Lifting of Corporate Veil

Prepared By: Group 3 1. Nirmal Aryal 2. Richa Joshi 3. Alok Kumar Patel 4. Deena Pradhan 5. Prashanta Lal Shrestha

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What is Company ?

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Introduction
Company derived from Latin word
Com : with or together Panis: bread Coming together for bread or meals

Ordinary sense
An association or group of persons of common minded people Grouped together for common goal, for promoting business, research, trade, or charity

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Introduction (Contd)
Nepalese Companies Act, 2063
Sec. 2(a) defines Company as, Company incorporated under this Act
Private, Public, Holding, Subsidiary, Foreign, Listed, and Company not distributing profits.

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Characteristics of Company

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Characteristics of Company (Contd..)

Incorporated body of Persons. Independent person in law and is endowed with special rights and privileges
Person distinct from its members

Perpetual Succession
Company never dies

Acquire and hold property in its corporate name.

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Characteristics of Company (Contd)

Common Seal Limited Liability for Shareholders Sue and Be sued in its corporate name.

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Corporate Veil
Definition and Corporate Veil Understanding of

A corporate veil or the corporate shield is a term used to describe the separation of a corporation from its owners. As a separate entity, the corporation or the limited liability company is set up or formed to shield the owner of the corporation from personal liability or protect your personal assets from the business creditors claims

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Corporate Veil History

Evolution of the Principle of Corporate Personality

Case of Salomon v. Salomon & Co.

Owner : Mr. Aron Salomon (British merchant) Operation: Sole Proprietorship Type : Manufacturing (Leather merchant and boot manufacturer)

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Corporate Veil History

In 1892, when his son showed interest in his business. Mr. Salomon then decided to incorporate his businesses into a limited company, in the name of Salomon & Co. Ltd. According to law they needed at least seven person to subscribe as shareholders for incorporation of the company. He owned 20,001 of the companies 20,007 shares, and each six member of his family owned one share each.

Mr. Salomon sold his business to a new corporation.

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At the time of liquidation of the company, the creditors whose claims could not be paid in full , tried to press their claim against Mr. Salomon, on the basis that he and the company was actually the same one entity.
The lord justices held that the company was a different legal person from Mr. Salomon, and the creditor could not sue Mr. Salmon The case Salmon Vs Salmon establish the principle that the company is a separate legal person from its member/shareholders. This principle was also know as the veil of incorporation. Once the company has been duly incorporated, the court usually do not look behind the veil to find out why the company was formed or who really controls it.

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Corporate Veil
Alter Ego Doctrine : A doctrine by which a court of law holds individual shareholders liable for a corporation's debts if the corporation is deemed to be nothing more than an "alter ego" of the corporation's owners.

The alter ego doctrine is also known as the instrumentality rule because the corporation becomes an instrument for the personal advantage of its parent corporation, stockholders, directors, or officers. When a court applies it, the court is said to pierce the corporate veil.

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Lifting of Corporate Veil

Theory of incorporation suggests that company is a distinct personality and is an artificial person However, what if the legal entity of the company is used for fraudulent and dishonest purposes? Hence, court in such cases shall break through the corporate shell and apply the principle lifting /piercing the corporate veil What this means is that individuals will not be allowed to take shelter behind corporate personality. Other labels for the veil used: cloak, alias, alter ego, agent, fiction,
instrumentality, puppet, and sham.

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Lifting the corporate veil

The doctrine of the lifting of the veil thus tries to change the concept of the separate entity or personality of the corporation. Why?
To ascertain the true character and economic realities behind the legal personality of the company

Doctrine laid down in Salomon V. Salomon & Co. Ltd has to be watched carefully Concept of Piercing the veil is much developed in US than in UK

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5 things to be checked before lifting:

Lifting can be resorted to in all cases depending upon:
The relevant statutory or other provisions;
The object sought to be achieved; The impugned conduct; The involvement of public interest; and The interest of the affected parties.

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When to apply lifting the veil?

The doctrine of lifting of the veil has been applied in five categories of cases:
Where companies are in relationship of holding and subsidiary companies; Where a shareholder has lost the privilege of limited liability and has become directly liable to certain creditors of the company on the ground that, with his knowledge, the company continued to carry on business six months after the number of its members was reduced below the legal minimum; In certain matters pertaining to the law of taxes, death duties and stamps, particularly where the question of the controlling interest is in issue; In the law relating to exchange control, and In the law relating to trading with the enemy where the test of control is adopted.

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Categories/ Types:
1. 2. 3. 4. Peeping behind the veil Penetrating the veil Extending the veil Ignoring the veil

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Peeping behind the veil

Least offensive and act of curiosity Veil is lifted only to get information involving the persons who control the company (shareholders) First and essential step by which court examines certain features of the company:
Composition, control, type (holding, subsidiary, etc.), character (alien), residence (for tax purposes) etc

Only after this, the courts decide what to do with it, i.e., whether to be satisfied with it or to more serious repercussions Can result to advantage to the company
Case scenario: Shareholders of a company was the trustees of a charitable trust. It was held that the company could claim to be exempt from paying a development charge because of this charitable status.

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Penetrating the veil

Operative with regard to shareholders Reach through the veil and grasp the controlling shareholders personally Why?
Impose upon the shareholders responsibility for the companys acts or to establish their direct interest in the companys assets Recognition of a direct interest of the shareholder in the companys assets.

