Corporate Personality & Lifting the Corporate Veil
1. Corporate Personality
Meaning
A company, upon incorporation, becomes a separate legal entity distinct from its members. It acquires an identity independent of the individuals who form or run it. This is known as the principle of corporate personality.
Legal Recognition
Under Section 9 of the Companies Act, 2013, a registered company becomes a body corporate capable of:
- Owning property
- Suing and being sued in its own name
- Entering into contracts
- Perpetual succession
Landmark Case Law
Salomon v. A. Salomon & Co. Ltd. (1897) AC 22 (HL)
Held: A company has a legal personality separate from its shareholders. Even though Salomon owned almost all the shares, the company was not a sham and was validly incorporated.
Implications
- Shareholders have limited liability
- The company’s debts are not personal debts of shareholders
- The company can own assets in its own name
2. Lifting the Corporate Veil
Meaning
While the company is treated as a separate legal entity, courts may, in certain circumstances, look beyond this separate identity and hold the individuals behind the company personally liable. This is referred to as “lifting” or “piercing” the corporate veil.
Purpose
- To prevent fraud or improper conduct
- To avoid misuse of corporate structure
- To ensure justice and accountability
Situations Where the Veil May Be Lifted
a) Fraud or Improper Conduct
If a company is formed or used to defraud creditors or evade legal obligations, the veil will be lifted.
Delhi Development Authority v. Skipper Construction Co. (1996) 4 SCC 622
Held: Corporate veil was lifted to hold directors personally liable for fraudulent activities.
b) Evasion of Tax
If a company is used as a device for tax evasion, the court may disregard its separate identity.
Re Sir Dinshaw Maneckjee Petit, AIR 1927 Bom 371
Held: The assessee formed companies purely to avoid tax. The court ignored the corporate entity.
c) Agency or Sham Companies
When a company acts as an agent or façade for its members, the veil may be lifted.
Gilford Motor Co. v. Horne (1933) 1 Ch 935
Held: Mr. Horne used the company to avoid a non-compete clause. The court lifted the veil and restrained the company.
d) Group of Companies
In group structures, the veil may be lifted to treat group companies as a single economic unit in exceptional cases.
e) Protection of Revenue or Public Interest
When the interest of public policy or government revenue is at stake, the courts may intervene.
f) Misuse of Limited Liability
When individuals exploit limited liability for personal gain, courts may hold them liable.
Statutory Provisions for Lifting the Veil
- Section 339 of the Companies Act, 2013 – In case of fraudulent conduct of business during winding up, directors and others can be held personally liable.
- Section 2(60) – Defines officers in default who can be penalized.
- Section 7(7) – In case of incorporation by furnishing false information.
Conclusion
While the doctrine of corporate personality is a cornerstone of company law, it is not absolute. Courts lift the corporate veil to prevent misuse and uphold the principles of justice and equity. The balance between recognizing a company’s independent identity and imposing personal liability is essential for ensuring corporate accountability and transparency.