Lifting of Corporate Veil_Group3.pptx

7/29/2019 Lifting of Corporate Veil_Group3.pptx

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Lifting of Corporate VeilPrepared By: Group 3

1. Nirmal Aryal

2. Richa Joshi

3. Alok Kumar Patel

4. Deena Pradhan

5. Prashanta Lal Shrestha


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What is Company ?

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Introduction

Company derived from Latin word

Com : with or together

Panis: bread

Coming together for bread or meals Ordinary sense

An association or group of persons of commonminded people

Grouped together for common goal,

for promoting business, research, trade, or charity

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Introduction (Contd)

Nepalese Companies Act, 2063

Sec. 2(a) defines Company as, Companyincorporated under this Act

Private, Public, Holding, Subsidiary, Foreign, Listed,and Company not distributing profits.

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Characteristics of Company

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Characteristics of Company (Contd..)

Incorporated body of Persons.

Independent person in law and is endowed withspecial rights and privileges

Person distinct from its members Perpetual Succession

Company never dies

Acquire and hold property in its corporate name.

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Characteristics of Company (Contd)

Common Seal

Limited Liability for Shareholders

Sue and Be sued in its corporate name.

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Corporate Veil Definition and Understanding of

Corporate Veil

A corporate veil or the corporate shield is aterm used to describe the separation of acorporation from its owners.

As a separate entity, the corporation or thelimited liability company is set up orformed to shield the owner of thecorporation from personal liability or

protect your personal assets from thebusiness creditors claims

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Corporate Veil HistoryEvolution of the Principle of Corporate Personality

Case ofSalomon v. Salomon & Co.

Owner : Mr. Aron Salomon (British merchant)

Operation: Sole Proprietorship

Type : Manufacturing (Leather merchant and bootmanufacturer)

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Corporate Veil History In 1892, when his son showed interest in his business. Mr.

Salomon then decided to incorporate his businesses into alimited company, in the name of Salomon & Co. Ltd.

According to law they needed at least seven person to

subscribe as shareholders for incorporation of the company.

He owned 20,001 of the companies 20,007 shares, and eachsix member of his family owned one share each.

Mr. Salomon sold his business to a new corporation.

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At the time of liquidation of the company, the creditors whoseclaims could not be paid in full , tried to press their claim againstMr. Salomon, on the basis that he and the company was actuallythe same one entity.

The lord justices held that the company was a differentlegal person from Mr. Salomon, and the creditor could

not sue Mr. Salmon

The case Salmon Vs Salmon establish the principle that thecompany is a separate legal person from itsmember/shareholders. This principle was also know as the veil

of incorporation. Once the company has been dulyincorporated, the court usually do not look behind the veil tofind out why the company was formed or who really controls it.

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Corporate Veil Alter Ego Doctrine :

A doctrine by which a court of law holds individualshareholders liable for a corporation's debts if thecorporation is deemed to be nothing more than an "alter ego"of the corporation's owners.

The alter ego doctrine is also known as the instrumentalityrule because the corporation becomes an instrument for thepersonal advantage of its parent corporation, stockholders,

directors, or officers. When a court applies it, the court is saidto pierce the corporate veil.

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Lifting of Corporate Veil

Theory of incorporation suggests that company is a distinctpersonality and is an artificial person

However, what if the legal entity of the company is used forfraudulent and dishonest purposes?

Hence, court in such cases shall break through the corporate shelland apply the principle lifting /piercing the corporate veil

What this means is that individuals will not be allowed to takeshelter behind corporate personality.

Other labels for the veil used: cloak, alias, alter ego, agent, fiction,

instrumentality, puppet, and sham.

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Lifting the corporate veil

The doctrine of the lifting of the veil thus tries to change the conceptof the separate entity or personality of the corporation.

Why?

To ascertain the true character and economic realities behind the legal

personality of the company Doctrine laid down in Salomon V. Salomon & Co. Ltd has to be

watched carefully

Concept of Piercing the veil is much developed in US than in UK

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5 things to be checked before lifting:

Lifting can be resorted to in all cases depending upon:

The relevant statutory or other provisions;

The object sought to be achieved;

The impugned conduct;

The involvement of public interest; and

The interest of the affected parties.

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When to apply lifting the veil? The doctrine of lifting of the veil has been applied in five

categories of cases: Where companies are in relationship of holding and subsidiary

companies; Where a shareholder has lost the privilege of limited liability and

has become directly liable to certain creditors of the company onthe ground that, with his knowledge, the company continued tocarry on business six months after the number of its memberswas reduced below the legal minimum;

In certain matters pertaining to the law of taxes, death duties andstamps, particularly where the question of the controllinginterest is in issue;

In the law relating to exchange control, and In the law relating to trading with the enemy where the test of

control is adopted.

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Categories/ Types:

1. Peeping behind the veil

2. Penetrating the veil

3. Extending the veil

4. Ignoring the veil

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Peeping behind the veil

Least offensive and act of curiosity Veil is lifted only to get information involving the persons who

control the company(shareholders)

First and essential step by which court examines certain features ofthe company:

Composition, control, type (holding, subsidiary, etc.), character (alien),residence (for tax purposes) etc

Only after this, the courts decide what to do with it, i.e., whether tobe satisfied with it or to more serious repercussions

Can result to advantage to the company

Case scenario: Shareholders of a company was the trustees of acharitable trust.It was held that the company could claim to be exemptfrom paying a development charge because of this charitable status.

