STUDENT INDEX NO: 11311417
COURSE CODE:
COURSE TITLE: COMPANY LAW
KESSBEN UNIVERSITY COLLEGE
SCHOOL OF BUSINESS
LEVEL 300
QUESTION: EXAMINE THE DOCTRINE OF LEGAL PERSONALITY AND ITS CONSEQUENCES WITH THE
PARTICULAR REFERENCE TO THE EXTENT TO WHICH THE COURTS HAVE DEVELOPED RATIONAL
CRITERIA FOR PIECING THE CORPORATE VEIL.
SOLUTION
Introduction
A court, in conditions where legal arrangement approves the' lifting' or 'penetrating 'of
the corporate veil, it has done as such regarding customary law standards. The
occasions where the court have 'lifted' or 'pierced' the corporate veil as far as
customary law standards have been done conflictingly, erratically, and unreasonably
and subsequently it is hard to foresee in some random circumstance whether a court
will 'Lift' or 'pierce' the corporate veil
Meaning Of Lifting Or Piercing Of The Corporate Veil
The human creativity anyway began utilising the veil of corporate character
unmitigated as a shroud for misrepresentation or ill-advised direct. In this way it got
fundamental for the Courts to get through or lift the corporate veil and take a gander
at the people behind the organisation who are the genuine recipients of the corporate
veil. Lifting of the corporate shroud implies ignoring the corporate character and
looking behind the genuine individual who are in the control of the organisation. At the
end of the day, where a false and deceptive use is made of the legitimate element, the
people concerned won't be permitted to take cover behind the corporate character
"An organization will be viewed as a legitimate element when in doubt… … however
when the idea of lawful substance is utilized to crush open comfort, legitimize wrong,
ensure extortion or shield wrongdoing, the law will see the company as a relationship
of people."
In Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs, Denning observed as
follows:
“The doctrine laid down in Salomon v. Salomon and Salomon Co.Ltd, has to be watched
very carefully. It has often been supposed to cast a veil over the personality of a limited
liability company through which the Courts cannot see. But, that is not true. The Courts
can and often do draw aside the veil. They can and often do, pull off the mask. They
look to see what really lies behind”.
CIRCUMSTANCES WHERE THE COURTS CAN LIFT’ OR PIERCE THE
CORPORATE VEIL
1. Judicial Provisions or Grounds for Lifting the Veil
1. FRAUD OR IMPROPER CONDUCT- The Courts have been more that prepared
to pierce the corporate veil when it fells that fraud is or could be perpetrated
behind the veil. The Courts will not allow the Salomon principal to be used as an
engine of fraud. The two classic cases of the fraud exception are Gilford Motor
Company Ltd v. Horne and Jones v. Lipman.
2. FOR BENEFIT OF REVENUE-“The Court has the power to disregard corporate
entity if it is used for tax evasion or to circumvent tax obligations. A clear
illustration is Dinshaw Maneckjee Petit,
3. ENEMY CHARACTER-A company may assume an enemy character when
persons in de facto control of its affairs are residents in an enemy country. In such
a case, the Court may examine the character of persons in real control of the
company, and declare the company to be an enemy company. In Daimler Co.Ltd
V. Continental Tyre and Rubber Co.Ltd is a clear illustration.
4. COMPANY AVOIDING LEGAL OBLIGATIONS- Where the use of an
incorporated company is being made to avoid legal obligations, the Court may
disregard the legal personality of the company and proceed on the assumption as
if no company existed.
5. SINGLE ECONOMIC ENTITY- Sometimes in the case of group of enterprises
the Salomon principal may not be adhered to and the Court may lift the veil in
order to look at the economic realities of the group itself. In the case of
D.H.N.food products Ltd. V. Tower Hamlets, it has been said that the Courts may
disregard Salomon’s case whenever it is just and equitable to do so. In the above-
mentioned case the Court of appeal thought that the present case was one which
was suitable for lifting the corporate veil. Here the three subsidiary companies
were treated as a part of the same economic entity or group and were entitled to
compensation.
6. WHERE THE COMPANY IS a SHAM- the Courts also lift the veil where a
company is a mere cloak or sham (hoax).
