In India, the very first legislative enactment for companies was passed in the year 1850 which was based on the English Companies Act of 1844. A company is a legal entity that is acknowledged by the legislation that permits a group of people to apply to form an organization that is set to pursue its objectives. The company also enjoys some legal rights which makes it more empowered when compared to a Sole proprietorship, Partnership firm, Hindu undivided family, etc. A Company is considered to have a separate legal entity of its own. This creates a veil between the persons working and the company which is called a ‘Corporate veil’.
What is a Company?
The word ‘company’ is derived from the Latin words ‘Com’ meaning with or together; ‘panis’ meaning bread, and it originally referred to persons who took their meals together. Nowadays in any practical sense, a Company means a group of certain people who come together voluntarily to form an association for some common object or purpose. Section 2 (20) of the Companies Act, 2013 defines a company incorporated under this Act. Since the Act does not clearly point out its meaning let us look at some definitions given by a few authorities.
- “A corporation is an artificial being, invisible, intangible, existing only in the eyes of the law. Being a mere creation of law, it possesses only those properties which the charter of its creation confers upon it, either expressly or as incidental to its very existence. – Chief Justice Marshall
- “A company is an artificial person created by law, having separate entity, with a perpetual succession and common seal.” – Prof. Haney
Nature and Characteristics
A company should have the following characteristics:
- Corporate Personality
A company is a different person from the members who compose it. Hence, a company is capable of owning property, incurring debts, borrowing money, etc just as an individual. Its shareholders are the notional owners and do not own anything except shares. They can not be held liable for acts of the company.
- Artificial Person
It is created by law and is an artificial person but acts as a human being. It is invisible, intangible, existing only in the eyes of law. It is considered a legal person and enters into agreements, contracts, and posse properties in its name.
- The company is not a citizen
A company does not constitute as a citizen under the Citizenship Act of 1955. It is considered a legal person and can act only through natural persons.
- Company has Nationality & Residence
Even though a company is not a citizen it is capable of having its domicile in the place of its registration and that acts as its nationality too. It must adhere to the Nation’s rules and regulations.
- Limited Liability
The company being a separate entity is the owner of its assets and liabilities. The members of the company have a liability limited to the contributions of their assets of the company. They are neither the owners nor can be held liable for debts.
- Perpetual Succession
Any incorporated company never dies unless it is instructed to wind up by the order of the Court. A company being a legal person is unaffected by death or insolvency and it remains the same despite changes made in the members.
- Transfer of Shares
The shares of a company are movable property and under certain conditions can be transferred freely from one person to another. The shareholders are not permanent members of the company. Section 44 of the Companies Act of 2013 provides for the transfer of shares and the way they should be done.
- Capacity to Sue and be sued
To sue means to bring a suit or legal proceedings in a court of law. If there are any legal proceedings against the company then they are to be instituted in its name similarly any company can take actions against anyone in its own name A company has the right to sue whenever there is a loss or damage faced by it.
What is the Corporate veil?
The Corporate veil is a shield that safeguards the members from the company’s actions. In general terms, it protects the shareholders and members when a company violates any law or incurs any liability. This legal concept separates the company from its members.
What is the Lifting or Piercing of the Corporate veil?
A company has a statutory privilege and it must be used for legitimate businesses only. When a fraud or dishonest use is made by the company the concerned individuals can not take shelter behind this veil of a corporate and separate entity. The court will break the shell and pierce through this veil. This is called a Doctrine of Lifting or Piercing the corporate veil. The Court will look through and behind the corporate entity and take actions against the members who are in control and they will be held liable for debts and obligations. This means looking beyond the company as a legal person or disregarding the corporate identity.
Lifting of corporate veil under judicial interpretation
- Fraud or improper conduct
If a company is formed for some illegal purpose or is found committing an unlawful task then the courts might decide to lift or pierce the corporate veil.
- Forming subsidiaries to act as agents
The basic formation of a company is to act as a trustee or agent of its members or another company. If the company loses its individuality and makes decisions favoring its principal then the person is liable for his/her acts.
- Avoiding legal obligation
When a company is formed with no assets, or liabilities and has no business of its own or income, and depends on a principal company just to avoid legal obligations.
- Determine the character of the company
The courts need to understand if a company created is a friend or enemy. Whether the moral character of the business is in the public interest or in harm to them.
- Protect revenue or tax
If a company tries to evade tax or hides its source of revenue to enjoy exemptions then the responsible person will be held liable.
Lifting of corporate veil under the Companies Act, 2013
- Ultra vires Act
The officers and directors of the company will be held liable if they perform any part which goes beyond the scope of the company.
- Misstatement in Prospectus
If the company’s prospectus is misrepresented then those individuals who had authorized it will hold liable to compensate the loss bore by the subscribers
- Misdescription of Name
Section 12(3)(d) of the Companies Act, 2013 mandates a company to print its name on promissory notes, bills of exchange, and other such documents. Thus, we the name of the company is not mentioned properly then that individual shall be held liable.
- Fraudulent Conduct of business
Section 339 of the Companies Act, 2013 states that during the course of the winding up of a company if it appears that any business was carried out with the intent to defraud creditors of the company or any other person then the Tribunal may personally hold the person responsible without any limitation of liability for any or all debts or liabilities of the company.
- Failed to return the application money
Section 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014 states if the minimum amount has not been subscribed and the sum payable on the application is not received within the stipulated time then the application money should be repaid within 15 days. If not repaid then the directors will be liable to repay the amount along with an interest of fifteen percent per annum.