Corporate Veil | Lifting of Corporate Veil | Company Law Notes for B.Com, BBA and MBA | CBCS Pattern

Corporate Veil

Lifting of Corporate Veil

Contents of Article of Association and Its Alternation

Company Law Notes for B.Com, BBA and MBA

Corporate Veil

From the juristic point of view, a company is a legal person distinct from its members [Saloman v. Saloman & Co. Ltd.]. When a company is incorporated, it has a separate legal status which is distinct from its members, shareholders, directors etc and any change is shareholding pattern or directors does not affect the existence and continuity of a company. Separate legal status of a company has led the concept of corporate veil. The effect of this principle is that there is a veil between the company and its members and company has a corporate personality which is distinct from its members.

The consequence of attributing a legal personality to a corporation is that it is distinct entity from its members and this “legal personality” is often described as an artificial person in contrast with a human being, a natural person. This clearly indicates that a corporation is completely capable of enjoying rights and of being subject to certain duties that are not same as borne by its members. Also members or directors are not personally made liable for all the acts of the company.

Corporate veil can be lifted (LIC v. Escort ltd.)

Lifting of corporate veil means disregarding the separate legal entity of any company and looking for the original persons who are in control of the company. The companies Act’ 2013 itself has provided for certain cases making the members or directors personally liable or corporate veil are lifted. These are:

1. Reduction in membership: If a company carries not business of more than six months after the number of its members has been reduced below seven in case of a public company and two in case of private company, every person who was a member of the company during the time when it carried on business after those six months and who was aware of this fact shall be severally liable for all debts contracted after six months.

2. Misdescription of the company: The name of the company should be fully and properly mentioned on all documents, instruments, etc. If an officer of a company or any other person acts on its behalf and enters into a contract or signs a negotiable instrument without fully writing the name of the company then such officer or person shall be personally liable.

3. Fraudulent trading: Where in the course of winding up of a company it appears that the business of the company has been carried on with intent to defraud creditors of the company or any other person or for any fraudulent purpose; all those who were aware of such fraud shall be personally liable without any limitation of liability.

4. Tax evasions: Corporate veil can be lifted if court is of the opinion that this doctrine is used for tax evasions or deceive tab obligations.

5. Enemy character of a company: If a company is controlled by a person who is a resident of an enemy country, in such a case court may examine the character of person in control of the company and may declare company as an enemy company and lift the corporate veil.

6. Holding act subsidiary company: In the eyes of law, the holding company and its subsidiary company have separate legal entities. In has been held that even a hundred per cent subsidiary is a separate legal entity and its holding company is not liable for its acts. A holding company is required to attach with its final accounts, a copy of the balance sheet profit and loss account directors report of each subsidiary. Sometimes the court may refuse to treat the subsidiary company as a separate entity and treat it as only a branch of the holding company.

7. Failure to Refund application money: If the application money of those applicants to whom shares have not been allotted, is not repaid within 15 days, then the directors shall be jointly and severally liable to repay that money with interest @ 12% p.a.

8. Ultra vires acts: Directors of a company shall be personally liable for all such acts which they have done on behalf of the company if they are ultra vires the company or ultra vires the directors and the company does not ratify their acts.

9. When a company is sham: The Courts also lift the veil where a company is a mere cloak or sham (hoax).