Lifting Of the Corporate Veil Decoding the Doctrine of Separate Legal Personality
Written by: Ms. Nikita Rai
A company is a juristic person, but in reality, it’s a group of people who are the salutary possessors of the property of the commercial body. Being an artificial person, it (company) cannot act on its own, it can act only by natural persons. The doctrine of lifting the robe can be understood as the identification of the company with its members.
The doctrine of lifting the commercial robe means ignoring the commercial nature of the body of individualities incorporated as a company. A company is a juristic person, but in reality, it’s a group of people who are the salutary possessors of the property of the commercial body. Being an artificial person, it (company) cannot act on its own, it can act only by natural persons. The doctrine of lifting the robe can be understood as the identification of the company with its members.
The company is equal in law, to a natural person. This is one of the keystones of Indian Company Law and has been followed since 1897 when the House of Lords handed down its decision in Salmon v. Salmon & Co. An important principle of a separate legal reality has been honored in Salman’s case which means a company has its legal personality, distinct from its members. It allows a company to perform juristic acts in its name, as well as to sue and to be sued. Members and Directors enjoy protection against particular liability.
Although this abecedarian rule has considerable influence in Company Law across the globe, including in India, it cannot be absolute and must allow some exceptions, where the court may disregard the legal personality of the company. Similar exceptions as there are represented by erratic declinations by the council or the courts to apply sense where it’s too flagrantly opposed to justice, convenience, or the interest of the profit. The robe of objectification in no way means that the internal affairs of the company are fully concealed from view.
Simply put, lifting the commercial robe is disregarding the conception of a company as a separate reality. The principle of separate legal reality stems from the judgment in Solomon’s case which is still the law in company justice. The court had held that the company and its members are to be considered separate beings. The law provides that the company on objectification gets the fictitious legal identity able of being sued in its name and capacity. Still, the first case that had honored the conception championed in Solomon’s was the Kondoli Tea Co. Ltd., Re. wherein it was held that between the company and the shareholders i.e., the people behind the company there live a robe of objectification.
A company is regarded as an artificial person i.e., it’s a juristic person, and is a fabrication of law. It exists in contemplation of law, able of having its rights and duties. Still, it also allows indulging in illegal and indecorous acts by the persons behind it using it as a bare facade to fulfill their wrong bournes without being caught. It’s also misused for committing frauds to escape liability which the perpetrators couldn’t have in the normal course of action if carried on individual capacity.
Therefore, to discipline the bones who abuse the law according to their convenience the doctrine of the lifting of the commercial robe saw the dawn to see the evildoers hiding behind the company by moving the iron curtain.
It’s material to examine cases where the strict principle of Separate Reality laid down in Salomon’s case can be adulterated and particular liability can be assessed. It can be adulterated in two ways under the following heads seriatim-
- 1. Under statutory vittles.
- 2. Under judicial interpretations.
A) UNDER STATUTORY VITTLES
The condition precedent under this head is that liability can be executed on individualities if the express enactment provides for directors to have liability.
Exempli Gratia, the Companies Act, 2013 itself provides cases under which the benefit of’ limited liability cannot be profited of and the members of the company will anyway be held tête-à-tête liable for their acts, and the conception of ‘distinct reality’ won’t be honored.
- 1.1 Misrepresentation in the prospectus– Section 34 and Section 35 of the Companies Act, 2013 provide that if there is any misrepresentation on the company’s prospectus also the people who have prepared the prospectus will be held liable, and not the company. They shall be liable to everyone who’d have bought or will buy the shares on bona fide belief of the information handed on the prospectus being true. However, and also, latterly on, if a company puts commodity on the prospectus misrepresentation. For case, if a company puts a commodity on the prospectus, and also, latterly on, does commodity differently will the plutocrat also for similar misrepresentation, the directors, promoters shall dodge liability.
- 1.2 Failure to return operation plutocrat- Section 39 lays down in case of failure to return operation plutocrat, the plutocrat has to be repaid within a specified time, which is a window of 15 days from the date of check of the issue as specified under Rule 11 of Companies (Prospectus and Allotment of Securities) Rules, 2014. In case no share has been distributed due to over-subscription also the entire quantum needs to b reimbursed. If some shares have been distributed also the balance quantum needs to be paid. However, also the liability can be assessed on the directors and other officers of the company If there is a failure in prepayment of the plutocrat.
- 1.3 Misdescription of name- According to section 12 if there is a misdescription of the name of the company also the directors, officers, or any other member of the company who’s involved in a similar misdescription shall be tête-à-tête made liable for the same. For case, if ‘A’’is a limited liability company, and if they do not add the word ‘Ltd’ will be demonstrated as disguising it as a public company and for the same, the directors shall be liable.
- 1.4 Non-failure of examination– Chapter XIV of the Companies Act, 2013 addresses examination, inquiry, and disquisition. Every officer and director of the company has to compliment the examination, and into the offense of the company. Failure to do so will affect particular liability.
- 1.5 Fraudulent conduct– Section 339 provides that if the company is incorporated with fraudulent intent also the directors and promoters shall be liable to the people.
- 1.6 Under any other statutory provision-If under any statutory provision commodity needs to be done also the elision of the same will affect in the duty of particular liability. For illustration, under the Negotiable Instruments Act, 1881, if a cheque that’s issued in the company’s name is bounced, also the directors of the company are made liable.
The experimenter thinks that the House of Lords gravely erred while deciding Salmon’s case which is still the law in company law justice. Still, the court pronounced the judgment just grounded on what the law says thereby completely neglecting the principles of equity and fairness without which occasionally strict adherence to the law might affect in privation of the legal rights of the others.
Thus, the doctrine of the lifting of the commercial robe is a copybook exemplar of courts perfecting legal justice. It’s a departure from the general rule yet reaches the ends of justice better than the rule. It has been successful in reaching secure the ends of justice which is apparent from the examination of all the cases forenamed in this paper when the commercial robe was lifted, and the evildoers were penalized.
Not always just strict adherence to the letter of law will affect the delivery of justice but could lead to confinement of justice if the interpretation of the law isn’t dynamic and accommodating with the changing time and compelling demands of the circumstances. More so, if the spirit of the law isn’t defended it could lead to the death of the legislation and faith of the public as what the legal world witnessed with the major Salmon’s judgment.
Therefore, the experimenter is in complete agreement with the conception of the doctrine of the lifting of the commercial robe for as important as the robe is imperative, so is chastising the evildoers who hide behind the commercial robe to reap overdue benefits.
To conclude, the law has always maintained that nobody should profit from its wrong, and thus, this doctrine acts as a check on anyone serving out of their wrong deeds.
Previous Posts
A Legal Framework For E-Consumer Protection in The Era of E-Commerce
Criminal Liability of Corporate Bodies in India
A Legal Framework for E-Consumer Protection in the Era of E-Commerce
Company as an Artificial Person: A Study of Opportunities and Obstacles Faced
