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Lifting Or Piercing Of Corporate Veil

Rishi Pandey
15 Dec 2022 6:43 AM GMT
Lifting Or Piercing Of Corporate Veil

Owing to the rising economic development and advancements within the corporate framework, the corporate world has witnessed various false statements, frauds, and insider trading. The concept of 'Corporate Veil' came into being in order to safeguard the members from the actions of the company. This piece of writing will discuss the "Piercing of Corporate Veil" underneath the "Companies Act of 2013".

Concept Of Corporate Veil: "Salomon V. Salomon And Co. Ltd":

The Salomon case comprehensibly stated that a company possesses its own existence and hence, a shareholder cannot be held accountable for the company's acts although he virtually holds the complete share capital. The entire law relating to a corporation is set up on the essence of a 'separate legal entity'.

It is a statutory entitlement which ought to be utilised for lawful purposes only. However, with merits come demerits too. Therefore, the doctrine of piercing or lifting of Corporate Veil was established in order to hold the members accountable in instances involving dishonest or fraudulent utilisation of the separate legal entity.

Grounds For Lifting Or Piercing Of Corporate Veil:

Wherever and whenever a fraudulent advantage pertaining to the legal setup is taken, the members will no longer be permitted to cover themselves with the aid of the corporate veil or personality. The necessary authority will do away with the company's veil and hold the individuals accountable for commission of such an offence. This piercing of the veil is called the "Lifting of Corporate Veil" as per the Companies Act of 2013.

Statutory Grounds For Lifting Of The Corporate Veil:

Since the lifting of Corporate Veil is an evolving concept, there is not a pre-defined or exhaustive list of the grounds or basis under which the veil can be pierced. However, there are certain statutory as well as judicial grounds for piercing of the Corporate Veil. Let us first discuss the statutory grounds related to the lifting of the veil.

1. Misstatement in the Company's Prospectus: Companies provide their securities for sale through publishing of its prospectus. The prospectus established under Section 26 of the Companies Act, 2013 mentions significant notes regarding the firm, such as facts about debentures and shares, the information about directors, the current activity, and principal goals of the company. If a person tries to give wrongful, inaccurate, or misleading information in the prospectus of the company, he is accountable for imprisonment, penalty, or both mentioned under Sections 26 (9), 34, and 35 of the Act, relying on the facts and situations.

2. Reduction of Membership below the Prescribed Limit: In case the minimum quantity of a company's membership goes below 2 (private companies), or below 7 (public companies), the corporation can further its operation for a time interval of 6 months while such quantity is decreased, and each individual who is a 'member' at that time, being aware of the fact that the quantity has been negatively affected. In instances where the grace period comprising 6 months has passed, the corporation alongside its members will be accountable and can be claimed for the amount they generated out of the 6 months, or it might be severally sued.

3. No Refund as to Money of Application: As per Section 39 (3) of the Companies Act, in instances where the company's directors fail to refund the "application money" without interest within 120 days in case the corporation fails to allot shares, they will be severally and jointly liable to refund the money in addition to an interest of 6% per annum, from the date of passing of 130 days.

4. Misperception of Company's Name: As per Section 12, an officer pertaining to a company signing any promissory note, bill of trade, or check wherein the corporation's title is not provided in the suggested or advocate manner, he can personally be accountable to the receiver of the bill of trade, check, etc., unless it is rightly provided by the company.

5. For Investigation of the Company's Ownership: As per Section 216, the "Central Government" may choose certain inspectors to scrutinize and check on the company's membership so as to find out the actual people financially involved in the corporation and those who are influencing its policies. Consequently, the Central Government might lift the concerned veil.

6. Inducing Persons to Invest Money in the Company: As per Section 36, someone who makes fraudulent, false, inaccurate or misleading promises or representations to another person or conceals appropriate information from a person so as to induce him to perform or enter into (A) an agreement to underwrite, subscribe to, acquire or dispose of securities, (B) an agreement to assure profits to any such party on the basis of return of securities or on the advances in the values of the securities, (C) an agreement to obtain credit from any banking or financial institution. In various instances such as these, the corporate veil might be ignored so as to find out the actual party who is guilty and hold him liable.

