LIFTING OF CORPORATE VEIL

• What is the Corporate Veil Theory?

• The Corporate Veil Theory is a legal concept which separates the identity of
the company from its members. Hence, the members are shielded from
the liabilities arising out of the company’s actions.
• But in certain circumstances , the Courts ignore the company and concern
themselves directly with the members or managers of the company. The
Courts, in compelling situations, ignored all the conceptions of the
corporate personality and hold the directors and shareholders personally
liable.This is called piercing the corporate veil.
The term corporate veil is a legal concept that separates the personality
of a corporation from the personalities of its shareholders and protects
them from being personally liable for the company’s debts and other
obligations. Sometimes, there’s a possibility that the corporate
personality of the company is used to commit fraud and improper or
illegal acts. This is known as the lifting of corporate veil. The principle of
a corporation having a separate legal entity was firmly established in
the landmark cases of Salomon v. Salomon & Co. Ltd. Lifting the
corporate veil refers to the probability of looking behind the company’s
separate personality to make the members liable; as a difference to the
rule that they are normally shielded by the corporate shell .When the
corporate veil is lifted, the individual shareholder may be treated as
liable for its acts.
 CIRCUMSTANCES UNDER WHICH
COURT MAY PIERCE CORPORATE
VEIL
• 1] To Determine the Character of the Company
• There are cases where the Courts need to understand if the company is an
enemy or friend . If the affairs of a company are under the control of people
from an enemy country, then the company might be an enemy too. In such
cases, the Court may examine the character of the humans who are
controlling the affairs of the company.
• 2] To Protect Revenue or Tax
• In matters concerning evasion or circumvention of taxes, duties, etc., the
Court might disregard the corporate entity.In such cases, piercing the
corporate veil allows the Court to understand the real owner of the income
of the company and make the said person liable for legitimate taxes.
• 3] If trying to avoid a Legal Obligation
• Sometimes the members of a company can create another company/subsidiary
company to avoid certain legal obligations. In such cases, piercing the corporate veil
allows the Courts to understand the real transactions.
• 4] Forming Subsidiaries to act as Agents
• Sometimes, the basis of the formation of a company is to act as an agent or trustee
of its members or of another company. In such cases, the company loses its
individuality in favour of its principal. Also, the principal is liable for the acts of such
a company.

• 5] A company formed for fraud or improper conduct or to defeat the law

• In cases where a company is formed for some illegal or improper purposes like
defeating the law, the Courts might decide to lift or pierce the corporate veil.
• 6] Where the Public Policy is to be Protected:
• The Courts invariably lift the corporate veil in order to protect the public policy and
prevent transactions, which are contrary to public policy.
 DOCTRINE OF INDOOR
MANAGEMENT
• If an act is authorized by the Memorandum or Articles of Association, then the
outsider can assume that all detailed formalities are observed in doing the act.
This is the Doctrine of Indoor Management or the Turquand Rule. The doctrine
of indoor management means that a company’s indoor affairs are the company’s
problem.The outsiders can assume that the members of the company are
performing their acts within the scope of their apparent authority. Hence, if an
act which is valid under the Articles, is done in a particular manner, then the
outsider dealing with the company can assume that the director/other officers
have worked within their authority. Negligence:
• If with a minimum of effort, the irregularities within a company could be
discovered, the benefit of the rule of indoor management would not apply. The
protection of the rule is also not available where the circumstances surrounding
the contract are so suspicious as to invite inquiry. And the outsider dealing with
the company does not make proper inquiry.
 Exceptions to Doctrine of Indoor Management

• Knowledge of irregularity: If an outsider has actual knowledge of irregularity

within the company, the benefit under the rule of indoor management would no
longer be available. In fact, he/she considers to be a part of the irregularity.

• Negligence: If with a minimum of effort, the irregularities within a company

could be discovered, the benefit of the rule of indoor management would not
apply. The protection of the rule is also not available where the circumstances
surrounding the contract are so suspicious as to invite inquiry. And the outsider
dealing with the company does not make proper inquiry.

• Forgery: The rule does not apply where a person relies upon a document that
turns out to be forged since nothing can validate forgery. However, a company
can never be held bound for forgeries committed by its officers. Where a
transaction involves forgery, say of the required signatures on a certificate, then
the certificate itself is a nullity and renders no title to its holder.
 Doctrine of Constructive Notice
The articles and memorandum of association of a company are registered with
registrar of companies, thus become public documents, and these documents
become accessible for all. So, it is the duty of all persons belonging to the
company to have knowledge about the public documents.
The doctrine of constructive notice is a doctrine where all persons dealing with a
company are deemed to have knowledge of articles of association and
memorandum of association of the companies. It is presumed that all the persons
dealing with company have full information and have read the public documents.
It is important for anyone who wants to join the company to have knowledge
about the limitations or drawbacks of the company which have mentioned in the
public documents and to also know that the directors can contract or not or till
which extent they can contract . An outsider cannot plead guilty of ignorance of
not properly reading the documents. The doctrine of constructive notice protects
a company against outsiders.
The doctrine of Indoor Management is an exception to it.