Author Name:   poojabhardwaj21

A company is a separate legal body/ entity which are different and separate from its promoters, directors, members, and employees. Subsequently, an artificial person is not capable of doing anything illegal or fraudulent. Hence, concept of the corporate veil, separating those parties from the corporate body, has arisen.

Comparison of Statutory Provisions In Support of Lifting of The Corporate Veil

A company is a separate legal body/ entity which are different and separate from its promoters, directors, members, and employees. Subsequently, an artificial person is not capable of doing anything illegal or fraudulent. Hence, the concept of the corporate veil, separating those parties from the corporate body, has arisen.

However, the topic has not received the attention in the literature that one would expect. No clear set of principles has emerged and it is difficult to predict when the courts will disregard the separate entity principle. There are equal confusion and uncertainty in the Australian and United States jurisdictions. Several researchers and scholars have argued that the courts have become progressively willing to lift the veil at the same time as others reach the opposite conclusion.

Lifting of Corporate Veil
Piercing the veil is corporate law's most widely used doctrine to decide when a shareholder or shareholders will be held liable for obligations of the corporation. It has been observed that it is still one of the most discussed as well as litigated doctrines in all of the corporate law. Although there is near unanimity among the commentators that the present rules neither guide good decision-making nor produce consistent or defensible results, and there are many proposals for reform or abolition of the present law, one sees little discernable movement in the case law toward a better approach.

Sometimes a corporate personality of the company is used to commit frauds and improper or illegal acts. Subsequently, an artificial person is not capable of doing anything illegal or fraudulent; the concealment of corporate personality might have to be removed to identify the persons who are really guilty. This is termed as ‘lifting of the corporate veil’.

It brings up to the situation where a shareholder is held liable for its corporation’s debts regardless of the rule of limited liability and/of a separate personality.

The doctrine of corporate veil is raised when shareholders blur the distinction between the corporation and the shareholders. A company or corporation can only act through human agents that compose it. Consequently, there are two main methods through which a company becomes liable in the company or corporate law:
1.Through direct liability (for direct infringement) and
2.Through secondary liability (for acts of its human agents acting in the course of their employment).

A decision by corporate law to allow shareholders limited liability is a decision to allow them, as investors, to allocate some of the risks of doing business to third parties.

Comparison of Statutory Provisions In Support of Lifting of The Corporate Veil

India law:
The Act itself provides for circumstances when corporate veil will be lifted and the individual members/directors will be made liable for certain transactions.

The statutory provisions are as follows:
·Reduction of membership below statutory minimum (Section 45): This section provides that if the number of member of a company is reduced below 7 in the case of public company or below 2 in the case of private company and the company continues to carry on the business for more than 6 months, while the number is so reduced, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time.

·Improper use of name (Section 147): Under sub-section (4) of this section, an officer of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the company is not mentioned in the prescribed manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company.

·Liability for fraudulent conduct of business (Section 542): If in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct.

English Laws:
·Reduction of the number of members: Under section 24 of the companies act if a public company carries on business for more than six months may become liable jointly and severally with the company for the payment of debts the right that this section confers on creditors is limited. It is only that member who remains after 6 months that can be sued. The anomaly of this section is that the liability attaches to a member and not a director unless the director also happens to be a director as well. This section has very little practical utility because of the limitation.

·Fraudulent or wrongful trading:
a) Criminal liability: If any business of a company is carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose who was knowingly a party to the carrying on of the business in that manner is liable to imprisonment or fine or both. This applies whether or not the company has been or is in the course of being wound up. The civil liability for the same offence is now a part of the Insolvency Act.
b) Sections 213: (1) If in the course of winding up of a company it appears that any business of the company has been carried on with the intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose...then.

(2) The court on application of the liquidator may declare that person in who were knowingly parties to the carrying on of business in that manner are liable to make such contributions (if any) as the court thinks proper.
Wrongful trading is dealt with in Section 214 of the insolvency act and has similar provisions to Section 213. However this section operates only in cases of insolvent liquidation and the declaration can be made only against a person who at some time before the commencement of winding up, was a director of the company and knew or ought to have concluded at that time that there was no reasonable prospect that the company would avoid going into liquidation. No such declaration will take place is the court is satisfied that the person took all the possible steps to minimize the losses. These sections have been considered to be opposed to the Solomon principle.

·Abuse of company names or employment of disqualified directors: Section 216 of the Insolvency Act now makes it an offence for anyone who was a director or a shadow director of the original company at any time during the 12 months preceding its going into insolvent liquidation to be in any way concerned (except with leave of court) during the next five years in the formation, management, of a company or business with a name by which the original company was known or one so similar as to suggest an association with that company.

A person acting in violation of 216 is under 217 personally liable, jointly and severally with that company and any other person so liable, for the debts and other liabilities of that company and any other person so liable, for the debts and liabilities of that company incurred while he was concerned in its management and breach of Section 216.

·Mis-description of the company:Section 349(4) of the companies act provides that if any officer of the company or other person acting on its behalf. Signs or authorizes to be signed on behalf of the company any bill of exchange, promissory note, endorsement, cheque or order for money or goods in which the companies name is not mentioned in legible letters. He is liable to a fine and he is personally liable to the holder of such as mentioned above.

·Premature trading: Another example of personal liability is section 117(8). Under this section a public limited company newly incorporated as such must not "do business or exercise any borrowing power" until it has obtained from the registrar of companies a certificate that has complied with the provisions of the act relating to the raising of the prescribed share capital or until it has re-registered as a private company. if it enters into any transaction contrary to this provision not only are the company and it's officers in default, liable to pay fines but it the company fails to comply with its obligations in that connection within 21 days of being called upon to do so, the directors of the company are jointly and severally liable to indemnify the other party in respect of any loss or damage suffered by reason of the company's failure.

End-Notes
# Gower, Principles of Modern Company Law, (4th ed., 1979), p. 112.
# Pickering, "The Company as a Separate Legal Entity" (1968) 31 M.L.R. 481, 48
# Lipton and Herzberg, Understanding Company Law, (2nd ed., 1985), p. 22.
# Swanson v. Levy 509 F.2d 859 (1975), 862. (U.S. Court of Appeals)
# Schmitthoff, "Salomon in the Shadow", [1976] J.B.L. 305, 305-312;
# Robert B. Thompson, Piercing the Corporate Veil: Is the Common Law the Problem? 37 CONN. L. REV. 619, 622 (2005).

Follow the Procedure Below To Submit Your Articles

Submit your Article by using our online form Click here
Note* we only accept Original Articles, we will not accept Articles Already Published in other websites.
For Further Details Contact: editor@legalserviceindia.com

File Your Copyright - Right Now!