lifting of corporate veil

CONCEPT• In the eyes of law, a company is a legal person with a separate entity distinct from its members of shareholders. Section 127- A director of a company is punishable with imprisonment or fine if a dividend which is declared has not been paid or a warrant which in respect thereof has not been posted within 30 days of the date of declaration. 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 corporate veil may be ignored if the company is formed merely to evade tax. In Income Tax Commissioner, Madras vs Sri Meenakshi Mills, Madurai, the Supreme Court held that the Income Tax authorities have a right in this case to lift the corporate veil. Such instance was observed in the case of Hendon v. 4 2. India being one of the top three emerging economies, has been longing for strong and cogent corporate laws that will enable the country’s international trade to conduct its affairs on a par with the western industrialized nations. The principle was applied against the managing director who made use of his position to contrary to the public policy. For collaborations contact [email protected]. Gilford did not have any legal restraints against Horne’s company, only Horne himself. This phenomenon which is applied by the courts and which is also provided now in many statutes is called “lifting of the corporate veil”. Thereafter, the film at the time of release was refused by the Board of Trade to register it as a British film because the British company acted merely as an agent of an American company. Although in law the company has an independent personality, it is an artificial person and hence, behind the corporate curtain, there are natural persons, i.e. Lee was a qualified pilot and formed a company named Lee’s Air Farming Ltd. for the purpose of carrying the business of aerial top-dressing with 3000 shares, 1 Euro each forming the share capital of the company. When the company’s business failed it went into liquidation. [2], According to Justice Lindley, “a company is an association of persons, these persons contribute money or money’s worth to common stock. As a result, there are two main ways through which a company becomes liable in company or corporate law: firstly through direct liability (for direct infringement) and secondly through secondary liability (for acts of its human agents acting in the course of their employment). LIFTING OF THE CORPORATE VEIL: Lifting or piercing the veil is corporate law‟s most widely used doctrine to decide when a shareholder or shareholders will be held liable for obligations of the corporation. By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. Section 542- Fraudulent conduct: If in the course of the winding up of the 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. Thereafter, he established a competing company with his wife, himself, and one of his friends, who were the sole shareholders. Judiciary is empowered to lift the corporate veil if the conduct of a company is in conflict with the public interest. 2- Day Webinar Series On “Debating And Mooting” [Fee: 60/-] By JLSR : Register Now! This fiction is created by a veil and is called the Corporate veil. The company established by Horne has lower price tags than that of Gilford’s company. The human ingenuity however started using the veil of corporate personality blatantly as a cloak for fraud or improper conduct. The Courts according to Gower’s common dictum would lift the veil when the corporate personality of the company is being blatantly being used as a means to commit fraud, improper conduct or where the protection This paper would deal with the lifting of corporate veil and its aspects with the judicial decisions. In any contravention to this effect, the director will be punishable with imprisonment or/and fine as prescribed. Cas. This was iterated by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd.[vi]. [ii] Guide to Companies Act, 17th edn 2010, part 1, A. Ramaiya, Pg 582, [v] See Sealy’s Cases and Materials in Company Law,9th edn., Len Sealy, Sarah Worthington;Oxford,Pg 53, [ix] Guide to Companies Act, 17th edn 2010, part 2, A. Ramaiya, Pg 3781. So D-1 and D-2 were both personally liable. Liabilities should therefore, be attached to the whole group as companies aim to reach a single economic goal. The circumstances under which corporate veil may be lifted can be categorized broadly into two following heads: Section 5 of the Companies Act defines the individual person committing a wrong or an illegal act to be held liable in respect of offenses as ‘officer who is in default’. [10] Shashi Aggarwal, DAIMLER CO LTD V CONTINENTAL TYRE RUBBER CO LTD COMPANY LAW (2019), https://www.gargshashi.com/2019/08/daimler-co-ltd-v-continental-tyre.html (last visited Dec 18, 2020). Signup for our newsletter and get notified when we publish new articles for free! In this case, the Corporate veil was lifted and declared that the doctrine of separate legal entity does not mean that the company will act as a mere agent of the shareholders.[8]. The chief advantage of incorporation is, of course, the separate legal entity of the company and limited liability. Editor’s Note: The principle of veil of incorporation 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. Once a company is incorporated, it becomes a separate legal identity. 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