Company Law 1ST Internal Assisment
Company Law 1ST Internal Assisment
Company Law 1ST Internal Assisment
COMPANY LAW
SUBMITTED BY:
NUPUR JHOD
ROLL NO.209
PRN NO.:- 15010125209
Div: ‘C’
TABLE OF CONTENTS
INTRODUCTION:............................................................................................... 3
ANALYSIS:..........................................................................................................4
i. CONCEPT OF LIFTING OF CORPORATE VEIL :....................................................4
ii. CIRCUMSTANCES UNDER WHICH CORPORATE VEIL IS LIFTED:..................6
1. LIFTING THE CORPORATE VEIL UNDER JUDICIAL
INTERPRETATION :...................................................................................6
2. LIFTING THE CORPORATE VEIL UNDER STATUTORY
PROVISIONS: ...............................................................................................8
CONCLUSION:.................................................................................................11
CASE INDEX :...................................................................................................12
BIBLIOGRAPHY:.............................................................................................11
INTRODUCTION
Corporate personality has been described as the ‘most pervading of the fundamental
principles of company law”. It constitutes the bedrock principle upon which company is
regarded as an entity distinct from the shareholders constituting it.
This theory of corporate entity is indeed the basic principle on which the whole law of
corporations is based. Instances are not few in which the Courts have successfully resisted the
temptation to break through the corporate veil. This doctrine has been established for
business efficacy, necessity and convenience. In the doctrine of ‘Lifting the Corporate Veil’,
the law goes behind the mask or veil of incorporation in order to determine the real person
behind the mask of a company.
But the theory cannot be pushed to unnatural limits. “There are situations where the Court
will lift the veil of incorporation in order to examine the ‘realities’ which lay behind.
Sometimes this is expressly authorized by statute…and sometimes the Court will lift its own
volition".
1
Lee v Lee's Air Farming Limited 1961 AC 12; 19603 ALL ER 420 (PC).
ANALYSIS
CONCEPT OF LIFTING OF CORPORATE VEIL
The doctrine of piercing the corporate veil is an important and powerful weapon in combating
or at least deterring the abuse of the separate personality of a corporation by its members,
directors, officers or employees and its agents. It should be noted however, that piercing the
corporate veil is an exceptional procedure and therefore, special or exceptional circumstances
must exist before the court could pierce the veil. 2 The general rule is that the corporate entity
should be recognized and upheld except in the most unusual circumstances.3
Lifting of the corporate veil means disregarding the corporate personality and looking behind
the real person who are in the control of the company. In other words, where a fraudulent and
dishonest use is made of the legal entity, the individuals concerned will not be allowed to
take shelter behind the corporate personality. In this regards the court will break through the
corporate shell and apply the principle of what is known as “lifting or piercing through the
corporate veil." And while by fiction of law a corporation is a distinct entity, yet in reality it
is an association of persons who are in fact the beneficial owners of all the corporate
property. In United States V. Milwaukee Refrigerator Co.,4 the position was summed up as
follows:
“A corporation will be looked upon as a legal entity as a general rule……but when the notion
of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend
crime, the law will regard the corporation as an association of persons."
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs 5, Denning observed as
follows:
“The doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be watched very
carefully. It has often been supposed to cast a veil over the personality of a limited liability
company through which the Courts cannot see. But, that is not true. The Courts can and often
do draw aside the veil. They can and often do, pull off the mask. They look to see what really
lies behind".
2
Cape Pacific Limited v Lubner Controlling Investments (Pty) Limited 1993 (2) SA 784 (C) 819 _ 821.
3
Lee v Lee's Air Farming Limited 1961 AC 12; 19603 ALL ER 420 (PC).
