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Lifting of Corporate Veil

Lifting of corporate veil is 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 the corporate veil means disregarding and ignoring the corporate personality and looking behind the real person who are in the control of the company. In other words, where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. In this regards the court will break through the corporate veil.

According to the definition of Black Law Dictionary, “the piercing the corporate veil is the judicial act of imposing liability on otherwise immune corporate officers, Directors and shareholders for the corporation's wrongful acts.”

Origin of Doctrine of Lifting of the Corporate Veil

An incorporated company has a legal entity distinct from its members from the date of its incorporation. The company as a separate entity was firmly established in the landmark decision in Salomon v. Salomon & Co. Ltd (1897). In this case, Salomon, a sole trader, sold his manufacturing business to Salomon & Co. Ltd. (a company he incorporated) in consideration for all but six shares in the company, and received debentures worth 10 thousand pounds. The other subscribers to the memorandum were his wife and five children who each took up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as a secured creditor. The liquidator argued that Salomon could not rank ahead of other creditors because, in fact, the company and Mr. Salomon were one and the same–or alternatively, that the company carried on business on Salomon’s behalf.

On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts of the corporation were not the debts of Mr. Salomon because they were two separate legal entities; and that once the artificial person has been created, “it must be treated like any other independent person with its rights and liabilities appropriate to itself.”

Statutory Provisions in India supporting Lifting of Corporate Veil

The Companies Act, 1956 provides for circumstances when corporate veil can be lifted and the individual members/directors will be made liable for certain transactions. The statutory provisions are as follows:

1. Reduction of membership below statutory minimum (Section 45 of the Act): This section provides that if the number of member of a company is reduced below 7 in the case of public company or below 2 in the case of private company and the company continues to carry on the business for more than 6 months, while the number is so reduced, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time.

2. Failure to refund application money: Section 69(5) of the Act provides that the directors of a company are jointly and severally liable to repay the application money with interest, if the company fails to refund the application money of those applicants who have not been allotted shares within 130 days from the date of issue of the prospectus

3. Failure to Deliver Share Certificate (Section 113): Sub section (2) of Section 113 provides that in case a company fails to deliver the share/debenture certificate within 3 months of allotment and within 2 months of application for transfer, then the company as well as every officer of the company who is at fault shall be punishable with fine upto Rs. 5000 per day till such default continues

4. Improper use of name (Section 147 of the Act): Under sub-section (4) of section 147, an officer of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the company is not mentioned in the prescribed manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company.

5. No person to be a director of more than fifteen companies (Section 275): After the commencement of this Act, no person shall, save as otherwise provided in section 276, hold office at the same time as director in more than fifteen companies.

6. Liability for fraudulent conduct of business (Section 542 of the Act): If 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 the creditors of the company or any other person or for any fraudulent purpose, the 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, as the court may direct.

Need of the Doctrine of Lifting the Corporate Veil

The theory of lifting the corporate veil becomes necessary when unscrupulous people started using the corporate veil as an instrument to conceal fraud in company's affairs. Thus, it becomes compulsory for the legislature and court to evolve and to lift the corporate veil and find out the person behind the company, who are the actual beneficiaries of the corporate body.

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