Lifting or Piercing the Corporate Veil

Company is a separate legal entity incorporated under Companies Act, 2013 and it is an association of persons formed to perform or operate a business with limited liability, has a common seal or stamp with its name, address and perpetual succession. Since the company has formed where transferability of shares and various functions take place, it is obvious to say that the disputes and altercations would also occur. An artificial person is not capable of committing any fraud or illegal act, so as to identify the actual guilty person it is necessary that the corporate personality of the company should be removed; this is called the lifting or piercing the corporate veil. It separates the identity or personality of company and the officials working in it.

Introduction

A company would always have fate of the people if the company is registered or created by law, as law can only modify, dissolve and regulate it. So as to maintain social order it is necessary that a company is regulated by legislation which would provide preventive actions and ensure that no wrong takes place. According to the definition of Professor Haney- “a company is an artificial person created by law, having separate entity, with a perpetual succession and a common seal”. The most important feature of a company is its ‘separate legal entity’ and member’s ‘limited liability’.

A company is an artificial legal entity which is distinct from its member working in it. When a corporate or a company intend to commit any fraud or misrepresentation or any illegal act, then that face of corporate personality should be removed to identify the guilty person. It is a situation where despite the rule of separate personality and limited liability a shareholder of the company is held liable for the wrongful act of corporate. The artificial entities run their business for the benefit of some individuals. Ultimately some human beings are the literal beneficiaries of corporate advantage, however in the case of Gallaghar v. Germania Brewing Company[1], it was said that “for while, by fiction of law, a corporation is a distinct entity yet in reality, it is an association of persons who are in fact the beneficiaries of the corporate property”.

Definition of Lifting or Piercing the Corporate Veil

Corporate veil can be defined as when corporate privilege enjoyed by company is snatched and boards of directors or directors are held liable for the default. As every day to day decisions of a company are taken by them and they are responsible for it. Corporate Veil is the legal concept which protects corporation or its member to being personally liable and separates personality in rights, duties or assets of corporation from the personality of its member. Lifting or piercing the corporate veil means the situation where the shareholder is held liable for the debts of the corporation debts despite the limited liability of the company and the separate liability of officials working.

Statutory Provisions

The circumstance under which the courts may lift or pierce the corporate veil is expressed in provisions of the legislation. The Companies Act, 2013 provides provisions in which separate entity of a country is maintained but the members and directors are held personally liable. The cases are following:

  1. Criminal and civil liability of mis-statements in prospectus: Section 34 and 35 of the Companies Act, 2013 deals with liability for mis statements in prospectus. In this scenario of mis-statements, under section 35 the company and every member such as director, expert etc who authorized issue of prospectus to the person subscribed for share shall be held liable for loss occurred and would have to pay compensation for the same. The person may also be punished with imprisonment of for a term not less than 6 months but may extend to 10 years and shall also be liable for fine not less or more than the amount of fraud mentioned in Section 447 of Companies Act. But if the person succeeds in proving that he had reasonable ground to believe or such statement is immaterial for the purpose, then he may escape from the conviction.
  2. Failure to return Application Money: Section 39 of the Companies Act, 2013 deals with allotment of securities by company, when there is issue of shares by company to public, if the stated minimum subscription is not received in 30 days of the issue or other period specified by SEBI, then the application money shall be repaid within 15 days from closure of issue. If such money is not repaid then the directors of the company shall severally or jointly be liable to repay the amount with interest rate of fifteen percent per annum. If there is default from the side of company and its officer then they shall be liable for the penalty of rupees one thousand for each day during which such default continues or one lakh rupees, whichever is less.
  3. Mis-description of Company’s name: According to the section 12 of Companies Act, 2013 a company shall have a registered office from where all the acknowledgement of communications and notices may be conveyed. Also, a company shall have its name printed on every document such as promissory notes, hundies etc. If any officer of a company signs on behalf of company any agreement or contract, then such person shall be liable to other party if the name of company is not mentioned. 
  4. Penalty for contravention in deposits by company: When deposit is made in contravention of manner or the conditions prescribed in section 73 or 76 of Companies Act, a company invites, accepts, allows, and causes any person to invite or accept on his behalf to make the deposit. If the company fails to repay the deposit or part thereof or any due interest in the time limit then besides the company, every officer who is in default shall be held liable.
  5. Investigations relating to the ownership of company: According  to the section 216 of Companies Act, 2013 to report and investigate on the membership of a company for determining that who are financially interested in company for controlling its policies and engage in its development. For this purpose section 216 allows central government to appoint one or more inspectors.
  6. Fraudulent Act: In the case of winding up of a company it seems that the business has been carried on with an intention to defraud the creditors of company or any other person then if the tribunal deems it to be fit may personally held liable without any limitation as to liability for all or any other debt and liability. The liability for fraudulent conduct of business of a company is enshrined under section 339 of Companies Act, 2013.
  7.  Liability for Ultra Vires Acts: Ultra Vires means that when an act needs to be done by authority but is done without it. It is a latin phrase which simply means ‘beyond the powers’. When director or any other officer performs any act on behalf of company would personally be held liable for those acts which are performed ultra vires the company.

