Eliminate Your Fears And Doubts About Concept Of Lifting Of Corporate Veil

Introduction To Lifting of Corporate Veil

The corporate veil is a concept which provides that the personality of a company has to be treated separately from that of its shareholders.  It also protects the shareholders from being held personally liable for the company’s debts and other obligations. The Cambridge Dictionary defines corporate veil as the idea that a company’s managers or shareholders are not legally responsible for the action of the company: Shareholders may hide behind the corporate veil, assured that their liability does not extend beyond the value of their shares.

The essential term that needs to be understood for this concept is what a company means. Section 2(20) of the Companies Act, 2013 defines a company as a company incorporated under the Companies Act 2013 or any previous company law.  A company is a separate legal entity and has a personality of its own.

This feature was established by the Supreme Court of India in the case of Rustom Cavasjee Cooper vs. Union of India. The court stated that “a company registered under the Companies Act is a legal person, separate and distinct from its individual members. Property of the company is not the property of the shareholders”.

But this protection is not impenetrable, under the legal concept of the lifting of the corporate veil, the courts may hold the shareholders liable for the company’s obligations. At many times it happens that the corporate identity of a company is used to commit some fraud or illegal activity. In this situation, the concept of the lifting of the corporate veil is initiated. The corporate personality of the company is disregarded in order to look out who were the people involved in that fraudulent act. In simple words, the veil of separate corporate personality is lifted and the real culprits behind the veil are held liable, as an exception to the rule of protection under a corporate shell. In the United States, there are two important theories prescribed for the creation of piercing standard-

• Alter ego theory- consider (if there is) the distinctive boundaries between a corporation and it’s shareholders.
• Instrumentality theory- examines if the corporation has been used in any way by its shareholders for their own benefits instead of the corporate.

The basic concept of the lifting of the corporate veil can be categorized broadly under two categories-

1. Statutory Provisions
2. Judicial interpretation

1. Statutory Provisions

The Companies Act, 2013 provides various provisions which point out the person which should be held liable for the fraud or illegal activity. Section 2(60) of the act states that these people (directors or key managerial positions) are to be referred to as “officer who is in default”. Some of these provisions are listed below.

• Company’s name- When the approved name of the company is used, it makes the contract legally binding. If any representative or shareholder of the company enters in incorrect details of the company and sign on behalf of the company, should be held liable.
• Misstatement of the prospectus- If a person publishes false or untrue statements in a company’s prospectus, that person would be punished under Section 26 (9), Section 34 and Section 35 of the Act.
• Investigation of ownership of the company- section 216 of the Act states that inspectors can be appointed to investigate, by the central government, on matters relating to the company.
• Liability for fraudulent conduct- Section 339 of the Act provides that if it appears that fraudulent activities were being carried out in the name of the company, the court can hold the people involved liable.
• Inducing persons to invest- Section 36 of the Act states that any person who by false and deceptive measures, induces some other person to enter into an agreement will be held personally liable under Section 447 of the Act.

2. Judicial Interpretation

Besides Statutory provisions, the judiciary has played an important role in lifting the corporate veil as well. Some cases where the judiciary performed its role are listed below.

• In Tata Engineering and Locomotive Co. Ltd. v. the State of Bihar, the Supreme Court of India stated that a company is not allowed to lay a claim on the fundamental rights on the basis that the company is an aggregation of citizens. When a company is formed, the business that is carried by the company is the business of the company only, and not of the citizens who formed the company.
• Judiciary is empowered to lift the corporate veil if the conduct of a company is in conflict with the public interest. In Jyoti Limited vs Kanwaljit Kaur Bhasin And Anr., the Delhi High Court held that corporate veil can be lifted if the representative of the company commits contempt of the Court.

Conclusion

Many individuals try to misuse their power under the corporate shell for their own benefits as they are protected under the corporate veil. But the concept of the lifting of the corporate veil is a powerful weapon in the hands of the judiciary. It makes sure that no individual gets to perform illegal acts under the company name and walk free. It acts as a watchdog over companies. The personality of a company is surely separate from that of the shareholders of the company, but this doesn’t mean that the shareholders can do wrong hiding behind the corporate veil.

References-

• Companies Act, 2013
• 1970 A.I.R. 564
• [1964] 34 Comp. Cas. 458(SC), AIR 1965 SC 40
• 1987 CriLJ. 1282
  
  

Original blog is published at LEGODESK  please read the blog for more content and for legal help

Legodesk is a legal practice management tool using which lawyers can manage their matters, win new clients and do their legal research all in one platform. Legodesk’s unique case management features helps to keep your legal practice organized and accessible everywhere.

5 Things You Needs To Know About 2018 Amendment To The Companies Act, 2013 These Companies Act Is Effective From 7th May 2018

These companies amendment act is effective from 7^th May 2018.

1. Changes in section 2 (Definition) under Companies amendment Act

• Associate Company (S. 2(6)): “significant influence” shall now be mean control of at least 20 percent of the Total voting powers (earlier it was total share capital) or control of or participation in business decisions under an agreement. Joint Venture: Earlier joint venture was not defined. Now Joint venture is defined as a joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the arrangement;
• Subsidiary Company (S. 2(87)): the exercise or control of more than one-half of the total voting power (earlier share capital).

