Corporate Veil: All you should know!
September 30, 2019
Once a business is incorporated according to the provisions laid out in the Companies Act of 2013, it becomes a separate legal entity. An incorporated company, unlike a partnership firm, which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members. This article will go over what this differentiation means, why this demarcation was brought about and how can the members be made personally liable for using the company as a vehicle for undesirable purposes.
What does the term ‘Corporate Veil’ mean?
A company is composed of its members and is managed by its Board of Directors and its employees. When the company is incorporated, it is accorded the status of being a separate legal entity which demarcates the status of the company and the members or shareholders that it is composed of. This concept of differentiation is called a Corporate Veil which is also referred to as the ‘Veil of Incorporation’.
Need for Introducing the Concept of Corporate Veil
The advantages of incorporation of a Company like Perpetual Succession, Transferable Shares, Capacity to Sue, Flexibility, Limited Liability and lastly the company being accorded the status of a Separate Legal Entity are by no means inconsiderable and, as compared with them, the disadvantages are, indeed very few.
Yet some of them, which are in essence complications arising out of the privilege of trading with limited liability, deserve to be pointed out. The corporate veil protects the members and the shareholders from the ill-effects of the acts done in the name of the company. Let’s say a director of a company defaults in the name of the company, the liability will be incurred by the company and not the member of the company who had defaulted. If the company incurs any debts or contravenes any laws, the concept of Corporate Veil implies that the members of the company should not be held liable for these errors.
When can a Corporate Veil be Lifted?
Once a company is incorporated, it becomes a separate legal identity. An incorporated company, unlike a partnership firm which has no identity of its own, has a separate legal identity of its own which is independent of its shareholders and its members.
The companies can thus own properties in their name, become signatories to contracts etc. According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of incorporation, the subscribers to the memorandum and other persons, who may from time to time be the members of the company, shall be a body corporate capable of exercising all the functions of an incorporated company having perpetual succession. Thus the company becomes a body corporate which is capable of immediately functioning as an incorporated individual.
The central favourable position of Incorporation from which all others pursue is the distinct lawful substance of the organization. In all actuality, be that as it may, the matter of the legitimate individual is constantly carried on by, and to assist a few people.
In a definitive examination, some people are the genuine recipients of the corporate focal points. What the milestone case Solomon v Solomon chooses is that “in inquiries of property and limit, of acts done and rights procured or liabilities accepted along these lines… the characters of the common people who are the organization’s corporators is to be disregarded”.
In Lee v Lee’s Air Farming Ltd, Lee fused an organization which he was the overseeing executive. In that limit, he named himself as a pilot of the organization. While on the matter of the organization he was lost in a flying mishap. His widow recouped remuneration under the Workmen’s Compensation Act. Essentially the enchantment of corporate character empowered him to be ace and hireling in the meantime. At times, the court dismisses the status of an organization as a different lawful substance if the individuals from the organization attempt to exploit this status. The aims of the people behind the cover are totally uncovered. They are made by and by obligated for utilizing the organization as a vehicle for unfortunate purposes.
Instances are not few in which the courts have resisted the temptation to break through the Corporate Veil. But the theory cannot be pushed to unnatural limits. Circumstances must occur which compels the court to identify a company with its members. A company cannot, for example, be convicted of conspiring with its sole director.
The Corporate Veil can be lifted under the following circumstances:
For Determination of Character of the Company:
In plenty of cases, it ends up being important to check the character of an organization, to check whether it is a companion or a foe of the country the business is set up in. A milestone managing in this field was spread out in Daimler Co Ltd v Continental Tire and Rubber Co Ltd. The certainties of the case are referenced beneath:
An organization was set up in England and it was set up to sell tires which were thus made by a German organization in Germany. Most of the control in the British organization was held by the German organization. The holders of the rest of the offers with the exception of one and every one of the chiefs were German, dwelling in Germany. In this way, the genuine control of the English organization was in German hands. During the First World War, the English organization started an activity to recuperate an exchange obligation. What’s more, the inquiry was whether the organization had turned into an adversary organization and should, accordingly, be banned from keeping up the activity.
The House of Lords set out that an organization consolidated in the United Kingdom is a lawful element. It’s anything but a characteristic individual with brain or inner voice. It tends to be neither steadfast nor traitorous. It can neither be anyone’s companion nor for yet it might accept a foe character when people in ‘true’ control of its issues are inhabitants in any adversary nation or, any place the occupants are, are acting under the control of the foes. On the off chance that the activity had been permitted, the organization would have been utilized as hardware by which the motivation behind offering cash to the foe would be practised.
