specific specific performance. The court lifted the corporate veil and and held that the company was a creature of the first person and a mere mask to conceal his identity in the eyes of equity. It was held that he must complete the contract contract with the second person. 4. AGAI AGAINST NST PUB PUBLI LIC C POLI POLICY CY
Where the principle of separate entity conflicts with public policy the court may lift the corporate veil in defence of the public policy. CASE EXAMPLE Connors Bros. Vs. Connors
In this case, the principle was applied against the Managing Director who made use of his position contrary to public policy. Here the House of Lords determined the character of the the company as enemy company, since the persons who were de facto in control of its affairs, affairs, were residents of Germany, which which was at war with England. The alien company was not allowed to proceed with the action, as that would have meant giving money to the enemy, which was considered as monstrous and against public policy. R Vs Registrar of Companies ex p Attorney General (1991) Ms Lindi St Clair set up a company through which to carry out her trade as a prostitute. She had applied for registration of this company under the names 'Prostitutes Ltd', 'Hookers Ltd', and 'Lindi St Clair (French Lessons) Ltd' all of which were rejected by the Registrar of Companies. Eventually the company was registered with the name 'Lindi St Clair (Personal Services) Ltd'. The Attorney General brought an action to challenge the registration of the company on the grounds that its purposes were unlawful. Held The Company was struck off the register, as its principal objects were illegal, contracts being made for sexually immoral purposes being contrary to public policy and illegal. 5. AVOIDAN AVOIDANCE CE OF OF LEGAL LEGAL OBLIGAT OBLIGATION ION
The Court will also disregard the legal personality of a company where the corporate veil is being used to avoid legal obligation. CASE EXAMPLE Re: Creasey Vs. Breachwood Motors Ltd.
In this case, the employer, Welwyn Welwyn Ltd., dismissed its general manager. manager. He issued a writ alleging wrongful wrongful dismissal. Shortly thereafter thereafter Welwyn ceased trading. trading. The company paid off off all its creditors creditors and then transferred transferred its remaining assets to another company. The plaintiff obtained obtained a default judgment against the company but by that time it had no assets and stood dissolved. The transferee company to which the the company’s assets were transferred (Motors) was was ordered to pay the decree. The court stated that the takeover of the the company’s assets
had been carried out without regard to the separate entity of the company and the interests of its creditors, particularly the plaintiff. plaintiff. When the directors transferred the company1s company1s assets and business, they did so in total disregard of their duties as directors directors and shareholders. Accordingly, it was held that that this constituted a case in which the courts would be justified in lifting the corporate veil and treating Motors liable for the company’s liability to plaintiff. 6. IN THE THE INTE INTERE REST ST OF REVENU REVENUE E
Where it appears that a company has ben formed or is being used for the only purpose of evading taxes or for avoiding tax liability, the courts may ignore the separate entity of the company and lift th veil to look into the persons responsible for tax evasion (Re Sir Dinshaw Maneckjee Petit) CASE EXAMPLE CIT Vs. Sri Meenakshi Mills Ltd
In this case a branch each of the three assessee mills and a branch of a bank (in which substantial number of share were held by the assessee mills and a director who occupied special position both in the assessee companies and the bank) were established in Native State (Pudukottak) outside the taxable territory of the British India with the intention of helping financial operations of the assessee-mills and the director, who was the moving figure both in the bank and the asessee–mills, and evading tax. The Court held that the Income tax authorities authorities were entitled to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion. In this case, a separate corporate entity entity was brought into existence outside the taxable territory with the ulterior motive of evading the tax obligation by the assess mills. Re; Associated Clothiers
A sale by one company to another having same sa me shareholders and former company owning all shares in the later could not escape the separate legal entity concept and the transaction was held taxable under the Income tax Act.
