This doctrine means disregarding the corporate personality and searching the real person who are in having the control of the company. In simple words, where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. This is the situation when the court will break through the corporate veil.
The doctrine of lifting the corporate veil becomes necessary when unscrupulous people started using the corporate veil as an instrument to hide fraud in company’s affairs. Thus, it becomes compulsory for the legislature and court to evolve and to lift the corporate veil in order to find out the person behind the company, who are the actual beneficiaries of the corporate body. In Andhra Pradesh State Road Transportation Casethe Supreme Court pointed out that a corporation has a separate legal entity is so firmly rooted in our notions derived from common Law.
GROUNDS WHERE DOCTRINE OF LIFTING OF CORPORATE VEIL IS USED
I. UNDER STATUTORY PROVISIONS
The Companies Act 2013 has been fused with many relevant provisions which tend to point out the person who is liable behind all the fraudulent acts of the company. These people who do this illegal act are known as ‘Officer in Default’ under Section 2(60) of the Act and it mentions that officers such as whole-time director, KMP, Directors etc shall be liable to pay in case of default. The instances of these defaults are mentioned below:-
(i) Reduction of Membership
The Companies Act provides that a company must have minimum number of members i.e. In case of Public company there must be 7 minimum members and in case of private company there must be minimum of 2 members. This is a very small section that discusses about the liability of the members if the numbers of the members which is prescribed by the law is less than the limit prescribed.
(ii) Investigation of Ownership
The central government shall appoint inspectors to investigate the ownership of the company and report on the same.
(iii) Mis-description of Name
If then name of the company is not mentioned properly while transacting business in name of the company then the signatory directors shall be personally liable. The name should also indicate that the acts are done on behalf of the company.
(iv) Fraudulent Conduct
At the time of winding up of the company if it is found that the business was carried out with the intention of defrauding the creditors or any other person or for fraudulent purpose, then the tribunal on the application of the Official Liquidator declare any person who were parties to the business personally responsible.
(v) Failure to pay Application Money
Application money is the money which is paid to the company along with application for purchase it its shares. If allotment is not being made then within the specified time periods as prescribed then the application money would be returned by the company within 15 days from the closure of the issue. In case of default the company directors would be liable to repay that money with 15% interest per annum.
(vi) Repeated Default
When any officer who is in default and then the same offence is committed by him again shall be liable for twice the amount of the fine.
(vii) Mis-representation in Prospectus
Prospectus is a document that is issues by the company which invites offer from the public for purchasing shares or debentures. Thus, the company must show true facts relating to the affairs of the company. Under this provision if any kind of misrepresentation is found in the prospectus every director, promoter and every other person who was authorised to issue the prospectus would be liable.
(viii) Inducing person to invest into company
Any person who makes any promise or states any false material facts so that another person invests in the company shall be liable under Section 447 of Companies Act, 2013.
(ix) Furnishing false statement
When a person who has to make a statement during inspection, inquiry etc s, if such person furnishes false information, destroys documents etc shall be liable for punishment under fraud in Section 447 of Companies Act, 2013.
(x) Non-compliance of requirements of incorporation
This provision deals with punishment for performing fraudulent activities. This provision keeps an eye on the person who does not get their company properly incorporated and punished them.
I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.
If you are interested in participating in the same, do let me know.
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