Special mode of penetrating the veil: Declaring an agency

relationship between controlling shareholder and his company

Case: Salomon Vs. House of Lords

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Extending the veil

Extending the veil through the enterprise entity so that it embraces a bunch of companies (sister concerns conducting a common activity treating as a single going concern) and lifting the veil of each entity However, in case the holding company doesnt have full control over subsidiary then it isnt regarded as one entity. Most notable example :
Provision in companies act, as per which a holding company must include in its accounts the profits earned or losses suffered by its subsidiaries, together with the collective assets and liabilities- group accounts.

Can also be advantage to the company (Eg: Dividends distribution)

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Ignoring the veil

Most extreme form Approach in which courts turn when they think that the company wasnt established for commercial purposes but for defraud or defeating creditors or circumventing laws This method of disregarding the companys separate entity has gone too far. Not only is it against the legal system: taken literally, it deprives the courts themselves of the possibility of issuing orders against the company as such. It contradicts its own order issued later on against the same company. The desire of the court to ignore the company does not always do justice, especially when other parties are affected. In such cases, a remedy can be found in a more conventional way, namely to nullify the hurtful action.

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International Perspective (English Law)

Reduction of number of members
Sec. 24 of Companies Act Public Co. carries on the business > 6months
Liable jointly and severally For the payment of debts Applicable only to Members and Not director.

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International Perspective (English Law) Contd.

Fraudulent or wrongful trading
Sec. 213 of Companies Act
Intention to defraud creditors or creditors of any other person or Carries on business knowingly that the purpose was fraudulent During the normal course of business or while winding up on application of liquidator

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International Perspective (English Law) Contd.

Abuse of company names or employment of disqualified directors
Sec. 216 and 217 of Insolvency Act
Any director of original company at any time during 12 months preceding of its going into insolvent liquation Carries out business with a name of the Original Company or one so similar to suggest an association with original company.

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International Perspective (English Law) Contd..

Misdiscription of the Company
Sec. 394(4) of Companies Act
Any officer or other person acting on behalf of company Signs any bill of exchange, promissory note or cheques or goods Companies name in not mentioned in legible letters.

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International Perspective (English Law) Contd

Premature Trading
Sec. 117(8) of Companies Act
Public limited Company Must not do business or excercise any borrowing power Until a certificate is obtained from Company Registrar Company has complied with provisions relating to raising of the share capital or until it has registered as private company

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International Perspective (Indian Law)

Reduction of membership below statutory minimum (Sec.45) Improper use of name (Sec. 147) Liability of fraudulent conduct of business (Sec. 542)

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Nepalese Perspective
Sec. 24 (3)
False information published on Prospectus
maliciously or deliberately any person sustains any loss or damage by reason of his/her subscription of securities on the faith of that prospectus, the directors who have signed that prospectus shall be personally liable to pay compensation for the actual loss or damage so sustained.

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Nepalese Perspective (Contd.)

Sec. 26(3)
Fails to indicate the name of the company
while signing on behalf of the company, the documents (reports, notices, official publications, negotiable instruments, promissory notes), such person shall be personally liable.

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Nepalese Perspective (Contd.)

Sec. 28(6)
Allotment of shares made discriminatorily or to cause any loss or damage to investor
Investor sustains loss or damaage Due to violation of this Section by any officer Realization of loss or damage personally As well as reasonable expenses incurred during the legal action.

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Nepalese Perspective (Contd.)

Sec. 60(3)
Net worth of the company reduced
Due to mala fide intention or recklessness of any director Shall be liable personally to pay compensation.

Sec. 95(4)
Director acting beyond his jurisdiction
Loss or damage caused to the company Company may recover it.

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Nepalese Perspective (Contd.)

Sec. 93
Significant transaction by public Co.
Without approval from General meeting with its
Directors, or his/her close relatives or substantial shareholder including subsidiary company

Any amount or benefit derived from such transaction Returned to the company If any loss or damage, pay compensation.

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Nepalese Perspective (Contd)

Sec. 99(2)
Personal benefit derived in the course of business
Company recovers the amount From director as a loan

Sec. 102
False statement on general meeting or encourage to distribute dividend higher than that of distributable profit
Officer personally liable for such act.

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Nepalese Perspective (Contd.)

Sec. 163
Realization of amount of loss
If a director, officer of an company or a person causes any loss or damage to the company or shareholder or creditor or any other person by committing an offense punishable under this Act or by violating any provision contains in this Act or MOA or AOA or consensus agreement, the aggrieved company, shareholder, creditor or any person shall be entitled to have realized the amount of such loss or damage. He /She shall personally bear the amount of such loss or damage.

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Protection of Corporate Veil

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Conclusion
Court will not allow corporate form to be used:
For the purpose of fraud or dishonesty For the express purpose of depriving claimants ability to exercise his/her lawful rights As a mere device of sham or deceit to evade contractual or other legal obligations As a mere faade to conceal true facts Where it is established that there has been abuse or dishonesty of the corporate form.

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Conclusion (Contd.)
Act of lifting corporate veil, one of the most controversial subjects in corporate law. Courts generally unwilling Rationale
Constant recognition of a corporate personality promotes stability as otherwise investors and business people would be unable to predict when the corporate form would be respected.

However, courts lifts only on an exceptional circumstances or required by statute.

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