Lifting of Corporate Veil under Companies Act, 2013
Doctrine of of Lifting of Corporate Veil
The word company is derived from a Latin word Com which means with or together and panis which means bread, and together it is referred to an association of persons who took their meals together. Company is an association created by a group of people who came together for the purpose of conducting business. However, after incorporation of a company, a company and its members become two separate legal identities.
After incorporation of a company, a company and its members become two separate legal entities. Company has a separate identity of its own. It is an artificial person. Company is not a real person so it can not act on its own. It needs help from a human agency like Director etc to perform on its behalf. Sometimes, Directors or other persons associated with the company start committing fraud, illegal activities, and start misusing corporate personality.
When the director or any person associated with the company starts misusing the corporate personality of a company to commit fraud and illegal activities, The court has authority to lift the corporate veil to identify the real culprit of the offence committed by the company. It is basically done to insure nobody commits fraud, illegal offences under the name of the company.
The main aim of Doctrine of Lifting of Corporate Veil is to ensure that corporate personality is used for legal purposes and not for fraud, misuse or illegal activity.
Circumstances under which Court may Lift the Corporate Veil
Fraud or Improper Conduct
A company is an artificial person and so it cannot act on its own. It needs a human agency to perform tasks on its behalf. If the director or any person involved with the company commits any fraud or illegal activity in the name of the company, then the court may apply the doctrine of lifting of corporate veil to find out the real culprit.
Gilford Motor Co.Ltd v. Horne
Horne was an employee in Gilford Motor Co. Ltd. Gilford enters into a contract with Horne that he will never solicit Gilford’s customers. Horne signs this contract but in order to avoid this condition he incorporates his own company which is similar in work like that of Gilford and approaches Gilford’s customers. The courts held that the company was incorporated to commit unlawful activities. Court applied for an injunction on both Horne and his company and held the act invalid.
Jones v. Lipman
Lipman enters into a contract with Jones to sell his property. Later on, Lipman changes his mind and refuses to sell his property and to avoid specific performance under contract, he sells his property to his own company. The court held that Lipman used his own company as a mask to avoid specific performance of the contract which is a fraudulent act.
Company is a Cloak or Sham
If a company is a cloak or sham and incorporated with an aim to escape the illegal acts done by the person behind the veil, then the court can lift the corporate veil to identify the real culprit hiding behind the company’s name.
Evasion of Tax
Every person who is earning in India is required to pay taxes. Non payment or Evasion of taxes is an offence. Company is a person in the eyes of law so Company has to pay taxes.
CIT v Sri Meenakshi Mills Ltd
In this case, veil was used for evasion of taxes and duties. The court held that lifting of the veil was necessary to look at the real transaction.
Determination of Enemy Character
The court can lift the corporate veil to determine or identify the enemy character of the company. When a country gets into a war with another country, the citizens of that country become an alien enemy of the other country and normal laws are not applicable in Enemy countries.
Daimler co. ltd v Continental Tyre and Rubber Company
Daimler co. was incorporated in England for selling tyres manufactured in Germany by a German Company. War broke between Germany and England in 1914 and the company was declared as an enemy company. The court dismissed the suit and held that payment would amount to trading with the enemy company.
Public Interest / Public Policy
Court may apply the Doctrine of lifting of corporate veil to catch hold of a person who has committed an act which is in conflict with Public policy.
Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.
The court held the sole aim of incorporating the new company was to use it as a device to reduce the amount to be paid as bonus to workmen. The Court can lift the corporate veil to identify the real culprit.
Liability for ultra vires acts
Every Company is required to perform or act in accordance with the Memorandum of Association and Articles of Association and the Companies act, 2013. And if any which is outside the purview of AOA, MOA and Companies Act,2013 will be termed as ultra vires act.
Ashbury Railway Carriage & Iron Company Ltd v. Hector Riche
In this case, a company entered into a contract for financing railway lines. However, it was not mentioned in their memorandum of association. The court held that the act was ultra vires.
Furnishing False Statements
The court may use the doctrine of lifting of corporate veil to find out the real culprit when false statements or false and untrue documents, reports, certificates, financial statements or prospectus etc are released or furnished in the name of the company.
For Investigation of Ownership of the Contract
Section 216 of Companies Act,2013 authorizes the Central Government to appoint an inspector or investigate matters relating to a company, its membership in order to find out the person who is financially interested in the success or failure of the company.
Misstatement in Prospectus
Section 26(9), section 34 and section 35 of the Act provides for punishment when an untrue or false statement in the prospectus of the Company. The person who furnishes false and untrue information in the prospectus will be subjected to penalty or imprisonment.
Inducing person to invest money in the company
The court may apply the Doctrine of Lifting of corporate veil to identify the culprit in case any person makes false, deceptive, misleading, untrue statements, untrue promises or conceals relevant data to induce another person to invest money in the company.
Author: Shreya Rathor,
Bharati Vidyapeeth Deemed University, Pune, Final Year