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Published : June 30, 2017 | Author : GopalSuthar
Category : Miscellaneous | Total Views : 476 | Rating :

  
GopalSuthar
Pursuing Int. BBA LLB from Unitedworld school of law, Gandhinagar.
 

Lifting Up The Corporate Veil –Explanation and Analysis

Today India has the fastest growing economy in the whole world. The Indian market is facing constant Changes and challenges that needs to be researched and controlled by the government. The governance of the corporate firms basically involves accountability, fluidity and transparency in each and every transaction. Before talking about the lifting of the corporate veil, it is very essential to understand the concept of a “company”. “Company” has been defined in section 1(4) of Companies act 2013 [1]which states that “a company means company that has been registered under this act.” The outstanding feature of a company is its independent corporate existence. It is distinct legal persona existing independent from its members. Thus company becomes a corporate body which is capable immediately of functioning as an incorporated individual. The company also has the advantages of limited liability with it. The company being a separate person is owner of its assets and bound by its liabilities the members are neither the owner of the company’s undertaking nor liable for its debts but corporate often misuse the advantages of incorporating a company. The corporates often misuse the company to commit illegal and inappropriate acts and since the members are not liable for any liabilities and debts of the company, they easily slip out from the guilt but since a inhuman cannot perform such activities, the identity of the company is removed over the member to identify the person who is guilty this is known as lifting of the corporate veil. This concept was introduced after the establishment of doctrine of limited liability in 1855. Eventually in Salomonvs SalomonCompany’s case, the Hon’ble Court held that the company is a separate legal entity from its members. This principal was called as the veil of incorporation.

Company As A Separate Legal Entity

Section 9 of the Companies act 2013 deals with independent existence of the company. This section states that a company becomes a corporate body that is capable of functioning as an incorporate individual. An exceptionally good feature of the Companies act is that, it has independent corporate existence. Company in law is a person. It is distinct legal personality that is independent of its members. Therefore it is separate from its shareholders, directors, promoters etc. It is bestowed with the certain rights and is bound by duties. No person or member has a right to say that ‘This is my company.’ No one can become the owner of the company because the enterprise has its own separate entity. The principle of the company was lead down in the case of Salomon vs. Salomon and company.

In the case of Salomon versus Salomon and company Ltd[2].
Salomon was a merchant who sold his manufacturing business to Salomon and company ltd. It was a company that was consolidated by him. There were seven endorsers of the reminder Salomon, his wife, his girl and four sons. They were the main individuals from the company. Salomon and his two son were the piece of leading body of the chief of the organization. The assembling business was acquired by the organization for £ 40,000. In installment Salomon took debentures of £10,000 and 20,000 shares of £ 1 each. Alternate individuals from the family were given one share each. The company got liquidated within one year. In the wake of ending up there was nothing left for the unsecured loan bosses. The lenders fought that the organization is not an autonomous presence. Salomon was sole proprietor of the organization and hence he is subject for all the rest of the obligations of the organization. Be that as it may, the house of ruler held that the organization Salomon and Salomon company was an unmistakable and autonomous partnership. It was further held that the company is different person altogether from the subscriber of memorandum. It is not quite the same as its share holders and has its own seal. It can sue someone else or company and furthermore can be sued itself.
In any case, amazingly the guideline of constrained risk and the different autonomous presence of the companywere a great deal more prior perceived in India in Calcutta high court.

In the case of Kondoli Tea Co. Ltd.[3]
A group of people had sold their tea estate to a company that was incorporated by them itself. They tried to avoid the ad valorem duty stating that they were themselves the shareholder of the company. Therefore it would be a transfer by them to themselves in another name. The Calcutta High court refused this observation and held that the company is separate person distinct from member shareholders promoters etc. The duty is to be paid by the shareholders to the company that itself is a separate legal entity.

Therefore this principle is used all over India even before the Salomon vs. Salomon Co. Ltd [4]case had come into existence. This principle was later prescribed in many statutes including the companies’ act 1956. It was recognized as the principle of “Lifting of the corporate veil.” According to this principle the company is a separate legal entity which confers its own rights and duties. The members of the company have limited liability in the normal course of business but can be held liable in extraordinary circumstances where the court feels that there is a misuse of the principle.

