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Lifting of Corporate Veil


Lifting of Corporate Veil

One of the main reasons for registering a company is limited liability protection for the members of the corporate veil. The corporate veil is regarded as a veil between the company and its shareholders or members, which protect the members from the liability of the company. In a few exceptional cases, the corporate veil can be lifted in the interest of the public interest. In this article, we look at such cases, were lifting of corporate veil is permissible and limited liability protection is not available for members of a company.

Public Interest

If a company has been set up against the public interest, then it is permissible for the Court to allow the lifting of the corporate veil to determine the reality. In such scenarios, it does not provide limited liability protection to the members of the company.

Presence of Fraud

The Supreme Court of India has observed that “The concept of corporate entity is to encourage and promote trade and commerce but not to commit illegalities or to defraud people. Where, therefore, the employment of corporate character is for the purpose of committing illegality or for defrauding others, the court would ignore the corporate character and will look at the realities behind the corporate veil so as to enable it to pass appropriate orders to do justice between the parties concerned.

Hence, in the case of the presence of fraud or illegalities, it would lift the corporate veil to do justice.

Tax Evasion

The corporate veil can be lifted when a corporate entity is used in defence proceedings or as a shield to cover wrongdoings in tax matters or for a commission of tax evasion. Hence, the usage of a corporate veil for facilitating evasion of legal obligations like payment of taxes or denial of statutory benefits to employees, the Court has allowed for the lifting of the corporate veil.

Diversion of Funds

In transactions where a sale of property by a company in favour of the wives of the Directors has alleged to be sham or collusive, the court has allowed for the piercing of the corporate veil. Hence, collusion amongst promoters and diversion of funds of the company for personal uses are cases eligible for the piercing of the corporate veil to render justice.

Other Causes

The following are other situations or circumstances under which the corporate veil can be lifted:

  • To determine if a company is an enemy company;
  • If a company formed to defeat or circumvent the law or defraud creditors or to avoid legal obligations;
  • If laws relating to foreign exchange control have been violated;

Where the corporate shield blatantly used to disobey the orders of a Court;