The document discusses the concept of lifting the corporate veil, where the separate legal identity of a corporation is ignored by the courts. It can occur where a corporation is a sham, is being used for fraudulent purposes, or to determine the true parties responsible. Grounds for lifting the veil include fraud, determining a company's actual character, or protecting public policy. Indian judicial cases are cited where the veil was lifted, such as where a private company engaged in sham transactions before nationalization. The conclusion states that while a company has a separate legal identity, the courts may lift the veil to reveal the real parties when a company's veil is misused.
2. Introduction
(Definition of
Company)
• According to Justice Marshall, “a
company is an artificial person, has
no physical existence. It is invisible
and intangible. It exists only in
contemplation of law”.
• Company under section 2(20) means
a company incorporated under the
Companies Act, 2013 or under any
previous Companies Act. Company
is generally a legal entity represented
by a set of members or association of
people, with specific objectives. The
line of business structure of the
company can be corporation,
partnership, or proprietorship. These
are the basic structure and types
which decide the ownership of the
company.
3. Introduction
• Corporate Veil:
• A legal concept that separates
the personality of a
corporation from the
personalities of its shareholders,
and protects them from being
personally liable for the
company’s debts and other
obligations
• Lifting of Corporate Veil:
• At times it may happen that the
corporate personality of the
company is used to commit
frauds and improper or illegal
acts. Since an artificial person is
not capable of doing anything
illegal or fraudulent, the façade
of corporate personality might
have to be removed to identify
the persons who are really guilty.
This is known as ‘lifting of
corporate veil’.
4. Corporate Criminal Liability
• Corporate criminal liability can be defined as a crime which has been
committed by individual or association of individuals who for pursuing a
common purpose or make business gain in course of their occupation
commit such acts or omission which is forbidden by law and with guilty
mind where it is for the benefit of the corporation or any individual out of
the association of individuals.
• Earlier in many situations when the concept of holding a corporation liable
was not introduced there was not any corporation held liable for any
criminal act as the it is an artificial legal person, so it could not be
imprisoned, and corporation not being natural person there was absence
of mens rea.
• When a Corporation is hold criminally liable it not only affects the business
of corporation but also the individuals in the corporation who are engaged
in criminal conduct it may make them suffer criminally and financially.
However, it has been suggested in case of punishment to be imposed on
corporation it has been suggested that fine should be imposed rather than
imprisonment.
5. Criminal
Liability
recognized
under the
Companies
Act 2013
• The Criminal Liability of corporation are defined
under following sections :-
• Section 53-Prohibition of shares at a discount.
• Section 118(12)-Minutes of proceedings of
General Meeting, Meeting of Board of Directors
and other meetings and resolutions passed by
Postal Ballot.
• Section 128(6)-Books of Account, etc, to be kept
by Company.
• Section 129(7)- Financial Statement.
• Section 134- Financial Statement, Boards report,
etc.
• Section 188(5)- Related Party transactions.
• Section 57-Punishment for personation of
Shareholder.
• Section 58(6)- Refusal for registration and appeal
against refusal.
• Section 182(4)- Prohibitions and restrictions
regarding Political Contributions.
• Section 184(4)- Disclosure of Interest by Director.
• Section 187(4)- Investments of the Company to be
held in own name.
• Section 447- Punishment for fraud.
6. Criminal Liability recognised under Various Laws in
India
• Food and Safety Standard Act, 2006 (section 60)
• (1) Where an offence under this Act which has been committed by a company, every person who at
the time the offence was committed was in charge of, and was responsible to, the company for the
conduct of the business of the company, as well as the company, shall be deemed to be guilty of
the offence and shall be liable to be proceeded against and punished accordingly.
• Code of Criminal Procedure, 1973 (section 305)
• Where a corporation is the accused person or one of the accused persons in an inquiry or trial, it
may appoint a representative for the purpose of the inquiry or trial and such appointment need not
be under the seal of the corporation.
• Where a representative of a corporation appears, any requirement of this Code that anything shall
be done in the presence of the accused or shall be read or stated or explained to the accused, shall
be construed as a requirement that that thing shall be done in the presence of the representative
or read or stated or explained to the representative, and any requirement that the accused shall be
examined shall be construed as a requirement that the representative shall be examined.
7. • Narcotic Drugs and Psychotropic Substances Act, 1985(Section
38)
• Where an offence under Chapter V has been committed by a
company, every Person, who, at the time the offence was
committed was in charge of, and was responsible to, the
company for the conduct of the business of the company as
well as the company, shall be deemed to be guilty of the
offence and shall be liable to be proceeded against and
punished accordingly.
9. Meaning and Definition of Corporate Veil
• A corporate veil is a legal concept that separates the acts done by the
companies and organizations from the actions of the shareholders. It
protects the shareholders from being liable for the actions done by
the company. This is not an absolute right the court depending on
the facts of the case can take the decision whether the shareholder is
liable or not.