Let us take an example, if “A” who is a member of the company commits any fraud or illegal act on behalf of the company. Then the court has the authority to set aside the barrier of the corporate veil and identify “A” as the true guilty person who will be responsible for the illegal act. Hence this principle is known as lifting of the corporate veil, it is also called as “disregarding the corporate veil”

Also, In the case of Lee vs. Lee’s Air Farming Ltd.[5]
Lee incorporated Air Farming Company being the managing director he appointed himself as a pilot. One day in a normal course of business he expired due to a flying accident. His wife recovered the compensation under the Workmen Compensation Act. This is because due to the doctrine of separate legal entity

Lifting Up of Corporate Veil
The theory of corporate entity is indeed a basic principle on which the whole law of corporations is based. The Lifting of Corporate Veil is doctrine used all over the world to identify the real person behind the veil who has committed the fraud in the name of the company. To be precise, where a false and deceptive utilize is made of the legal entity, the people concerned won't be permitted to take shield behind the corporate identity. In this respects the court will get through the corporate shell and apply the standard of what is known as "Lifting of the Corporate Veil."

In a situation wherein there is an involvement of this doctrine, there is a need to disclose the members and the directors of the company. They are liable for the obligations ignoring the concept of separate legal entity of the company.[6]

The doctrine of corporate veil has been divided into two theories.
i. Alter-ego Theory
ii. Instrumentality Theory

Alter-ego theory states that there is an existence of a thin line between the company and its shareholders. While on the other hand the Instrumentality theory is to examine the method in which the owners are using the company for their own benefits instead of the company’s benefit. Many a times court is hesitant to remove the veil, hence it is only done where there is a strong need to reach to appropriate result. The court has the power to decide which of the following theory should be applied according to the facts of the case.

On account of Delhi Development Authority versus Skipper Construction Co. Pvt. Ltd. [7]
The Apex court managed the rule of lifting of corporate veil. It was held that the idea of independent substance was endorsed to the organization for to energize exchange and trade however it is rather being utilized to submit illicit and unseemly activities. The corporate cover obviously can be punctured when the corporate personality is seen to be against equity, comfort and enthusiasm of the wage or worker or against public interest.

Let us now discuss the grounds on which the corporate veil can be lifted. It has been classified under two heads:
1) Judicial Interpretation
2) Statutory provisions

Judicial Interpretations
The courts might break the shell of the corporate veil and impose personal liability on the members, shareholders and the directors of the company under the following grounds:

1) Character Of The Company:
Numerous a times, it turns out to be essential to decide the character of the company. Here the expression "character of the company" alludes to distinguishing the "adversary" company. A company whose true power and control is with inhabitants of the foe nation is said to have an adversary character. This ground can be best clarified with the instance of Daimler Co Ltd v Continental Tire and Rubber Co (Great Britain) Ltd [1916] 2 AC 307 [8]

In the present case, A German Company combined a company in England with the manner of thinking of offering tires that were created in Germany itself. Most of the shareholders of the company were Germans. Henceforth they had the primary energy to control the undertakings of the company. However, amid world war I Daimler declined to give the portion of the tires that were given by the Germans since making portion may mishandle the sec 2(1) of the trading with Enemy act 1914.[9]

The House of Lords held that the company incorporated in UK, is a separate legal entity. It is a person that is developed by the laws and is not a natural person. Therefore the company neither can be a friend nor an enemy. But it can have a “enemy character “because the members and the share holders of the company are the inhabitants of the enemy country. Hence all the actions of the enemy company needs to be ceased and is not permitted because it violates the sec1(2) of the trading with enemy act.

Therefore to determine the character of the company, the courts may pierce the corporate veil in order to examine with whom does the control and powers of the company lies. Hence one of the grounds for lifting up the corporate veil is to determine the character of the company.

2) For The Benefit of Revenue:-
The law has the ability to lift up the corporate cloak in the event that it is vital for tax avoidance. On account of Dinshaw Maneckjee Petit,[10] re:

Here in the present case, the respondent was a well off man. He shaped four privately owned businesses and concurred with each to hold a square of venture as a specialist for it. The wage was credited in the records of the company yet the company given back the sum to him as an imagined advance. Along these lines he isolated his pay into four sections in an offered to decrease his tax liability. It was held that“The Company was found by the defendant purely as a means of avoiding super tax and the company was nothing but the respondent itself. It was simply created as a legal entity to receive the dividends and interest.”

On account of Bacha F Guzdar v CIT[11].
Under the Income Tax Act, at that point in drive, farming pay was absolved from charge. The salary of a tea organization was excluded up to 60% as horticulture pay and 40% was burdened as wage from make and offer of tea. The offended party was an individual from a tea organization. She got a specific sum as profit in regard of offers held by her in the organization and asserted that this profit pay ought to be viewed as agrarian wage up to 60%. It was held in spite of the fact that the wage in the hands of the company was halfway agrarian yet an indistinguishable salary when gotten by the shareholders from profits ought not to be viewed as rural pay.

