By Rhea Sinkar ~ DES Law College
The separation of the identity of a company from its members is known as the concept of the corporate veil. What this does is the members of the company are free from liability of any acts committed on behalf of that company. The veil shelters defaulters from violating laws and the members enjoy unreasonable immunity. The concept of corporate veil and recognizing the company as a separate entity/distinct from its members came into existence through: Salomon vs Salomon &Co Ltd (1897) AC 22]. This is currently in practice throughout the globe in different forms.
The concept recognizes the company as a separate legal person which means that the company can sue and be sued. However, executives in certain companies started using the veil to cover up their frauds and the courts have recognized this decision that certain members should be held responsible individually for their acts of misconduct. This is known as the lifting of the corporate veil which now has gained statutory recognition through the Companies Act,2013.
Lifting the Corporate Veil:
The concept of Corporate veil recognizes the company as a separate entity from its members. However it fails to recognize the fact that although a company is an artificial legal entity, its functioning and day to day affairs is run by its members. However, the disadvantage, in this case, is if a director/shareholder commits fraud or takes part in illegal activities, it is unfair to hold the company responsible as a separate entity which is when the corporate veil needs to be pierced and the director/person responsible should face the charges for committing the offenses.
In the case of the United States vs. Milwaukee Refrigerator Transit Company, it was held that ‘an organization shall be looked as a separate entity as a general rule unless there is sufficient reason for the contrary. If it appears that the veil is used to justify a wrong, protect fraud, or defend crime, the law will regard the corporation as an association of persons.’[i]
In Santanu Roy vs Union of India, the court held that the corporate veil can be lifted by authorities to determine which director is responsible for evading tax by fraud and wilful suppression of facts or violation of laws. [ii]
In Delhi Development authority vs Skipper Construction company, it was held that where individuals claim corporate immunity to commit illegal acts and defraud others, the court would ignore the corporate character and lift the company’s veil.[iii]
In Subhra Mukherjee vs Bharat Coking Coal Ltd, on intimation of nationalization, the company moved its immovable assets to the director’s wives accounts. The court held that the transaction was not made in the best interests of the company but slyly by the directors and lifted its corporate veil.[iv]
When can the corporate veil be lifted: Statutory provisions under the Companies Act-
- Section 7(7):
If a Company is incorporated by furnishing false information or by suppressing material facts or information in any documents, the court may choose to lift the corporate veil and hold members liable for their defaults.[v]
- Section 26(9):
It says that if false statements are furnished in the prospectus for the sale of securities, the company shall be fined with Rs 50,000 up to Rs 3,00,000 and the members of the company who knowingly participate in the act shall be imprisoned for a period which may extend to 3 years or a fine of Rs 50,000 up to Rs 3,00,000 or both. This provision lifts the corporate veil and holds persons individually responsible for any contraventions.[vi]
- Section 34 &Section 35:
Section 34 imposes criminal liability for making any misleading statement in the prospectus by way of omission or inclusion and Section 35 imposes civil liability for making any misleading statements because of which the company sustains any losses or damages.[vii]
- Section 39(3):
It makes a provision against allotment of securities. If the sum to be paid on the application is not received within 30 days from the date of issuance of the prospectus, the officer in default is fined with a sum of Rs 1000 for each day of continuance of the default or Rs 1,00,000 whichever is less.[viii]
- Section 216 & Section 219:
The Government has the authority to lift the corporate veil and check the legitimacy of the company and find out the members of the company responsible for the day to day working, finances, and the success and failure of the company. Both sections have a similar purpose.[ix]
- Section 339:
In course of winding up of a company, if it is found that it was involved in any fraudulent transactions, unlawful activities, the Court is empowered to lift the corporate veil and hold the person responsible, liable for such acts.[x]
- Section 447 & Section 448:
If in any return, report, certificate, financial statement, prospectus, or any other documents any false statement/concealment of material fact has been done, the guilty person responsible for such a release in the company’s name shall be found by lifting the corporate veil and held liable.[xi]
The doctrine of corporate governance creates a check on the activities of a corporation which acts as a dangerous weapon against defaulters who seek protection behind the company’s veil. The statutory provisions make sure that there is no blame game and that illegal activities/transactions come to a complete halt. The punishments and fines provided by the act increase the potency and makes sure that businesses carry out activities with complete transparency. However, courts need to apply the doctrine only in situations where it is of utmost necessity.
- [i] United States vs Milwaukee,(1905) 142F,edn.244.
- [ii]SantanuRoyv Union of India, 1989 65 CompCas 196 Delhi.
- [iii] Delhi Development Authority vs Skipper Construction Company, 1996 AIR 2005, 1996 SCC (4) 622.
- [iv]Subhra Mukherjee vs Bharat Coking Coal Ltd, AIR 2000 SC 1203
- [v]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 7(7).
- [vi]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 26 (9).
- [vii]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 34, Section 35.
- [viii]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 39(3).
- [ix]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 216, Section 219.
- [x]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 339.
- [xi]Companies Act,2013,Act No.18, Acts of Parliament,2013, Section 447, Section 448.