Introduction To Lifting Up Of Corporate Veil

Khurana and Khurana


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In a world full of progress, technological advancements, developments, innovations, competition, liberalization, and globalization, there have been so many changes in business...
India Corporate/Commercial Law
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In a world full of progress, technological advancements, developments, innovations, competition, liberalization, and globalization, there have been so many changes in business, from sole proprietorships to partnerships, which have a minimum of two members and are governed by the Indian Partnership Act of 1932, and from partnerships to various forms of company. The most popular form of all the three types of businesses mentioned above is a company. Due to the above emergencies and also due to rapid competition from the foreign sector or external sector, due to the new industrial policy of 1991, the concept of a company emerged to meet the growing needs of the environment and time. Sole proprietorship became inappropriate or inadequate, keeping in mind the need for the development of our country. In the company, there are also various types, such as one-person companies, small companies, limited liability companies, companies limited by shares, unlimited companies, listed companies, unlisted companies, company forms for charitable purposes (section 8), dormant companies (section 455), companies limited by shares, private companies, public companies, etc. These companies are currently governed by the company's Act of 2013. Earlier, there were several company acts that were now removed or repealed for example, the Company Act 1956 was currently replaced by the Company Act 2013, but that does not mean that companies registered under the Companies Act 1956 are now not companies; they are also companies, as the company enjoys perpetual succession, meaning that its members may come and go but the company will continue for forever and its existence is not affected by the death of its members.

The Companies Act of 2013 contains 470 sections and seven schedules. The word company has been derived from the Latin words "com," meaning together, and panis, meaning bread. The Companies Act, 2013 aims to improve corporate governance, simplify regulations, strengthen the interests of minority investors, and, for the first time, legislate the role of whistleblowers and provisions relating to class action suits. A company has various features, such as that it is not a citizen but has nationality, domicile, and residence; it is a voluntary association for profit; it has separate management; it is a separate legal entity; it has a contractual right; it has a limitation of action as it cannot go beyond its MoA (memorandum of association); it has perpetual succession; it has limited liability; and it has a common seal; it can sue and be sued. A member does not have even an insurable interest in the company and its property or assets. To deal with cases related to the company, there has been the formation of the national company law tribunal, whose appeals go to the national company law appellate tribunal, and then the Supreme Court, which has the ultimate authority to decide the cases in the country. Since the formation of a company requires a lot of capital and is beyond the capacity of a single individual to meet such large amounts of requirements, these capitals are taken from the share market or stock exchange through the issue of instruments like shares, debentures, and bonds. The owners of these shares are called shareholders. The most common stock exchanges are the National Stock Exchange and the Bombay Stock Exchange for raising capital at the national level. There are also various ways to issue shares, such as at par or face value, at premium, and at discount, and there are also various types of shares, such as equity shares and preference shares. Preference shares are further divided into cumulative preference shares, non-cumulative preference shares, convertible preference shares, non-convertible redeemable preference shares, participating preference shares, and non-participating preference shares.

The Companies Act, 2013 was applicable to companies incorporated under this Act or under any previous company law, insurance companies, banking companies, engaged in the generation or supply of electricity, any special act for the time being (except where the provisions of the said Act are inconsistent with the provisions of their respective acts), such body corporate that are incorporated by any act for the time being in force, and as the Central Government may, by notification, specify in this behalf. According to Professor Haney, "A company is an incorporated association, which is an artificial person created by law, having a separate entity, a perpetual succession, and a common seal." Section 2(20) of the Companies Act, 2013 defines a company as a company incorporated under this Act or under any previous company law.".

A company is a separate legal entity, meaning it is separate from its shareholders. It is a legal person in the eyes of the law, distinct from its members, who each have their own rights and obligations. It can have its own property, bank account, loans, assets, and liabilities, and it can enter into contracts in its own name. A company is capable of owning, enjoying, and disposing of assets in its own name. Though the capital and assets are contributed by the shareholders, the company becomes its owner. The shareholders are not the sole, private, or joint owners of the company's property, the very popular cases in this regard are Salomon v. Salomon & Co. Ltd.1 and Macaura v. Northern Assurance Co. Ltd2.