4
142 F. 247 (1905)
5
[1969] 1 WLR 1241
The veil doctrine is invoked when the shareholders blur the distinction between the
corporation and the shareholders. Although a company is a separate legal entity, it acts only
through human agents. Hence there are two ways by which a company becomes liable in
company of corporate law: through direct liability (for direct infringement) and through
secondary liability (for acts of human agents acting in course of their employment).6
As stated “for while by fiction of law, a corporation is a distinct entity, yet in reality it is an
association of persons who are in fact the beneficial owners off all the corporate property.” 7
The company has separate and distinct feature in ultimately, some human beings are the real
beneficiaries of the corporate advantages. As noted by Lord Denning in Littlewoods Mail
Order Stores Ltd. v. IRC incorporation does not fully: "cast a veil over the personality of a
limited company through which the courts cannot see. The courts can, and often do, pull off
the mask. They look to see what really lies behind."8The company is an artificial person as it
does not have a natural birth and a legal person as company does not have its physical
existence and hence k known as legal person and as legal entity. Being an artificial person it
needs natural person to run the business.7 Thus, piercing the corporate veil essentially means
disregarding the separation between entities organized in corporate form with limited liability
of shareholders.9
In the American case of Milwaukee Refrigerator company case,10 it was held that "A
corporation will be looked upon as a legal entity as a general rule but when the motion of
legal entity is used to defeat the public convenience, justify wrong, protect fraud or defend
crime; the law will regard the corporation as an association of persons.” In order to promote
justice and to prevent inequity, courts will sometimes ignore the separateness of a corporation
and its shareholders by piercing the corporate veil. The primary consequence of piercing the
corporate veil is that a corporation‟s shareholders may lose their limited liability.
6
Amin George Forji, The Veil Doctrine in Company Law
7
Gallaghar v Germania Brewing Co, (1893) 53 Minn: 214 NW 1115.
8
Littlewoods Mail Order Stores Ltd. v. IRC [1969] 1 W.L.R. 1241, 1254
9
Yaraslau Kryvoi, Piercing The Corporate Veil in International Arbitration, available at
http://ssrn.com/abstract=1572634
10
United States v. Milwaukee Refrigerator co. (1905) 142 Fed. 247
1) Determination of character : The Corporate veil has been lifted by the courts to
determine the enemy character of a company in time of war. The court will lift the
veil for the purpose of finding out the person who in reality controls the
company’s affairs and if the affairs of the company are found to have been
controlled by enemy aliens, it will assume the enemy character. In case Daimler
Co. Ltd. v. Continental Tyre and Rubber Co.,11 where a company was
incorporated in London for the purpose of selling German tyres manufactured by a
German company. Its majority shareholders and all its directors were German.
The English Courts held it to be an enemy company on lifting the veil and trading
with this company was held to amount to trading with the enemy.
2) Determination of Residence for Tax Purposes: The determination of the
residence of a company is important for tax purpose also because the assessment
is usually made on the basis of its residential status. A company is usually
considered to be residing at the place where its central management and control is
situated. According to S.6 (3) of the Indian Income Tax Act, 1961, a company is
said to be resident in India in any previous year if: (i) it is an Indian Company, or
(ii) during that year, the control and management of its affairs are situated wholly
in India.
For this purpose the expression “control and management” means de facto control
and management and the place of the control and management of the affairs of a
company is the place where the meetings of the directors are held. In the case
of CIT v. Sri Meenakshi Mills Ltd., 12 where the veil had been used as means of
tax evasion, the court upheld the piercing of the veil to look at the real transaction.
11
(1916) 2 A.C. 307
12
1967 AIR 819, 1967 SCR (1) 934
13
(1933) Ch. 935 (CA)
14
[1962] 1 WLR 832
15
[1953] 1 WLR 483
When membership is reduced : Under section 45 of the Companies Act, when the
number of members of a company are reduced below 7 in case of a public company
and below 2 in case of a private company and the company continues to carry on its
business for more than 6 months while the number is so reduced, every person who is
a member of such company, knows this fact, is severally liable for the debts of the
company contracted during that time.
Improper use of Name : Section 147(4) provides that an officer of a company who
signs any Bill of Exchange, Hundi, Promissory note, cheque, wherein the name of the
company is not mentioned in the prescribed manner, such officer shall be held
16
(1989) 65 Comp. Cas. 196 (Delhi)
17
(1983) 54 Comp. Cas. 66 (Delhi)
18
(1967) 2 QB 786
personally liable to the holder of such Bill of exchange, hundi, promissory note or
cheque as the case may be; unless it is duly paid by the company.
