The company, once incorporated, holds a separate legal entity in the eyes of law. The company can act under its own name, have a seal of its own, can enter into contracts, purchase or sell property, have a bank account and sue or get sued in the same manner as an individual. Thus, a company is a juristic person different from the persons who constitute it.
The Corporate Veil is a shield that protects the members from the action of the company. In simple terms, if a company violates any law or incurs any liability, then the members cannot be held liable. Thus, shareholders enjoy protection from the acts of the company.
Case Law: Salomon vs. Salomon and Co Ltd.
Fact of the case: In this case, Salomon incorporated a company named “Salomon & Co. Ltd.”, with seven subscribers consisting of himself, his wife, four sons and one daughter. Salomon was a shareholder as well as a secured creditor. There were other unsecured creditors as well. Later on, the company incurred losses and decides to wind up. At the time of winding up, the unsecured creditors claimed that they should be paid before Salomon (as a secured creditor) as it was his company.
Held: This case clearly established that company has its own existence and as a result, a shareholder cannot be held liable for the acts of the company even though he holds virtually the entire share capital. The whole law of a corporation is in fact based on the principle of the separate legal entity.
The separate legal entity of a company is a statutory privilege that must be used for legitimate purposes only but with advantages comes the disadvantages as well. Thus, the Doctrine of lifting up of or piercing of Corporate Veil was introduced to hold the members liable in case of fraudulent or dishonest use of the separate legal entity.
The Doctrine of lifting up of or piercing of Corporate Veil:
If it is found that the members are misusing the statutory privilege then the individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will break through the corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing the corporate veil”.
Cases where the court has ordered lifting up of veil-
- In case the Company commits a Fraud.
- Where the company do not have a physical presence, it is just on instruments.
- If the company has an enemy character because of its association with the enemy country.
- If the criminal activities are being hidden behind the company’s name.
Further, the lifting of the corporate veil can be Statutory Lifting or Judicial Lifting.
Statutory Lifting: If the company violates the Companies Act, 2013 and the act provides for the lifting of the veil for the same, then it is termed to be Statutory Lifting.
Judicial Lifting: If the company violates the Companies Act, 2013 and the act does not provide for the lifting of the veil then the judges can order the lifting of the veil which is known as Judicial Lifting.
Case Law: Re Sir Dinshaw Maneckji Petit Bari, AIR 1927 Bom.371
The fact of the case: The assessee, Sir Dinshaw Manckjee Petit, was a wealthy man enjoying huge income from dividends and interests. He formed four private companies and agreed with each to hold a block of the investment as an agent for it. He credited the income received by him in the accounts of the companies and took it back in the form of a pretended loan. The whole idea was to split his income into four parts with a view to reduce the tax liability.
Held: The company was formed by the assessee with an intention to evade tax and the company was nothing more than the assessee himself. It did undertake any business but was created simply as a legal entity to ostensibly receive the dividends and interests and to hand them over to the assessee as pretended loans.
Thus, the corporate veil was lifted and the member behind the veil was held liable.
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