The doctrine of lifting the corporate veil means ignoring the corporate nature of the body of individuals incorporated as a company. A company is a juristic person, but in reality, it is a group of people who are the beneficial owners of the property of the corporate body. Being an artificial person, it (company) cannot act on its own, it can act only by natural persons. The doctrine of lifting the veil can be understood as the identification of the company with its members.
The company is equal in law, to natural person. It allows a company to perform juristic acts in its own name, as well as to sue and to be sued. Members and Directors enjoy protection against personal liability. Although this fundamental rule has considerable influence in Company Law across the globe, including India, it cannot be absolute and must allow some exceptions, where the court may disregard the legal personality of the company. Such exceptions as there are represent haphazard refusals by the legislature or the courts to apply logic where it is to flagrantly opposed to justice, convenience or the interest of the revenue. The veil of incorporation never means that the internal affairs of the company are completely concealed from view.
Ordinarily, corporate personality of a company is to be respected. The whole law of corporations is still based on this basic principle of corporate entity. There are umpteen instances in which the courts have uphelded this principle and resisted the temptation to break through the veil. But when the benefit is misused, the court is not powerless, and it can lift the veil of corporate personality to see the realities behind the veil. In doing so the court sub serves the important public interest, namely, to arrest misuse or abuse of benefit conferred by law.
A legal concept that separates the personality of a corporation from the personalities of its shareholders and protects them from being personally liable for the company’s debts and other obligations.
Lifting Of Corporate Veil:
At times it may happen that the corporate personality of the company is used to commit frauds and improper or illegal acts. Since an artificial person is not capable of doing anything illegal or fraudulent, the façade of corporate personality might have to be removed to identify the persons who are really guilty. This is known as ‘lifting of corporate veil’.
It refers to the situation where a shareholder is held liable for its corporation’s debts despite the rule of limited liability and/or separate personality. The veil doctrine is invoked when shareholders blur the distinction between the corporation and the shareholders. A company or corporation can only act through human agents that compose it. As a result, there are two main ways through which a company becomes liable in company or corporate law: firstly through direct liability (for direct infringement) and secondly through secondary liability (for acts of its human agents acting in the course of their employment).
There are two existing theories for the lifting of the corporate veil. The first is the “alter-ego” or other self-theory and the other is the “instrumentality” theory.
The alter-ego theory considers if there is in distinctive nature of the boundaries between the corporation and its shareholders.
The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation. It is up to the court to decide on which theory to apply or make a combination of the two doctrines.
Concept of Limited liability:
One of the main motives for forming a corporation or company is the limited liability that it offers to its shareholders. By this doctrine, a shareholder can only lose what he or she has contributed as shares to the corporate entity and nothing more. This concept is in serious conflict with the doctrine of lifting the veil as both these do not co-exist which is discussed by us in the paper in detail.
The basic concept of the lifting of the corporate veil can be categorized broadly under two categories-
The Companies Act, 2013 provides various provisions which point out the person which should be held liable for the fraud or illegal activity. Section 2(60) of the act states that these people (directors or key managerial positions) are to be referred to as “officer who is in default”. Some of these provisions are listed below.
- Company’s name: When the approved name of the company is used, it makes the contract legally binding. If any representative or shareholder of the company enters in incorrect details of the company and sign on behalf of the company, should be held liable.
- Misstatement of the prospectus: If a person publishes false or untrue statements in a company’s prospectus, that person would be punished under Section 26 (9), Section 34 and Section 35 of the Act.
- Investigation of ownership of the company: section 216 of the Act states that inspectors can be appointed to investigate, by the central government, on matters relating to the company.
- Liability for fraudulent conduct: Section 339 of the Act provides that if it appears that fraudulent activities were being carried out in the name of the company, the court can hold the people involved liable.
- Inducing persons to invest: Section 36 of the Act states that any person who by false and deceptive measures induces some other person to enter into an agreement will be held personally liable under Section 447 of the Act.
By contrast with the limited and careful statutory directions to “Lift the veil” judicial inroads into the principle of separate personality are more numerous. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs.
Besides Statutory provisions, the judiciary has played an important role in lifting the corporate veil as well. Some cases where the judiciary performed its role are listed below.
- In Tata Engineering and Locomotive Co. Ltd. v. the State of Bihar, the Supreme Court of India stated that a company is not allowed to lay a claim on the fundamental rights on the basis that the company is an aggregation of citizens. When a company is formed, the business that is carried by the company is the business of the company only, and not of the citizens who formed the company.
- Judiciary is empowered to lift the corporate veil if the conduct of a company is in conflict with the public interest. In Jyoti Limited vs Kanwaljit Kaur Bhasin And Anr., the Delhi High Court held that corporate veil can be lifted if the representative of the company commits contempt of the Court.