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Lifting the Veil of Corporate Personality

In the case of Salomon Vs. Salomon & Co. Ltd. 1897 it was considered from the Justice point of view a company is a legal person distinct from its members. This principle is regarded as a veil/curtain/shield but not a wall between the company and its members. The effect of this principle is that there is a fictional veil and permitted to look at the person behind the veil.
According to this principle, when a company has been formed and registered under the Companies Act, all dealing with the company will be in the name of the company and the person behind the company will be disregarded however important they may be.

Because of the human mentality, fraud or improper conduct started by using this veil of corporate personality. So that it becomes necessary for courts to lift the corporate veil and look at the person behind the company who are the real beneficiaries of the corporate fiction.

Where the courts ignore the company and concern themselves directly with the members or managers, the corporate veil may be said to have been lifted. Only in appropriate circumstances, the courts are willing to lift the corporate veil and that too when questions of control are involved rather than merely a question of ownership.

Exceptions:
The corporate veil of a company will be lifted only in exceptional cases such as follows;
Under statutory provisions:

Reduction of number of members below statutory minimum:

  1. In the case of a public company with less than seven members and three directors and
  2. In the case of a private company with less than 2 members and 2 directors. Severally liable for the payment of whole debts of the company contracted during that time and may be severally sued thereof.

Failure to refund application fee:

Under Section 39 of the Companies Act, 2013 the director of the company shall be jointly and severally liable to repay that money with interest at the rate of 6% per annum from the expiry of the 133 days if they fail to repay the application money without  interest within 120 days when the company fails to allot shares.

Mis-description of company's name:

Under Section 12 of the Companies Act, 2013 if an officer of a company signs, or authorizes to be signed, on behalf of the company, any bill of exchange, hundi, promissory note, endorsement, cheque or order for money or goods wherein its name is not mentioned, apart from penal liability, the officer becomes personally liable on those instruments.

Fraudulent Trading:

Under Section 339 of the Companies Act, 2013 every person knowingly a party to the carrying on of the business in the manner aforesaid, shall be punishable with imprisonment for a term which may extend to two years or with fine which may extend to fifty thousand or with both.

Holding and Subsidiary Company:

Separation is ignored for the purpose of group accounts.

For investing in a company's ownership:

Under Section 216 of the Companies Act, 2013 the central government may appoint inspectors to investigate and report on the membership of any company for the purpose of determining the true persons who  are financially interested in the company and who control its policy. Thus the central government has authority to ignore the corporate veil.

Under Judicial interpretation:

  • Protection of Revenue:
    Under Section 179 of Income Tax Act, 1961 the corporate veil may be ignored where the company has been formed merely for evading tax liability
  • Prevention of fraud or improper conduct
  • Determination of character of a company whether it is enemy
  • Whether the company is a sham
  • Innovation of the principle of Agency
  • Public policy

Conclusion: Company Law is a wider concept based on commercial law. It states about all legal rights, relation, and conduct of a persons, companies, organizations & businesses and its formation, funding, governance & death of a corporation. This act deals with the powers, privileges, obligations, objects and scope of the companies. Which helps in economic growth and developments.

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