DOCTRINE OF LIFTING THE CORPORATE VEIL BY CHIRAGH DEVAL @LEXCLIQ

The doctrine of lifting the corporate veil

A company should be regarded as a separate entity from its stakeholders but sometimes it becomes necessary to look after the persons behind the corporate veil and then some of the advantages disappear. The lifting of the corporate veil is the provision available to the court, authorities, etc. to identify the offenders and also find out the true persons who control the daily affairs of the company.

A company under section 2(20) means a company incorporated under the companies act 2013 or under any previous companies’ act. A company is generally a legal entity represented by a person or set of persons or association of people with specific objectives. The line of the business structure of the company can be a corporation, partnership, or proprietorship. These are the basic structure and types which define the ownership of the company. According to Lord Justice Lindley,” A company is an association of many persons who contribute money or money’s worth to common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the capital of the company. The person who contributes or to whom it belongs to our members. The proportion of capital to which each member is entitled is his share.”

A corporate veil is a legal concept that separates the acts done by the company and its shareholders. It protects the shareholders from being liable for the actions done by the company. This is not the absolute right, the court depending upon the facts of the case can decide whether the shareholder is liable or not.

The below case is one of the examples of this doctrine.

Salomon Vs. Salomon & Co Limited (1897)

Facts: –

  • Saloman was running a business of boot making and leather merchant as a sole proprietorship and transferred his business to Salomon ltd, incorporated with members comprising his own family and himself
  • The value paid to Salomon for such exchange was made with the assistance of shares and debentures having floating charge on the resources of the company
  • The business was failed and was incurring losses. When the company’s business failed and went into liquidation. Salomon’s right of recovery secured through a floating charge against debentures stood as a priority against the creditors of the company, they contended that Salomon and his Co. “Salomon & Co.” are the same
  • The liquidator on behalf of the Unsecured Creditors alleged that Company was fiction and was an agent of Salomon
  • Salomon being the principal was made liable to pay the unsecured creditors. The liquidator disregarded the separate personality of Salomon & Ltd.
  • As Salomon was the major shareholder of the company, he was made personally liable for the company’s debt. Hence the issue was whether he is personally liable for the company’s debt regardless of the separate legal entity of the company

Judgment: –

It was held that the company is a real and legal company, fulfilling all legal requirements. It had an identity different from its members and therefore, the unsecured creditors were to be paid at priority from the secured debentures.

This is to conclude that the company acts on the concept of Doctrine of Corporate Veil, this veil when misused for fraudulent acts will reveal the true nature and real beneficiaries of the company thus called the lifting of the corporate veil

 

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