Doctrine of lifting the corporate veil

 

1.    1.Concept.

‘’ that is the judicial act in which  the court by applying the statuary provisions and on the base of the judicial ground to remove the immunity veil of corporate shied of company from the corrupt members of company to make them personal liable for their misconducts ‘’

1.    2.Origin.

as the company has the one versatile feature ‘’separate legal entity ‘’at one side It secure the superior position of company by showing its independency over its members ,shareholders and directors so on the one side their members use it for their fraud ant acts by using the advantage of the corporate shield of company .

So, on that ground the salmon vs. salmon case identify that the both company and person hold the separate status.

·       case reference

·       Salmon vs. salmon & Co.Ltd.

a.    Facts.

·       Mr. salmon ,leather merchant sell his manufacturing business to this company and hold six share in the company

·       and get the debenture bond of about 10,000 pounds but the business collapse by misfortune

·       so now Mr. Salmon claim his money on the base of debenture

b.    Issue.

Company refuses to give money to Mr. Salmon by declaring him and company as one body.

c.     Judgment.

Company declare them both different person as artificial and natural and Mr. Salmon recover his money

   3.Meaning.

Lifting the corporate veil phrase meaning ‘’ that ‘’ remove the corporate shield of company to expose culprits.

  4.Definition.

‘’According to this doctrine if the company members commit misconduct under company and their act can became cause loss of company like cause of insolvency of company so but applying that doctrine that person would be liable for their misconducts not company ‘’

  5.significance

This doctrine is significant because its remove the corporate veil of company and make liable to the person for their wrongful acts and safe the company from the wrong acts of its members by making them personally liable.

6.Consequence of applicability.

1.    There will be the following consequences of the applicability of this doctrine.

2.    .if the company is made to carry out fraud.

. If the company carry its business even in the reduction of the members from maximum

3. If the company is carry out the ultra vire business.

4. If the company carry out its business without the publication of name.

5. If the members of company violate the contractual obligations which are imposed on them.

7. Exceptions

A. company status suspected.

this doctrine is apply in the case of the fraud ant and the other unlawful acts of the members of the company but if the company is also involve in fraud and involve in get the advantage of wrong acts by its members then company held liable for it .

8. Types of provisions for lifting the corporate veil.

Ø There are two provisions for lifting the corporate veil.

1.    8.1Judicial provisions.

‘’ In it the court has the authority to lifting the corporate veil of the company by using the judicial provisions in the following situations ‘’

1.    Contractual obligations.

Ø in that case/situation  when the members of the company violate the obligation of the contract which are imposed on them by contract so that case doctrine of lifting the corporate veil implement to make them personal liable for their contractual obligation consequences .

Ø Case reference.

·       Gilford Motor Company Ltd vs. Horne.

a.    Facts.

·       In that case Mr. Horne was an ex-employed of the Gilford motor company.

·       And at the time of employment the condition is made in their employment contract that Mr. Horne if did any business he not has authority to solicit /invite their company customers [where he was employ] to invest in his originate company.

·       But he incorporated a limited company on his wife name and solicited the customers of company.

b.    Issue.

The file suit on Mr. Horne for breach of contractual obligations.

c.     Held.

The court held the purpose of incorporated company clear that is to commit fraud and effective carrying of business by solicited of customers.

2.    Fraud.

In that case the doctrine of lifting the corporate veil implement to make the members of company personal liable for their farudant act if they commit company and safe company.

·       Case reference

·       Re Darby ex Parte Brougham [1911]

a.    Facts.

·       In that case ‘’Darby ‘’ and ‘’Gyde ‘’ were undiscahrged by court as bankrupt for the conviction of fraud.

·       Because both incorporated a company in London named ‘’ London investment corporation Ltd [LIC].

·       The company has 7 shareholders.

·       And the nominal capital value of the company from 11 pounds to 10,000 pounds.

·       And Darby and Gyde were the only director of the company so entitled of the all profit

·       But they shift their register company in England named of company now ‘’welsh slate Quaries Ltd’’ and nominal value of capital was 30,000 pounds.

·       And after that they issue prospectus to invite public to take debunters [loan certificates] in WSQ and at this time they state the name just LIC not the name of Darby and Gyde were mentioned as mentioned in previous

·       But WSQ Company failed to perform its incorporation function and liquidate/end.

b.    Issue.

After liquidation of WSQ the liquidator claimed that the Darby made the secret profit but Darby claimed LIC made secret profit not I.

c.     Held.

The court reject Darby claimed and held liable him for his clear fraud act which shown from his act to not mention their name in LIC while that was mentioned in previous.

3.    To reduce the tax liability /for benefit of revenue.

In that case when the member of company used the shelter of corporate to avoid the payment of tax then that doctrine implement to make sure the person liable for payment.

·       Case reference.

·       Dins haw case.

a.    Facts.

·       In that case Dinsahw was assess [a person liable to pay tax] because he enjoying/receive the huge dividend and interest income.

·       He formed 4 private companies and also invests the huge investment in his companies as agent.

·       So, all income he received are recorded in company account as company credit but he avoid to tax invest this amount in company as pretending loan.

