Lifting The Corporate Veil – Provisions

under the Companies Act, 2013

Introduction
Incorporation of an organization by registration was presented in 1844 and the
precept of limited liability of an organization followed in 1855. In this manner
in 1897 in Salomon v. Salomon and Company, the House of Lords
influenced these establishments and solidified into English law the twin ideas
of limited liability and corporate entity. All things considered, the pinnacle
Court set out the rule that an organization is a distinct legitimate person
altogether not the same as the members of that organization. This guideline
is alluded to as the ‘veil of incorporation’.

The main preferred standpoint of incorporation from which all others follow is
the separate entity of the organization. As a general rule, be that as it may,
the matter of the legitimate person is constantly carried on by, and for the
advantage of, a few people. In a definitive investigation, some individuals are
the real beneficiaries of the corporate preferences, “for while, by the fiction of
law, an enterprise is an unmistakable distinct entity, yet in all actuality, it is a
relationship of people who are in certainty the beneficial proprietors of all the
corporate property.

“And what the Salomon case decided is that ‘in questions of property and limit, of acts done and
rights gained or, liabilities expected in this manner… the personalities of the natural persons who
are the organizations’ corporators are to be overlooked”.

This hypothesis of corporate, entity is, in fact, the essential guideline on which
the entire law of corporation is based. The cases are not few in which the
Courts have effectively opposed the compulsion to get through the corporate
shroud.
However, the hypothesis can’t be pushed as far as possible. “There are
circumstances where the Court will lift the veil of incorporation keeping in mind
the end goal to analyze the “realities” which lay behind. Now and again this is
explicitly approved by statute… and sometimes the Court will lift its own
particular volition”.

Meaning of lifting or piercing of the Corporate

Veil
The human resourcefulness, however, began utilizing the veil of corporate
personality explicitly as a shroud for misrepresentation or despicable direct. In
this way, it ended up noticeably important for the Courts to get through or lift
the corporate veil and take a gander at the people behind the organization who
are the real beneficiaries of the corporate fiction.

The lifting of the corporate veil implies neglecting the corporate personality
and looking for the genuine individual who is in the control of the organization.
At the end of the day, where a false and deceptive utilize is made of the
legitimate entity, the people concerned won’t be permitted to take shield
behind the corporate personality. In this respects, the court will get through
the corporate shell and apply the guideline of what is known as “lifting or
piercing the corporate veil.” And while by the fiction of law an organization is
an unmistakable element, yet truly it is an association of people who are in
reality the beneficial proprietors of all the corporate property. In United
States V. Milwaukee Refrigerator Co., the position was summed up as
follows:

“An organization will be looked upon as a lawful entity as a general rule…… however when the
idea of the legitimate element is utilized to vanquish public convenience, defend crime or protect
fraud, justify wrong, the law will view the enterprise as a relationship of people.”

In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, it was

observed that:
 “The regulation set down in Salomon v. Salomon and Salomon Co.Ltd must deliberately be
observed. It has frequently should cast a veil over the personality of a limited liability organization
through which the Courts can’t see. In any case, that is not valid. The Courts can and generally it
does draw aside the veil. They can and often do, pull off the cover. They hope to perceive what
truly lies behind”.

Judicial provisions or grounds for lifting The

Corporate Veil

Fraud Or Improper Conduct

The Courts have been more than arranged to pierce the corporate veil when it
feels that fraud is or could be executed behind the veil. The Courts won’t enable
the Salomon standard to be utilized as an engine of fraud. The two great
instances of the fraud exception are Gilford Motor Company Ltd v. Horne
and Jones v. Lipman. In the main case, Mr. Horne was an ex-worker of The
Gilford engine organization and his business contract gave that he couldn’t
solicit the clients of the organization. With a specific end goal to crush this, he
incorporated a limited organization in his better half’s name and solicited the
clients of the organization. The organization brought an action against him.
The Court of appeal was of the view that “the organization was shaped as a
gadget, a stratagem, keeping in mind the end goal to veil the viable carrying
on of the business of Mr. Horne” for this situation obviously the primary reason
for incorporating the new organization was to execute fraud. Along these lines,
the Court of appeal viewed it as a negligible sham to shroud his wrongdoings.

In the second instance of Jones v. Lipman, a man contracted to offer his

territory and after that point altered his opinion with a specific end goal to keep
away from an order of specific performance, he transferred his property to an
organization. The court, in this case, held that the organization here was “a
veil which (Mr. Lipman) holds before his face trying to maintain a strategic
distance from acknowledgment by the eye of equity” Therefore the court
ordered for specific performance both against Mr.Lipman and the organization.
For Benefit Of Revenue

“The Court has the ability to ignore corporate substance in the event that it is
utilized for tax evasion or to dodge tax commitments. A reasonable outline is
Dinshaw Maneckjee Petit, Re;

The assessee was a rich man enjoying gigantic profit and interest income. He
formed four privately owned businesses and concurred with each to hold a
piece of speculation as an operator for it. Income received was credited in the
accounts of the organization however the organization gave back the sum to
him as a pretended loan. Along these lines, he separated his income into four
sections in an offer to lessen his tax liability.

It was held that “the organization was formed by the assessee absolutely and
basically as a method for maintaining a strategic distance from super tax and
the organization was just the assessee himself. It did no business, yet was
made basically as a legitimate entity to apparently get the profits and interests
and to hand them over to the assessee as pretended loans”.

