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Lifting the Corporate Veil

This article is written by ADARSH SHARMA , Siddhartha law college Dehradun , BA LLB during his internship at LeDroit India

Contents:

  • Introduction
  • Meaning
  • Shedding light on the removal of corporate veil under company act 2013
  • The condition on  which corporate veil is lifted 
  • Cases on Lifting the Corporate Veil
  • CONCLUSION

Introduction

The limited liability of a company theory was adopted in 1855, while incorporation by registration was first offered in 1844. Following these enactments In 1897, the House of Lords firmly established the concepts of limited liability and corporate entity in English law case of Salomon v. Salomon & Company. For example, the Supreme Court established the rule that a firm is a unique legal entity that is not related to its members in any way. The “veil of incorporation” is the name given to this idea.

The main advantage of incorporation is the company’s autonomous existence, which determines all other advantages. However, in reality, a small group of individuals always manage the legal person’s business and it is to their benefit. In the end, some people do gain from corporate benefits; after all, “for a while, under the pretense of law, a company is a different creature, yet It is actually a group of people who together hold all of the company property beneficially.” Furthermore, the Salomon decision determines that “personalities of the natural people who constitute the firms corporates are to be considered in matters of property and capacity, of acts done and rights gained or, obligations assumed .”

Meaning

A company becomes a separate legal entity from its members upon formation. Its rights, responsibilities, and liabilities are separate from those of each of its members individually, and it has its own corporate identity. Consequently, a veil of incorporation separates the company from its members, making the firm and its members unidentifiable. To safeguard themselves against members frequently seek cover behind the corporate veil because to the obligations of the firm. This corporate veil is occasionally used to commit fraud or to avoid paying taxes or following the law. It becomes vital to pull back the curtain or ignore the corporate persona in order to investigate the truths hiding beneath the legal façade and to hold the company’s individual participants responsible for its deeds or obligations.

 The primary characteristic of corporate personality, which dictates all other aspects, is the corporation’s status as a separate legal organization made up of its members. This ideology has been put in place for convenience, need, and business effectiveness. Under the theory of “lifting the corporate veil,” the law exposes corporate concealment. One of the most popular theories for determining when One of the most contested and talked-about theories in corporate law is that a shareholder may be held accountable for the debts of the company. Consequently, it would be quite helpful to examine the same via the prism of prominent case laws and decisions, as the author has done.

Shedding light on the removal of corporate veil under company act 2013

A corporation is a different entity from its members, as made clear by the Companies Act, 2013. In actuality, though, it is a group of people who own the company’s corporate assets and are its beneficial owners. The corporate veil is the veil that creates this deception.

In this case, lifting the corporate veil in accordance with the Companies Act, 2013 entails ignoring the fact that a company is a distinct legal entity with a corporate personality. Instead, lifting the corporate veil in accordance with the Companies Act, 2013 looks back at the true owners who are in control of the company.

The distinct personality is a regulatory benefit that can only be used legitimately. People will not be allowed to hide behind the facade of corporate personhood whenever or wherever they utilize the legal system fraudulently.

The relevant authorities will crack this company’s shell and bring legal action against those responsible for this offense.

The condition on  which corporate veil is lifted  

Misstatement in prospectus

If there is a misrepresentation in the firm’s prospectus, the company, as well as any directors, promoters, and other individuals who approved its release, will be held accountable for compensating any losses incurred by those who subscribed for shares based on the false information.

Furthermore, these persons may face a minimum six-month jail sentence as a form of punishment. It is possible to prolong this period to 10 years. The concerned individual or corporation may also be subject to a fine that is up to three times the amount of the fraud, but it cannot be less than the amount of the fraud.

Name Misdescription

A company’s name must appear on all official papers, such as promissory notes, BOEs, and any other documents that may be referenced, in accordance with the Companies Rule of 2014.

Therefore, if an official of the business signs a contract, BOE, Hundi, promissory note, check, or money order on the company’s behalf and the name of the company is not correctly specified, that person will be held accountable by the holder.

Fraudulent conduct

In the event that a company is being wound up and it is discovered that any business was conducted with the intention of defrauding creditors, other individuals, or for any illicit purpose, the Tribunal may, if it deems it appropriate, order the individual to be held personally liable for all or any of the company’s debts or other obligations

If it is established that the company’s operations have been conducted in a way that has misled its creditors, liability under the fraudulent conduct may be enforced.

As Per Judicial Interpretation

The court initially refused to lift the corporate governance veil due to the separate entity and district corporate persona principles. However, as corporations have grown in popularity and the tension between them and their various stakeholders has increased, courts have adopted a more practical approach and lifted the corporate governance veil.