7. To Furnish False Statements: As per Section 448, if a person makes false representations in a mandatory return, certificate, prospectus, report, financial statement, or other document, or conceals any appropriate or pertinent truth, he will be liable under Section 447. The Corporate Veil ought to be pierced so as to discover the actual guilty member who authorises those documents to be released in the company's name.

8. In Case of Ultra-Vires Acts: All the companies are required to operate according to their MoA, AoA, and the Companies Act of 2013. An act performed beyond the scope of either of these is held to be "ultra-vires" or outside the certified jurisdiction. Penalties may be laid if the operations of a company are found to be illegitimate. The directors and other officers of a company will personally be accountable for all the activities performed on their behalf if they are ultra-vires.

Judicial Grounds For Lifting Of Corporate Veil:

Alongside the statutory provisions, the Indian Courts on their own discretion, also pierce the Corporate Veil in certain cases. Some of them are as follows:

1. Sham Company (Fraud): No company can perform a fraudulent activity by itself. To perform such offences, there must be a human element involved with it. Consequently, measures can be adopted in order to prevent fraudulent activities in future. The courts are endowed with the authority to lift or pierce the veil if they are of the opinion that such businesses are a Sham or a Hoax. Such companies are simply cloaks and their traits may be overlooked so as to discover the actual guilty party.

"Santanu Ray v. UOI": The Supreme Court stated that the veil may be lifted so as to inspect which director was accountable for permitting the active concealing or purposeful suppression of important data as well as excise duty evasion motivated by fraud.

2. Invocation of the Principal of Agency: The Corporate Veil may be pierced if it is essential to find out the principal and agent in relation to a wrongful activity performed by the agency.

"Smith Stone and knight v. Birmingham Corporation": The fact that the subsidiary did not act on its own behalf but rather for the benefit of the parent was good enough justification for the parent to make a claim on the subsidiary's behalf. Despite this, it was acknowledged that the subsidiary had a separate legal identity. The main company was designated as the principle by using the agency principle, and the subsidiary was designated as its.

3. Against Public Policy: In instances where the activities of a company are violating the public interest or public policy, the courts possess the authority to lift the veil and personally hold the guilty parties liable for their actions.

"Jyoti Limited v. Kanwaljit Kaur Bhasin": The Supreme Court utilised this doctrine to investigate the firm's interests in a commercial transaction; it was found that the corporation is liable for contempt of court; ultimately, the members were held accountable.

4. Determining the True Character of the Company/ Avoiding Welfare Legislation: When the objective of setting up of a business is simply to make gains, a company will not make an attempt to do good for the society. It might, however, cause harm instead.

"Workmen Employed in Associated Rubber Industries Ltd., v. The Associated Rubber Industries Ltd., Bhavnagar": The Supreme Court stated that any action taken by a firm to enhance the avoidance of welfare laws will be a good enough ground for the courts to pierce the veil.

5. Tax Evasion: Every earning person is responsible to pay the taxes. Taking law into account, a company is not distinct from an individual. Any person who makes an attempt to evade this responsibility in an illegitimate manner is regarded as an offender in the eyes of law.

"Bacha F. Guzdar v. Commissioner of Income tax": The Supreme Court disagreed with the plaintiff's position and determined that even while the company's income had some agricultural components, it could not be classified as such when distributed to shareholders in the form of a dividend.

A business as well as natural persons possess a legal character. The primary distinctive element is that a company, although possessing a legal character, cannot conduct or manage its acts in a similar manner like that of a natural person. A company carries on its operations under the concept of Corporate Veil, which when exploited for fraud or wrongful activities, discloses the actual identity of the company and real benefactors, leading to the piercing of such veil. The Courts have utilised this principle quite often, making some changes that were pertinent according to the situations and future references.

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