Means if he show himself as shareholder liable to pay tax but by pretended as creditor he avoid payment of tax .

·       So, by this way he divides his income into 4 parts to get rid of his tax liability.

·       Held.

The court held that the assess act to pretend himself as creditor and hide company credit as company loan clearly show his intention of avoiding super tax .

4.    Enemy character.

·       In that case if the alien company is working in the territory of state so if require then court by applying judicial provisions that lifting the corporate veil implement.

·       Case reference.

·       Daimier Co.Ltd Vs.Continental Tyre & Rubber Co.Ltd.

a.    Facts.

·       In that case the German company was incorporated in England for the purpose of the selling of tyres which are made in Germany.

·       And the shareholders in that company were germens expect 1

·       And all directors of company were Germans who are residing in Germany.

b.    Issue.

During WW1 the English company commenced an action for the recovery of debt in trade.

c.     Held.

The court held that as the company was an alien and at the time of war that action of recovery of trade debt would amount as trade with enemy so the company was not allowed to proceed in action.

5.    Where the company is sham .[illusion]

When the company is just a cloak then the court can also lift the veil.

6.    Company avoiding legal obligations.

When the company is made to avoid the legal obligations so in that case the court can also lift the corporate veil.

7.    Agency or trust.

When the company act as the agent for its shareholders then shareholders seems liable for the acts of the company and in the case of the contravention of this situation the lifting the corporate veil doctrine can implement by court.

·       Case reference

·       F.G Films Ltd.

a.    Facts.

·       In that case an American company provides finance of the production of film in India in the name of British company /on British company behalf.

·       And the president of the American company held 90% capital in British company.

b.    Issue.

But the board of trade of Great Britain refused to register film as a British film.

c.     Decision

The court held that the action of British company is valid because the British company was just the nominee of the American company.

2.    8.2 Statuary provisions.

‘’ In it the court has the authority to lift the corporate veil of company by applying the statuary provisions on the base of the following grounds /circumstances ‘’

1.    Reduction of the members of the company.

In that situation if the any company at any time if the members of the company are reduced to its minimum amount members like

·       in private company if the members of company reduced 2

·       or In case of public company iF members of company reduced to 3

·       Expect in case of single member company.

If the member of company reduced to its minimum amount and that company carry out its business for more than 180 days /6 month after the reduction of its members so company would be personal label for all the debts of the contract which company made during this time /interval.

   2.Penalties for non-publication of name.

 

In that case if the any company not display its company name according to the manner which are provided under this company act then in that case the company would be liable of the penalty which not exceeding to level 1 on the standard scale and every officer of the company who authorize that default shall be liable to the same penalty of company.

3.    Prospectus.

·       not the any prospectus shall be issue by the company or on the behalf of company unless before the date of publication of that prospectus that is not signed by the each members or the director of the company

·       And in the result of the violation of it the company and the every officer who are responsible for it shall be liable to a not exceeding of level 2 on the standard scale.

4.    Investments in associated companies.

·       Not the any company has the authority to invest in any associated companies expect has the authority which is get by passing of special resolution.

5.    Liability for farudant conduct of business.

·       If at the winding time of the company that is clear that the business purpose of company is to defraud the creditors or the any other person so in that case the company personally liable on the application of the official liquidator.

6.    Penalty for carrying on ultra vires business.

·       When the business carried out by the company is ultravires then every director or officer of the company shall be liable for penalty of level 3 on standard scale.

Note – in above all circumstances the doctrine of lifting corporate veil implement by applying statuary provisions because that circumstances like not publish names ,commit fraud etc. are the illegal acts so corporate veil left and real culprit expose by implementation of that doctrine .

 

9. Modern status /value.

That doctrine is most worthy now a day because of two reasons.

1.    1.Liable the real culprits.

Before it the culprits get the advantage of this fact that the company is the artificial person so not has the mind so if have no mind so how can involve in criminal conspiracy by which they has the opportunity to hide their mess but that doctrine expose the real faces of the culprits who are behind the curtain of the company.

2.   2. Liable to director to be loyal to company.

Even though that obligation is not secure by the statuary provisions of the companies act 2017 so, after this doctrine applicability he know what will be the consequences if he exceed its limit.

10. Legal consequences.

a.    Liable the real culprits.

Before it the culprits get the advantage of this fact that the company is the artificial person so not has the mind so if have no mind so how can involve in criminal conspiracy by which they has the opportunity to hide their mess but that doctrine expose the real faces of the culprits who are behind the curtain of the company.

11.   11. Conclusion.

After all of the above discussion we can conclude that as in modern era as the demand of economy and business increase in the same way the complexities are also arise so as other doctrine safe company from outsider and outsider from company but in that tough completion there also the probability that company has the danger from his own operators like directors etc. so to safeguard from that the lifting the corporate veil implement to make them personal liable for their misconducts but before implementation the investigation must need to made on merits and beside of it court also has authority to implement that doctrine on the ground of statuary and judicial provisions .

In short we can say that doctrine help in meantime check and balance on working of company and its operators.