People come together to do business to generate profits. For this purpose, they often form a separate legal entity under the Companies Act. They do business in the name of their company while controlling the affairs of the company as themselves. The provisions of the Companies Act limit the liability of such associations formed under the Companies Act and free the business owners from the risk their company possesses. It provides security to the business owners but at the same time, it also opens the doors to possible fraud which the business owners can perform in the name of the company. In any such event, the court may take notice and order the lifting of corporate veil, which means the company will be set aside and the business owners will be sued for the acts they performed on behalf of the company.
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What is a Company?
The word company is defined under the Companies Act of 2013. The definition is mentioned in section 2 (20) which states that the company means the company incorporated under this act or any previous laws governing the companies in the country. Based on its structure, a company can be a private company, a public company or a one-person company. The company can be limited by shares, or guarantees or can also be an unlimited company. The concept of a separate legal entity provides security to the owners of these companies from the liability of the companies.
Liabilities Often Incurred by the Company
Companies may incur liabilities towards the clients, partners or other concerned stakeholders and it has to furnish the same as the parties are legally entitled to the claim the company owes towards them. These liabilities may arise from various incidents. Some of the major incidents that pose a liability to the company are as follows-
- Pending loan and interest thereof
- Services not provided to the clients
- Refund for unfurnished services
- Any unpaid cost for the purchases made by the company
- Unpaid wages of the employees
- Compensation in case of guarantees assured by the company
Corporate Veil Meaning in Company Law
The concept of the corporate veil lets the company owners work without worrying about the unpredictable liabilities it may incur during business. The acts performed by the company are always for the generation of profit by satisfying the needs of the client. Sometimes things do not go as planned and clients may face inconveniences. In such cases, the company becomes liable to take corrective measures which it has to fulfil from the profits earned by the clients so far and the assets owned by the company in its name. The concept of the corporate veil ensures that any such liability limits itself and does not extend to the assets of the company owner. The owner remains hidden under the veil for all the liabilities of the company and he only deals in the name of the company on behalf of it.
Lifting of Corporate Veil
There also arise some cases where business owners try to misuse this concept of lifting of corporate veil and perform fraudulent acts in the name of the company to earn personal profit. Wherever there is such an ill intention, the court needs to take appropriate action to prevent such malafide activities. The purpose behind these activities is to take benefit personally and limit the liabilities in the name of the company only. The Companies Act of 2013 provides various circumstances where the concept of lifting of corporate veil can be implemented to find out the real offender hidden behind the name of the company and punish the same. Apart from these activities as described in the Companies Act, the court has also set various precedents that serve as binding law and allow the court to use the lifting of corporate veil where the business owners appear to be having undue benefit.
Provisions under the Companies Act, 2013
The Companies Act provisions allow the lifting of corporate veil under various sections for punishing those who act fraudulently behind the cover of a company incorporated with malafide intentions. This is called the Statutory Lifting of Corporate Veil as the rules come from the Companies Act. Some of the major provisions are as follows-
- Person In Default
If the company is in default to any provision of the Companies Act of 2013 the responsible person for the company shall be punished with either penalty, fine, or imprisonment as the court may deem fit or as per the provision if it specifies the punishment for the offence. The responsible person has to be identified from case to case. In general, the whole-time director and key managerial personnel are identified as the responsible person. In such cases, the court will lift the corporate veil and punish the real offenders.
- Irregularities in Prospectus
Liability for misstatements in the prospectus are defined in sections 34 and 35. Section 34 discusses the criminal liability under the act and section 35 describes the civil liability. The company should issue the prospectus only according to the description of section 26 of the Companies Act 2013 with only correct facts and if the section is violated, it will result in criminal and civil liability as applicable.
- Illegal Acceptance of Deposits from Public
If a company accepts, invites, or allows others to give it money against the provisions as described under section 73 and section 76 and if the company doesn't give the money back before the deadline, the corporate veil can be lifted and the people in charge of the company can get punished for the same. The offenders may be punished with imprisonment of up to seven years and a fine of a minimum of twenty-five lakh rupees which can go up to two crore rupees.
