A company becomes a distinct legal entity once it is incorporated in accordance with the guidelines outlined in the Companies Act of 2013. In contrast to a partnership firm, which lacks a distinct legal identity of its own, an incorporated corporation has a legal identity that is distinct from its shareholders and members. This article will explain what this distinction implies, why it was formed, and how the members can be held personally accountable for utilising the business for improper purposes.
Meaning & Concept
A firm is made up of its shareholders and is run by its board of directors and staff. When a corporation is incorporated, it is given the status of a distinct legal entity that distinguishes it from the members or shareholders who make up its membership. The term "Corporate Veil" or "Veil of Incorporation" is used to describe this idea of separation.
The benefits of incorporating a business, such as perpetual succession, transferable shares, the ability to sue, flexibility, limited liability, and finally, the company receiving the status of a Separate Legal Entity, are by no means negligible, and the disadvantages are actually quite few in comparison.
But, some of them, which are essentially issues brought on by the benefit of trading with limited liability, ought to be mentioned. The corporate veil protects the members and the shareholders from the ill-effects of the acts done in the name of the company. If a director of a corporation breaches an obligation on the company's behalf, the company will be held liable rather than the defaulting member. The idea of Corporate Veil suggests that the members of the corporation should not be held accountable for any debts or legal violations the firm may have.
When is it possible to remove a corporate veil?
When a business is incorporated, it acquires its own legal personality. A corporation that has been incorporated, as opposed to a partnership firm that lacks a distinct legal identity, has a legal identity that is distinct from its shareholders and members.
So, the businesses are able to execute contracts, own property in their names, etc. The subscribers to the memorandum and other individuals who may from time to time be members of the company shall be a body corporate capable of exercising all the powers of an incorporated company having perpetual succession, as defined in Section 34(2) of the Companies Act, 2013, upon the issuance of the certificate of incorporation. Hence, the business becomes a body corporate with the ability to operate immediately as an incorporated person.
The separate legal substance of the organisation is the primary benefit of incorporation, from which all others proceed. In all actuality, though, the issue of the genuine individual is continually pursued, and to help a few people.
Lee merged an organisation of which he was the governing executive in Lee v. Lee's Air Farming Ltd. He identified himself as a pilot for the organisation within that bounds. He got lost in a flying accident as he was discussing the organisation. Under the Workmen's Compensation Act, his wife received compensation. In essence, the charm of corporate persona enabled him to be both a hireling and an ace at the same time. When members of an organisation try to take advantage of their status as a different legal substance, the court occasionally throws that status out. The motivations of those hiding behind the cover are fully revealed. They are forced into using the organisation as a means of achieving their bad intentions.
There are numerous instances where the authorities have resisted the urge to pierce the Corporate Veil. Yet, the theory cannot be stretched too far. To identify a firm and its members in court, certain circumstances must arise. For instance, a business cannot be found guilty of plotting with its lone director.
The following situations allow for the lifting of the Corporate Veil:
To determine the character
In many instances, it turns out to be crucial to examine an organization's character to determine if it is a friend or foe of the nation where the firm is based. In the case of Daimler Co Ltd v. Continental Tire & Rubber Co Ltd, a turning point in this field was established. The following provides references to the case's certainty:
To sell tyres that were manufactured by a German company in Germany, a company was established in England. The German organisation had the majority of the power within the British organisation. With the exception of one chief, all of the other offers were held by German residents who resided in Germany. German forces effectively held control of the English organisation in this way. The English group began a project to pay back an exchange commitment during the First World War. Also, it was being asked if the group had become a rival organisation and should, as a result, be prohibited from continuing its operations.
For Revenue Advantages
If corporate substance is used to evade paying taxes or avoid making commitments to pay expenses, the court has the authority to downgrade that corporate substance. In Dinshaw Maneckjee Petit, Re, this circumstance is defined in an obvious way. The assessee was a wealthy man who enjoyed enormous profit and intriguing pay. He moulded four personally owned businesses and consented with each to hold a square of venture as an operator for it. Although the organization's records showed that he received pay, the organisation returned the money to him as an erroneous advance.
He divided his compensation into four parts in an effort to reduce his assessment liability. According to the ruling, the assessee created the corporation entirely and primarily as a means of avoiding supercharge, and the organisation consisted of simply the assessee himself. It did not conduct any business but was created primarily as a legal entity to purportedly get the profits and royalties and transfer them to the assessee as fictitious credits.
Fraud or inappropriate behaviour
The corporate entity cannot in any way be used for a fraudulent or criminal purpose. If a company was founded solely to violate the law or dodge legal duties, the courts will not support its distinct existence. Some businesses are merely founded with the intention of defrauding their clients or conducting business illegally. This was amply demonstrated in the historic decision Gilford Motor Co. v. Horne. The circumstances of the case are described below:
The litigant was chosen as a supervising chief of the aggrieved party organisation with the condition that he would not solicit or entice away clients of the organisation at any time while he held the position of an overseeing executive. His work was completed in accordance with an agreement. He quickly formed a business for the benefit of his better half that asked for the customers of the offended party after that. According to the ruling, the organisation was just a guise to enable the claimant to submit a breach of his agreement with the sellers.
When a person borrowed money from a business and invested it in three separate ventures in which he and his child were the major participants, the loaning business was permitted to share in the benefits of those ventures because they were specifically designed to defraud the loaning business.
An organisation may occasionally be seen as the manager or trustee of its members or of another organisation, and as a result, it may be thought to have lost its distinction as the head. This question has frequently come up in relation to governmental entities in India. Many privately held companies with commercial purposes have been registered under the Companies Act, with the president and a few other officials serving as the investors.
The indisputable advantage of structuring an administration organisation is that it allows the State's activities "a tad bit of the opportunity that was appreciated by private partnerships and the legislature got away from the standards and standards which hampered activity when it was finished by an administration division rather than an administration enterprise. In the end, it donated some of the person's robes to the administration.
It is abundantly obvious that incorporation of the business does not always and in every situation eliminate personal liability. A corporate entity's sanctity is only sustained insofar as it is in accordance with the fundamental principles that give it existence.
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