The Corporate Personality and Piercing the Corporate Veil

Concept of Corporate Personality

A company is a legal person, since in the eyes of law it is capable of having legal rights and  obligations just like a natural person. Like any other person it can acquire and own property, transfer  property, enter into contracts and sue and be sued in its own name. Being a legal person, a company has a  separate legal entity, a personality distinct from its members or shareholders.

The concept of separate entity of a company was established in the celebrated case of Salomon Vs  Salomon & Co. Ltd. The facts of the case are that one Salomon, a boot manufacturer, formed a company  with himself, his wife, and daughter and four sons as the sole shareholders. Salomon took 20,000 shares  of £1 each, debentures worth £10,000 secured by the assets of the company and the balance in cash. His  wife, daughter and four sons took the company and the balance in cash. His wife, daughter and four sons  took up one £1 share each. The personal business assets of Salomon were taken over by the company for   £38,782. The company contracted debts and went into liquidation. The unsecured creditors claimed  payment of their dues before the secured debentures held by Salomon on the ground that Salomon and the  company were one and same person and the company was a mere ‘alias’ or agent for Salomon. It was  held by the House of Lords that the company, being a legal person and having existence quite distinct  from its members, could not be regarded as an agent or ‘alias’ for Salomon. As such, Salomon being a  secured creditor of the company is entitled to payment out of the assets of the company in priority to the  unsecured creditors.

In the words of McNaghten, L.J:

“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.”

Lifting or Piercing the Corporate Veil

Ordinarily, the Courts recognise the separate legal entity of the company and consider themselves  bound by the principle laid down in the case of Salomon Vs Salomon & Co. Ltd. But in reality there is no  such separation between the economic interested of the company and its members. In exceptional cases,  the Courts may disregard the concept of corporate entity to look at the persons behind the company. They  may lift the corporate veil to probe into the economic realities behind the scene. This is known as the  ‘lifting or piercing the corporate veil’.

In general the Courts have made a departure from the principle of corporate entity when there was  reason to suspect that the veil of corporate personality had been used to conceal fraudulent or improper  conduct or for doing things against public policy or public interest. Lifting of the corporate veil may also  become necessary in cases where the directors or members of a company are held personally liable for  violation of statutory provisions under the Companies Act.

Some of the exceptional cases necessitating the lifting of the corporate veil may briefly be  indicated below:

  1. In the Interest of Revenue: Where it appears that a company has been formed or is being used for the  only purpose of evading taxes or for avoiding tax liability, the Courts may ignore the separate entity  of the company and lift the veil to look into the persons responsible for tax evasion.
  2. Avoidance of Welfare Legislation: Where it appears that the company has used the ‘veil of  incorporation’ as a means of avoiding social welfare legislation, it is the duty of the Court to lift the  corporate veil and discover the true state of affairs.
  3. For Checking Fraud or Improper Conduct: Where it appears that the company has been formed for  some fraudulent purpose or to conceal the real identity of the owners, the Courts will lift the corporate  veil to find out the real owners of the company.
  4. Against Public Policy: Where the principle of separate entity conflicts with public policy the Court  may lift the corporate veil in defence of the public policy.
  5. Avoidance of Legal Obligation: The Court will also disregard the legal personality of a company  where the corporate veil is being used to avoid legal obligation.  
  6. Under Companies Act, 1956: The following instances necessitate lifting of corporate veil to identify  the persons responsible for such acts:
    • Reduction in membership below the statutory minimum.
    • Fraudulent  conduct of business.
    • Failure to refund application money.
    • Contracts made in personal names of directors.
    • Mis-statements in Prospectus.
    • Ultra vires acts.

Credit: Business Law-CU

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