Before talking about lifting the corporate, the important thing to know what a “Company” is. According to Sec 3(1)(i) of thew Companies Act, 2013, a company means a company formed and registered under this Act or an existing company defined in sec 3(1)(ii) of this act. The company must be registered under the Companies Act for it to become an incorporated person.
By the provision of law, a corporation is clothed with a distinct personality, yet in reality it is an association of persons who are in fact, in a way, beneficial owners of the property of the body corporate. A company being an artificial person, cannot act on its own, it can act only through natural persons.
LIFTING OF OR PIERCING THROUGH CORPORATE VEIL: –
It is a legal concept which separates the company from its shareholders, and protects them from being personally liable for the company’s losses and other obligations. Indeed, the theory of corporate veil is still a basic principle on which the whole law of corporation is based. But since the company has a separate personality and is a statutory privilege, it must be used for legitimate business purposes only. If a fraudulent or dishonest act is found, one cannot take the shelter of the corporate personality. The Court will break through the shell and apply the principle of “lifting of or piercing the corporate veil”. The Court will look behind the corporate body and will take action as though no entity separate from the members existed and make the members or the controlling persons liable for debts and obligations of the company.
The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an entity relies on its corporate personality as a shield to cover its wrong doings. [BSN(UK) Ltd. v. Janardan Mohandas Rajan Pillai].
The shareholders, however, cannot ask for lifting the veil for their own purpose. This was upheld in Premlata Bhatia v. Union of India (2004) 58 CL 217 (Delhi) wherein the premises of a shop were allotted on a licence to the individual licence. She set up a wholly owned private company and transferred the premises to that company with the Government consent. She could not remove the illegality by saying that she and her company were virtually the same person.
In the case of Salmon v. Salmon, it was held that the company has been validly constituted, since the Act only required 7 members holding at least one share each and that Salmon is separate from Salmon & Co. Ltd. The company has a separate entity from its shareholder. It has its own name and it can sue and be sued exclusively for its purpose, and the liability of the members is limited to the shares held by them.
WHEN THE CORPORATE VEIL CAN BE LIFTED?
The Companies Act, 1956: –
- Reduction of Membership (Sec. 45)
- Holding and Subsidiary Company (Sec. 212)
- Failure to Deliver Share Certificate (Sec. 113)
The Companies Act, 2013: –
- Failure to Return Application Money (Sec. 39)
- Misrepresentation in the Prospectus (Sec. 34 and Sec. 35)
- Fraudulent Conduct (Sec. 339)
To conclude with, this theory is just to strike a balance between the company and the concept of separate entity. Thus, this theory is essentially used as a flexible tool to secure justice.
It would be defeating the object of the device if it were to be applied rigidly with no scope at all left for judicial discretion. There can be no single unifying principle that underlines the decisions of the Courts. Although on ad hoc explanation may be offered by a Court which so decides, there is no principle approach to be derived from the authorities. Thus, it is not possible to evolve a rational, consistent and inflexible principle which can be invoked in determining the question as to whether the veil of corporation should be lifted or not. Courts and Legislature must adopt a single set of statutory standards as to when limited liability should be disregarded. This will provide the certainty in this area of law and will allow uniformity, applying the doctrine of lifting the corporate veil.
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