DOCTRINE OF LIFTING OF CORPORATE VEIL
In the eyes of law, a company is a legal person with a separate entity distinct from its members of shareholders. In essence it means that there is a veil or curtain separating the legal entity of the company fromits members or shareholders. But in reality there is no such separation between the economic interests of thecompany and its members. The members are shareholders are the beneficial owners of the property of thecompany and as such they’re economic interest are identical with those of the company.
The theory of corporate entity is still the basic principle on which the whole law of corporations is based.But as the separate personality of the company its statutory privilege, it must be used for legitimate businesspurposes only. When fraudulent and dishonest use is made of the legal entity, the individuals concerned willnot be allowed to take shelter behind the corporate personality. The Courts will break through the corporateshell and apply the principle of lifting or piercing the corporate veil. The Court will look behind the corporateentity and take action as though no entity separate from the members existed and make the members or thecontrolling persons liable fro debts and obligations of the company.
Ordinarily, the Courts recognize the separate legal entity of the company and consider themselves boundby the principle laid down in the case of
Salomon Vs. Salomon & Co. Ltd.
They do not lift or pierce the veil of corporate entity to look at the economic realities behind the legal veil. But in exceptional cases, the courts maydisregard the concept of corporate entity to look at the persons (members or shareholders) behind thecompany. They may, so to say l
ift the corporate veil to probe into the economic realities behind thescene. This is known as the “lifting or piercing the corporate veil.’
Salomon Vs. Salomon & Co. Ltd
it was decided that a company has an independent and legalpersonality distinct from the individuals who are its members, it has since been held that the corporate veil maybe lifted, the corporate personality may be ignored and the individual members recognized for who they are incertain exceptional circumstances. The doctrine of the lifting of the veil thus marks a change in the attitude thatlaw had originally adopted towards the concept of the separate entity or personality of the corporation.
In general the Courts have made a departure from the principle of corporate entity when there was reasonto suspect that the veil of corporate personality had been used to conceal fraudulent or improper conduct or for doing things against public policy or public interest.
In an American case
Re Clarks`s Will Stone J
Many cases present avowed disregard of corporate entity…but they all come to just this- courts simply will not let interposition of corporate entity or action prevent a judgment otherwise required. Corporate presence and action no more than those of a individual will bar a remedy demanded by law in application to facts. Hence, the process is not accurately termed one of disregarding corporate entity. It is rather and only a refusal to permit its presence and action to divert the judicial course of applying law to ascertained facts. The method neither pierces any veil nor goes behind any obstruction save for its refusal to let one fact bar judgment, which thewhole sum of facts requires
But it would not be possible to evolve a rational, consistent and inflexible principle which can be invoked indetermining the question as to whether the veil of the corporation should be lifted or not. Broadly stated, wherefraud is intended to be prevented, or trading with an enemy is sought to be defeated, the veil of a corporation islifted by judicial decisions and the shareholders are held to be the persons who actually work for thecorporation.
Exceptions to the Doctrine
Some of the
exceptional cases necessitating the lifting of the corporate veil
may briefly be indicatedbelow: -
1.FOR DETERMINING THE CHARACTER OF THE COMPANY
Where there is reason to suspect that the persons in real control of a company are enemy agents or areresidents of an enemy country, the Courts may disregard the corporate fiction and examine the character of thepersons behind the company to determine whether it is an enemy company
Daimler Co. Ltd Vs.Continental Tyre & Rubber Co Ltd)
2.COMPANY CANNOT ACT AS AGENT OF SHAREHOLDERS
Where a company is acting as the agent of the shareholders under an express or implied agreement,
thecorporate entity of the company will be disregarded and shareholders will be held liable for the acts of thecompany.
Shareholders cannot be the principals for the company but if so, it should be proved that the company was their agent in one or more transactions.