2. Insertion of Section 3 in Companies amendment Act –A: If at any time the number of members in a company is reduced below the requisite level (7 for a public company and 2 for private company) and the company carries on business for more than six months, then after six months, each member shall be severally liable for the whole debt of the company contracted during that time.
3. Section 12 (Registered office of the Company) in the Companies Amendment Act: Earlier the time limit to have a registered office was before the fifteenth day of its incorporation. Now the time limit is within thirty days of its incorporation.
4. Prospectus (Section 26) in Companies amendment Act: SEBI in consultation with Central Government is empowered to prescribe the contents of the prospectus. Clause a, b, c is omitted (Name, Address of the registered office, opening and closing of the issues, capital structure and auditor’s report on profits/losses need not be provided)
5. Private Placement (Section 42) under Companies amendment Act:
6. A company can make a private placement of securities.
7. PP can be made only to a selected group of people who have been identified by the board, and such person shall not be more than 50.
8. Section 54 (Sweat Equity Shares) under the Companies Amendment Act: Now the companies are permitted to issue sweat equity shares within the period of one year from the commencement of business.
9. Section 77 and Section 78 (registration of charges): The amendment does not require registration of such charges as may be prescribed in consultation with the RBI.
10. Section 90 (Significant Beneficial owner of the company): the person who is the significant beneficial owner has to give a declaration to the company. The person alone or together, or through person or persons have a beneficial interest of not less than 25 % shall be considered of having a beneficial interest in the company. This provision will be applicable to all the companies and the company has to register them as a significant beneficial owner.
11. Section 92 (Annual Returns) under Companies amendment Act: The central Government is now empowered to prescribe a form of Annual Return. It is now mandatory for the company to provide for the entire annual report on the website of the company. Section 93 omitted so now the registrar need not be informed when the stake of promoter’s change.
12. Section 96 (Annual General Meeting): For unlisted Companies, the Annual General Meeting can be held anywhere in India with the consent of all members either in written or electronic mode in advance.
13. Section 100 (EGM): The wholly-owned subsidiary of a company incorporated outside India has been allowed to hold its extraordinary general meeting outside India. Such Companies or subsidiaries can hold EGM at any place where they want in the world.
14. Section 101: Now a meeting can be commenced with a shorter notice period if 95% of voting power consents to such notice.
15. Section 123 (Declaration of Dividend): The BoD may declare interim dividend during any financial year at any time during the period from closure of financial year till holding of any of annual general meeting out from surplus in profit & loss account or else out from profits of fiscal or the financial year for which such dividend (interim) is required to be stated or out from the profits generated in such financial year until quarter prior the date of declaration of the dividend.

Read Also: All About Companies Act 2013

Final Dividend:  Any time through the period from closing of financial year till the holding of next annual general meeting out from surplus in profit & loss account or out from profits of fiscal or financial year for which such dividend is required to be stated or out from profits made in such said financial year until the quarter prior the date of declaration of the dividend.

14. Section 129 (Financial Statement): The consolidated financial statement of the company, its subsidiaries and associates should be in accordance with the applicable accounting standards and be laid before the Annual General Meeting.
15. Section 130 (Re-opening of books of Accounts): Re-opening of books of accounts is limited to 8 financial years immediately preceding the current financial year. The order for reopening of accounts can be made up to eight years unless there is a specific direction under section 128(5) from the Central Government for a longer period.
16. Section 136 (Audited Financial Statement): Amendment to sub-section (1) of section 136 provides that the copies of audited financial statements and other documents may be sent even with a shorter notice period if the same is agreed upon by ninety-five percent of the members entitled to cast their votes.
17. Section 139 (Appointment of Auditors): An auditor appointed for a period of five years need not be ratified every year at the AGM. Non-Compliance of the auditor to the terms the fine is either 50,000 or the amount received by the auditor whichever is lower. (Section 140). Contravention to the provision of 139 by the company, is 25,000 and may increase to 5 lakh Rupees or four times the remuneration of an auditor, whichever is lower.
18. Section 149 (Board of Directors): For resident Director, the director needs to stay in the country for 182 days in the previous financial year (Earlier previous calendar year).

Read Also: Section 185 of Companies Act 2013

Independent Director: the pecuniary relationship is now substituted “pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten percent of the persons’ total income in all or such sum as to be agreed upon,” shall be thus substituted;

19. Section 160 (Retiring directors and directorship) under Companies amendment Act: The necessity to deposit a number of rupees one (1) Lakh w.r.t. recommendation or nomination of the directors shall not be pertinent in the situation where the case is of appointing an independent director/directors or the directors that are nominated through the nomination and remuneration committee.
20. Section 164 (Disqualification of a director): In case the Company has defaulted on the grounds of non-filing of the financial statement or failure to repay the interest after the due dates, then the director newly appointed shall not incur any liability for a period of six months from the date of appointment.

Disqualified on the ground of conviction: If a person is disqualified for a conviction for any offense, even if an appeal is preferred against the order of conviction, it shall still serve as a ground for conviction.

21. Section 167 (vacation of Director): If a director is disqualified for not filing the financial Statements or failure in repayment of dues, the office of the director shall become vacant in all the companies, other than the company which is in default under that sub-section.

Vacation need not be carried out: If conviction is for less than 30 days or where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, only until the expiration of the period of seven (7) days since the date when any such petition or appeal has been disposed of; or elsewhere any similar further petition or appeal is chosen in opposition to the sentence or order within a period of seven (7) days, awaiting such additional further appeal or petition is disposed of.”.

22. Section 168 (Resignation of Director): Earlier it was mandatory for the resigning director to file a form with a detailed reason of resignation within 30 days. Now, this provision is made optional.