Explain the doctrine of lifting the veil and discuss the circumstances under which the veil is lifted.
Ans. Lifting or Piercing the Corporate Veil—The above mentioned advantages of incorporation flow from the principle that for all purposes of law a company should be regarded as a separate entity from its shareholders, but sometimes it may become necessary to look at the persons behind the corporate ‘veil and then some of those advantages disappear. The separate entity of the company, deregistered and the schemes and intentions of the persons behind are exposed to full view. They are made personally liable for using the company as a vehicle for undesirable purposes. This is called Doctrine of Lifting the Veil. This veil is usually lifted in the following circumstances-
(a) When it Becomes Necessary to Determine the Legal Character of a Corporation-It has been held by the House of Lords in Daimler Co. Ltd. Vs. Continental Tyre and Rubber Co. (1916) 2AC 307, that a company, though registered in England, would “assume as enemy character when person in de facto control of its affairs, are residents . of an enemy country or, wherever residents are acting under the control of enemies”. On the other hand, an American Court in People’s Pleasure Park V.s. Roheleder (1908), refused to hold that a company consisting of Negroes would become a black company.
(b) For the Benefit of Revenue- The separate existence of a company may be disregarded when the only purpose for which it appears to have been formed is the evasion of taxes.
(c) When Company Conceived and Brought Forth for Fraudulent Purposes- In Gilford Motor Co. V.s. Home (1933) Ch. 935, A motor company was restrained from acting when its principal shareholder was bound by a restraint covenant and had incorporated the company only to escape the covenant.
(d) Agency or Trust and Government Company- The separate existence of a company may be ignored where it is being used as an agent or trustee. The courts insist upon very strong evidence for this purpose. For Example, a Government Company is not regarded as an agent or trustee of the State unless it is performing sovereign as opposed to commercial functions. The property of a Government Company has been held to be not that of the state. A transport company in which all the shares were held by the Transport Commission was held to be not acting as an agent for the Commission. A wholly owned subsidiary company is also viewed to be as distinct from its parent as any other company, except when the parent controls its activities in all respects. Thus, the power generating unit created by a company for its own exclusive supply was not regarded as a separate entity for the purpose of excise Vide; State of U.P. Ramusagar Power Co. (1991).
Lifting the veil is not always to the disadvantages of the company’s promoters. The Supreme Court looked through the veil and finding that the joint-venture sponsors of the company were qualified for participating in Government tender held that their company should also be treated as a qualified tender. Vide: Now Horizons Ltd. V.s. Union of India, (1995).
(e) Under Statutory Provision- Besides this, The Act itself imposes personal liability in certain cases upon person clothes behind the company For Example, where business is carried on beyond six months after knowledge that the membership of the company has gone below statutory minimum or a contract is made by misdescribing the name of the company or the business is carried on only to defraud creditors, members or officers who are parties to such transactions are personally liable.
2. Formality and Expense- Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation of the company and administration of its affairs.
3. Company is not a Citizen- Although, a company, is a legal person yet it is not a citizen. It can have the benefit of only such fundamental rights as are guaranteed to every person whether a citizen or not. A company does, however, have a nationality, domicile and residence. A company incorporated in a particular country has the nationality of that country although unlike a natural person, it cannot change its nationality.