Table of contents

Introduction

Theories for Lifting of corporate veil

• Alter-ego theory
• Instrumentality theory

Categories

• Under statutory provision
• Failure to return application money
• For investigation of ownership of company
• Fraudulent conduct
• Furnishing false statements
• Misstatement in Prospectus
• Misdescription of Company’s name
• Inducing persons to invest money in company
• Repeated defaults
• Punishment for false evidence
  • Judicial Provision
• Salomon v. A Salomon & Co. Ltd
• Lee v. Lee’s Air Farming Ltd.
• United States v. Milwaukee Refrigerator Transit Company
• The King v Portus; ex parte Federated Clerks Union of Australia
• Chiranjitlal Chaudhary v. Union of India 
• Delhi Development Authority vs. Skipper Construction Company

Grounds under which Corporate veil is Lifted

Conclusion

Introduction

Section 3(1)(i) of the companies act defines company as “a company means a company formed and registered under this act or an existing company as defined in section 3(i)(ii).” Company being an artificial personal, company is a separate legal entity distinct from its members and it is also considered liable for any debts or obligation. The concept of corporate veil was introduced to protect the shareholders from being personally liable for the debts or obligations of a company.

Theories for Lifting of corporate veil

• Alter-ego theory – In the case of International Aircraft Trading Co. v Manufacturers Trust Co. court defined alter-ego as “When a corporation has been so dominated by an individual or another corporation and its separate entity so ignored that it primarily transacts the dominator’s business instead of its own it will be called the individual’s alter ego. Since the business owner and the corporation are alter egos, they are merely two sides of the same coin.” Therefore, the unit of the interest between company and the owner are so amalgamated that a company is deemed to be one and same as owner or vice-versa.  
• Instrumentality theory – The instrumentality theory on the other hand examines the use of a corporation by its owners in ways that benefit the owner rather than the corporation

Under statutory provision

The Companies Act, 2013 (Hereinafter referred as the act)  replaced the Indian Companies Act, 1956. The Companies Act 2013 makes comprehensive provisions to govern all listed and unlisted companies in the country. It has integrated with various provisions, points out the person liable for any such improper/illegal activity as “officer who is in default” under Section 2(60) of the Act, it states that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise. The term ‘officers’ have been given wide interpretation and includes whole-time director, key managerial personnel and director or directors as specified by the Board. Some of the key provisions under this act for lifting of corporate veil are as follows:

1. Failure to return application money (Under Section 39 (3) of the Act):  This section deals with Allotment of securities by company If the stated minimum amount has not been subscribed and the sum payable on application is not received within a period of thirty days from the date of issue of the prospectus, the company and its officer who is in default shall be liable to a penalty, for each default, of one thousand rupees for each day during which such default continues or one lakh rupees, whichever is less.

2. For investigation of ownership of company (Under Section 216 of the Act): This provision allows central government to do Investigation of ownership of company by appointing one or more inspectors to investigate for the purpose of determining the true persons who are or have been financially interested in the success or failure or able to control or to materially influence the policy of the company.

3. Fraudulent conduct (Under Section 339 of the Act): It deals with Liability for fraudulent conduct of business, in the course of the winding up of a company, it appears that any business of the company has been carried on with intent to defraud creditors of the company or any other persons, the Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any creditor or contributory of the company, may, if it thinks it proper so to do, declare that any person, who is or has been a director, manager, or officer of the company or any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company.

4. Furnishing false statements (Under Section 448 of the Act): If any return, report, certificate, financial statement, prospectus, statement or other document, made by any person are found to be false in any material particulars, knowing it to be false; or omits any material fact, knowing it to be material, he shall be liable for punishment under section 447 of the act.

5. Misstatement in Prospectus (Under Section 26 (9), Section 34 and Section 35 of the Act): It imposed liability If a prospectus is issued in contravention of the provisions, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees and every person who is knowingly a party to the issue of such prospectus shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to three lakh rupees, or with both.
6. Misdescription of Company’s name (under Section 4 and Section 12 of the Act): If any default is made in complying to the Registered office of company, the company and every officer who is in default shall be liable to a penalty of one thousand rupees for every day during which the default continues but not exceeding one lakh rupees.
7. Inducing persons to invest money in company (Under Section 36 of the Act): Any person who, either knowingly or recklessly makes any statement, promise or forecast which is false, deceptive or misleading, or deliberately conceals any material facts, to induce another person to enter into any agreement, shall be liable for action under section 447.
8. Repeated defaults (Under Section 451 of the Act): — If a company or an officer of a company commits an offence punishable either with fine or with imprisonment and where the same offence is committed for the second or subsequent occasions within a period of three years, then, that company and every officer thereof who is in default shall be punishable with twice the amount of fine for such offence in addition to any imprisonment provided for that offence.
9. Punishment for false evidence (Under Section 449 of the Act) : if any person intentionally gives false evidence  upon any examination on oath or solemn affirmation or in any affidavit, deposition or solemn affirmation, in or about the winding up of any company under this Act, or otherwise, he/she shall be punishable with imprisonment for a term which shall not be less than three years but which may extend to seven years and with fine which may extend to ten lakh rupees.

Judicial Provision

Salomon v. A Salomon & Co. Ltd – In this case it was held that The entity of the corporation is entirely separate from that of its shareholders; it bears its own name and has a seal of its own; its assets are distinct and separate from those of its members; it can sue and be sued exclusively for its purpose; liability of the members are limited to the capital invested by them.

Lee v. Lee’s Air Farming Ltd.- question was raised regarding the dual capacity of a person. The court held that a person can function in dual capacity both as director and employee in the same company.

United States v. Milwaukee Refrigerator Transit Company – Court noticed that where the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will disregard the corporate entity and treat it as an association of persons.

The King v Portus; ex parte Federated Clerks Union of Australia – the principle that company is separate legal entity have been established  but due to fiction in the application of such law, many persons committed crime and were hiding behind the veil of corporation. Therefore, the concept of Lifting of the corporate veil emerged.

Chiranjitlal Chaudhary v. Union of India  – The Hon’ble  Supreme Court held that fundamental rights guaranteed by the constitution are available not merely to individual citizens but to corporate bodies as well except where the language of the provision or the nature of right compels the inference that they are applicable only to natural persons.

Delhi Development Authority vs. Skipper Construction Company  – In this case the court determined that, where corporate character is employed for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the reality behind the corporate veil.  

Grounds under which Corporate veil is Lifted

• Protection of Revenue (Tax Evasion)
• Where the Company is a Sham (Fraud)
• Public Policy
• Determining True Character of the Company
• Invocation of the principal of agency

Conclusion

Many times cases have been seen where crime or fraud have been committed by these shareholders while hiding behind the veil of the company. To make them responsible for the wrong done, the concept of Lifting of corporate veil has been introduced and expanded by judgments of courts from time to time. Lifting of corporate veil means separating shareholders’ personality from that of corporations, to find out the person who is really responsible for the fraud or any illegal act committed.