Detailed Information Corporate Veil Process

This blog will give you complete Detail about Corporate Veil. The company is an artificial person and holds a separate legal entity in the eyes of law. The company can act under its name, have its seal, can enter into contracts, buy or sell property, have a bank account, and sue or get sued in the same manner as an individual.

Thus, a company is a juristic person distinct from its shareholders and other members. However, it cannot be ignored that a company is run by its members or shareholders who are human beings. Thereby, it becomes important to balance between the two concepts, one being the limited liability of members and the other being the distinct legal personality of a company.

Overview of Corporate Veil:

A corporate veil is a legalized concept in protecting the personality of the corporation from that of its members. In layman's language, if a company contravenes any law or incurs any liability, then the members cannot be held liable. Thus, shareholders enjoy protection from the acts of the company. The acts of members or shareholders are considered acts of the Company. 

Lifting Of Or Piercing The Corporate Veil

When the members are involved in illegal or fraudulent activities, it becomes difficult to impose liability. In this situation, who can be blamed for illegal or fraudulent activities? The company or the shareholders who were engaged in such fraudulent acts. Here is where the lifting of the corporate veil comes into the picture. The veil is lifted and the members will be held independently liable for the company's fraudulent acts. But up to what extent, the members can be held liable, as the limited liability concept says that the members are liable only to the extent of the shares he holds? This is in direct conflict with the concept of the ‘lifting of the veil’. 

Circumstances When The Court Has Ordered The Lifting Up Of The Corporate Veil:

• In case the corporate commits Fraud.
• Where the corporation does not have a physical presence, it is just on instruments or paper. 
• When the corporation has an enemy character as its association with the enemy country. 
• If the criminal activities are being hidden behind the corporate’s name. 

Ways Of Lifting The Corporate Veil 

Statutory Lifting: 

If the company contravenes the provision of the Companies Act, 2013 and the act provides for the lifting of the veil for the same, then it is called to be Statutory Lifting.

Judicial Lifting: 

If the company contravenes the provision of the Companies Act, 2013 and the act does not provide for the lifting of the veil then the judge has ordered the lifting of the veil which is known as Judicial Lifting.

Landmark Judgment Related To The Doctrine Of The Corporate Veil

1. Salomon vs. Salomon and Co Ltd.

Facts of the case

Salomon was a wholesale supplier of the export quality leather boot, and after he transferred his business to a company. He incorporated a company with seven subscribers consisting of himself, his wife, one daughter, and four sons. He sold his business to Company for the sum of £ 38,782 of which £ 16,000 was decided to be paid in form of cash or debenture. For the worth of the company, this was a very high price. He took 20,001 of the company’s 20,007 shares as a payment for his old business and a debenture worth £ 10,000 was issued in favor of Aron Salomon. Later on, the company’s business failed and an order was made to wind up the business of the company. At this date, the company was indebted to £ 7,773 to the unsecured creditors. The liquidator claims that the company was only a sham and brought an action against the appellant to indemnify the debts of the company.

Issue of the case:

The liquidator claims that Aron Salomon is guilty of nonfulfilling his fiduciary duty towards the company by taking excessive money to sell his business. As per the liquidator's contentions, Aron Salomon was the major shareholder, he failed to fulfill his responsibilities against the company and unsecured creditors. Hence the question was whether the shareholder could be imposed with unlimited liabilities and can be personally charged for it.

Judgment/Order

The Court of Appeal ordered in favor of liquidator contentions over the appellant and found Aron Salomon responsible to indemnify the debts of unsecured creditors. The court considered the company’s business as Salomon’s own business and the subscribers of the memorandum were dummies and the company was working just as Aron Salomon’s agent. The Court of Appeals considered the company as a personal liability of Salomon by ignoring the fact of the company as a separate legal identity.

The House of Lord reverses the order or judgment of the Court of Appeal. Salomon's to sell his business was excessive in amount but here one thing is important to notice at the time when Salomon transferred or sold his business to the company it was in sound condition and there was a profitable business. After observing all the facts and law, the House of Lords relied on the fact “that Incorporation of the Company can’t be disputed.”

Thus, it is the Landmark judgment that laid down the facts about the formation and working of the company and the Corporate Veil. This theory of corporate entity stated the basic principle on which the whole law of Incorporation is based.

1. Lee v Lee’s Air Farming Ltd:

The fact of the case:

The appellant’s husband Lee incorporated the company named LEE’S AIR FARMING LTD in the year 1954 to carry on the business of aerial top-dressing with 3000 thousand shares and out of which 2999 shares were owned by Lee himself. Lee was the director of the company and exercised control over the affairs of the company. The company entered into a contract with insurance agencies for providing insurance for its employees and a few premiums of the policies were paid from the company’s bank account for the personal policies taken by Lee in its name but it was debited in the account of Lee in the company’s book. Lee was a director, as well as the pilot of the company, was also a pilot. Lee was killed while piloting the aircraft during aerial top-dressing. Lee’s wife who is the appellant claimed worker compensation as she claimed that Lee during work as an employee of the company. 

Issue of the case:

The respondent company claimed that Lee was the true owner of the company and held a maximum number of shares of the company, so his wife is not entitled to claim workmen's compensation as he was not an employee of the company. Respondent claimed that Mr. Lee was not the owner of the company as there is no master-servant relation that exists between him and the company.

Judgment/Order:

The privy council advised that claim of Mrs. Lee(appellant) is valid as Mr. Lee can have a contract with the company he owned as the company is a separate legal entity. 

Lord Morris quoted Lord Halsbury LC’s judgment in Salomon’s case, that company ‘was a real thing’ and said that: “[Always assuming that the respondent company was not a sham, then the capacity of the respondent company to make a contract could not be impugned merely because the deceased was an agent of the respondent company in its negotiation of Mr. Lee’s contract of service].”

This judgment is very important as it lays the precedent that Company is a separate legal entity and it can enter into a contract with its member or shareholder as both are separate legal entities. The separate legal entity is a double-sided sword as it can be used in bad faith also by a fraudulent stakeholder to hide behind the corporate veil that it provides between the company and its members.

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