Understanding Corporate Veil and the Doctrine of Lifting Corporate Veil

Corporate Veil in India

The concept of lifting the corporate veil involves disregarding the separate legal entity of a company. This doctrine becomes crucial when a company’s directors, members, or managers use the company’s identity to shield themselves from personal liability for their actions. In such cases, the corporate identity is pierced, holding the company members accountable for unlawful acts.

The Concept of Lifting the Corporate Veil in India

Indian law has largely adopted its concepts from English law, and the doctrine of lifting the corporate veil in India closely resembles that of English law. The landmark case of Salmon v. Salmon serves as the authority for decisions in company law.

Provisions in the Companies Act

The Companies Act specifies situations where the corporate veil can be lifted, and individuals can be held liable for their actions.

1. Reduction of Membership: Members of a company are liable for the payment of the company’s debts. The number of members can be increased or reduced based on statutory requirements without affecting the company’s legal entity.
2. Holding and Subsidiary Companies: Under Section 212 of the Companies Act 2013, a company must maintain transparency and provide a true and fair view of its financial position. The parent company must disclose its financial position along with the financial statements of its subsidiaries.
3. Failure to Deliver Share Certificates: If a company fails to issue share certificates to its members, the company and the members can be held liable for a fine of Rs. 5000 per day until the default is rectified (Section 113, sub-section 2).
4. Application Money (Section 39): If a company accepts applications for shares from the general public but fails to meet the minimum subscription requirement, the company’s directors will be held liable to repay the application money with interest.
5. Misrepresentation in Prospectus (Sections 34 and 35): If false information is published, the directors, members, and partners responsible can be liable to the public who subscribed to shares based on the false statements.

Investigations and Liability for Fraudulent Conduct

• Investigation of the Company’s Affairs: The central government can order an investigation into a company’s affairs based on complaints from the Registrar of Companies or for the benefit of the public.
• Establishment of Serious Fraud Investigation Office: The central government establishes the Serious Fraud Investigation Office to investigate companies involved in fraudulent activities.
• Investigation to Determine Actual Members: The central government has the power to appoint sub-inspectors to investigate and determine a company’s actual members or directors, especially those capable of influencing the business.
• Liability for Fraudulent Conduct of Business: If the winding-up process is used to defraud creditors, the tribunal can take action against the members or directors responsible for the fraudulent conduct based on applications filed by the liquidator or members.

Conclusion

The doctrine of lifting the corporate veil plays a vital role in distinguishing between the actions of a company and its members. Understanding this concept helps protect companies from fraudulent activities perpetrated by their members.

FAQs

1. What is the concept of lifting the corporate veil?

Lifting the corporate veil refers to disregarding a company’s separate legal entity to hold its members personally liable for their actions.

2. How does Indian law view lifting the corporate veil?

Indian law closely follows English law in lifting the corporate veil, with the landmark case of Salmon v. Salmon serving as a precedent.

3. Are there specific provisions in the Companies Act related to lifting the corporate veil?

Yes, the Companies Act specifies situations where the corporate veil can be lifted, and individuals can be held liable for their actions.

4. Can you provide some examples of situations where the corporate veil can be lifted in India?

Examples include reduction of membership, holding and subsidiary companies, failure to deliver share certificates, application money, and misrepresentation in a prospectus.

5. What is the significance of transparency in holding and subsidiary companies?

Transparency is crucial, as the parent company must disclose its financial position and its subsidiaries’ financial statements under Section 212 of the Companies Act.

6. What are the consequences of a company’s failure to issue share certificates to its members?

The company and its members can be held liable for a fine of Rs. 5000 per day until the default is rectified (Section 113, sub-section 2).

7. When can directors be held liable for repayment of application money?

Directors can be held liable if a company accepts applications for shares from the general public but fails to meet the minimum subscription requirement (Section 39).

8. Who can be held liable for false information in a prospectus?

Directors, members, and partners responsible for publishing false information in a prospectus can be held liable to the public who subscribed to shares based on false statements (Sections 34 and 35).

9. What grounds are for ordering an investigation into a company’s affairs?

The central government can order an investigation based on complaints from the Registrar of Companies or for the benefit of the public.

10. What actions can be taken against members or directors engaged in fraudulent conduct during the winding-up process?

The tribunal can take action against them based on applications filed by the liquidator or members if the winding-up process is used to defraud creditors.