Judiciary is empowered to lift the corporate veil if the conduct of a company is in conflict with the public interest. The court pierced the corporate veil and ordered an injunction against Horne. This was laid down in the case of Chiranjitlal Chaudhary v. Union of India[xxix] where the Supreme Court held that fundamental rights guaranteed by the constitution are available not merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of right compels the inference that they are applicable only to natural persons. Section 239– Power of inspector to investigate affairs of another company in same group or management: It provides that if it is necessary for the satisfactory completion of the task of an inspector appointed to investigate the affairs of the company for the alleged mismanagement, or oppressive policy towards its members, he may investigate into the affairs of another related company in the same management or group. [2] Company Law, excellentcareersolution, http://excellentcareersolution.com/images/note/Company Law BCOP-302.pdf (last visited Dec 18, 2020). India being one of the top three emerging economies, has been longing for strong and cogent corporate laws that will enable the country’s international trade to conduct its affairs on a par with the western industrialized nations. [7], It was held that the decision was valid in the view of the fact that the British company acted merely as a nominee of the American company. Non Performing Assets Against The Backdrop of Quid…, Implementation of Work From Home Policy in India in…, http://www.business-standard.com/india/news/industry-welcomes-companies-bill/458638/, Nature of Continental Shelf Rights under International Law, Aruna Ramchandra Shanbaug v. Union Of India: Case Analysis. The other side of this coin can be that, as the company is privileged to have its own right to life and personal liberty, how can its fundamental right be taken away by disregarding its corporate entity for the wrongs committed by its members and not the company itself. ‘lifting the corporate veil’ has been regarded by the courts and jurists. All shareholders held shares of UK pound 1 each. Gilford did not have any legal restraints against Horne’s company, only Horne himself. This [xi]section postulates a nexus between fraudulent reading or purpose and liability of persons concerned. It was held that D-3 being a housewife had little role to play and therefore could not be made liable. [5] Salomon v Salomon – Case Summary, Law Teacher (2018), https://www.lawteacher.net/cases/salomon-v-salomon.php (last visited Dec 18, 2020). The value paid to Salomon for such exchange (transfer) was made with the assistance of shares and debentures having a floating charge on the resources of the company. The concept of lifting of corporate veil says that a company will be regarded as having enemy character if the persons having de facto control of the company are resident of enemy country or whenever they are acting on instruction of enemy, therefore there should be a lifting of corporate veil. 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). Further in Lee v. Lee’s Air Farming Ltd.[iii], it was held that there was a valid contract of service between Lee and the Company, and Lee was therefore a worker within the meaning of the Act. As a consequence of the lifting of the corporate veil, the company as a separate legal entity is disregarded and the people behind the act are identified irrespective of the personality of the company. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. This argument for lifting the veil is targeted at companies within a corporate group. LIFTING OF THE CORPORATE VEIL: Lifting or piercing the veil is corporate law‟s most widely used doctrine to decide when a shareholder or shareholders will be held liable for obligations of the corporation. The House of Lords determined the character of the company as an enemy company because the persons who were de facto who were residents of Germany, which was at war with the British during that time. It protects the shareholders from being liable for the actions done by the company. Section 542- Fraudulent conduct: If in the course of the winding up of the company, it appears that any business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct. In Income Tax Commissioner, Madras vs Sri Meenakshi Mills, Madurai, the Supreme Court held that the Income Tax authorities have a right in this case to lift the corporate veil. Let us first discuss the exact meaning of corporate veil and lifting of corporate veil with limited liability concept. [ix] The section applies to all public as well as private companies. The company in less than one year ran into difficulties and liquidation proceedings commenced. It did not do any business, except for helping the assessee to evade tax and to have a separate legal entity to superficially receive the dividends and interest and then to hand it to them to the assessee as pretended loans. Before dealing with the lifting of corporate veil it is pertinent to define what the meaning of a company is. The shareholders started soliciting the customers of Gilford Motor