About the Author: Anant Tripathi is a Student of the OP Jindal Global University, Sonipat.
INTRODUCTION
The Company is considered as an independent person under section 2(20) of the Companies Act, 2013[1], having an identity of its own, which is independent and distinct from its members and shareholders. The Honorable Supreme Court of India, in Bacha F. Guzdar v CIT, Bombay[2], recognised the distinct juristic personality of a company, separate from its shareholders. This principle has since been utilized to distinguish a company’s independent existence from that of its owners (whether individuals or entities) through the concept of the “Corporate Veil.” The concept of separate identity originated from the Saloman case in England. In the case of Chiranjitlal Chaudhary v Association of India[3], the court gave the company similar status as an individual and gave rights to the company under Article 21 as well. Article 21 states that no individual can be denied of his life and liberty with the exception as per procedure established by law[4]. A company uses its employees, managers, directors, and other agents to carry out its operations. It owns all of its assets and liabilities, but neither the owner nor the directors are accountable for the company’s actions. It termed this the corporate veil. It is a legal concept that separates an organization’s operations from its shareholders’. Additionally, it shields investors from being held accountable for the company’s decisions. A court may also decide in this situation whether or not stockholders ought to be held accountable for the company’s deeds. To put it simply, the beneficiaries are shielded from their fraudulent activities by the act and the veil. Under Companies Law, the directors can’t get personal benefits from the company, and their assets can’t be used to fulfill the liabilities of the company. So, this is a gap present in the governance which is misused by the employees of the company, especially directors or owner, unless specified by law. The gap is often misused for personal benefits by using the company’s name, and therefore the companies are made liable, thus directors can escape themselves.
The idea of lifting the Corporate Veil is presented to close the existing gap and stop employees from receiving personal benefits from the business. Although this idea isn’t specifically included in the Companies Act of 2013, it has granted courts and tribunals the power to disregard the firm’s corporate personality privilege in cases where any member of the organization has engaged in fraud or other crimes. This idea, which operates as an exception to a company’s corporate identity, was inspired by several court rulings. Therefore, in certain circumstances, the rule of separate identity can be ignored to find out the actual preparator who is hiding behind the veil. The Supreme Court enshrined this concept in the L.I.C India v Escorts Ltd. & Others[5] case and disregarded the notion of corporate personality by lifting the veil. The act implicitly provides room for the tribunals to use its power in case the company’s privilege is misused using fraudulent means or tactics. This can be observed in Section 7 (7) of the Act[6] provides that, “when a company has been incorporated by furnishing false or incorrect information, or has actively concealed any material fact or information or documents filed in the process of incorporating such company, using fraudulent means and tactics, then the tribunal has the power to take action and pass such orders, as it may think fit for regulation of the management of the company”. Section 339 of the act[7] provides that “when a company undergoes the process of winding up, and it is found that that the company has conducted certain business with an intention to defraud its creditors or any other person, or for any fraudulent activity, then the Tribunal has the power to adjudge that any person who has been a director, manager, or officer of the company, or any other person who was involved in carrying out that particular business, shall be personally responsible, without any limitation of liability, for all the debts and other liabilities of the company”. As per Sec. 7(6) of the Act[8], if it is proved that during the incorporation process, the company had furnished false and incorrect information or has actively concealed or suppressed any vital material fact or information fraudulently, then the promoters, the persons named as first directors of the company, and the persons making declaration[9] under 7(1)(b), will be held liable as per Sec. 447[10] of the Act which lays down the penalties and punishments for any wrongful, fraudulent or illegal activity done by any person associated with the company. Criminal liabilities for providing wrong and misleading statements in the prospectus of the company have been duly highlighted in Sec. 34 of the Act[11], whereas Sec. 35[12] highlight the civil liabilities that arise in the same circumstance17.
The statutory provision under Sec. 2(60) of the Act[13] provides that ‘officer who is in default’ i.e. “any officer or member of the company who has committed any wrong or illegal offence, shall be liable for punishment or penalty in the form of imprisonment or fine, as prescribed by the law for that particular offence”. All portfolios that will be held accountable under the phrase “officer who is in default” are also listed in this section. Although the Act makes no explicit reference to the provisions for “lifting of the corporate veil,” it does grant courts and tribunals the authority to disregard the company’s corporate personality privilege in situations where any of its members have engaged in dishonesty or mischief.
The alter ego theory and the instrumentality theory are the two main ideas upon which Indian courts rely for their application of the notion of piercing or lifting the corporate veil. According to the alter ego theory, when a business just serves as an extension of its owners to engage in unlawful activity, it becomes difficult to distinguish between the business and its owners. In these situations, the firm and its owners have a common interest, which essentially ends the company’s independent legal existence. When the business and its owners are separated, the owners’ unlawful activities are frequently revealed. However, when a company’s directors or owners make use of its corporate personality for their benefit rather than the company’s, the instrumentality theory comes into play. In this case, the business is only a tool in the hands of its directors or owners, who have total authority over it and can use it to further their agendas.
CONCLUSION
In summary, a crucial exception to the idea of a company’s distinct legal character is the theory of lifting the corporate veil. Although the rule gives businesses a lot of legal protection, it also gives judges the authority to lift this veil in special cases to stop abuse of the corporate structure. Several court rulings, such as the Supreme Court’s observations in Balwant Rai Saluja v. Air India and DDA v. Skipper[14], make it clear that courts must use this authority carefully and respect the corporate personality unless it is clear that the company is a fraud or is being used to avoid obligations. The doctrine’s application requires a balance: too lenient an approach could undermine the protective purpose of corporate identity, while excessive stringency could harm genuine business interests. The principle should be invoked only in cases of fraud, evasion of legal obligations, or misuse of the corporate form as an instrumentality or alter ego.
References:
[1] Companies Act 2013, s 2(20)
[2] Bacha F. Guzdar v CIT, Bombay (1954) SC 0072
[3] Chiranjitlal Chaudhary v Association of India (1950) SC 0009
[4] Constitution of India 1950, at 21
[5] Life Insurance Corporation of India v Escorts Ltd & Ors AIR 1986 SC 1370
[6] Companies Act 2013, s 7(7)
[7] Companies Act 2013, s 339
[8] Companies Act 2013, s 7(6)
[9] Companies Act 2013, s 7(1)(b)
[10] Companies Act 2013, s 447
[11] Companies Act 2013, s 34
[12] Companies Act 2013, s 35
[13] Companies Act 2013, s 2(60)
[14] Balwant Rai Saluja & Anr Etc v Air India Ltd & Ors AIR 2013 SC 652; DDA v Skipper (2014) SC 0732