Lifting or Piercing of Corporate Veil
A company is an artificial person different for its members and directors. In the eyes of
law it has a separate corporate personality. It has its own corporate name. It works
under that name. In normal circumstances company cannot be considered as agent or
trustee of its members. Therefore members and directors of a company cannot be held
liable for any act of that company.
This concept is known as Corporate Veil. Means only company can be held liable for an
act done in the name of the company.
But, as per company laws, a company can be created for lawful purpose only. If a
company is created for
dishonest use
fraudulent purpose
unlawful purpose
evading taxes
any other purpose which is against the public interest
than law can identify the persons who are behind it and are responsible for any
fraud/unlawful act.
Concept is very simple. Company cannot work or think on its own. Its directors and
members are its mind and body. Therefore, company cant do anything wrong own its
own. Thus, for any wrong act in the name of company, members/directors can be held
liable.
This concept is called Lifting of Corporate Veil.
It is in the interest of the members in general and in public interest to identify and punish
the persons who misuse the medium of corporate personality.
In the following circumstances different courts found it necessary to lift the corporate veil
and punish the actual persons who did wrong or unlawful acts under the name of
company:
Protection of The Court may ignore the Separate Legal Entity status of a
Revenue Company, where it is used for tax invasion or circumventing tax
obligation. (Sir Dinshaw Maneckjee Petit)
Determination of Company being an artificial person cannot be enemy or friend.
enemy character of But during war, it may become necessary to lift the corporate
the Company veil and see the persons behind it to determine whether they are
friends or enemy. This is due to the reason that though a
company enjoys Separate Legal Entity but its affairs are run by
individuals. (Daimler Co. Ltd. Vs Continental Tyre & Rubber Co.
Ltd.)
Prevention of fraud Where a Company is used for committing frauds or improper
conduct, Court may lift the corporate veil and look at the realities
of the situation. (Jones vs Lipman)
Protection of public The Court shall lift the Corporate Veil without any hesitation to
policy protect the public policy and prevent transaction opposed to
public policy.
Company mere sham Where the Company is a mere sham and was really a ploy used
or cloak for committing illegalities and to defraud people, the Court shall
lift the Corporate Veil. (Gilford Motor Company vs Horne)
Where a Company If there is an arrangement between the shareholders and a
acts as an agent of Company to the effect that the Company will act as agent of
its shareholders shareholders for the purpose of carrying on the business, the
business is essentially of that of the shareholders and will have
unlimited liability.
Avoidance of Where a Company tries to avoid its legal obligations, the
Welfare Legislation corporate veil shall be lifted to look at the real picture.
(Workmen of Associated Rubber Industry Ltd. Vs Associated
Rubber Industry Ltd.)
To punish for Company being an artificial person cannot disobey the orders of
contempt of Court the Court. Therefore, the persons at fault should be identified.
