As per the judicial point of view, a company is a separate legal entity different from its members (saloman Vs. Saloman & co. Ltd.). When there are cases of dishonesty and fraudulence in incorporation, the law lifts the veil. This veil is a fictional veil and not a wall between the company and its members. Lifting the corporate veil may be defined as looking behind the company as a legal person and identifying the persons who are behind the scene and are responsible for the preparation of fraud.
The circumstances under which the court may lift the corporate veil may be broadly divided into following two heads:-
- Judicial Interpretation
- Statutory Provision
Judicial Interpretation: following are the cases under which the court has lifted the corporate veil:-a. Avoidance of welfare legislation: Where the device of incorporation is used for reducing the amount to be paid by way of bonus to the workmen, the Supreme Court can upheld the lifting of the veil to look at the real transactions: [workmen of Associated Rubber Industry Vs. Associated Rubber Co.]
b. Protection of Revenue: Where the medium of the company has been used for tax evasion or to circumvent tax obligation, courts have lifted the veil and looked at the realities of situation [In Sir Dinashaw Mancekjee Petit]
Where company is a sham: When the court finds that company is a mere cloak or sham and is used for some illegal or improper purpose, it may lift veil. The leading case on this was P.N.B. Finance V. Shital Prasad, where a person borrowed money from a company and invested it into three different companies, the lending company was advised to bring together the assets of all the three companies, as they were created to do fraud with the lending company.
d. Where the company is acting as the agent of the shareholders: Where a company is devised to act as an agent of its shareholders or of another company it will be responsible for its acts. However, it will be a question of fact every case whether the company is acting as agent for its shareholders.
Determination of character: Test of control is adopted in the cases when the trade is conducted with enemy country. In such cases the court will lift the veil at the times of war to see whether a company is controlled by enemy aliens. Consequently a company registered in England may be alien enemy if its agents or the persons in default controls of its affair are alien.
Provision of fraud or improper conduct: The court will disregard the separate existence of the company, where it is shown the company is formed for evading contractual and statutory obligations [Gilford Motor Co. Ltd. V. Horne]
Statutory Provision : cases are as follows:-
a. Number of member below statutory minimum [sec. 45]
When at any time the number of member of a company is reduced below two in case of a private company or below seven in case of a public company and then too it continues it s business for more than six months, the every member who knows the fact will become liable to an unlimited extend for the payment of the whole debt of the company done during that time. The reason behind this is to withdraw the advantage of incorporation when the conditions are not fulfilled.
b. Company not mentioned on the bills of exchange [sec. 147]: When the bills of exchange, promissory note, cheque or order for money or goods are signed by officer of the company or any other person on behalf of the company, and the name of company is not fully or properly mentioned. Then the person who signed the instrument will be personally liable. Unless the amount is paid by the company.
c. Failure to refund application money [sec. 69]: In case of issue of shares by a company to the public, if the company is unable to receive minimum subscription within 120 days from the first issue of the prospectus than all money received from application shall have to be returned. If the amount is not refunded within 10 days, the directors shall be liable to repay the money with interest at the rate of 6% per annum.
d. Fraudulent trading [sec. 542]; On the winding up procedure of the company, if it is found that any business of the company has been carried on to defraud creditors, the court shall declare those persons personally liable for the debts and other liabilities of the company.
e. Group accounts [sec. 212]: Where the company has subsidiaries and group accounts, than the principle of separate legal entity may be disregarded. Along with the own profit and loss account and balance sheet, subsidiaries and group accounts have also to be laid down.
Thus, these are the circumstances where the veil can be lifted.