The concept of the "lifting of the corporate veil" refers to the disregard of the legal distinction between a company and its members. The term "wheel" in this context is synonymous with "curtain," and "corporate veil" denotes an artificial or imaginary barrier established upon the incorporation of a body corporate. For instance, if Mr. A, Mr. B, and ABC Limited establish a company named BCD Limited, upon its incorporation, BCD Limited acquires an artificial legal status, becoming a distinct legal entity separate from its founders—ABC Limited, Mr. A, and Mr. B. From the moment of incorporation, all actions undertaken by the company or by individuals acting on its behalf are attributed to the company itself. Any actions performed by individuals are deemed to be actions of the company, irrespective of whether they result in profit or loss for the company. This mechanism is fundamentally understood as the corporate veil, where individuals execute transactions, but the ownership of these transactions resides with the company.
A pertinent question arises regarding whether this corporate veil is formally recognized by company law or if it merely constitutes a legal fiction developed through judicial precedents?
Companies act 2013 legally recognises concept of corporate veil under following sections:
Section 7(7) (false information at incorporation), Section 339 (fraudulent business during winding up), Section 34 & 35 (civil and criminal liability for prospectus misstatements), Section 251(1) (fraudulent application for name removal), and Section 447 (general penalties for fraud)
It is important to note that certain provisions within company law explicitly acknowledge the concept of the corporate veil. The principle of the corporate veil was initially established in the landmark case of Salomon v. Salomon &Co. Ltd.
In this case, a foreign court ruled that the liabilities incurred by Salomon & Co. Ltd. were solely attributable to the company, and Mr. Salomon and his family members were not personally responsible for their settlement. This judgment has since served as a foundational precedent for subsequent legal interpretations. More recently, in light of significant fraud cases such as those involving IL&FS, Yes Bank, Kingfisher Airlines, and Gitanjali Gems, courts have exercised their power to lift the corporate veil, holding promoters or individuals responsible for the actual operation of the business personally liable for the transactions. Various judicial bodies have consistently lifted corporate veils and held individuals accountable for fraudulent activities.
Given that the concept of the corporate veil is now formally recognized by the Companies Act, it is enforceable through established legal mechanisms. It is no longer merely a legal fiction and, consequently, warrants serious consideration. Operating a company for personal gain at the expense of shareholders' funds constitutes a criminal offense. This implies that individuals are exploiting the privilege granted for conducting business operations.
While traditional business structures such as sole proprietorships, Hindu Undivided Families (HUFs), and partnership firms continue to exist, the necessity for a limited liability entity to conduct business remains paramount. Such an entity is essential for expanding a business nationally and internationally without incurring personal liability or being restricted by personal financial limitations. A limited liability entity confers the advantage of business expansion without augmenting the personal liability of any single individual. Furthermore, it facilitates the professional management of the business, enabling a clear separation between ownership and management. This structure also allows for the utilization of various professional advantages.
Hence corproate veil and limited liability structure shall be utilised to grow business
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