"Behind the Corporate Veil: Unveiling Legal Exceptions to Corporate Personhood"

 

"Behind the Corporate Veil: Unveiling Legal Exceptions to Corporate Personhood"

Introduction

The principle of a separate legal entity, propounded in Salomon v. Salomon & Co., is a foundational concept in company law. Upon incorporation, a company becomes a distinct legal entity, and its dealings are conducted in its own name. This creates a 'veil of incorporation' that separates the company from its members. However, there are instances where the corporate veil may be lifted to expose the individuals behind the company, especially when justice or public interest demands it. This article explores the statutory and judicial exceptions to the doctrine of separate legal entity.

Statutory Provisions

The Companies Act, 2013 contains provisions where the corporate veil may be lifted, holding members or directors personally liable in certain cases.

1.      Reduction in Membership Below Statutory Minimum (Sec. 45): If the number of members falls below the statutory minimum (7 for a public company and 2 for a private company), and the company continues to operate for more than six months, the continuing members aware of this fact become personally liable for the company’s debts.

2.       Failure to Refund Application Money (Sec. 46(6)): If application money is not refunded to those who have not been allotted shares within 60 days of issuing the prospectus, directors become jointly and severally liable to repay the money with interest at 12% per annum.

3.      Mis-statements in Prospectus (Sec. 62): Directors and promoters are liable for mis-statements in the prospectus and must compensate those who subscribed for shares on the basis of false information. They can also be held liable for damages under tort law.

4.      Directors with Unlimited Liability (Sec. 322): Although directors' liability is typically limited, it can be made unlimited through the memorandum, either initially or by special resolution. In such cases, directors are personally liable for the company’s debts.

5.      Holding and Subsidiary Companies: A subsidiary may lose its separate identity in certain cases, where it is viewed as merely a branch of the holding company. The presentation of group accounts is mandated under the Act to reflect the overall financial position.

6.      Inspector's Investigation (Sec. 210, 212, 213): An inspector investigating the affairs of a company can also investigate related companies to ensure the integrity of management and prevent fraudulent activities.

7.      Investigation of Ownership (Sec. 216): The Central Government may appoint inspectors to determine the real persons who control the company, particularly when ownership or financial influence is in question.

8.      Fraudulent Trading (Sec. 339): During winding-up, if business is found to have been conducted with the intent to defraud creditors or for any fraudulent purpose, those responsible may be held personally liable for the company’s debts.

Judicial Interpretation

The courts may lift the corporate veil to serve justice, protect public interest, or benefit revenue authorities. Below are some significant judicial cases:

1.      Enemy Character of the Company: In Daimler Co. Ltd. v. Continental Tyre & Rubber Co., the court refused to allow a company controlled by enemy aliens during wartime to recover a trade debt, as it was deemed an enemy company.

2.      Protection of Revenue: In In re Sir Dinshaw Maneckjee Petit, the court disregarded corporate personality to prevent tax evasion where a company was created to reduce the individual tax liability of its owner.

3.      Prevention of Fraud: In Gilford Motor Co. v. Horne, the court ruled that a company was a sham created to breach an employment contract's non-solicitation clause.

Recent Developments

In recent years, Indian courts have increasingly relied on lifting the corporate veil to hold individuals accountable in complex corporate fraud and insolvency cases. One such case is ArcelorMittal India Private Limited v. Satish Kumar Gupta (2019), where the Supreme Court pierced the corporate veil to identify the true controller of the company during insolvency proceedings. This case highlights the evolving approach of Indian courts in ensuring corporate accountability.

Doctrine of Ultra Vires

The doctrine of ultra vires, first established in Ashbury Railway Carriage Co. Ltd. v. Riche, states that any transaction beyond the company’s powers as set out in its memorandum is void. The doctrine prevents companies from exceeding the scope of their legitimate business.

However, there are distinctions between ultra vires and illegal acts. While ultra vires acts are outside the company’s powers but not necessarily illegal, illegal acts contravene the law and are void from the outset. The Companies Act, 2013 further reinforces this doctrine by limiting the company's powers to those specified in the memorandum.

Conclusion

While the principle of separate legal entity protects companies, there are circumstances where the veil of incorporation must be lifted to prevent abuse, protect creditors, and ensure justice. Statutory and judicial provisions provide mechanisms for piercing the corporate veil in cases of fraud, misrepresentation, or where public interest demands it.

The evolving nature of corporate law continues to adapt to ensure that justice prevails in complex corporate structures.

Bibliography

1. Salomon v. Salomon & Co. Ltd. [1897] AC 22.
2. Daimler Co. Ltd. v. Continental Tyre & Rubber Co. Ltd. [1916] 2 AC 307.
3. Gilford Motor Co. v. Horne [1933] Ch 935.
4. In re Sir Dinshaw Maneckjee Petit, AIR 1927 Bom 371.
5. ArcelorMittal India Private Limited v. Satish Kumar Gupta & Ors., (2019) SCC OnLine SC 607.
6. Ashbury Railway Carriage Co. Ltd. v. Riche [1875] LR 7 HL 

Comments

Popular posts from this blog

Navigating Corporate Law: The Significance of the Doctrine of Indoor Management

"Comparative Analysis of Section 173 BNSS and Section 154 CrPC: A Modern Shift in Criminal Procedure"

"Understanding the Memorandum and Articles of Association under the Companies Act, 2013"