There are judicial interpretations wherein courts might lift or pierce the corporate veil. Some of the cases where judicial decision lifted the veil of incorporation and also the court have discussed cases where façade of corporate personality will be removed or if necessary the person acting behind the corporate entity identified and punished.

  • CIT v. Sri Meenakshi Mills Limited[2] Case: The case was related to protection of revenues, the veil was used for evasion of duties and taxes, so the court upheld the lifting of veil to look at the real transaction.
  • Estate Officer, UT, Chandigarh &others v. Esys Information Technologies Pte. Limited[3]: In this case, the respondent company was allotted land on condition that it would not transfer it to third party within a period of 10 years. But the company transferred the land to another Chennai based company via one of its subsidiary company and further surpassed this before the court. The court looked into the matter and held that, “the respondent has concealed the facts with respect to Teledata and has not come up with clear hand…”  and found respondent guilty of misrepresentation or suppressio very.
  • Juggilal Kamlapat v. CIT [4]: In this case it has been laid down that, “the doctrine of lifting of corporate veil can be applied by court and it is entitled to lift the mask of corporate veil when it is used for perpetrating fraud or for evasion of tax”.

Conclusion

Veil means a thin cloth which a women wears to cover her head and the face, similarly corporate veil is the veil which separates the company from the identity of the members working. The company wears a veil of corporate personality, behind which various officials or shareholders use to do work. If the court thinks that it is necessary to lift or pierce the veil, then corporate veil might be lifted or pierced for preventing illegal act or fraud. Article 21 of constitution of India provides a principle that a company has separate legal personality. Although Companies are the artificial person but behind the corporate personality there are officials, promoters, board of directors etc who are controlling it. So, as to find out the real guilty person it is necessary to uncover or unveil the corporate veil.

Frequently Asked Questions (FAQs)

  1. What is Corporate Veil?
  2. What are the statutory provisions for lifting or piercing the corporate veil?
  3. Explain statutory provisions of lifting or piercing the corporate veil.
  4. Why lifting or piercing the corporate veil is necessary?

References

  • Book Referred
  • Dr. G.K. Kapoor & Sanjay Dhamija, Company Law & Practice (21st Edition Taxmann Publications)
  • Cases Referred
  • Gallaghar v. Germania Brewing Company [(1893) 53 MINN. 214]
  • CIT v. Sri Meenakshi Mills Limited [AIR 1967 SC 819]
  • Estate Officer, UT, Chandigarh &others v. Esys Information Technologies Pte. Limited [(2016) 12 SCC 582]
  • Juggilal Kamlapat v. CIT [AIR 1969 SC 932]
  • Website Referred:
  • www.scconline.com
  • www.manupatrafast.in
  • Legislation Referred:
  • Constitution of India
  • Companies Act, 2013

[1] [1893] 53 MINN. 214

[2] AIR 1967 SC 819

[3] (2016) 12 SCC 582

[4] AIR 1969 SC 932

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