That would be incredibly against the open arrangement. Be that as it may, it was additionally observed that where there is no peril to such open intrigue, the courts may decline to tear open the Corporate Veil. In People’s Pleasure Park Co v Rohleder, certain terrains were moved by one individual to another interminably ordering the transferee from offering the said property to hued people. He moved the property to an organization made only out of Negroes.
An activity was started for dissolution of this movement on the ground that every one of the individuals from the organization being Negroes, the property had, in break of the confinement, go to the hands of the hued people. The court, be that as it may, rejected the contention and held that the individuals exclusively or all in all are not the partnership, which “has a particular presence a presence separate from that of its investors.
For Benefits of Revenue
The court has the ability to slight the corporate substance in the event that it is utilized for tax avoidance or to go around expense commitment. An unmistakable delineation of this situation is given in Dinshaw Maneckjee Petit, Re. The assessee was an affluent man getting a charge out of tremendous profit and intrigue pay. He shaped four privately owned businesses and concurred with each to hold a square of speculation as an operator for it. Pay got was credited in the records of the organization yet the organization gave back the sum to him as an imagined advance.
Thusly he isolated his pay into four sections in an offer to lessen his assessment obligation. It was held that the organization was shaped by the assessee absolutely and basically as a method for maintaining a strategic distance from super-charge and the organization was just the assessee himself. It did no business however was made essentially as a legitimate substance to apparently get the profits and interests and to hand them over to the assessee as imagined credits.
Fraud or Improper Conduct
The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will refuse to uphold the separate existence of the company where the sole reason of it being formed is to defeat law or to avoid legal obligations. Some companies are just set up simply to defraud their customers or to act in a way which is against the statutory guidelines. This was clearly illustrated in the landmark ruling Gilford Motor Co v Horne. The case of the facts are laid out below:
The litigant was selected as an overseeing chief of the offended party organization depending on the prerequisite that he will not whenever while he will hold the workplace of an overseeing executive or subsequently, request or allure away the clients of the organization. His work was resolved under an understanding. In the blink of an eye thereafter he started a business for the sake of his better half which requested the offended party’s clients. It was held that the organization was a simple shroud to empower the litigant to submit a break of his agreement against sales.
Proof with regards to the development of the organization and with regards to the situation of its investors and executives prompts that deduction. The respondent organization was an insignificant channel utilized by Horne to empower him, for his very own advantage, to acquire the upside of the clients of the offended party organization, and that the litigant organization should be limited just as Horne.
Where an individual obtained cash from an organization and put it in offers of three distinct organizations in all of which he and his child were the main individuals, the loaning organization was allowed to join the advantages of such organizations as they were made uniquely to dupe the loaning organization.
An organization may some of the time be viewed as an operator or trustee of its individuals or of another organization and may, accordingly, be esteemed to have lost its distinction for its head. In India, this inquiry has regularly emerged regarding Governmental organizations. Countless privately owned businesses for business purposes have been enrolled under the Companies Act with the president and a couple of different officials as the investors.
The undeniable preferred position of framing an administration organization is that it gives the exercises of the State “a tad bit of the opportunity which was appreciated by private partnerships and the legislature got away from the standards and standards which hampered activity when it was finished by an administration division rather than an administration enterprise. At the end of the day, it gave the administration a portion of the robes of the person”.
So as to guarantee this opportunity, the Supreme Court has repeated in various cases that an administration organization isn’t an office or an augmentation of the state. It’s anything but a specialist of the State. As needs be, its representatives are not government workers and right writs can’t issue against it. In one of the cases, the court commented:
“The organization being a non-statutory body and one consolidated under the Companies Act there was neither a statutory nor an open obligation forced on it by a resolution in regard of which requirement could be looked for by methods for the writ of Mandamus”.
The Madhya Pradesh High Court regarded a Government company to be a separate entity for the purpose of enabling a Development Authority to subject it to development tax. The assets of a Government company were held to be not exempt from payment of non-agricultural assessment under an AP legislation. The exemption enjoyed by the Central Government property from State taxation was not allowed to be claimed by a Government company.
It is conspicuously clear that incorporation of the company does not cut off personal liability at all times and in all circumstances. The sanctity of a separate corporate entity is upheld only in so far as the entity is consonant with the underlying policies which give it life.