CORPORATE VEIL

INTRODUCTION

Company law lays on two key aspects; that an organization is a separate legal entity which empowers financial obligations of its individuals. It has for quite some time been built up that an organization is a different legitimate individual from its investors, members and executives. This is legitimately and financially a basic aspect as it is the premise on which third parties are qualified to manage organizations. The ‘corporate veil’ refers to “the principle of separation between corporate entity and shareholder” where the ‘veil’ is an assurance for investors from activities of the organization.

In 1897 in the case of Solomon v. Solomon and Company[1], the House of Lords solidified into English law the twin ideas of corporate entity and financial obligation where the apex court set forth a rule that a firm is a separate authorized individual different from members of the organization. This standard is alluded to as the ‘veil of incorporation’.

In the event that the organization brings about obligations or negates any laws, the individuals are not at risk for those mistakes and enjoy corporate protection. In simple words, the investors are shielded from the activities of the organization.

There are illustrations where the corporate personality can be dismissed. This raises huge clash as the component of discrete legitimate character is frequently portrayed as core and inviolate, while it is contending to guarantee the corporate veil might be lifted.

LIFTING THE CORPORATE VEIL

Sometimes, it happens that the corporate character of a firm is availed to submit frauds and inappropriate or illicit acts. Since an artificial being cannot do anything illegal, the façade of corporate character must be expelled to concede people who are extremely reprehensible. This is known as ‘lifting of corporate veil’. And keeping in mind that an organization is a particular element, yet as a principle, it is a link of people who are in actuality the useful proprietors of all the corporate property. In United States v. Milwaukee Refrigerator Co.[2], the position was summarized as “ A corporation will be looked upon as a legal entity as a general rule, but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons.”

Lifting the veil law exists as a check of the rule that, investors cannot be obligated for the duties of their enterprise past the assessment of their venture. The reason for giving individuals financial obligation takes out three sorts of exchange costs. First are the expenses of individual investors or lenders checking the riches position of different investors, and second, the expenses and different complexities of every investor observing the risks of the board activities. Third, investor’s financial obligation makes it less exorbitant and simpler for investors to differentiate their ventures. The consequence of restricting these transactions is that financial obligation both empowers venture and encourages the activity of share markets. Hansman and Kraakman have contended that “limited liability is part of a broader phenomenon of asset partitioning which serves important social interests by guaranteeing creditors that business assets will also be protected from investor’s creditors[3].” Another accord is rising in the discourse that limited liability may well not be legitimized in tort cases and, in spite of the fact that with less unanimity, likewise when the case depends on legal obligations instead of common law obligations.

CIRCUMSTANCES UNDER WHICH CORPORATE VEIL CAN BE LIFTED

There are two circumstances under which the corporate veil can be lifted:

  1. Statutory provisions
  2. When membership is reduced ( Section 45 of Companies Act)
  3. Improper use of Name (Section 147 (4))
  4. Fraudulent conduct (Section 542)
  5. Failure to refund application money (Section 69(5))w
  6. Misrepresentation in prospectus (Section 62)
  7. Holding subsidiary companies (Section 212)
  8. For facilitating the task of an inspector to investigate the affair of the company(Section 239)
  9. For investigating of ownership
  10. Liability for ultra vires acts
  1. Judicial interpretation
  2. Protection of revenue
  3. Prevention of fraud or improper conduct
  4. Determination of the enemy character of a company
  5. Where company acts as an agent for its shareholders
  6. In case of economic offences
  7. Where company is a sham or cloak

APPROACHES ADOPTED BY COURT TO LIFT THE VEIL

  1. Peeping behind the veil: This method is utilized by court to manage the data with regards to who are the investors, what is the extent of their possessions, who are the controllers, and what is their between relationship with respect to the control of the organization. In the wake of knowing the data, the veil is pulled down and the organization again becomes separate lawful entity. The most significant case in such manner is the “Daimler case”[4]. The inquiry there was whether the litigant, a British organization, should pay the offended party, a British enlisted organization, despite the fact that all the chiefs and investors of the British enrolled organization were German residents. The lower courts decided for the offended party as the Proclamation against Trading with the Enemy Act 1914 specified that “in the case of incorporated bodies, enemy character attaches only to those incorporated in an enemy country.” The House of Lords, nonetheless, permitted the appeal on a state of truth that is to perceive the character of the organization.
  • Penetrating the veil:  In second categorization, the courts reach through the veil and get hold of the controlling investors. The motive behind infiltrating the veil is to force obligation upon the investors for the organization’s activities and to set up their direct interest for the organization’s benefits. One case of the investor’s direct interest is tax collection. Other model when veil is infiltrated is when there is propensity of war.

In R v. London County Council[5], a local authority would not restore a cinematography permit held by an organization fused in England, in light of the fact that a significant greater part of its shares were held by German nationals and three out of its six executives were Germans. The court maintained the refusal, holding that the control or at least the impact which adversary nationals may apply over the exercises of the organization in displaying films was a pertinent issue during wartime. Bray J. said that it is “clearly permissible for the council to consider, when a company is the applicant, who are the persons who control the company.”

  • Extending the veil: A third method of lifting the veil is by its extension with the goal that it grasps a heap of organizations. At the point when a group of legitimate entities is leading a typical movement, so that as opposed to alluding to everyone independently, one can see them all as a solitary element, under one broadened veil of incorporation. A case of this would be DHN Food Distributors Ltd. v. London Borough of Tower Hamlets[6]. In this case, an organization asserted remuneration for unsettling influence inferable from the confiscation of land, however, the land had a place with another organization, the investors of which were indistinguishable from those of the two others. Lord Denning emphasized that, “This is especially the case when a parent company owns all the shares of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says. The three companies should, for present purposes, be treated as one.”
  • Ignoring the veil: This is the most extraordinary type of lifting the veil. This method is taken by the court when they feel that the organization was not established for business or other sound grounds, yet just as a way to swindle or defeat creditors or to bypass laws. Courts utilize this methodology as an authorization. Not only is it against the legitimate framework yet it likewise denies the courts of the chance of giving orders against the organization, if and when they deem fit.

CONCLUSION

Till date, the demonstration of piercing the corporate veil stays one of the most disputable subjects in corporate law. Despite the fact that specific classifications, for example, misrepresentation, agency, sham, unfairness and group enterprises have been distinguished for being the premise under which courts would pierce the corporate veil yet it is of most extreme significance to take note of that these classes are simply rules and by no methods a long way from being exhaustive. Although the courts have pierced the corporate veil to decide the character of the people behind the commission of offenses, for example, frauds and so on, the courts through legal translation have held that the corporates ought not be dealt with uniquely in contrast to an individual and ought to be kept on a similar balance while fixing criminal obligation and thus they can be criminally indicted.

REFERENCES

  • Lawteacher.net
  • Researchgate.net
  • Company Law by Avtar Singh

[1] (1897) A.C. 22

[2] 142 F.247 (1906)

[3] Henry Hansmann & Reinier Kraakman, The Essential Role of Organizational Law, 110 YALE L.J. 387 (2000)

[4] [1916] 2 AC 307

[5] [1915] 2 KB 466

[6] [1967] 1 WLR 852

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