Company. Lee apart from being the director of the company was also a pilot. For collaborations contact [email protected]. That the relevant corporation is only the alter ego or mere instrumentality of the parent corporation or its shareholder(s) 2. The circumstances under which corporate veil may be lifted can be categorized broadly into two following heads: Section 5 of the Companies Act defines the individual person committing a wrong or an illegal act to be held liable in respect of offenses as ‘officer who is in default’. So if this corporate personality is uncovered or unveiled, the shareholders or the directors mostly are found to be behind the veil. Some cases where the courts did lift the veil are as follows: Some of the earliest instances where the English and Indian Courts disregarded the principle established in Salomon’s case are: His wife and another employee were the main share holders and the directors of the company. A company is known by its own name and has its own right, duties, obligations, and liabilities. We respect your privacy and won't spam you, Copyright © 2012-2020 All Rights Reserved. This phenomenon which is applied by the courts and which is also provided now in many statutes is called “lifting of the corporate veil”. According to Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of incorporation, the subscribers to the memorandum and other person… The most illustrative case in this regard is the case decided by House of Lords- Salomon v. A Salomon & Co. Ltd[i]. [2], According to Justice Lindley, “a company is an association of persons, these persons contribute money or money’s worth to common stock. His widow wife claimed compensation under the New Zealand Workers’ Compensation Act, 1992 for the death of her husband in the course of his employment. Thereafter, he established a competing company with his wife, himself, and one of his friends, who were the sole shareholders. The proposals in the Bill are expected to act as a catalyst to fostering the growth of the economy. D-2 was running the business in the name of the company. 458(SC), AIR 1965 SC 40, [xx] [2000] 101 Comp. In other words, the company alone is liable for all the acts done and the debts incurred by it and not the directors or the shareholders who are in fact the beneficial owners of the company. The legislature and the courts have in many cases now allowed the corporate veil to be lifted. The basis of this argument is that despite the separate legal personalities of the companies within the group, they in fact constitute a single unit for economic purposes and should therefore be seen as one legal unit. Signup for our newsletter and get notified when we publish new articles for free! The company purchased the business of Salomon for 39000 pounds, the purchase consideration was paid in terms of 10000 pounds debentures conferring charge on the company’s assets, 20000 pounds in fully paid 1 pound share each and the balance in cash. For example, in Vodafone the Bombay High Court did not consider lifting the corporate veil to impose taxation in case of indirect transfers. If any director of a company contravenes, such director shall be punishable with imprisonment or with fine under Section 159. Lifting or piercing of corporate veil means ignoring the fact that a company is a separate legal entity and has a separate identity (Corporate personality). In this case the acts done by the members of the company led the court to lift the corporate veil to punish the offenders as the company had been formed to accomplish an act that is against the public policy. The German company has almost all of the shares in their position and all the directors of the company were Germans. In The King v Portus; ex parte Federated Clerks Union of Australia[iv], where Latham CJ while deciding whether or not employees of a company owned by the Federal Government were not employed by the Federal Government ruled that the company is a distinct person from its shareholders. The resilience of the corporate veil was tested in the 2019 Court of Appeal case of Rossendale Borough Council v Hurstwood Properties Ltd [2019] EWCA Cov 364. Section 279 provides for a punishment with fine which may extend to Rs. Read … According to the Cambridge Dictionary, “shareholders may hide behind the corporate veil, assured that their liability does not extend beyond the value of their shares”. The shareholders do not own the property of the company. [8] Rebecca Furtado, Lifting the Corporate Veil iPleaders (2016), https://blog.ipleaders.in/lifting-corporate-veil/ (last visited Dec 18, 2020). The protection of a company is not ironclad or impenetrable. The High Court of Karnataka held that the Petitioner should reply to the show-cause notice issued by the Tax department and urge all their contentions before it. These are the basic structure and types which decide the ownership of the company.[1]. Such instance was observed in the case of Hendon v. Incorporation of a company is very important for the commencement of business and to have a separate legal entity. Author: Aayush Akar, NLUO. 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