Company law assignment

Introduction
Once a business is incorporated according to the provisions laid out in the
Companies Act of 2013, it becomes a separate legal entity. An incorporated
company, unlike a partnership firm, which has no identity of its own, has a
separate legal identity of its own which is independent of its shareholders and
its members. This article will go over what this differentiation means, why this
demarcation was brought about and how can the members be made personally
liable for using the company as a vehicle for undesirable purposes.
Strictly, a company has no particular definition but section 3(1) (i) of the
Companies Act attempts to provide the meaning of the word in context of the
provisions and for the use of this act. It states: ‘a company means a company
formed and registered under this Act or an existing company as defined in
section 3 (1) (ii).’ The company must be registered under the Companies Act for
it to become an incorporated association. If it is not registered it becomes an
illegal association. This paper would deal with the lifting of corporate veil and
its aspects with the judicial decisions.

What is Corporate Veil

A company is composed of its members and is managed by its Board of
Directors and its employees. When the company is incorporated, it is accorded
the status of being a separate legal entity which demarcates the status of the
company and the members or shareholders that it is composed of. This concept
of differentiation is called a Corporate Veil which is also referred to as the
‘Veil of Incorporation’.

LIFTING THE CORPORATE VEIL

Meaning Of The Doctrine:

Lifting the corporate refers to the possibility of looking behind the company’s
framework (or behind the company’s separate personality) to make the
members liable, as an exception to the rule that they are normally shielded by
the corporate shell (i.e. they are normally not liable to outsiders at all either as
principles or as agents or in any other guise, and are already normally liable to
pay the company what they agreed to pay by way of share purchase price or
guarantee, nothing more).[v]
When the true legal position of a company and the circumstances under which
its entity as a corporate body will be ignored and the corporate veil is lifted, the
individual shareholder may be treated as liable for its acts.
The corporate veil may be lifted where the statute itself contemplates lifting the
veil or fraud or improper conduct is intended to be prevented.

“It is neither necessary nor desirable to enumerate the classes of cases where
lifting the veil is permissible, since that must necessarily depend on the relevant
statutory or other provisions, the object sought to be achieved, the impugned
conduct, the involvement of the element of public interest, the effect on parties
who may be affected, etc.”. This was iterated by the Supreme Court in Life
Insurance Corporation of India v. Escorts Ltd.[vi]
The circumstances under which corporate veil may be lifted can be categorized
broadly into two following heads:

1. Statutory Provisions
2. Judicial interpretation
STATUTORY PROVISIONS

Section 5 of the Companies Act defines the individual person committing a

wrong or an illegal act to be held liable in respect of offenses as ‘officer who is
in default’. This section gives a list of officers who shall be liable to punishment
or penalty under the expression ‘officer who is in default’ which includes a
managing director or a whole-time director.

Section 45– Reduction of membership below statutory minimum: This section

provides that if the members of a company is reduced below seven in the case
of a public company and below two in the case of a private company (given in
Section 12) and the company continues to carry on the business for more than
six months, while the number is so reduced, every person who knows this fact
and is a member of the company is severally liable for the debts of the company
contracted during that time.
In the case of Madan lal v. Himatlal & Co.[vii] the respondent filed suit against
a private limited company and its directors for recovery of dues. The directors
resisted the suit on the ground that at no point of time the company did carry on
business with members below the legal minimum and therefore, the directors
could not be made severally liable for the debt in question. It was held that it
was for the respondent being dominus litus, to choose persons of his choice to
be sued.
Section 147- Misdescription of name: Under sub-section (4) of this section, an
officer of a company who signs any bill of exchange, hundi, promissory note,
cheque wherein the name of the company is not mentioned is the prescribed
manner, such officer can be held personally liable to the holder of the bill of
exchange, hundi etc. unless it is duly paid by the company. Such instance was
observed in the case of Hendon v. Adelman.[viii]
Section 239– Power of inspector to investigate affairs of another company in
same group or management: It provides that if it is necessary for the satisfactory
completion of the task of an inspector appointed to investigate the affairs of the
company for the alleged mismanagement, or oppressive policy towards its
members, he may investigate into the affairs of another related company in the
same management or group.
Section 275- Subject to the provisions of Section 278, this section provides that
no person can be a director of more than 15 companies at a time. Section 279
provides for a punishment with fine which may extend to Rs. 50,000 in respect
of each of those companies after the first twenty.
Section 299- This Section gives effect to the following recommendation of the
Company Law Committee: “It is necessary to provide that the general notice
which a director is entitled to give to the company of his interest in a particular
company or firm under the proviso to sub-section (1) of section 91-A should be
given at a meeting of the directors or take reasonable steps to secure that it is
brought up and read at the next meeting of the Board after it is given.[ix] The
section applies to all public as well as private companies. Failure to comply
with the requirements of this Section will cause vacation of the office of the
Director and will also subject him to penalty under sub-section (4).
Sections 307 and 308- Section 307 applies to every director and every deemed
director. Not only the name, description and amount of shareholding of each of
the persons mentioned but also the nature and extent of interest or right in or
over any shares or debentures of such person must be shown in the register of
shareholders.
Section 314- The object of this section is to prohibit a director and anyone
connected with him, holding any employment carrying remuneration of as such
sum as prescribed or more under the company unless the company approves of
it by a special resolution.
Section 542- Fraudulent conduct: If in the course of the winding up of the
company, it appears that any business of the company has been carried on with
intent to defraud the creditors of the company or any other person or for any
fraudulent purpose, the persons who were knowingly parties to the carrying on
of the business, in the manner aforesaid, shall be personally responsible, without
any limitation of liability for all or any of the debts or other liabilities of the
company, as the court may direct. In Popular Bank Ltd., In re[x] it was held that
section 542 appears to make the directors liable in disregard of principles of
limited liability. It leaves the Court with discretion to make a declaration of
liability, in relation to ‘all or any of the debts or other liabilities of the
company’. This [xi]section postulates a nexus between fraudulent reading or
purpose and liability of persons concerned.