7. AGENCY OR TRUST- Where a company is acting as agent for its shareholder,
the shareholders will be liable for the acts of the company. It is a question of fact
in each case whether the company is acting as an agent for its shareholders. There
may be an Express agreement to this effect or an agreement may be implied from
the circumstances of each particular case.
8. AVOIDANCE OF WELFARE LEGISLATION- Avoidance of welfare legislation
is as common as avoidance of taxation and the approach of the Courts in
considering problems arising out of such avoidance is generally the same as
avoidance of taxation. It is the duty of the Courts in every case where ingenuity is
expended to avoid welfare legislation to get behind the smokescreen and discover
the true state of affairs.
9. PUBLIC INTEREST-The Courts may lift the veil to protect public policy and
prevent transactions contrary to public policy. The Courts will rely on this ground
when lifting the veil is the most ‘just’ result, but there are no specific grounds for
lifting the veil. Thus, where there is a conflict with public policy, the Courts
ignore the form and take into account the substance.
2. Statutory Provisions For Lifting The Veil
1) REDUCTION OF NUMBER OF MEMBERS- Under Section 45 of The
Companies Act, 1956, if a company carries on business for more than six
months after the number of its members has been reduced to seven in case
of a public company and two in case of a private company, every person
who knows this fact and is a member during the time that the company so
carries on business after the six months, becomes liable jointly and
severally with the company for the payment of debts contracted after six
months. It is only that member who remains after six months who can be
sued
2) FRAUDULENT TRADING- Under Section 542 of The Companies Act,
1956, if any business of a company is carried on with the intent to defraud
creditors of the company or creditors of any other person or for any
fraudulent purpose, who was knowingly a party to the carrying on of the
business in that manner is liable to imprisonment or fine or both. This
applies whether or not the company has been or is in the course of being
wound up. This was upheld in Delhi Development Authority v. Skipper
Constructions Co. Ltd. (1997)
3) MISDESCRIPTION OF THE COMPANY- Section 147 (4) of The
Companies Act, 1956, provides that if any officer of the company or other
person acting on its behalf signs or authorizes to be signed on behalf of the
company any bill of exchange, promissory note, endorsement, cheque or
order for money or goods in which the companies name is not mentioned in
legible letters, he is liable to fine and he is personally liable to the holder of
the instrument unless the company has already paid the amount.
4) PREMATURE TRADING- Another example of personal liability is
mentioned in Section 117 (8) of The English Companies Act. Under this
section a public limited company newly incorporated as such must not “do
business or exercise any borrowing power” until it has obtained from the
registrar of companies a certificate that has complied with the provisions of
the act relating to the raising of the prescribed share capital or until it has
re-registered as a private company. If it enters into any transaction contrary
to this provision not only are the company and its officers in default, liable
to pay fines but if the company fails to comply with its obligations in that
connection within 21 days of being called upon to do so, the directors of the
company are jointly and severally liable to indemnify the other party in
respect of any loss or damage suffered by reason of the company’s failure.
5) FAILURE TO REFUND APPLICATION MONEY-According to Section
69(5) of The Indian Companies Act, 1956, the directors of a company are
jointly and severally liable to repay the application money with interest if
the company fails to refund the money within 130 days of the date of issue
of prospectus.
6) HOLDING AND SUBSIDIARY COMPANIES- In the eyes of law, the
holding company and its subsidiaries are separate legal entities
Conclusion
Thus it is abundantly clear that incorporation does not cut off personal
liability at all times and in all circumstances. “Honest enterprise, by means
of companies is allowed; but the public are protected against kitting and
humbuggery”. The sanctity of a separate entity is upheld only in so far as the
entity is consonant with the underlying policies which give it life. Thus those
who enjoy the benefits of the machinery of incorporation have to assure a
capital structure adequate to the size of the enterprise. They must not
withdraw the corporate assets or mingle their own individual accounts with
those of the corporation. The Courts have at times seized upon these facts as
evidence to justify the imposition of liability upon the shareholders. The act
of piercing the corporate veil until now remains one of the most controversial
subjects in corporate law. There are categories such as fraud, agency, sham
or facade, unfairness and group enterprises, which are believed to be the most
peculiar basis under which the Law Courts would pierce the corporate veil.
But these categories are just guidelines and by no means far from being
exhaustive.
