Lifting the Corporate Veil

Introduction: 

A notion in company law known as "lifting the corporate veil" distinguishes between the firm and its owners. Lifting the corporate veil entails treating the rights and obligations of a corporation as those of its shareholders. Although this fundamental idea has a substantial impact on company law around the world, including in India, it cannot always be implemented; in some circumstances, the court may disregard the legal personality of the corporation. There are exceptions, but they represent arbitrary rejections of reason by the legislature or the courts when they conflict with justice, viability, or the general welfare. Typically, the corporate personality of a corporation should be respected. The cornerstone of corporate law is still this fundamental notion of a corporate entity. 

 

The Concept of the Doctrine of Lifting the Corporate Veil 

The corporate character of the group of people who are incorporated as a firm is ignored by the ideology of lifting the corporate veil. Although a business is a legal entity, the actual owners of the assets owned by the corporate body are a group of individuals. Since it is a manufactured person and is unable to act on its own, it can only function through natural individuals. One may consider the lifting of the curtain idea to be the identification of the firm with its members. Removing the corporate veil would entail treating a corporation's rights and liabilities as belonging to its stockholders. 

The concept of the corporation as a distinct legal entity was recognized and firmly established in the Salomon v. Salomon & Co. Ltd. case.   

In this case, Salomon was the sole owner of his boot-making firm and therefore, it was a sole proprietorship firm. He then sold the company to himself and his family members, therefore making it a Corporation of limited liability.  Salomon & Co Limited gave Mr. Salomon  £20,007 shares as payment for his old business. Mr. Salomon received $10,000 in debentures. Salomon got $10,000 in debentures. Mr. Salomon received £5,000 from Edmund Broderip for his debentures.When Salomon incorporated, boot sales fell.The business neglected to make interest payments on its loan (half held by Broderip). Broderip filed a security lawsuit. Company was dissolved. Broderip received his £5,000 back. As a result of retaining debentures, Salomon asserted £1,055 in corporate assets. With Salomon's claim, unsecured creditors would have nothing. The liquidator said Salomon should fulfil the company's debts after it filed for bankruptcy. accusing Salomon 

 The issue in this case was whether Mr. Salmon should be made liable for paying others even after the organisation is a partnership firm. The "Court of Appeal" decided that the firm was a phantom, determining that Salomon had formed it in contravention of the Companies Act's intended purpose and that since it worked as Salomon's agent, Salomon was accountable for any obligations acquired as a consequence.The “House of Lords” unanimously reversed the prior judgement on appeal, concluding that the business's legal creation makes it an independent person with its own rights and duties, and that the intentions of people who participated in forming the firm are entirely irrelevant. The "corporate veil" between a corporation and its stakeholders was created by the Salomon case. 

 

The Doctrine in Indian Context 

The majority of the elements that make up the Indian Company Law were taken directly from English law. Since then, all subsequent Indian Company Law cases have looked to the Salomon case as the precedent upon which to base their decisions concerning the doctrine. 

The court in  a case2 ruled that corporations are legal persons with their own legal existence. Company is different from its shareholders , the company has its own name, seal and the assets are different from that of the owner. Shareholders responsibility is directly proportional to the money they contribute in the organisation and the creditors have no recourse to business asset.In a case3, the court ruled that the corporate veil should be removed where allied firms are inexorably linked. After the Bhopal Gas Tragedy, corporate veil lifting has increased. In the case of State of UP v. Renusagar Power Company4 Hindalco was the parent company and Renusagar was the subsidiary. Hindacalo was using Renusagar to avoid paying electricity bills. The Supreme Court held that Renusagar should be recognized as Hindalco's own part and must pay electricity bills. In the case of  Singer India v. Chander Mohan Chadha5 the court held that Corporate entities were created to promote trade and commerce, not to perpetrate illicit acts or mislead the public. When the corporate charter is used to perpetrate crime or cheat others, the court will overlook the corporate character and look beyond the corporate curtain to accomplish justice between the parties. In another case6 the court held that in order to look into a complaint of oppression, the court ruled that the corporate veil can be lifted not only in the case of a holding company, but also in the case of its subsidiary if both are family businesses. 

 

The Importance of the Doctrine and the Human Rights Abuse 

When the corporate veil became a method to hide the fraud of the company business, the doctrine became important. This doctrine is also called “piercing the corporate veil”. In light of this, it is imperative that both the legislative body and the judicial system develop new policies, uncover the "corporate veil," and investigate in order to discover the identity of the individuals who are the true beneficiaries of the corporate body.7No matter our country, location of residence, sex, ethnicity, color, religion, language, or any other status, human rights are rights that are inalienable to all people. There are no exceptions when it comes to human rights and these rights are interconnected and tied to each other. Lifting the corporate veil means that the law decides that the rights and responsibilities of a corporation are the same as the rights and obligations of its shareholders. Each person's human rights are fundamental and cannot be taken away in any way. They are there to make sure that everyone has dignity and worth. Since the shareholders and members are the ones who keep the company going, it is essential to make sure they keep their satisfaction. The doctrine comes into play to ensure that the basic rights of the shareholders are not violated.No one in the company can be treated without respect, no matter what. Individuals are afforded the protection of their human rights not only to ensure justice, equality, and a clear conscience but also to ensure the continued operation of democracy in its broadest sense. However, the same cannot ever be guaranteed to exonerate you from the responsibility of criminal obligation, which you have already made yourself eligible enough to bear because of your actions. The Corporate Personality Doctrine was created to protect companies from minor legal responsibilities for industrializing our economy. But when it comes to criminal liability, the larger public and national interest take precedence over the goal of improving the economy because improving the economy means improving the national interest and the living standards of each person. 

 

Conclusion 

Overall, the Salomon ruling is still the most important and important part of English company law. Most of the time, the veil-piercing exception is used when there is a sham, facade, or fraud. However, these are not the only reasons, and much is up to the discretion and interpretation of the courts in each case. Companies must protect and uphold human rights at all costs in today's hectic environment. Because a corporation is made up of and governed by individuals, it may own and sell properties, sue or be sued, and commit crimes. Members or shareholders conduct fraud under the "seal of the company," hence the corporation should be responsible as a person with fundamental rights under Article 21 of the Indian Constitution. As a result of the high occurrence of human rights violations, those who are victims may be entitled to compensation. Businesses are reaping enormous profits at the cost of the rights of innocent people and the environment. Although expanding the company is beneficial, it cannot come at the expense of human life. Corporate social responsibility must be seriously embraced by businesses today, and those who fail to do so should be held responsible. 

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