Whenever we listen to the term company, one simple definition comes to mind “a company is an artificial person” that means not a person with flesh and blood but legally available. In this blog, we are going to study the concept of company law with a specific doctrine which is the lifting up of the corporate veil. By briefly studying the corporate veil that “what exactly it means and it works” what does the lifting up of the corporate veil mean? In what circumstances is the veil lifted? Why was the concept introduced? And all of this study is done with relevant case studies.
The concept of the corporate veil is a vast concept and most important in company law but before understanding this it is mandatory to understand basic aspects of company law and about the company.
The Companies Act, 2013 is an act passed by parliament which provides the rules and regulations about the incorporation of a company, responsibilities of the companies, directors, and dissolution of a company. According to Section 2(20) of the Company Act 2013, “company is a company incorporated under this act and previous company law”. In other words, a company is an artificial person created by law that has a separate legal entity, perpetual succession and common seal and has limited liability. It is basically a voluntary association of a person who together contributes to the capital of the company to do business. The capital of a company is divided into small parts known as shares, the ownership of which is transferable subject to certain terms and conditions. A company must be registered under the companies act section 3(1)(ii) and if it is not registered then it is an illegal company or association.
In the world of business and commerce, the concept of the “corporate veil” plays a very important and main role in shaping corporate law for companies. it refers to the legal distinction between a company’s debt and obligation. Let’s go deeper into the concept of the corporate veil and understand its significance in the monarchy of limited liability.
WHAT IS THE CORPORATE VEIL?
The corporate veil is a legal principle that separates the liabilities and legal responsibilities of the company from those of its shareholders or owners. It treats the company as a separate legal entity, making it different from its individual members. This separation allows the company to enter into contracts, own property and incur debts in its own name.
It is a legal concept which separates the members of a corporation from its shareholders, and protects them from being personally liable for the company’s debt and other obligations.
We can understand it as simpler. when a company is formed it is composed of its members and is managed by the boards of directors and its employees but there is a principle of separate legal entity which means the members of the company and the company itself have separate identities. This principle includes under the concept of the corporate veil the members of the company are separated from shareholders and only the company as a person represented to its shareholder
NEED FOR THE CONCEPT OF CORPORATE VEIL
The concept of the corporate veil was introduced in India to protect the shareholders from personal liability in case the company is sued. The corporate veil is a fundamental concept in which a company is allowed to function as a separate entity from its shareholder it is mentioned in corporate law. This means that the company can enter into contracts, borrow money, and own property in its own name. if the company is sued, the shareholders are not personally responsible or liable for the debt and liabilities of the company other than their investment in the company. This means that the shareholders personal assets are protected from the company’s creditors. The concept of the corporate veil has been introduced in India to promote and encourage entrepreneurship and investment in companies and to provide a legal framework for the functioning of companies. It is also considered as a safeguard which protects from any uneven activities done by others.
One of the landmark cases that introduced the concept of the corporate veil in India is the case of Salomon v. Salomon & Co. Ltd. In this case, the House of Lords in the UK held that a company has a different identity and shareholders are separate from them, and the shareholders are not liable for the debt of the company. They are the investment in the company, not debt. the principle of the concept of corporate personality established by this case, it can be said as the foundation of the concept of corporate personality has been adopted in India and other countries to provide a legal framework for the functioning of companies.
LIFTING UP OF CORPORATE VEIL
The concept of the corporate veil is introduced by the separate entity concept that the owner and the company are two different persons and a veil is always there to make a difference between the members of the company and the shareholders. Corporate veil has its own aspects positive as well as negative. It is a privilege for the members, managers, and owners of the company. But the privileges also can be misused as well.
To avoid the chance of any kind of fraud or injustice with the shareholders the doctrine of lifting up of corporate veil / piercing the corporate veil was introduced. So basically, the doctrine of lifting the corporate veil is applied in India when a company is used for fraudulent or illegal activities.
In the case of Shantanu Ray v. Union of India, it was held that a court is entitled to lift the veil of corporate entity in the case of economic offences and pay attention to the economic realities behind the legal facade. It was stated that the company had violated section 11(a) of the central exercises and salt act, 1994.
The corporate veil is lifted:
In the case of fraud committed by the company.
If any fraudulent or criminal activities are being done with the company’s name.
If the company has an association with the enemy country and has an enemy character.
CIRCUMSTANCES UNDER WHICH THE CORPORATE VEIL BE LIFTED
There are mainly two provisions due to which the corporate veil is lifted, one is a statutory provision and the other is a judicial provision. Statutory provisions for the doctrine of lifting the corporate veil are contained in the companies act, 2013, which provides the legal framework for the doctrine. Judicial provisions are established through case law, where courts have applied the doctrine in specific cases and have applied the doctrine in specific cases and established precedents for future cases.
Both statutory and judicial provisions are important in the application of the doctrine of lifting the corporate veil.
The act sets out the circumstances in which the corporate veil can be lifted. circumstances such as reduction in members, misdescription in members, misdescription of name, fraudulent conduct of business, failure to refund application money etc.
Section 241 of the act allows members or credits of a company to apply to the national company law tribunal (NCLT) for an investigation into the affairs of the company if they have reasons to believe that the company is being run in a fraudulent or illegal manner.
Section 242 of the act allows the NCLT to pass orders for the winding up of the company. If it finds that the company was formed for fraudulent or illegal purposes or that the company is being run in a fraudulent or illegal manner.
Judicial provision provides the grounds for lifting up of veil the grounds such as frauds, character of company, protection of revenue, single economic entity etc.
Provision provides clarity about specific circumstances to lift up the veil due to which this is the most important provision
With the evolution of time, things change the same with law and way of doing business. The corporate world provides a huge number of employment and growth to the country’s economy but to promote it there is a requirement of providing safeguards to it. A company is consisting of its members and board of directors who operate it, employers who work in it and shareholders who invest money or capital in it. The concept of the corporate veil makes a difference between members of a company and shareholders and to divide their work it is a kind of privilege for them. The doctrine of lifting up of corporate veil is for the situation when any kind of misuse happen with the privileges provided to them.
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