Unveiling the Truth: Exploring the Theory of Lifting the Corporate Veil

Adyasha Pattnaik,

Xavier Law School, XIM University, Bhubaneswar

INTRODUCTION

Section 2 (20) of The Companies Act, 2013 defines a "company" in India as one that is "incorporated under this Act or under any previous company law. Despite being governed by its board of directors or even just one, the company has an independent personality. Its legal identity is distinct from that of its directors or owners. In the Rustom Cavasjee Cooper v. Union of India case, the Hon. Supreme Court of India established this characteristic of a business by ruling that "a company registered under the Companies Act is a legal person, separate and distinct from its individual members." [i]The shareholders' property is not the company's property. This incorporation-related feature was initially discovered in the Salomon v. Salomon & Company Ltd. case, and has since been widely used in various versions across the world.[ii]

An Incorporated company has a independent legal identity of its own, which is not dependent on its shareholder and its members. A firm is run by its staff and board of directors, and its members make up the organisation. The company is granted the status of being a distinct legal entity upon incorporation, which distinguishes the firm from its members, or shareholders. Often known as the "Veil of Incorporation," this idea of difference is known as a Corporate Veil.

Salomon and Co. Ltd. v. Salomon[iii]

Facts: Salmon was a boot maker and leather merchant. He established a limited company with a capital of seven pounds, and the shareholders were himself, his wife, his four sons, and his daughter. Salmon later sold his solvent firm for 38782 pounds to the limited company he had founded; the 10,000 pounds in debts were secured by a floating charge on the company's assets. Later, the business encountered problems, and the holders of the debt appointed a receiver, putting the business into liquidation.

Issue: Could a controller or shareholder of a firm be held personally accountable for the debts?

Judgement: The House of Lords determined that, being distinct legal entities, the Company and its shareholders are distinct individuals and, for legal purposes, are not one and the same. Therefore, Mr. Salmon will not be held accountable for all of the company's debts.

Interpretation of the Lifting of the Corporate Veil Doctrine 

The corporations' legislative privilege of corporate personality may only be utilised for approved purposes. Should the aforementioned privilege be utilised to conceal unlawful or dishonest behaviour, the court will lift or breach the corporation's curtain. Piercing the corporate veil is the term for this idea. This doctrine's classic illustration is Salomon's case. In addition, it was decided in Lee v. Lee Air Farming Ltd. that Lee was the company's owner, director, and employee at the same time, and that their service agreement was still in effect. In a firm, a person can hold both master and servant roles simultaneously. [iv]

Nonetheless, this philosophy cannot be utilised by the shareholders for their own gain. In Premlata Bhatia v. Union of India (2004), this took place. In examining the true essence of the case and the transactions involved, the Karnataka High Court applied this approach to the tax evasion case. In the case of Richter Holding versus the Assistant Director of Income TaxInc.Legal Clauses Interpretation by Judges: Even though the notion is still being developed in several jurisprudences, it has shown to be an excellent corporate watchdog. But the rule should only be used in extreme circumstances and not always. According to Article 21 of the Constitution, even corporations have the right to life and freedom37. The temptation for the Courts to quickly lift the veil must be resisted. The corporate personality identity must be respected by the courts, as the Apex Court correctly noted in the Balwant Rai Saluja & Anr. v. Air India Ltd. & Anr38. case. The principle must be applied narrowly, only in situations where it is abundantly clear that the company is a sham or a company is a fraud or a front used by the owners of the company to avoid responsibility.

A "officer who is in default" is a person who violates the Companies Act, as defined by Section 5, and who may be held accountable for their actions. The term "officer who is in default" in this section refers to a list of officers, including managing directors and full-time directors, who may face sanctions or penalties.

Section 45: Reduction of membership below statutory minimum: According to this section, if a company's membership falls below the statutory minimum of two or seven (as specified in Section 12) and it continues to operate for more than six months, then the number of members may be reduced.

Everyone who is a member of the company and is aware of this fact has joint and several liability for the firm's debts incurred during that period.

The respondent filed a lawsuit for debt recovery against a private limited business and its directors in Madan lal v. Himatlal & Co.The directors opposed the lawsuit, arguing that since the corporation never operated with fewer members than the minimum required by law, they could not be held jointly and severally accountable for the outstanding debt. It was decided that the respondent, acting in his capacity as dominus litus, had the right to select the people he wanted to sue. [v]

Conclusion

It is abundantly clear from a review of the statutes and court rulings covered in this paper that there cannot be a numerus clausus36 in order for the corporate veil to be lifted. In India, lifting the corporate veil is not governed by a set of established laws since there is no explicit statute outlining the prerequisites for starting the process. In India, there is a fairly broad law about veiling, and judges have a great deal of discretion in deciding whether or not to do so. Courts must exercise caution in this area because decisions on the removal of the corporate veil cannot be made in a way that is either too liberal or too strict since either way, the public may suffer. Despite the fact that the idea is still being refined in several jurisprudences, it has shown to be an excellent corporate watchdog. But the rule should only be used in extreme circumstances and not always. According to Article 21 of the Constitution, even corporations have the right to life and freedom37. The temptation for the Courts to quickly lift the veil must be resisted. The corporate personality identity must be respected by the courts, as the Apex Court correctly noted in the Balwant Rai Saluja & Anr. v. Air India Ltd. & Anr38. case. The principle must be applied narrowly, only in situations where it is abundantly clear that the company is a sham or a disguise as a way for the business owners to avoid liability.

References

1.      https://www.lawctopus.com/academike/corporate-veil/

2.      https://www.livelaw.in/know-the-law/lifting-or-piercing-of-corporate-veil-216786/

3.      https://www.corpseed.com/knowledge-centre/lifting-of-corporate-veil-under-the-companies-act-2013/

4.      https://blog.ipleaders.in/lifting-of-corporate-veil/

5.      https://articles.manupatra.com/article-details/Lifting-the-Corporate-Veil-in-India/

[i] 1962 SCR Supl. (1) 567

[ii] [1896] 11 WLUK 76

[iii] [1896] UKHL 1 [1897] AC 22

[iv] [1960] UKPC 33

[v] [2000]99COMPCAS266(MP)