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Penetrating the veil

Operative with regard to shareholders

Reach through the veil and grasp the controllingshareholders personally

Why? Impose upon the shareholders responsibility for the companysacts or to establish their direct interest in the companys assets

Recognition of a direct interest of the shareholder in thecompanys assets.

Special mode of penetrating the veil: Declaring an agencyrelationship between controlling shareholder and his company

Case: Salomon Vs. House of Lords

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Extending the veil

Extending the veil through the enterprise entity so that it embracesa bunch of companies (sister concerns conducting a common activity treating as asingle going concern) and lifting the veil of each entity

However, in case the holding company doesnt have full control over

subsidiary then it isnt regarded as one entity. Most notable example :

Provision in companies act, as per which a holding company must include in itsaccounts the profits earned or losses suffered by its subsidiaries, together withthe collective assets and liabilities- group accounts.

Can also be advantage to the company(Eg: Dividends distribution)

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Ignoring the veil Most extreme form Approach in which courts turn when they think that the company

wasnt established for commercial purposes but for defraud ordefeating creditors or circumventing laws

This method of disregarding the companys separate entity has gone

too far. Not only is it against the legal system: taken literally, itdeprives the courts themselves of the possibility of issuing ordersagainst the company as such.

It contradicts its own order issued later on against the samecompany.

The desire of the court to ignore the company does not always dojustice, especially when other parties are affected.

In such cases, a remedy can be found in a more conventional way,namely to nullify the hurtful action.

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International Perspective (English Law)

Reduction of number of members

Sec. 24 of Companies Act

Public Co. carries on the business > 6months

Liable jointly and severally For the payment of debts

Applicable only to Members and Not director.

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Contd. Fraudulent or wrongful trading Sec. 213 of Companies Act

Intention to defraud creditors or creditors of any

other person or Carries on business knowingly that the purpose was

fraudulent

During the normal course of business or while

winding up on application of liquidator

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Contd. Abuse of company names or employment ofdisqualified directors

Sec. 216 and 217 of Insolvency Act

Any director of original company at any time during12 months preceding of its going into insolventliquation

Carries out business with a name of the Original

Company or one so similar to suggest an associationwith original company.

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Contd.. Misdiscription of the Company Sec. 394(4) of Companies Act

Any officer or other person acting on behalf of

company Signs any bill of exchange, promissory note or

cheques or goods

Companies name in not mentioned in legible letters.

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Contd Premature Trading Sec. 117(8) of Companies Act

Public limited Company

Must not do business or excercise any borrowingpower

Until a certificate is obtained from CompanyRegistrar

Company has complied with provisions relating toraising of the share capital or until it has registeredas private company

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International Perspective (Indian Law)

Reduction of membership below statutoryminimum (Sec.45)

Improper use of name (Sec. 147)

Liability of fraudulent conduct of business (Sec.542)

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Nepalese Perspective

Sec. 24 (3) False information published on Prospectus

maliciously or deliberately

any person sustains any loss or damage by reason ofhis/her subscription of securities on the faith of thatprospectus,

the directors who have signed that prospectus

shall be personally liable to pay compensation for the actual loss or damage so

sustained.

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Nepalese Perspective (Contd.)

Sec. 26(3) Fails to indicate the name of the company

while signing on behalf of the company,

the documents (reports, notices, official publications,negotiable instruments, promissory notes),

such person shall be personally liable.

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Sec. 28(6)

Allotment of shares made discriminatorily or tocause any loss or damage to investor

Investor sustains loss or damaage Due to violation of this Section by any officer

Realization of loss or damage personally

As well as reasonable expenses incurred during the

legal action.

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Sec. 60(3)

Net worth of the company reduced

Due to mala fide intention or recklessness of any

director Shall be liable personally to pay compensation.

Sec. 95(4)

Director acting beyond his jurisdiction

Loss or damage caused to the company Company may recover it.

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Sec. 93

Significant transaction by public Co.

Without approval from General meeting with its

Directors, or his/her close relatives or substantialshareholder including subsidiary company

Any amount or benefit derived from suchtransaction

Returned to the company

If any loss or damage, pay compensation.

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Nepalese Perspective (Contd)

Sec. 99(2)

Personal benefit derived in the course of business

Company recovers the amount

From director as a loan Sec. 102

False statement on general meeting or encourageto distribute dividend higher than that of

distributable profit Officer personally liable for such act.

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Sec. 163 Realization of amount of loss

If a director, officer of an company or a person causes any lossor damage to

the company or shareholder or creditor or any other person by committing an offense punishable under this Act or

by violating any provision contains in this Act or MOA or AOAor consensus agreement,

the aggrieved company, shareholder, creditor or any personshall be entitled to have realized the amount of such loss or

damage. He /She shall personally bear the amount of such loss or

damage.

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Protection of Corporate Veil

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Conclusion

Court will not allow corporate form to be used:

For the purpose of fraud or dishonesty

For the express purpose of depriving claimants

ability to exercise his/her lawful rights As a mere device of sham or deceit to evade

contractual or other legal obligations

As a mere faade to conceal true facts

Where it is established that there has been abuseor dishonesty of the corporate form.

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Conclusion (Contd.)

Act of lifting corporate veil, one of the mostcontroversial subjects in corporate law.

Courts generally unwilling

Rationale Constant recognition of a corporate personalitypromotes stability as otherwise investors andbusiness people would be unable to predict whenthe corporate form would be respected.

However, courts lifts only on an exceptionalcircumstances or required by statute.

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Thank You


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Lifting of Corporate Veil_Group3.pptx