LIFTING OF CORPORATE VEIL

Explain the meaning of the concept of corporate veil ! "n#er circ%m&tance& have the co%rt& pierce# or lifte# the corporate veil! $hat

INTRO'"CTION( As the company is a separate legal entity, it has been provided with a veil, compared to that of individuals who are managing the company. When a fraudulent and or dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The court will breakthrough the corporate shell and apply the principle of what is known as lifting of or piercing thro%gh the corporate veil and makes the individual liable for such acts which they should not have done or are doing in the name of the company. CIRC")*TANCE* TO LIFT T+E CORPORATE VEIL( The corporate veil can be lifted either

$ifting of Corporate 3eil

5nder the 'tatutory provisions

6udicial interpretations

The statutory provisions are provided under the Companies Act, 19 !. The other circumstances are decided through "udicial interpretations, which are based on facts of each case and are as per the decisions of the court. *TAT"TOR, CIRC")*TANCE* FOR LIFTING T+E CORPORATE VEIL 1. Re#%ction in mem-er&hip # $ess than seven in public company and less than two if it is a private company. %. Fail%re to ref%n# application mone. # After the issue of shares to the public, the company has to pay back the initial payment to the unsuccessful applicants &'()* +uidelines# 1,- .ays/0 if they fail to do so, the corporate veil can be lifted. ,. )i&/#e&cription of companie&0 name# While signing a contract if the company1s name is not properly described, then the corporate veil can be lifted. 2. )i&repre&entation in the pro&pect%&# &.erry 3s 4eek/ *n case of misrepresentation, the promoters, directors and every other person responsible in this matter can be held liable. . Fra%#%lent Con#%ct# *n case the company is carried on with intent to defraud the creditors the court may then lift the corporate veil. !. +ol#ing an# &%-&i#iar. companie&/ A subsidiary has a distinct legal entity from the holding company other than in a few circumstances, so if otherwise shown, the court may under the Act , lift the corporate veil of the subsidiary company.

LIFTING OF CORPORATE VEIL

CIRC")*TANCE* TO LIFT T+E CORPORATE VEIL T+RO"G+ 1"'ICIAL INTERPRETATION*

1. Empo$erment of the co%rt( When the court feels that there are no statutory provisions which can pierce the corporate veil, and the identity of the company is not the one which e7ists, and the court has to interfere in order to avoid the activities that are done in the name of the company by persons managing them, it has been empowered to do so. %. Protection of Reven%e# When the veil has been used for evasion of ta7es 8 duties the Court can upheld the piercing of the veil to look at the real transaction 9Commissioner of *T v. :eenakshi :ills $td A.*.;. 19!< '.C. =19> ,. Prevention of fra%# or Improper con#%ct # The incorporation has been used for fraudulent purpose, like defrauding the creditors, defeating the purpose of law etc.. 9+ilford :otor Co. 3. ?orne, &19,,/ 1 Ch. 9, > 2. 'etermination of the character of the compan. # (nemy Company or all the members being the citi@ens of the enemy country. &.aimler Co. $td 3. Continental Tyre 8 ;ubber Co. $td/ OT+ER CIRC")*TANCE* 1. Where a company is used to avoid welfare legislation# *f a company is formed in order to avoid the benefits to the workers like bonus, or other statutory benefits. 9The workmen (mployed in Associated ;ubber *ndustries $td, )havnagar v. The Associated ;ubber *ndustries $t, )havnagar> %. Aor determining the technical competence of the company# To look into the competency of the company or the shareholders or promoters &Bew ?ori@on1s $td and Another 3. 5nion of *ndia &1992/. ,. Where the doctrine conflicts with public policy, courts lifts corporate veil for protecting the public policy. 9Connors )ros. 3. Connors &192-/ 2 All (.;. 1<9> 2. 'ole purpose for which the company was formed was to evade ta7es 9'ir .inshaw :anak"ee 4etit, A.*.; 19%< )ombay ,<1> . Cuasi criminal cases !. 6ust and eDuitable reasons which the court may think fit LAN')AR2 CA*E* Ca&e La$/ 3 A&h-%r. Rail$a. Carriage an# Iron Compan. Lt#! V! Riche( The company was formed with the ob"ect Eto make and sell, or lend or hire railway carriage and wagons and all kinds of railway plants, to carry on the business of mechanical engineers and general contractors1. The company contracted with ;iche to finance the construction of railway line in )elgium. The company repudiated the agreement and was sued for breach of contract. +el#( The contract was entirely beyond the ob"ects in the memorandum of association. Ca&e La$ /4( 'r! A! La5&hmana&$ami )%#aliar v LIC of In#ia 63789: 1. Articles cannot e7tend scope of memorandum. %. The memorandum of association has to be read with the articles of association where the terms are ambiguous or silent.

LIFTING OF CORPORATE VEIL

,. The articles may e7plain the memorandum but cannot e7tend its scope. +EL'( Article& cannot exten# &cope of memoran#%m