Fraudulent conduct : If in the course of winding up of a company, it appears that any
business of the company has been carried on with the intent to defraud the creditors of
the company or any other person or for any other fraudulent purpose, the persons who
were knowingly parties to the carrying on of the business, in the manner aforesaid,
shall be personally liable for all or any of the debts or other liabilities of the company,
as the court may direct.19
Failure to refund application money : The directors of a company are jointly and
severally liable to repay the application money with interest, if the company fails to
refund the application money of those applicants who have not been allotted shares
within 130 days from the date of issue of the prospectus.20
Misrepresentation in prospectus : In case of misrepresentation in a prospectus, every
director, promoter and every other person, who authorizes such issue of prospectus
incurs liability towards those who subscribed for shares on the faith of untrue
statement.21
For facilitating the task of an inspector to investigate the affairs of the company. If it
is necessary for the satisfactory completion of the task of an inspector appointed to
investigate the affairs of a company for alleged mismanagement, or oppressive policy
towards its members, he may investigate into the affairs of another related company in
the same management or group.23
19
Section 542
20
Section 69(5)
21
Section 62
22
Section 212
23
Section 239
For investigation of ownership : The Central Government may appoint one or more
inspectors to investigate and report on the membership of any company for the
purpose of determining the true persons who are financially interested in the company
and who control its policy or materially influence it.
Liability for ultra vires acts : Directors and other officers of a company will be
personally liable for all those acts which they have done on behalf of a company if the
same are ultra vires the company.
CONCLUSION
Company is fiction of law, a corporation is clothed with a distinct personality, but in real it is
an association of persons who are in fact, the beneficial owners of the property of the body
corporate. A company, being an artificial person, cannot act on its owns but need the Board
to regulate being abstract body, it can act only through natural person. Although a company is
a corporate body but still having a distinct feature but still there are instances in which the
court can lift up the veil looking inside actual functioning of the company. A company is
supposed to be formed for the benefit of human society. But when the company acts in a
different manner against the law or public policy then the court is bound to disregard its
distinct feature and lift up the veil. Thus Lifting of corporate veil is issued when there could
be an abuse of corporate device in course of incorporation of company where Company refers
to a legal entity formed which has a separate legal identity from its members and is ordinarily
incorporated to undertake commercial business. Although some jurisdiction refer to
unincorporated entities as companies, in most jurisdiction the term refers only to incorporated
entities, it has been judicially remarked that “the word company has no strict legal meaning”,
but is taken to mean specific form of entity created under the laws of relevant jurisdiction
because of limited liability of members of company, it has become the most popular form of
business vehicle in most countries in the world.
CASE INDEX
1. United States V. Milwaukee Refrigerator Co.
2. Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs.
3. Littlewoods Mail Order Stores Ltd. v. IRC
4. Milwaukee Refrigerator company case
5. Daimler Co. Ltd. v. Continental Tyre and Rubber Co
6. CIT v. Sri Meenakshi Mills Ltd
7. Gilford Motor Company Ltd v. Horne24
8. Jones v. Lipman
9. F.G. Films Ltd., Re
10. Santanu Ray v. Union of India
11. P.N.B. Finance v. Shital Prasad
12. Snook v London and West Riding Investments Ltd.25
24
(1933) Ch. 935 (CA)
25
(1967) 2 QB 786
BIBLIOGRAPHY
BOOKS:
Ashish Adhikari and Sudeep Gautam, Business Law in Nepal ps.241, 242
Avatar Singh, Company Law, Eastern book company, 14th edt. (2004), P. 11.
Yaraslau Kryvoi, Piercing The Corporate Veil in International Arbitration
Dr. Rega Surya Rao, Lectures on Company Law, Asia law house publication (2008),
P 48-51.
Business Law The Ethical, Global, and E-Commerce Environment FIFTEENTH
EDITION Jane P. Mallor A. James Barnes Thomas Bowers Arlen W. Langvardt all of
Indiana University
ONLINE DATABASE:
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