MEANING OF THE CONCEPT
Lifting of the corporate veil is the concept of company law and is referred to as an exemption of corporate personality of the company and excludes the separate identity of the company from its members or directors in a particular situation. The concept of the lifting of the corporate veil provides the meaning that lifting refers to removing and corporate veil refers to the curtain over the company. Therefore this principle refers to the exposure of the person who resides behind the company and is in complete control of it. However, the corporate veil means the members and the owners are the separate entity who exists on one another side of the veil and the company occupies the other side, but somehow in several matters, there is the requirement or the application of the principle “lifting of the corporate veil “. In the case where fraudulent activities or illegal acts take place, in such a situation this principle is applied to find out the person behind such activities.
CHIEF INTENT OF THE CONCEPT
This principle was introduced for removing the veil from the activities of the company and for searching who is the fraud and is behind such actions. Somehow we know that the company depends upon the members, directors, owners, etc, however, it consists of a separate entity from them but sometimes such directors or members misused such concept of the corporate personality of the company. In the case where directors or members of the company embezzle or wrongly utilizes the name of the company and commits fraudulent activities then the principle of the lifting of the corporate veil is applied. Therefore, whenever any fraudulent activities and illegal actions are held regarding the company, then to prevent such actions, this principle is applied and finds out the person behind such actions.
COMPANY LAW PROVISIONS REGARDING THE CONCEPT
According to the statutory provision, sections 34 and 35 of the Companies Act, 2013 provides the concept of the lifting of the corporate veil. This section consists of the provisions for the lifting of the corporate veil and allows the court to pay the principle that the court may punish the person who misuses the concept of corporate personality and misrepresents or commits fraudulent actions in the name of the company. In the aspect of this concept, section 251 clause 1 of the company law provides the provision which penalizes for committing the offense of fraudulent activities or any illegal acts in the name of the company.
INDISPENSABLE CHARACTERISTICS OF THE CONCEPT
- Fraud or improper conduct- In the matter, where the corporate personality is used for illegal or fraudulent activities then in such case, the court may apply the rule of the lifting of the corporate veil.
In the landmark case and very prominent case of the lifting of the corporate veil, that is Jones vs Lipman, the fact was that Jones and Lipman were in contract wherein Lipman promised Jones to sell his own property but later he changed his mind and for escaping from the contract or specific performance of the contract, he sold his complete property to his company. When Jones demanded the property which he promised then Lipman raised the point that he already sold it to his company and not having any property with him. It was laid down by the court that Lipman had committed the fraudulent act and misused the concept of corporate personality as he used the company as a mask.
- Company is cloak or sham- In the matter where the company is established or incorporated by any person just for a show-off or personality it to a separate entity for only for using the concept of corporate personality. In the case of Gilford Motor Company Limited vs Horne, the consisted facts were that Horne was an employee in the Gilford Motor company and Gilford contracted with Horne that he must not solicit his customers ever, apart from their business, in other words, he will not do any transactions with their customers outside their business and Horne agreed with the contract. Later, Horne established a separate company so as to make himself release from the contract which was similar to the company of Gilford, and through his company, he started approaching the customers of Gilford company and breached the contract. It was held by the court that the company established by Horne was for the purpose of unlawful conduct or illegal activity and thus applied the rule of the lifting of the corporate veil, also considered the act of Horne as invalid.
- Invasion of tax or avoiding welfare legislation- In the case where a company or any establishment of any number has been set up for reducing or decreasing the tax liability then the court may apply the rule of the lifting of the corporate veil. This was held in the case of Workmen of Association Rubber Industry Limited vs Associated Rubber Industry Limited.
- Determination of enemy character- In the matter of enemy company or the company belongs to the country which refers to be the enemy character or having a war with our nation then in such matter, normal rules are not applied, hence lifting of corporate veil is applied.
In the case of Daimler company limited vs Continental Tyre and Rubber Company Limited, the fact contained was that some German citizens established a tyre and rubber manufacturing Germany company, later with the purpose of expanding their business, they also established a company named Daimler Company Limited in England which consisted one percent of shareholder belonging to England and other left proportions of percent of shareholders were from Germany. The work of the Daimler company was to sold the products of the tire and rubber manufacturing company in England and transacted many times with a company of England named the Continental Tyre and rubber limited. These circumstances were held during the world war between these two countries. And when Daimler company demanded the payment for their transaction from the continental tyre and rubber, then continental tyre and rubber denied the payment and stated that if they will pay them then they may constitute or their actions would lead to the offence against state or nation as Daimler company belongs to the enemy nation. It was held by the court that the Daimler company limited was incorporated by the German citizens, who belonged to the enemy country as per the war. Therefore, they are not supposed to maintain any transaction with the continental tyre and rubber company limited.
Just like our constitution provides the fundamental rights for the citizens with some limitations or exceptions or restrictions, similarly, the provisions of the company law provide the concept of corporate personality for the rights of the companies along with the concept of the lifting of the corporate veil which acts as an exception or restriction because when there is a misuse of the concept of corporate personality then the concept of the lifting of the corporate veil shall be applied.