3) Fraudulent Conduct: The corporate entity is wholly incapable of being strained to an illegal purpose. In the case of Gilford Motor Co Ltd v Horne[12]
Horne was utilized by the offended parties as their overseeing chief. In contract incorporated a prohibitive pledge, that, after his work had finished, he would not request the clients of the offended party. The case emerged on the grounds that Horne broke the agreement. H requested framing organization of which he was a representative and every one of the offers had been issued to his better half and another worker, who were the main chiefs. The Court of Appeal viewed this organization as a „cloak or sham‟, framed just as a „device or stratagem‟ keeping in mind the end goal to „mask the solicitation‟. A directive was conceded against both H and the organization from acting in break of the contract.

4) Government Companies-An organization may now and then be viewed as an operator of its individuals or of another organization and may subsequently be regarded to have lost its distinction for its principals. The Supreme Court has emphasized various cases that an administration organization is not an office or an expansion of the state. It is not the operator of the state. In like manner its representatives are not government employees.

The Madhya Pradesh high court regarded as Government Company to be a separate entity for the purpose of enabling a development authority to subject it to development tax.

Statutory Legal Provisions
Autonomous presence of the organization is viable and the organization may likewise be at risk. In any case, aside from the liability of the organization, those shrouded behind it are additionally made at risk. Following are some such arrangements of the demonstration:
a) Noncompliance of requirements of incorporation (S.464):The reason for this arrangement is to pull back the benefit of the incorporation when the conditions of incorporation are not kept up.
b) Misdescription of the name: where in any act or contract of an organization, its name is not completely shown as required by section 12, the individuals who have really done the act or made the agreement should be by and by at risk for it. In this manner, the executives were held by and by subject on a check marked by them for the sake of company.
c) Fraudulent lead of business: section 339 forces liability for the fraudulent direct of a company of a company's business.
d) Holding and backup organizations: According to sec2 (46) and (87) ACompany qualifies as a holding company when it has the ability to control the structure of the leading group of the executives of another company or holds a majority of its shares.
e) Subsidiary foundations (branch office): Sec 2(14), the expression "branch office", in connection to a company implies any foundation portrayed in that capacity by the company.

Venture Global Engineering vs Satyam Computer Services Ltd & Anr
The Satyam trick is known to be India's greatest corporate trick. It harmed its notoriety with financial specialists, household and remote. The organization distorted its records both to its board, stock trades, controllers, financial specialists and every other partner. The outrage softened up 2009 when author director of Satyam Computers Ramalinga Raju admitted that the Company's records were messed with. He unveiled Rs.7, 000-crore bookkeeping misrepresentation in a critical position sheets. An exceptional CBI court sentenced B Ramalinga Raju, his two siblings and seven others to seven years in jail and furthermore forced a fine of Rs 5 crore on Ramalinga Raju, the Satyam Computer Services Ltd.’s. Founder and previous executive, in the Satyam extortion case.

Conclusion
Therefore it is very clear and evident that though the company is separate entity but it is a body of individuals who are the profit sharers of the company. A company should be framed for the advantage of human culture. Be that as it may, when the company demonstrations in an alternate way illegal or open strategy then the court will undoubtedly ignore its particular element and lift up the cloak. In this way Lifting of corporate cover is issued when there could be a manhandle of corporate gadget in course of fuse of company where Company alludes to a lawful substance shaped which has a different legitimate personality from its individuals and is customarily joined to embrace business.

End-Notes
[1] The Companies Act,2013 sec 1 cl. 4
[2]Salomon vs Salomon & Co Ltd[1896] UKHL 1
[3] The Kondoli Tea Co. Ld. (1886) ILR 13 Cal 43
[4] Supra Note 2
[5]Lee v Lee’s Air Farming Ltd [1960] UKPC 33
[6] Rashtriya Mill Mazdoor Sangh vs Khatau Makanji Spg & Wvg Co. Ltd (2000) 100 Comp Cas 33 (Bom).
[7]Delhi Development Authority vs Skipper Construction Company1996 AIR 2005.
[8]Daimler Co Ltd v Continental Tire and Rubber Co Ltd [1916] 2 AC 307
[9] The Trading with the Enemy ActPub.L. 65−91, 40Stat.411, H.R.4960 (1917)
[10]Dinshaw Maneckjee Petit case, (1927) 29 BOMLR 447
[11]Bacha F. Guzdar vs Commissioner Of Income-Tax1955 AIR 740
[12]Gilford Motor Co Ltd v Horne [1933] Ch 935

 




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