In Life Insurance Corporation of India v. Escorts Limited and Others [1] , the Supreme Court laid down two major instances when the corporate veil is lifted. These are —. Thus, this section talks about the joint and several liability of the members. Reduction of Membership Section 45 of the Act — A public company requires at least 7 members for its formation and a private company requires at least two members Section 3 of the Act.
However when a company has been formed without complying with this minimum requirement and continues to carry on its business, then each member who knows such fact is individually liable for any debts contracted by the company during that time. Improper use of Name Section of the Act — Sub-section 4 of Section of the Act provides the liability of the officer who signs Bill of Exchange, Hundi, Promissory note, cheque under the improper name of the company.
Such officer shall be to the holder of such Bill of Exchange, hundi, promissory note or cheque as the case may be; unless it is duly paid by the company. Fraudulent conduct Section of the Act — If at the time of termination of the corporation, it is found that the activities of the company were carried to deceive the investors of the company then the individuals who had knowledge of such business would be personally liable for any loss caused to such investors as the court may direct.
Failure to refund application money Section 69 of the Act — If the company fails to repay the application money to the applicants who were not allotted the shares within days from the date of issue of the prospectus, then the directors of a company are jointly and severally liable to repay the application money with interest. Apart from the statutory provisions, the courts in India on its own discretion also lift the corporate veil on certain grounds.
Some of the cases in respect of this are-. The intention behind it is to find the real interests of the members. In such cases, the members cannot use Salomon principle to escape from the liability. In one of the leading cases of Shri Ambica Mills Ltd. Similarly, the court pierced the corporate veil in the case of VTB Capital v.
Nutritek [3] and held the directors personally liable for obtaining loan fraudulently. Tax Evasion — Sometimes, the corporate veil is used for the purpose of tax evasion or in order to avoid any kind of tax obligation. It is not possible for the legislature to fill all the gaps in the law and thus it is important for the judiciary to interfere.
In such cases, the courts lift the veil of the company to find out the real state of affairs of the company. The leading case of Vodafone [4] was an example of the corporate structure formed to evade the taxes. Company as an Agent — In every case where a company is acting as an agent for its shareholders, in such cases the principle of vicarious liability is applied, and the shareholders will be responsible for the acts of the company.
The court in such cases would look at the facts of the cases to determine whether the company is acting an agent for its members or not. This argument for lifting the veil is targeted at companies within a corporate group. The basis of this argument is that despite the separate legal personalities of the companies within the group, they in fact constitute a single unit for economic purposes and should therefore be seen as one legal unit.
Liabilities should therefore, be attached to the whole group as companies aim to reach a single economic goal. This argument was advanced successfully in the case of DHN Food Distributors v Tower Hamlets where the veil was lifted for the benefit of the parent company in a group situation. DHN were treated as owning the land of its subsidiary and entitled to compensation for the corporate torts committed by Tower Hamlets. This case appears to have been the exception, rather than the rule in terms of advancing this argument as subsequent case law has rejected this ground on the basis that the argument is based on economics, and not the law.
This has proven to be a more successful line of argument in past case law. In Woolfson v. In Re Darby, ex Broughham which dates back to , the veil was lifted where career-fraudsters had incorporated companies to disguise their true involvement as sole beneficiaries of the scheme. The veil was lifted to grant an injunction against Horne and the new company. In Jones v Lipman the defendant attempted to evade a contract for the sale of land by transferring it to a company. The court lifted the veil and required specific performance from both the defendant and company.
In Trustor v Smallbone a director of the claimant stole money from Trustor and paid it to his own company Intercom. The veil was lifted in order to make Smallbone jointly and severally liable for the sums received by Intercom. This argument asserts that the company is an agent for its controllers, i. In a corporate group it would be argued that the subsidiary is an agent of the parent company. It is generally presumed that there is no such agency relationship and that in principle, a company is not an agent of its shareholders.
This ensures that present and future management are not punished for the wrongs of the past directors. There is also a six-month window after two specific proceedings for which directors and officers may be liable: a commencement of liquidation or dissolution proceedings or making an assignment in bankruptcy. If there is a claim for an amount within the six-month window, directors and officers can be liable.
Throughout the legislation, federal and provincial, the general defence for directors and officers is where they have exercised the degree of care, diligence, and skill that a reasonably prudent person would have exercised in comparable circumstances. Examples of statutory liability can be found in the following statutes: Canada Pension Plan Act : failing to remit deductions Typically these offences relate to adverse effects on land, including discharge or presence of a substance, no matter the ownership of the land.
Directors should be alert to their decision-making indications, as the broad range of actions are considered for environmental liability: directing, authorizing, assenting to, acquiescing in , or participating in, an act or omission as it relates to an environmental offence. Often in bylaws, dissents must be formally noted in meeting minutes; simply abstaining often does not amount to dissenting to a motion or decision in meetings. Some examples include:.
The separate legal entity of a corporation facilitates and brings clarity to business transactions in Canada. However, those involved either as executives, officers, or shareholders must remain mindful of the circumstances in which they can be found personally liable for the actions of the corporation.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion.
Readers should consult a legal professional for specific advice in any particular situation. Copy link. Copy Copied.
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