The corporate veil refers to the fact that its members, i.e., shareholders, are different from the company and are protected from the liability, expenses, and errors of the company. It is a complex and evolving aspect of corporate law and serves as a tool to prevent abuse. Due to the concept of the corporate veil, the shareholders of the company are protected from the acts of the company. Solomon vs. Solomon and Co. forms the basis of the corporate veil theory. Lifting up a corporate veil means that in the event of any default, inconsistency, or malpractice, the court will lift up the veil that shielded the shareholder. It was held by Lord Mac Naughten that "the company is at law a different person altogether from the subscribers to the memorandum, and though it may be that after incorporation the business is precisely the same as it was before and the same persons are managers and the same hands receive the profits, the company is not in law the agent of the subscribers or trustees for them. Nor are the subscribers, as members, liable in any shape or form, except to the extent and in the manner provided by the Act."

The main conditions for lifting up the corporate veil are to determine the character of the company, whether friend, foe, or co-enemy (Daimler Co. Ltd. vs. Continental Tyre & Rubber Co.)3; to save tax or revenue, i.e., if the company is formed to protect its revenue or tax by not paying it to the government or appropriate authority (S. Berendsen Ltd. vs. Commissioner of Inland Revenue)4; to avoid the legal obligation, for example, paying a labour bonus, etc. (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber Industries Ltd., Bhavnagar and another)5; If a company is formed to defeat the law or to engage in fraud or improper conduct (Gilford Motor Co. vs. Horne)6; a company may sometimes be regarded as an agent or trustee of its members or of another company and may therefore be deemed to have lost its individuality in favour of its principal, here, the principal will be held liable for the acts of that company (Merchandise Transport Limited vs. British Transport Commission)7.

In brief, we can say that if the company is involved in any malpractice, misbehaviour, or fraudulent activity and does not follow the law, then the court of law can do anything to do justice, as India is a democratic country, and to protect the people and their rights are the responsibilities of the courts. Companies become very important for the development of the country as they generate a lot of employment. There is a growing trend toward growing careers in the corporate sector due to various reasons, and there are also a lot of frauds, scams, and malpractices going on, so it became necessary to be aware of concepts like this in order to protect our rights and interests and to safeguard ourselves. There are various sections in the company's Act 2013, such as Section 447, that impose the penalty to protect the people, and there is a growing need to increase our knowledge in this regard so as to protect ourselves. It is necessary to strike a balance between these advantages and the need for justice. The lifting of the corporate veil is a multifaceted legal doctrine with deep historical roots and far-reaching implications. As every coin has two sides in a similar way, there are positive and negative aspects to everything. Similar things happen in the corporate world as well. The lifting of the corporate veil is not a monolithic concept; its application varies across jurisdictions. As the world is developing in a similar way, the theory of the corporate veil is also developing. With time, we cannot bind the concept of the corporate veil in a few words as it is a very vast and dynamic concept.


1. Salomon v. Salomon & Co. Ltd.- (1897) AC 22.

2. Macaura v. Northern Assurance Co. Ltd. – (1925) AC 619.

3. Daimler Co. Ltd. vs. Continental Tyre & Rubber Co- (1916) 2 AC 307.

4. S. Berendsen Ltd. vs. Commissioner of Inland Revenue – (1957) 2 WLR 447.

5. The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar vs. The Associated Rubber Industries Ltd., Bhavnagar, and another- (1985) 4 SCC 114.

6. Gilford Motor Co. vs. Horne- (1933) 1 Ch 935.

7. Merchandise Transport Limited vs. British Transport Commission– (1961) EWCA Civ J0728-6.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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