• According to the Cambridge Dictionary, “shareholders may hide
behind the corporate veil, assured that their liability does not extend
beyond the value of their shares”.
10. Company: A Separate Legal Entity (Corporate
Personality)
• Corporate personality is the reality
expressed by the law that a company is
perceived as a legal entity distinct from
its members. A company with such
recognition and personality will be
considered as a separate legal entity
having an independent legal existence
from the members of the company. A
company is known by its own name and
has its own right, duties, obligations, and
liabilities. Therefore, there is a clear
difference between the company and its
members, this is commonly called a
Corporate Veil.
11. Development of the Concept of Lifting up the
Corporate Veil (Salomon vs Salomon & Co Limited
(1897) )
• Salomon was running a business of boot making and leather merchant as a sole
proprietorship and transferred his business to Salomon Ltd, incorporated with
members comprising of his own family and himself.
• The value paid to Salomon for such exchange (transfer) was made with the assistance
of shares and debentures having a floating charge on the resources of the company.
• The business was failed and was incurring losses. When the company’s business failed
it went into liquidation. Salomon’s right of recovery secured through floating charge
against debentures stood at a priority against the creditors of the company, they
contended that Salomon and his company “Salomon Company” are one and the
same.
• The liquidator on behalf of unsecured creditors, alleged that the company was fiction
and was (the company) essentially an agent of Salomon.
12. • Salomon being the principal was made liable to pay the unsecured creditors. In simple
words, the liquidator disregarded the separate personality of Salomon Ltd.,
particularly from its members making him liable personally for the acts of the
company.
• As Salomon was the major shareholder of the company, he was made personally
liable for the company’s debt. Hence, the issue was whether he is personally liable for
the company’s debt, regardless of the separate legal entity of a company.
• JUDGEMENT :- It was held that the company is a real and legal company, fulfilling all
legal requirements. It had an identity different from its members and therefore, the
unsecured creditors were to be paid at priority from the secured debentures.
14. Lifting of
Corporate
Veil (Piercing
the
Corporate
Veil)
• By a fiction of law, a company is seen as a distinct
entity separated from its members, but in reality,
it is an association of persons who in fact the
beneficial owners of the company and its
corporate property. This fiction is created by a veil
and is called the Corporate veil. Lifting or piercing
of corporate veil means ignoring the fact that a
company is a separate legal entity and has a
separate identity (Corporate personality). This
concept disregards the separate identity of the
company and looks behind the true owners or real
persons who are in control of the company.
• The separate personality of a company is a
statutory privilege and it must be used for a
legitimate purpose only. Whenever and wherever
a fraudulent or dishonest use is made of the legal
entity, the individuals will not be allowed to hide
behind the curtain of corporate personality. The
appropriate authority will break this shell of the
company and sue the individuals who have done
or committed such a crime or offence. This lifting
of the curtain is called a Lifting of the Corporate
veil.
15. Grounds
under which
Corporate
veil is Lifted
With Judicial
Responses
• Where the Company is a Sham
(Fraud): Gilford Motor Company vs.
Horne (1933)
• Invocation of the principal of agency:
RG Films Ltd (1953)
• Public Policy: Connors Bros vs.
Connors (1940)
• Determining True Character of the
Company: Daimler Co. Ltd vs.
Continental Tyre and Rubber Co. Ltd
(1916)
• Protection of Revenue (Tax Evasion):
CIT vs. Meenakshi Mills Ltd.
16. Judicial
Responces in
India
• Subhra Mukherjee v. Bharat Coking Coal
Ltd.
Sham or façade- In this case a private
coal company sold its immovable
property to the wives of directors prior
to nationalization of the company. In
fact, documents were ante-dated to
show the transaction was prior to
nationalization of the company).
Where such transaction is alleged to
be sham and collusive, the Court was
justified in piercing the veil of
incorporation to ascertain the true
nature of the transaction as to know
who were the real parties to the sale
and whether it was genuine and bona
fide or whether it was between the
husbands and wives behind the façade
of the separate entity of the company.
17. • Bajrang Prasad Jalan v. Mahabir Prasad Jalan
Subsidiary-holding company- The court, for the purpose of
considering a complaint of oppression held that the corporate veil
can be lifted in the cases of not merely of a holding company, but
also its subsidiary when both are family companies.
• Singer India v. Chander Mohan Chadha
The concept of corporate entity was evolved to encourage and
promote trade and commerce but not to commit illegalities or to
defraud the people. Where therefore the corporate charter 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 so as to enable it to pass
appropriate orders to do justice between the parties concerned
18. Conclusion
• A company has a legal personality just like all other natural
individuals, the only difference between the two is that a
company even with its legal personality cannot run or conduct its
affairs as a natural person does. The company acts on the
concept of the corporate veil, this veil when misused for
fraudulent acts will reveal the true nature and real beneficiaries
of the company, thus, called the lifting of the corporate veil. The
courts from time to time implemented this rule and also brought
in a few changes suitable for the situations and for future
reference.