- Fraudulently Seeking Investment
If any person issues any false, statement, promise or forecast about the company and induces any person to invest in the company, such an act will be tried under section 447 of the Companies Act. Section 447 of the Companies Act prescribed the punishment for fraud and the offender can be punished with imprisonment for six months to ten years and a fine.
- During the Investigation
If the central government has appointed inspectors to investigate any matter relating to the company then the inspectors have the right under section 216 to pierce through the corporate veil and find out the true persons behind the company who are making decisions on behalf of the company. In any such case, the corporate veil is lifted and the persons hidden behind the veil of the company are punished for their acts.
- Fraudulent Conduct of Business
In the course of the winding up of the company, if the official liquidator, company liquidator, creditor or contributor of the company has a belief that the company carried on the business with an intent to defraud the creditors for any fraudulent purpose. In such a case, under section 339 of the Companies Act, the court may order the lifting of corporate veil and punish those who were responsible for the business carried on by the company. In such a case the business owners will be personally liable without any limitation.
- Furnishing False Evidence
Suppose any company furnishes false evidence under any provision of the Companies Act of 2013. In that case, the court may order the lifting of corporate veil and punish those hiding behind the company. The offenders, for furnishing false evidence in terms of oath, affirmations, affidavits, or depositions, shall be punished with three to seven years of imprisonment with a fine of up to ten lakh rupees.
Judicial Rulings Relating to the Lifting of Corporate Veil
Apart from the above-mentioned statutory lifting of corporate veil, some case laws provide provisions for lifting of corporate veil even in more situations. This kind of lifting based on the case laws is called Judicial Lifting of Corporate Veil. Some of the major case scenarios are as follows-
- Evasion of Taxes
When a company gets the title of a separate legal entity, it is treated as a separate legal person and has to fulfil the liabilities applicable to all other legal persons. One such liability is tax payments. Taxes have to be paid on time every year on the earnings yielded by the company and if it fails to do so, legal action can be taken against the company. But as the company itself cannot do much wrong, the corporate veil is lifted and the persons behind the company are punished for the non-fulfilment of the taxes by the company.
- Fraud Prevention
Similar to the non-fulfilment of taxes, a company cannot commit fraud on its own. The operators behind the company must be liable for the fraud committed by the company. It is reiterated in various judgements that the corporate veil must be lifted to find out the offenders and punish them in cases where a company appears to be committing fraud of any kind. The key managerial person of the company must be responsible for such fraud.
- Enemy Character of the Company
A company by default is not an enemy or a friend being a legal person but the character of the company may turn enemy if the affairs of the company are controlled by a person resident of an enemy state. In a case where a company of German origin in England was being controlled by the residents of Germany, the court used the doctrine of lifting of corporate veil and decided the matter considering who was controlling the affairs of the company instead of the nationality of the company.
- Ultra Vires Acts
A company registered under the Companies Act needs to fulfil the compliances as mentioned under the Memorandum of Association, Articles of Association and the Companies Act. The operations of the company are also properly defined and anything it performs beyond that limitation is called the ultra vires act and for that matter, the penalty is levied by the responsible person of the company under the doctrine of the lifting of corporate veil.
- Public Policy
If the acts of a company go against the public interest then the corporate veil can be lifted and the penalties can be inflicted upon the person representing the company. In Jyoti Limited vs. Kanwaljit Kaur Bhasin and ANR., the representatives of the company were held liable for contempt of court.
To wrap things up, the corporate veil provides security to business owners from unwarranted risks and allows them to pursue business and contribute to the growth of the country in a bonafide manner. But when this security is misused by some business owners with ill intentions to commit any civil or criminal wrong, the laws do not remain silent and provide the provisions to counter the same with the doctrine of the lifting of corporate veil. The separate legal personality of the company is set aside and the person responsible for the day-to-day affairs of the company is punished appropriately.
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.
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