Recording each court ruling where the curtain was raised is not an easy task. Nonetheless, there are a number of situations in which the corporate persona can be lifted, allowing the individuals behind the business organizations to be identified and dealt with.

1. Improper behavior and fraud prevention.

2. Establishing the subsidiary business to function as the agent.

3. Financial offense

4. Protection of Revenue

5. The business utilized it for illicit activities.

6. The business disregards welfare laws.

7. Business engaged in outright deception.

Cases on Lifting the Corporate Veil

Resolving the cases of Commissioner of (Inland Revenue v. His Grace the Duke of Westminster and WT Ramsay v. Inland Revenue Commissioner), the historic case of (Vodafone International Holdings BV v. Union of India) came to the conclusion that the revenue authorities had every right to lift the corporate veil in cases where the taxpayer had used questionable tactics or colorable devices to minimize tax. Following the sale of Cayman Islands Co.’s shares to Vodafone by Hutchison, a joint venture with Essar, the Indian tax authorities assessed a $02.2-billion debt against the British mobile operator. The reason given was that since an Indian asset was involved in the transaction, the business had to pay capital gains tax. Lastly, following an appeal, In interpreting the current statute, the Supreme Court decided in Vodafone’s favor, holding that since the income-tax law does not refer to “indirect transfers,” it cannot be read to include transfers of capital assets or property located in India.

In the Vodafone case, paragraph 66, the Chief Justice proposed, whenever feasible, to remove the corporate veil. He reiterated that, “a subsidiary and its parent are totally distinct taxpayers,” and that this would be the case even in the event that a parent had a significant amount of influence over the company’s operations. He goes on to provide exceptions in paragraph 67 for situations when the decision-making either if the parent company undertakes a “indirect transfer through abuse of legal form and without reasonable business purpose” or if it is “fully subordinate” to the holding company.

Even the “former chairman of the Central Board of Direct Taxes, Sudhir Chandra”, concurred that Vodafone’s case was the ideal one in terms of piercing the “corporate veil” and imposing taxes. The Finance Bill, 2012 underwent a number of retroactive revisions in reaction to the Vodafone case, which dealt with the taxation of foreign transactions involving Indian assets. It had resulted in a way that makes a retroactive revision necessary and equitable in that particular circumstance.

“In a recent case of Kotak Mahindra Bank Limited v Subhiksha Trading Services Limited,18 Kotak Mahindra Bank” requested Subhiksha be wound up since the company had not paid back a Rs 35 crore interest-bearing loan. As Subhiksha was unable to demonstrate how the global financial crisis caused it to lose Rs 800 crores, Kotak’s attorney, “Mr. H. Karthik Seshadri”, stated that the actions of The M.D  of Subhiksha, Mr. R. Subramanian, requested a thorough investigation by lifting the corporate veil due to sufficient evidence to conclude that he “willfully” gave the company’s assets to companies that he and a few others control, including “Cash and Carry Wholesale Traders Pvt. Ltd”., Shevaroy Holiday Resorts, Triad Trading Services, Custodial Services India, and Pentagon Trading Services. This is a good example of the corporate veil being lifted because of Mr. Subramaniam’s dishonest behavior, which was done deliberately with the goal to deceive creditors by not repaying loans and loans, and the court rightly upheld Kodak’s motion for a winding-up.

Relevant Case: Solomon v. Solomon and Co. Ltd., Lifting of Corporate Veil Under Companies Act, 2013.

In the example, Salomon founded “Salomon & Co. Ltd.”, a business with seven subscribers, including

  • He, his spouse,
  • Four boys in addition to
  • one daughter.
  • Salomon was a stakeholder and a secured creditor of the business. There were other unsecured creditors. The business eventually started to lose money and chose to shut down. Because it was Salomon’s firm, the unsecured creditors argued during the winding-up procedure that they should be paid before Salomon (as a secured creditor).

CONCLUSION

The corporate veil piercing idea is subject to no strict rules or requirements. Courts fought for years to define and refine how they assess these claims. However, because each new action brings with it new facts and circumstances, it is vital to determine whether the plaintiff has shown sufficient evidence of control and superiority  on its own. Inappropriate use or purpose and the injury that results. At least partially, the counsel of qualified experts may be useful in deciding whether to break the corporate veil. The fact- finder would particularly benefit from expert testimony when determining whether the business has received the proper funding for its intended use. Ultimately, nevertheless, the choice of whether to Ignore the corporate structure will be made by considering a variety of factors, some or all of which are necessary but might not be adequate to raise the issue.

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