When a company is incorporated, it is known to be separate legal entity. This entity consists of its members, board of directors and other employees. The company incorporates various aspects such as transferable shares, capacity to sue etc. The other members such as shareholders are distinct in nature and the differentiation between the entity and parties is known as corporate veil. There exits as fictional veil which sometimes keep the members away from the required information. This led to the emergence of the concept of “lifting of corporate veil”. This has been recognized by courts in various cases.
The lifting of corporate veil is an exception to the case of Soloman V Soloman and Soloman Co. Ltd. In this case it was held that entity and members are separate and the member cannot be held liable for the liability of company. However, there are various situations where the corporate veil needs to be lifted in order to keep the legality of corporates intact.
Lifting of corporate veil means breaking down the difference that exists between the entity and people. This helps in looking behind the person who is responsible for the working. This will avoid people from taking shelter behind the veil and will also avoid the illegal tasks to be done to the members.
Judicial grounds for lifting of corporate veil
There are various reasons that may lead to the lifting of corporate veil. They may depend on the scenarios and circumstances. They are:
Fraud or improper conduct– this refers to a situation when it is felt that there has been a fraud committed on the part of the company. In the case of Jones v. Lipman, it was held that court cannot allow any kind of corporate fraud. Also, if any such thing happens, court will interfere and immediately stop the same in order to maintain the legality and dignity. This will also lead in determining the reasons for fraud.
Determination of an enemy character– in this situation, a company may assume that a person is acting with false intentions which ma cause loss to the company. This can happen when a company is acting with false intentions for the other company. In such situation, the court can order for lifting the corporate veil of such company. In the case of Dailmer Co. ltd v Continental Tyre and Rubber Co. Ltd, it was held that a company with false intentions and is alien is not allowed to trade with other companies.
Group entities or enterprises- when the companies work in group, there might be some situations that some in the group may work with false intentions, in such situation the court may order for the lifting of corporate veil. In the case of DHN Food products Ltd. v Tower Hamlets London Borough Council, it was held by the court that there may be many entities where the court may dim fit for lifting the corporate veil. This will save the other companies from loss too.
Tax evasion- there are some situations where the corporate veil is used for tax evasion. In such cases, the judiciary needs to interfere so that tax evasion can be stopped. In the case of Bacha F. Guzdar V Commissioner of Income Tax, it was held that the income is held in the hands of company and hence it necessary to look after the functioning so that frauds cannot be committed. This is also necessary to look after the interest of shareholders.
These are the judicial grounds for which the lifting of corporate can be lifted. However, there are statutory provisions that provide for the grounds too.
Statutory provisions for lifting of corporate veil
Section 9 of the companies act states that a company enjoys separate legal entity from its shareholders. However, the lifting of corporate veil is exception to the same.
Section 45 of the Companies Act states that if the number of members of a company has diminished over a period of time, the lifting of corporate veil can be needed. According to section 542 of the act, in case of fraudulent trading by the company, the lifting of corporate veil can be done. However, these are the provisions of the act of 1956. These have been in force for a long period of time and state the grounds that can be applied for lifting of corporate veil.
Thus, the concept of lifting or piercing of corporate veil is much needed to have an eye on the working of the members. Holding the members liable will also assure that they do not commit any fraud against the company they work for. The grounds can vary from case to case and more can be established in future circumstances depending on the situation. This will help in maintaining more transparency.
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