Judicial Grounds under which Corporate veil is Lifted

 1. Where the Company is a Sham (Fraud): Gilford Motor Company
vs Horne (1933)
 Mr. Horne was a former Managing Director of Gilford Motor Home
Company Ltd. His employment contract stipulated a condition that
he should not solicit customers of the company once he leaves his
job.
 Mr. Horne was fired from his position and job. Thereafter, he
established a competing company with his wife, himself, and one of
his friends, who were the sole shareholders. The company
established by Horne has lower price tags than that of Gilford’s
company.
 The shareholders started soliciting the customers of Gilford Motor
Company. Gilford did not have any legal restraints against Horne’s
company, only Horne himself.
 Gilford filed or commenced proceedings against Horne individually,
claiming that Horne’s company was an attempt to evade legal
obligations through soliciting customers.
It was held that the company was set up to evade Horne’s contractual
obligations and was used as an instrument of fraud to conceal Mr. Horne’s
illegitimate actions. The court pierced the corporate veil and ordered an
injunction against Horne.[7]
2. Invocation of the principal of agency: RG Films Ltd (1953)
 An American company financed the production of a film in India in
the name of a Britain company.
 90% of the shares in the British Company was held by the president
of an American Company. The company had no business other than
its registered office and it had no staff also.
 Thereafter, the film at the time of release was refused by the Board
of Trade to register it as a British film because the British company
acted merely as an agent of an American company.
It was held that the decision was valid in the view of the fact that the British
company acted merely as a nominee of the American company. In this case, the
Corporate veil was lifted and declared that the doctrine of separate legal entity
does not mean that the company will act as a mere agent of the shareholders.[8]
3. Public Policy: Connors Bros vs Connors (1940)
 In this case the acts done by the members of the company led the
court to lift the corporate veil to punish the offenders as the company
had been formed to accomplish an act that is against the public
policy.
 The principle was applied against the managing director who made
use of his position to contrary to the public policy.
The House of Lords determined the character of the company as an enemy
company because the persons who were de facto who were residents of
Germany, which was at war with the British during that time.

The alien company was not allowed to proceed with the action, which was
directly or indirectly meant giving money to the enemy, thus was considered
against the public policy.[9]
4. Determining True Character of the Company: Daimler Co. Ltd vs
Continental Tyre and Rubber Co. Ltd (1916)
 A private company was incorporated in England for the purpose of
selling motor tires manufactured in Germany and was a German
company.
 The German company has almost all of the shares in their position
and all the directors of the company were Germans.
 During the First World War, the English company commenced an
action for recovery of Trade debt.
 The House of Lord held that the company was an enemy company
for the purpose of trading because its effective control or the
management was in the hands of Germans.
The court held that it would against public policy if there is a trade among them
and hence it was decided that the company will not be allowed to proceed with
the action.[10]
5. Protection of Revenue (Tax Evasion): CIT vs Meenakshi Mills Ltd
The corporate veil may be ignored if the company is formed merely to evade
tax. In Income Tax Commissioner, Madras vs Sri Meenakshi Mills, Madurai,
the Supreme Court held that the Income Tax authorities have a right in this case
to lift the corporate veil.

Sir Dinshaw Maneckji Petit (1927)

 In this case the assessee was a wealthy man enjoying large dividends
and interest income. He formed 4 companies and agreed with each
other to hold a block of investment as an agent for it.
 Income revived was credited in the accounts of the company but the
company handed back the amount to him as a pretended loan, like
this, he divided his income into 4 parts so that he can easily escape
the tax liability.
It was held that the company was formed only with an intention to evade tax
and the company was nothing but the assessee himself. It did not do any
business, except for helping the assessee to evade tax and to have a separate
legal entity to superficially receive the dividends and interest and then to hand it
to them to the assessee as pretended loans.[11]
Conclusion
A company has a legal personality just like all other natural individuals, the only
difference between the two is that a company even with its legal personality
cannot run or conduct its affairs as a natural person does. The company acts on
the concept of the corporate veil, this veil when misused for fraudulent acts will
reveal the true nature and real beneficiaries of the company, thus, called the
lifting of the corporate veil. The courts from time to time implemented this rule
and also brought in a few changes suitable for the situations and for future
reference.

Bibliography
[1] Corporate Veil Definition: Protecting the Corporate Veil, The Strategic
CFO (2019), https://strategiccfo.com/corporate-veil/ (last visited Dec 18,
2020).
[2] Company Law, excellentcareersolution,
http://excellentcareersolution.com/images/note/Company Law BCOP-302.pdf
(last visited Dec 18, 2020).
Dr N.V Pranjape;”Company Law in India” p. 40(1stedn, 1995)
# Kailash Rai, “Principle of Company Law” p. 27(3rdedn,1985)
https://www.lawctopus.com/academike/corporate-veil/