What is Lifting of Corporate Veil under Companies Act, 2013?

When you create a company, the law treats it as separate from its owners. This means that the company is responsible for its actions, not the people who own or run it. This separation is called the corporate veil. It protects the individuals behind the company by limiting their personal liability. However, there are cases where the law might ignore this separation. This is known as lifting the corporate veil.

Let’s explain what this means and how it works under the Companies Act, 2013 in simple terms.

What is the Corporate Veil?

The corporate veil is what separates the company from the people who own or control it. Once a company is registered, it becomes its own legal entity. It can:

• Own property,
• Enter into contracts,
• Be sued or sue others,
• Conduct business on its own, separate from its owners.

One of the biggest advantages of this is limited liability. This means that if the company gets into trouble, the owners’ personal assets are usually safe. They only risk losing the money they invested in the company, not their own property or savings.

What Does Lifting the Corporate Veil Mean?

Sometimes, the law will ignore the separation between the company and its owners. This is what we call lifting or piercing the corporate veil. When this happens, the individuals behind the company—like the directors or shareholders—can be held personally responsible for the company’s actions.

The law usually does this when the company structure is being used for dishonest or illegal purposes. In simple terms, lifting the corporate veil means that the people running the company can no longer hide behind its legal identity.

When is the Corporate Veil Lifted?

The corporate veil is lifted when people misuse the company’s legal identity to avoid personal responsibilities or to break the law. Here are some common reasons for lifting the corporate veil:

1. Fraud: If a company is used to commit fraud, the courts can hold the people involved personally responsible.
2. Providing False Information: If the company gives misleading information, those responsible for the lies can be personally liable.
3. Evading Legal Duties: When people use a company to escape their legal responsibilities, the courts can step in and hold them accountable.
4. Tax Evasion: If a company is used to avoid paying taxes, the veil can be lifted to catch those responsible.

Lifting the Corporate Veil under the Companies Act, 2013

The Companies Act, 2013 includes several situations where the it can be lifted. This is done to prevent people from using the company as a cover for illegal activities.

Key Situations Where the Corporate Veil May Be Lifted:

1. False Statements in Prospectus (Section 34 and 35):
   • If a company issues a prospectus with false or misleading information to attract investors, those responsible, like the directors or promoters, can be held personally liable.
2. Fraudulent Removal of Company Name (Section 251):
   • If a company tries to remove its name from the official registry to avoid debts or legal action and it is found to be fraudulent, the people behind the action can be held responsible.
3. Fraudulent Business Activities (Section 339):
   • If a company’s business was run with the intent to cheat creditors, the directors or individuals involved can be personally liable for the company’s debts.
4. Punishment for Fraud (Section 447):
   • If anyone is involved in fraud while using the company, they can face severe penalties, including personal liability.
5. Serious Fraud Investigation (Section 212):
   • If the government’s Serious Fraud Investigation Office (SFIO) finds fraudulent activities within a company, the individuals behind the fraud can be held accountable.

Examples of Lifting the Corporate Veil

Here are some real-world examples to help explain when the corporate veil might be lifted:

• Transferring Assets to Avoid Debt: If a company transfers its assets to another company to avoid paying creditors, the courts can lift the it and hold the people responsible for these actions accountable.
• Shell Companies: Sometimes, people create companies that don’t have any real business purpose just to protect themselves from personal liability. Courts can lift the corporate veil to prevent this kind of misuse.

Conclusion

Lifting the corporate veil is an important tool to prevent people from using a company’s separate legal identity to commit fraud or avoid responsibility. The Companies Act, 2013 provides clear guidelines on when and how this can happen, ensuring that individuals who misuse the company structure are held accountable for their actions.

Understanding this concept is important for both business owners and investors to ensure that the company is run responsibly and within the law.