Enemy Character

An organization may expect a foe character when people in true control of its
affairs are occupants in an enemy nation. In such a case, the Court may
analyze the character of people in genuine control of the organization, and
announce the organization to be an adversary organization. In Daimler
Co.Ltd V. Mainland Tire And Rubber Co.Ltd, An organization was
incorporated in England with the end goal of selling in England, tires made in
Germany by a German organization which held the majority of shares in the
English organization. The holders of the rest of the shares, aside from one,
and every one of the chiefs was Germans, living in Germany. Amid the First
World War, the English organization commenced an action for the recuperation
of a trade debt. Held, the organization was an outsider organization and the
payment of debt to it would add up to trading with the foe, and in this manner,
the organization was not permitted to continue with the activity.
Where The Company Is A Sham

The Courts additionally lift the veil where an organization is a minor cloak or
sham (lie).

Company Avoiding Legal Obligations

Where the utilization of an incorporated organization is being made to maintain

a strategic distance from legitimate commitments, the Court may dismiss the
lawful personality of the organization and continue on the presumption as
though no organization existed.

Single Economic Entity

Now and again on account of the meeting of endeavors, the Salomon principle
may not be clung to and the Court may lift the veil to take a gander at the
financial realities of the group itself. On account of D.H.N.food items Ltd. V.
Tower Hamlets, it has been said that the Courts may neglect Salomon’s case
at whatever point it is just and impartial to do so. In the previously mentioned
case, the Court of claim suspected that the present case was one which was
appropriate for lifting the corporate veil. Here the three auxiliary organizations
were dealt with as a part of the same financial entity or group and were
qualified to pay compensation.

Agency Or Trust

Where an organization is going about as agent for its investor, the investors
will be obligated for the acts of the organization. It is an issue of facts for each
situation whether the organization is going about as an agent for its investors.
There might be an Express consent to this impact or an agreement might be
suggested from the conditions of every specific case. In the case of F.G.Films
ltd, An American organization financed the creation of a film in India in the
name of a British organization. The leader of the American organization held
90% of the capital of the British organization. The Board of exchange of Great
Britain declined to register the film as a British film. Held, the decision was
substantial in perspective of the way that British organization acted only as
the nominee of the American Company.

Avoidance Of Welfare Legislation

Avoidance of welfare enactment is as normal as avoidance of tax collection and

the approach of the Courts in considering issues emerging out of such evasion
is, for the most part, the same as avoidance of tax assessment. It is the
obligation of the Courts for each situation where ingenuity is used to maintain
a strategic distance from welfare enactment to get behind the smoke screen
and find the genuine state of affairs.

Public Interest

The Courts may lift the veil to ensure open strategy and prevent exchanges in
opposition to public policy. The Courts will depend on this ground while lifting
the veil is the most “just” result, however, there is no particular justification
for lifting the veil. Consequently, where there is a contention with public policy,
the Courts disregard the form and consider the substance.

Statutory Provisions For Lifting The Corporate

Veil

Reduction Of Number Of Members

Under Section 45 of The Indian Companies Act, 1956, if an organization carries

on business for over a half year after the number of its members has been
diminished to seven if there should arise an occurrence of a public company
and two in the event of a privately owned business, each individual who knows
this fact and is a member during the time that the organization so carries on
business after the half year, becomes liable severally and jointly with the
organization for the payment of debts contracted following a half year. It is
just that part who stays after a half year who can be sued.
Fraudulent Trading

Under Section 542 of The Indian Companies Act, 1956, if any business of an
organization is gone ahead with the aim to defraud creditors of the
organization or creditors of some other individual or for any deceitful reason,
who was intentionally a party to the carrying on of the business in that way is
subject to imprisonment or fine or both. This applies regardless of whether the
organization has been or is in course of being twisted up. This was upheld
in Delhi Development Authority v. Captain Constructions Co. Ltd. (1997).

Misdescription Of The Company

Section 147 (4) of The Indian Companies Act, 1956, gives that if any officer of
the organization or other individual acting on its benefit signs or
approves/authorized to be signed by the organization any promissory note, bill
of exchange, order or cheque for money or goods, endorsement in which the
organization’s name is not specified in readable letters, he is obligated to fine
and he is personally liable to the holder of the instrument unless the
organization has effectively paid the sum.

Failure To Refund Application Money

As indicated by Section 69(5) of The Indian Companies Act, 1956, the

executives of an organization are mutually and severally at risk to reimburse
the application cash with premium if the organization neglects to refund the
cash within 130 days of the date of issue of the prospectus.

Holding and Subsidiary Companies

In the eyes of law, the holding organization and its subsidiaries are separate
legitimate entities.

However, in the accompanying two cases, the subsidiary may lose its different
entity-
  Where toward the end of its monetary year, the organization has subsidiaries,
it must lay before its members in meeting not only its own particular accounts
but also append therewith yearly accounts of each of its auxiliaries along with
copy of the board’s and examiner’s report and a statement of the holding
organization’s interest in the subsidiary.
 The Court may, on the facts of a case, regard a subsidiary as simply a branch
or division of one expensive endeavor claimed by the holding organization.

Conclusion
In this manner, it is bounteously certain that incorporation does not cut off
individual liability consistently and in all conditions. “Honest enterprise, by
methods for organizations, is permitted; however people, in general, are
ensured against kitting and humbuggery”. The holiness of a different entity is
maintained just in so far as the entity is consonant with the fundamental
approaches which give it life.

Along these lines, the individuals who enjoy the advantages of the machinery
of incorporation need to guarantee a capital structure satisfactory to the size
of the enterprise. They should not pull back the corporate assets or blend their
own individual accounts with those of the corporation. The Courts have now
and again seized upon these realities as evidence to legitimize the burden of
liability upon the investors.

The demonstration of piercing the corporate veil up to this point says a

standout amongst the most disputable subjects in corporate law. There are
categories, for example, agency, fraud, facade or sham, group enterprises,
and unfairness, which are accepted to be the most curious premise under
which the Law Courts would pierce the corporate veil. However, these
categories are simple rules and in no way, means far from exhaustive.