Yashashvi Agrawal, Jindal Global Law School
1. Introduction
Corporate Veil refers to the separation of actions between that of the shareholders and the company as a juristic entity. It is an imaginary barrier that draws the line between the two. This feature heavily depends on the separate entity characteristic of companies. This doctrine is made use of to ‘avoid the perpetration of fraud, evasion of tax or eliminate the possibility of subtle means being adopted for circumventing one particular statue’1. It is a fundamental principle of Company law, and this doctrine exists to protect the shareholders’ liability in case the company defaults. The corporate veil is very rarely ‘pierced’ or ‘lifted’, because it is of the utmost importance to adhere to this veil because a company is considered to be a legal person as well.
Since the company is an artificial person, it is impossible for the company to physically run operations. It delegates its work to directors and shareholders who undertake the work on the company’s behalf. There may be instances where this corporate veil is abused. This veil can be used to evade taxes and carry out various frauds under the façade of the corporate identity. In scenarios like these, the corporate veil is lifted to identity the person or people behind the fraud. It must be kept in mind though; corporate veil is lifted in very extreme scenarios where it becomes absolutely necessary. In fact, it was held in the case of Hare v. Commissioner of Customs and Excise, that. The veil mut be lifted in cases where the company behaved as a vehicle to avoid detection of fraudulent activities. Though it must be kept in mind that the doctrine is sacrosanct to companies and protects it from the acts of the shareholders.
In India, the corporate veil was lifted by the Supreme Court in a limited number of cases such as State of U.P v. Renusagar Power Co., State of Rajasthan v Gotan Limestone, etc. It is one that originated from common law in the case of Salomon v. Salomon. Given the importance of corporate veil, it is only lifted or pierced in very limited circumstances, where it becomes necessary to hold shareholders liable for their malpractices.
Comments