Corporate Veil Theory

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A company is an association of persons (other than an OPC) and has a separate legal identity in the eyes of the law, which distinguishes it from its members, and it does all acts in its own name. A separate legal identity protects the member from the faults of the company, as both the company and its members are two different persons in the eyes of the law.

Due to the separate legal identity, a shield is formed between the company and its members that separates the company and its members, called the corporate veil. It keeps the company’s acts and members separate from each other and saves the member from whatever happens in the company.

With time, the separate legal entity (corporate veil) started getting misused because the members knew that if they do anything wrong, the name of the company will come up and they will be saved because the members of the company were not liable for anything, whatever happens, the company will be liable. To avoid this problem, the concept/process of lifting the corporate veil started which is still going on.

What is a Corporate Veil?

Corporate Veil is a concept in the company law that creates shield between the company and its members that separating the company from its members. Due to the corporate veil, the company members are protected by the company acts and unlimited liabilities. In the other words, it hides the members of the company from the public so that they can be saved, and all the responsibilities are taken by the company, even if there is a mistake by the member.

It protects the member’s personal assets to pay for the company’s losses, or members are protected from unlimited liabilities, which means members are responsible only up to their share. Due to this provision, no one can sue the member or hold him responsible for paying the company’s debts. This provision encourages risk-taking decisions that help in the growth of the company as members are protected by personal liability, due to which they are able to make decisions with a free mind.

Note: This protection is not absolute because when the rule is violated, the court ordered the corporate veil to lift and behave as a member and the company as a same person and if something is damaged, the member is held responsible for it.

What is Lifting the Corporate Veil?

Lifting the corporate veil is a legal concept or provision and is also called piercing the corporate veil in which a competent court orders to lifting of the veil of the company and holds members personally responsible for the company’s functions. This usually occurs when the law is violated, such as avoiding tax, doing business with the enemy, avoiding legal obligation, misusing corporate structure, doing illegal activities, etc.

When the corporate veil is lifted, facilities such as the limited liability of the members are postponed as long as the veil is lifted, and the liability of the members becomes unlimited. In this situation, a member and the company are considered one because the separate legal entity is postponed, and the member is personally liable for damage.

Why is the Corporate Veil Lifted?

The company is an artificial person, due to which it is not able to work on its own, and for this, natural persons are appointed to various positions so that the work of the company can be done. The company does not have its own mind to think what is right and what is wrong, and many times its members take advantage of this thing due to which the company has to bear losses. To stop these things, the veil of the company is lifted so that it can be known who has caused the loss.

Reasons for Lifting the Corporate Veil

Following are the reasons for lifting the corporate veil:

1. Tax Evasion

All the companies registered under the company act need to follow all the laws properly and also need to assess the tax properly, if tax is due then it has to be deposited and if any company intentionally fails to deposit the tax many times then the court can order the authority to lift the veil of the company and find out who is responsible for it.

2. Trading with the Enemy

If the company does business with the enemy of the country, then the veil of the company can also be lifted. This is done so that it can be known who is behind it, who is doing business with the enemy of the country despite knowing it. This method can be different for every country because it depends on the law of the country whether the company’s veil needs to be lifted or not.

3. Avoiding Legal Obligations

Companies registered under the Companies Act have to fulfil various legal obligations such as corporate social responsibility, payment of taxes, social welfare, employee welfare, public welfare, and compliance with various laws, etc. Companies that try to evade legal obligations, their veil can be lifted to find out who is behind it.

4. Public Interest

Public interest means the welfare or benefit of the general public. When the company works beyond public interest or against public interest, the competent court can order to lifting of the company’s veil and punish the members who are responsible for it.

5. Fraudulent Activities

If the company is involved in fraudulent activity or illegal activities, then the veil of that company can be lifted by the court order. This is done in the public interest, and to know the real person who is doing such acts. Fraudulent activity or illegal activities are prohibited by law, and it is a punishable offense.

Note: Not all the reasons for lifting the corporate veil are mentioned above.

Read Also:

• What is the Company? Meaning, Features and More.
• Advantages and Disadvantages of the Company
• Types of Companies under the Companies Act, 2013
• What is a One Person Company? Meaning, Features, and More.
• What is a Private Limited Company? Meaning, features, and more.
• What is a Public Limited Company? Meaning, features and more.

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