Thursday, October 30, 2014

Why and when do courts pierce or lift the corporate veil ???

A company is a distant legal person, an entity different from its members. Consequently, a corporate veil is drawn between the company and its members or the public itself. It is a general rule that a company has a “separate legal identity”, and all its transactions will be in its own name. This curtain or partition between the company and its members is based on this important principle of company law which regards a company as separate from its members and hence, courts generally do not attempt to go behind that curtain to see who in fact the real beneficial owners of the company are.
When the corporate forms are not adhered to by them and are being misused, then in order to expose the true character of the persons responsible for the same; the courts have the power to lift or pierce this corporate veil.
What are the exceptional cases in which the corporate veil can be lifted?
1.    Fraud or improper conduct: When company has been used as a medium for committing fraud or improper conduct or to carry out fraudulent trading, the courts have resorted to lifting the corporate veil.

2.    Protection of revenue: When a company takes advantage of the corporate veil for evasion or tax and other duties, it is necessary to lift the veil and find out what the real transactions are.

3.    Determination of the enemy character: Companies do not have a nationality. But the people responsible for the workings of the company have a nationality. During times of war, transactions among multi-national companies are suspended in order to ascertain whether the persons behind the veil are a friend or an enemy.

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 Germany company. Its majority shareholders and all the directors were Germans. On declaration of war between England and 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 facade will be against public policy.

4.    Reduction of membership below a statutory minimum: in case, the number of members of the company has reduced below the statutory minimum and the company carries on business for more than the limitation period while the number is so reduced, then every aware member will be individually liable for the payment of the company’s debts contracted during that time.

5.    Holding or subsidiary companies: More recently, the High Court in Industrial Equity v. Blackburn [9] has held that the principle operates to prevent a holding company from treating a wholly-owned subsidiary’s profits as its own. Therefore, it can be seen that there has been, and still is, the highest authority for the separate entity concept.

In Balwant Rai Saluja vs. Air India Ltd., the question was whether workers in a statutory canteen maintained at Air India’s premises were to be treated as employees of Air India or as employees of the contractor running the canteen. The contractor, HCI, was a wholly owned subsidiary of Air India. The workers made two arguments. The learned Judges also had varying interpretations regarding the status of the HCI as a sham and camouflage subsidiary by the Air India created mainly to deprive the legitimate statutory and fundamental rights of the concerned workmen and the necessity to pierce the veil to ascertain their relation with the principal employer.

The doctrine of piercing the corporate veil is not subject to any specific guidelines. Courts have struggled for years to develop and refine their analysis of this doctrine and each new action brings a different set of facts and circumstances into the equation and a separate determination has to be made as to whether the plaintiff has provided sufficient evidence of dominion or control, improper purpose or use and the ensuing damage. At such times, the opinion of qualified experts are adhered to. Particularly, expert testimony is helpful to the judge in determining whether the corporation has been adequately capitalized for its intended purpose. 
Eventually, however, the judgment whether to disregard the corporate entity will be based upon a balance of numerous factors all or some of which are necessary but may not be sufficient to lift the veil. The bottom line being the court will lift the veil only when facing grave violation of the corporate form and not otherwise. Also the connection between the judicial pronouncements of two separate cases regarding lifting of veil of a corporate entity cannot be ascertained as every court’s view on lifting of corporate veil depends on the facts of each case.

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