January 23, 2022

Lifting of Corporate Veil of the Companies in India

Companies Act

Abstract

A company is seen as an individual person in eyes of law. A Company is treated as a significant human in legislation. There are various aspects and duties performed by employees of the company and Directors of the company under companies act, 2013. Responsibilities of directors stipulated by the Indian companies Act of 2013, under its section 166:   A director of a company shall act in accordance with the Articles of Association (AOA) of the company. A director of the company shall act in good faith. A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment. A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.

A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates. Company and its members have different persona, but every member that works under the company have similar intention to expand and establish it in renowned way. The members who perform unethically and in false way always choose the option to work unlawfully behind the company, from which whole company Is held liable for their immoral work.

 In this company’s character is shown wrong and their misdeed members behind this unlawful work easily hide their inexpert character behind company spiffing character. these member’s take advantage of company for their selfish motives by perform illegal acts. Thus, this article elaborates, define the various aspects of the doctrine of lifting the corporate veil and judiciary to identify the real culprit behind such unlawful acts.

Definition of a Company

The word company has no strictly technical or legal meaning. it may be described to imply an association of persons for some common object or objects. The word company, in simple term, may be described to mean a voluntary association of person who have come together for carrying on some business and sharing the profits there from.

A more precise, global and modern definition of a company could be:

business entity which acts as an artificial legal person, formed by a legal person or a group of legal persons to engage in or carry on a business or industrial enterprise.

According to the law in the USA:

A company can be a “corporation, partnership, association, joint-stock company, trust, fund, or organized group of persons, whether incorporated or not, and (in an official capacity) any receiver, trustee in bankruptcy, or similar official, or liquidating agent, for any of the foregoing”

The Companies Act 2013 of India defines a company as-

A registered association which is an artificial legal person, having an independent legal, entity with a perpetual succession, a common seal for its signatures, a common capital comprised of transferable shares and carrying limited liability.

What is corporate veil?

Corporate veil helps in differentiate between the personality of corporation from the personality of its shareholders, and protects them from being personally or individually liable for the company debts, unlawful Acts, 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.

Conducts on which corporate veil can be lifted:

This explains if shareholders can be held liable for corporate veil. This operation helps to identify the real culprit behind illegal work conducted in company and separate false accused or shareholders of company. This also explains the real personality of the company by exposing personality of culprit performing illegal tasks inside company.

In other terms, where the shareholders take the corporate personality of the company as a means to commit fraud and unlawful tasks, then the court will break through the corporate shell and apply the principal of “lifting of piercing through the corporate veil “. In united states V. Milwaukee refrigerator Co., it was observed that “A corporation is considered to have a separate legal entity as a general rule but when the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime the law will regard the corporation as an association of persons”.

Statutory Provisions dealing with Lifting of Corporate Veil of the Companies in India

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’. This section gives a list of officers who shall be liable to punishment or penalty under the expression ‘officer who is in default’ which includes a managing director or a whole-time director.

Section 45– Reduction of membership below statutory minimum: This section provides that if the members of a company is reduced below seven in the case of a public company and below two in the case of a private company (given in Section 12) and the company continues to carry on the business for more than six months, while the number is so reduced, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time.

In the case of Madan lal v. Himatlal & Cothe respondent filed suit against a private limited company and its directors for recovery of dues. The directors resisted the suit on the ground that at no point of time the company did carry on business with members below the legal minimum and therefore, the directors could not be made severally liable for the debt in question. It was held that it was for the respondent being dominus litus, to choose persons of his choice to be sued. 

Section 147- Misdescription of name: Under sub-section (4) of this section, an officer of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the company is not mentioned is the prescribed manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company. Such instance was observed in the case of Hendon v. Adelman.

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.

Section 275- Subject to the provisions of Section 278, this section provides that no person can be a director of more than 15 companies at a time. Section 279 provides for a punishment with fine which may extend to Rs. 50,000 in respect of each of those companies after the first twenty.

Section 299- This Section gives effect to the following recommendation of the Company Law Committee: “It is necessary to provide that the general notice which a director is entitled to give to the company of his interest in a particular company or firm under the proviso to sub-section (1) of section 91-A should be given at a meeting of the directors or take reasonable steps to secure that it is brought up and read at the next meeting of the Board after it is given. The section applies to all public as well as private companies. Failure to comply with the requirements of this Section will cause vacation of the office of the Director and will also subject him to penalty under sub-section (4).

 Sections 307 and 308- Section 307 applies to every director and every deemed director. Not only the name, description and amount of shareholding of each of the persons mentioned but also the nature and extent of interest or right in or over any shares or debentures of such person must be shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone connected with him, holding any employment carrying remuneration of as such sum as prescribed or more under the company unless the company approves of it by a special resolution.

 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 Popular Bank Ltd., In re it was held that section 542 appears to make the directors liable in disregard of principles of limited liability. It leaves the Court with discretion to make a declaration of liability, in relation to ‘all or any of the debts or other liabilities of the company’. This section postulates a nexus between fraudulent reading or purpose and liability of persons concerned.

Judicial Interpretations of Lifting of Corporate Veil of the Companies in India

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. Some cases where the courts did lift the veil are as follows:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd This is an instance of determination of the enemy character of a company. In this case, there was a German companyIt set up a subsidiary company in Britain and entered into a contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for the supply of tyre . During the time of war, the British company refused to pay as trading with an alien company is prohibited during that time. To find out whether the company was a German or a British company, the Court lifted the veil and found out that since the decision-making bodies, the board of directors and the general body of shareholders were controlled by Germans, the company was a German company and not a British company and hence it was an enemy company. 

Gilford Motor Co. v. Horne– This is an instance for prevention of façade or sham. In this case, an employee entered into an agreement that after his employment is terminated, he shall not enter into a competing business or he should not solicit their customers by setting up his own business. After the defendant’s service was terminated, he set up a company of the same business.

His wife and another employee were the main shareholders and the directors of the company. Although it was in their name, he was the main controller of the business and the business solicited customers of the previous company. The Court held that the formation of the new company was a mere cloak or sham to enable him to breach the agreement with the plaintiff. 

Re, FG (Films) Ltd– In this case the court refused to compel the board of film censors to register a film as an English film, which was in fact produced by a powerful American film company in the name of a company registered in England in order to avoid certain technical difficulties. The English company was created with a nominal capital of 100 pounds only, consisting of 100 shares of which 90 were held by the American president of the company. The Court held that the real producer was the American company and that it would be a sham to hold that the American company and American president were merely agents of the English company for producing the film. 

Jones v. Lipman– In this case, the seller of a piece of land sought to evade the specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose and thus he attempted to avoid completing the sale of his house to the plaintiff. Russel J. describing the company as a “devise and a sham, a mask which he holds before his face and attempt to avoid recognition by the eye of equity” and ordered both the defendant and his company specifically to perform the contract with the plaintiff. 

Conclusion

There are many corporate companies and many their members who perform fraud, illegal Acts and blame it under the name of company. This doctrine of lifting or piercing of corporate veil helps to find the real culprit behind such unlawful acts. this doctrine provide justice to personality of company by exposing malicious personality of culprit. This doctrine works as a very useful tool for judiciary to find the imposter in crew. There is strict punishment for such unlawful offences under companies Act ,2013.


Author: Simran Singh Chandel [Student, New Law College, BVDU, Pune]

Law Library LawBhoomi

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