Intermediate · Paper 5 – Business Laws & Ethics · Companies Act, 2013 · 2:25
English
Transcript
Can a company be used as a mask to hide a cheat? The law says no. Today, we learn when courts lift the corporate veil.
Ravi agreed to sell his house to Kavya. But before the sale was completed, he changed his mind.
Ravi: I will transfer the house to my new company. Then I don't have to sell it to Kavya!
Kavya: But Ravi, you own and control that company! This is just a trick.
A company is a separate legal person. But this is a privilege, to be used only for honest business. When the company is used for fraud, the court breaks through the corporate shell. This is called lifting, or piercing, the corporate veil.
The court looks behind the company, as if it did not exist, and makes the real persons liable for its debts and obligations.
This is exactly what happened in Jones versus Lipman. The court lifted the veil and ordered the seller and his company to complete the sale. Kavya gets her house.
Courts lift the corporate veil in these situations. One, protection of revenue, when a company is used to evade tax.
Two, prevention of fraud, as in Jones versus Lipman.
Three, when the company is a mere sham or cloak, as in Gilford Motor Company versus Horne.
Four, to find the enemy character of a company during war, as in Daimler versus Continental Tyre.
Five, to protect public policy.
Six, when the company acts as an agent of its shareholders.
Seven, when a company tries to avoid welfare legislation.
And eight, to punish for contempt of court.
Exam tip! Separate legal entity is the rule. Lifting the veil is the exception. Write each situation with its case name.
Let's recap. A company is a separate person, but not a mask for fraud. The court can lift the veil, and hold the real persons liable. Remember the eight situations and their cases.
Now try the test in the MPA app. In the next video, we will meet the different kinds of companies.