Introduction:
The Case Analysis of Salomon vs Salomon & Co. Ltd. is a landmark case that has established an important principle that a company has a separate legal entity and its corporate veil should not be pierced so as to protect the interest of the shareholders and uphold the true spirit of the Companies Act. Piercing the corporate veil means going beyond the legal entity of a corporation. Or, ignore the corporate image and focus on the real owners instead. In some cases, the courts leave the company and deal directly with the members or the directors of the company. This is called Lifting of the corporate veil. Usually, courts choose this option when the case involves a question of control rather than ownership.
Key Words: Corporate veil, Company, Ownership, Separate legal entity.
Meaning:
A company is a separate legal entity from its shareholders and directors. As a result shareholders and directors cannot be held responsible for any default or offense committed by the company, this is popularly known as the corporate veil.
The corporate Veil Can be lifted
- As per the Companies Act
- As per judicial precedent
Lifting of Corporate Veil as per Companies Act.
- Wrong or False Information (Section 7): Incorporation of the company by furnishing false information by promoters.
- Misrepresentation in Prospectus (Section 34 & 35): In case of misrepresentation in the prospectus, every director, promoter, and every other person, who authorizes the issue of prospectus, incurs liability towards those who subscribed for shares on the faith of untrue statement.
- Failure to return application money (Section 39): In case of the issue of shares by accompany to the public, if the minimum subscription as stated in the prospectus has not been received within 30 days from the first issue of the prospectus the company must return the application money within 15days from the closure of the issue.
If money is not paid, all directors shall be jointly liable to return the money with interest @ 15 % per annum.
- Ultra-vires Act: Directors and the other corporate officers will be personally liable for all those acts they have done on behalf of the company if the same is ultra-vires the company.
Lifting of corporate veil as per Judicial Interpretation
- Protection of Revenue: The Court maybe ignore the corporate entity of a company where it is used for tax evasion to reduce tax liability.
Sir Dinshaw Maneckjee Fetit
An assesse was earning huge income by way of dividends and interest.
He formed four private companies and transferred his investment to each of these companies in exchange for their shares. The dividends and interest income received by the company was given back to Sir Dinshaw as a pretended loan.
It was held that the company was formed by the assesse purely and simply as a means of avoiding tax. It did no business but was created simply as a legal entity to ostensibly receive the dividends and interest and to hand them over to the assesses as pretended loans
- Protection of Fraud or improper conduct: Where the medium of a company has been used for committing fraud or improper conduct, Court has lifted the veil and looked at the realities of the situation.
Jones vs. Lipman
L agreed to sell certain land to J for $5250. He subsequently changed his mind and to avoid the specific performance of the contract, he sold it to the company which is formed especially for the purpose The company had Land a clerk of his solicitors as the members’ brought an action for the specific performance against L and the company. The court looked at the reality of the situation, ignored the transfer, and ordered that the company should transfer the land to J.
- Determine the enemy character of the company: The company being an artificial person cannot be an enemy or friend. However, during the war, it may become necessary to lift the corporate veil and dee the persons behind as to whether they are enemies or friends. It is because, though accompany enjoys a district entity its affairs are essentially run by individuals.
- Subsidiary to act as an agent: Sometimes a corporation is formed on the basis of acting as an agent or trustee for its members or another corporation. In this case, the company loses its individuality in favour of its principal. Also, the principal is liable for the acts of such a company.
- To Avoid welfare Legislation: Where it was found that the sole purpose for the formation of the new company was to use the device to reduce the amount to be paid by way of bonus to reduce the amount to be paid by way of bonus to workmen, the supreme court upheld the piercing of the veil to look at the real transaction- Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd.
Conclusion
It is clear that incorporation of the company does not cut off personal liability at all times and in all circumstances. The sanctity of a separate corporate entity is upheld only in so far as the entity is consent with the underlying policies which give it life.
This article is written by Komal Andhale, Nawalmal Firodia Law College PUNE, 1st Year, LLM.
