Piercing of the corporate veil: Structure in India

A company according to the companies act 2013 is an artificial person incorporated, having a separate legal identity. It has its own separate identity o and has perpetual succession and a company seal. A company incorporated under the Act has powers which an individual does not have, incorporation of a company can benefit the company as it has features like 1) Separate legal entity 2) Transferability of shares 3) Perpetua existence 4) Limited liability. A company incorporated under any of the company Acts makes a company a separate legal entity, this concept separates the personality of an individual shareholder from that of the corporation, protecting them from being personally liable for the debts and obligation incurred by the company. This legal concept is called a corporate veil. This protects the interests of the shareholders and the company’s interests. And a corporate behaves like a natural person, A great example would be the case of Salomon v. Salomon & Co. the case has given rise to the principle of corporate veil making an incorporated company have its own identity. It allows a company to take juristic decisions in its own name, and also to sue and to be sued. Members and Directors enjoy protection against personal liability. This corporate veil can be lifted by the court of law, when there is any fraud or misconduct found in the company and when the individual is taking shelter under the corporate veil to escape from his liability.

History and Background
Most of the provisions of the Indian company Act are taken from English law, it pretty much resembles English law. Salomon’s case has become an authority in the decisions of the doctrine of the corporate veil for the Indian company cases. The apex court in Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others,” the incorporated company in law is equal to a natural person and has a legal entity of its own. The entity of the incorporated company is completely separate from that of the shareholders; it has its own names and seal; its assets are also given a separate identity and the creditors and the members have no right when it comes to the assets company”. In the case of LIC of India v. Escorts Ltd, Justice Reddy says that the corporate veil should be lifted where the associated companies are inextricably connected as to be in reality, part of one concern. After the incident of the Bhopal Gas leak, the lifting of the corporate veil has become more essential.

Indian legislative
There are no explicit meanings or provisions for the doctrine but can be inferred from the following Sections of the different acts.

1) Companies Act 1956:
Section 45 of the act says that if the number of members in the company is lower than the statutory number prescribed (2 for private and 7 members for any public company) then the members become labial for the payment of the whole debt of the company. The provision of the section is not to destroy the separate/individual personality of the company but the corporate personality still remains as an existing entity even though there are one or more members.
When a company fails to deliver a share certificate Section 113(2): This Sec is more punitive in nature and it says that if a company fails to give a share/Debenture certificate within 3 months then the company and the officers of the company who are at fault will be fined for Rs 3000

2) Companies Act 2013
Section 39 of the Act: A company when issuing shares to either public or by way of rights, the subscription which is stated in the prospectors is not delivered, then the directors will be liable to pay the money with interest, only if the application money is not paid back within the time.
Section 34-35: this act talks about the misrepresentation in the prospectus, in case of any misrepresentation which affects the subscribers of the share which was on the faith of untrue statement then the promoters and the directors who authorize the issues of the prospects will be held liable.
Section 447 of the Act says that if the prospectus issued or distributed contains any untrue or misleading information in any form and context which will mislead any person who authorizes the prospects will be held liable, under the Act.

 

The corporate veil is usually lifted by the court of law or by the tribunal to determine the culprit behind the company, this is done to find out who really is in control of the company’s affairs. This doctrine is merely designed to keep the balance of public interest and the concept of separate corporate identity. This doctrine strives to deliver justice when corporates shield their Mala Fide interests behind the corporate veil. It would be defeating the object of the device if it were to be applied rigidly with no scope at all left for judicial discretion. There can be no single unifying principle that underlines the decisions of the Courts. Courts and Legislature must adopt a single set of statutory standards as to when limited liability should be disregarded. This will provide certainty in this area of law and will allow uniformity, applying the doctrine of lifting the corporate veil. Especially in this era where we see exponential growth information of new companies a strong and practical method should be applied to not only protect the people’s interests but also to protect the corporate structure of a company.

 

 

 

 

 

 

 

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