Apart from the judicial decisions laying down the situations, which may necessitate the lifting of the corporate veil, the Companies Act, 1956 itself contains some provisions which allow the ignoring of the legal fiction of separate entity to identify the real state of affairs . Other legislations legislations like the Wealth Tax Act, Estate Duty Act and Income Tax Act also make similar provisions in certain cases. For instance, the Wealth Tax and Estate Duty legislation incorporate statutory formulae for shares of private companies which disregard the separate corporate entity and impute the owner ship of such corporate property to the shareholders. Under the Income tax Act, directors directors of private companies have been made personally liable for the tax liabilities. UNDER THE COMPANIES ACT, 1956
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Reduction Reduction in in membershi membership p below the statuto statutory ry minimum minimum (Sec (Sec 45) Civil Civil Liabilit Liability y in case case of any mis-s mis-statem tatement ent in Prospe Prospectus ctus (Sec (Sec 62) Failur Failure e to to refun refund d appli applicat catio ion n money money (Sec (Sec 69) 69) Fraudu Fraudulen lentt conduc conductt of busin business ess (Sec (Sec 542) 542) Contracts Contracts made made in in personal personal names names of director directors s etc (Sec 147) Subs Subsid idia iary ry Comp Company any (Sec (Sec 212) 212) 7. Ultra vires acts NOTE ON LIFTING THE CORPORATE VEIL
It is now well settled that the corporate veil of a company can be lifted or pierced in certain situations. Where it is found that a corporate entity has abused its corporate personality for an unjust and inequitable purpose the superior court would not hesitate to lift the corporate veil and look into the realities of the case to identify persons guilty of such inequitable acts. It is also well settled that the corporate veil could be lifted when acts of a corporation are allegedly opposed to justice, convenience and interests of revenue or workmen or are against public interest. Government companies/public sector undertakings being 'States' within the meaning of that expression in the Constitution would be constitutionally liable to respect life and liberty of all persons in terms of Article 21 of the Constitution. They must do so in respect of their own employees. In the instant case the deep and pervasive pe rvasive control that State exercises over government companies, in so far as the enforcement of human rights and/or rights of citizens of life and liberty are concerned, it has additionally to see that rights of employees of such corporations are not infringed. In the instant case the State of Bihar is liable to see that the life and liberty clause in respect of employees of State undertakings are fully safeguarded. The State cannot say that it did not know the actual state of affairs of the government undertakings or that it was kept in the dark that
salaries of their employees had not been paid for years. The concept of accountability arises out of power conferred on an authority. In so far as statutory authorities are concerned the State has the requisite power to issue necessary directions, which are binding on them. The State may not be liable in relation to the day-to-day functioning of public sector companies but its liability would arise on its failure to perform the constitutional duties and functions by these undertakings. In a long line of decisions the Supreme Court has held that the right to life envisaged in Article 21 has a wide and far-reaching facet, including livelihood and many other facets of life. "Life means something more than mere animal existence. The inhibition against deprivation of life extends to all those limits and faculties by which life is enjoyed". It is pertinent to state that while the State expects industrial houses and multi- national companies to take such measures as would provide a decent life to persons living in society in general, and to their employees in particular, it would not be too much to expect it to practise what it preaches. Apparently the State cannot be so insensitive to the plight of its own employees in general and employees of public 'sector undertakings in particular. Financial stringency may not be a ground for not issuing requisite directions when a question of violation of fundamental rights arises. CERTIFICATE OF INCORPORATE – CONCLUSIVE EVIDENCE
The conclusiveness of the certificate, however, does, not warrant that all the objects of the company as set out in its memorandum are legal, nor will it validate what may otherwise be illegal objects. If a company with illegal objects happen to be registered, the effect will be that while the existence of the certificate preclude its corporate status from being questioned, the company is forbidden to carry on any business in furtherance of its illegal objects (Bowman Vs. Secular Society)
Compliance with mechanical procedure cannot be challenged once the certificate of incorporation is issued (Benaras Bank Vs Bank of Bihar). A subscriber cannot, after the issue of the certificate of registration repudiates his subscription on the ground of misrepresentation, mistake or fraud, although he retains any claims for damages against the person who misled him (Metal Constituents Ltd. In re) Where the object of a company is unlawful, it has been held that the certificate of registration is not conclusiveness for this purpose (Performing Right Society Ltd. Vs. London Theatre of Varieties)
