Lifting of corporate veil
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The document discusses the concept of lifting the corporate veil, where courts may ignore the legal separation between a company and its owners to prevent fraudulent or improper conduct. It provides examples of when courts may lift the veil under statutory provisions, such as for tax avoidance or when a company no longer meets minimum membership requirements. Courts may also lift the veil through judicial interpretation, such as to protect revenue, prevent fraud or solicitation in violation of contracts, or determine if a company has an "enemy character" and its owners are alien enemies. The document supports this with case law examples.
Lifting of corporate veil
- 1. LIFTING OF THE CORPORATE VEIL BY: Amandeep Kaur BBA Sem. 4
- 2. CONCEPT • In the eyes of law, a company is a legal person with a separate entity distinct from its members of shareholders. In essence it means that there is a veil or curtain separating the legal entity of the company from its members or shareholders. • When any fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The Courts will break through the corporate shell and apply the principle of ‘lifting or piercing the corporate veil’. The Court will make the members or the controlling persons liable for debts and obligations of the company.
- 3. law will lift the corporate veil: Under statutory provisions Under judicial interpretation
- 4. UNDER STATUTORY PROVISIONS Reduction of the number of members below statutory minimum For establishing the relationship of holding and subsidiary company For facilitating the task of an inspector to investigate the affairs of the company For investigation of the ownership of the company
- 5. UNDER JUDICIAL INTERPRETATION Protection of revenue Example Case Re Sir Dinshaw Maneckjee Petit: In this case, the assessee formed four companies and transferred his investments to each of these companies in exchange for shares. Now the companies received his income but they handed back the amount to him as pretended loan. His income was divided into four parts reducing his tax liability. It was held that the companies did no business and were created by the assessee simply as the means for avoiding tax.
- 6. Prevention of fraud or improper conduct Example Case Gilford Motor Co. vs. Horne: In this case, Horne was appointed as the Managing Director of Gilford Motor Co., under an agreement that contained a condition that he shall not solicit away the customers of the company. But Horne formed a company which resorted to solicitation in violation of the contract. The court restrained the company.
- 7. Determination of the enemy character of a company Example Case Daimler Co. Ltd. vs. Continental Tyre and Rubber Co. (Great Britain) Ltd.: In this case, a company was incorporated in England for the purpose of selling their tyres manufactured in Germany by a German company. Its majority shareholders and all the directors were Germans. On declaration of war between England & Germany in 1914, the persons in control of its affairs became alien enemies and accordingly the company was declared to be an enemy company. During the war period the company filed a suit to recover a trade debt, which was dismissed by the court and observed that such payment would be a trading with an enemy company and to allow alien enemies to trade under the corporate façade will be against public policy.