What is the Corporate Veil?
A company consists of its members and is overseen by its Board of Directors and workers. When a corporation is incorporated, it is granted the status of a distinct legal entity, separating the firm from its members or shareholders. The concept of differentiation is known as the Corporate Veil or the Veil of Incorporation.
Meaning of Lifting of Corporate Veil
The benefits of incorporating a company, such as perpetual succession, transferable shares, capacity to sue, flexibility, limited liability, and the company’s status as a separate legal entity, are significant and should not be underestimated. In comparison, the drawbacks are minimal.
However, certain of them, which are really intricate, should be highlighted. The corporate veil shields the members and shareholders from the negative consequences of actions carried out on behalf of the company. Let’s assume a director of a company defaults in the name of the company, the obligation will be incurred by the company and not a member of the company who had defaulted. The notion of Corporate Veil states that company members are not personally responsible for the firm’s debts or legal violations.
What is the concept of the Corporate Veil Theory?
The Corporate Veil Theory is a legal notion that distinguishes the company’s identity from its individuals. Therefore, the members are protected from the obligations resulting from the company’s acts.
Thus, if the company accumulates debts or violates any laws, the members are not held responsible for those mistakes and benefit from corporate protection. Shareholders are shielded from the actions of the firm.
This leads us to several crucial inquiries:
- Is it feasible to lift or pierce the corporate veil?
- If so, what specific situations and regulations dictate the piercing of the corporate veil?
Piercing the Corporate Veil involves examining the corporation beyond its legal entity status. Disregarding business branding and prioritizing human considerations instead.
Sometimes, the Courts disregard the company and focus directly on the members or management of the company. This is known as piercing the corporate veil. Courts typically choose for this choice when the dispute pertains to a matter of control rather than ownership.
Piercing the Corporate Veil
The circumstances in which courts may contemplate penetrating or raising the corporate veil are as follows:
- To evaluate the company’s character
Sometimes, the Courts need to determine whether a firm is considered an adversary or an ally. Courts in such situations utilize the control test. Courts typically refrain from breaching the corporate veil unless there is a threat to the public interest. The Court may choose to determine whether a corporation is considered an adversary company.
How can a firm be considered a foe? It lacks a mind or consciousness and hence cannot be considered a friend or foe, correct? If a corporation’s operations are overseen by individuals from a hostile nation, the company may also be considered an adversary. In certain instances, the Court may scrutinize the individuals in charge of the company.
- To Safeguard Income or Taxation
When it comes to avoiding or bypassing taxes, duties, etc., the Court may choose to ignore the corporate organization.
Imagine a corporation that is utilized for tax evasion. Piercing the corporate veil in such instances enables the Court to identify the true owner of the company’s income and hold them accountable for paying appropriate taxes.
- Avoiding a legal obligation.
Members of a corporation may establish a subsidiary company to circumvent specific legal responsibilities. Piercing the corporate veil in such instances enables the Courts to uncover the actual transactions.
Consider a corporation obligated to distribute 20 percent of its income to its employees as a bonus. This is a legal requirement. To prevent this, the corporation establishes a fully owned subsidiary and shifts its investment interests to it.
The newly established corporation lacks assets and does not generate any business profits. It relies entirely on the parent firm.
The main corporation decreased the bonus sum owed to its employees. The Courts can reveal the true intentions of the main corporation and enforce its legal responsibilities by disregarding the corporate veil.
- Creating subsidiaries to serve as agents
At times, a company is formed to serve as an agent or trustee for its members or another firm. In such instances, the corporation forfeits its distinctiveness in favor of its principal. The principal is responsible for the actions of the company.
- A firm established for fraudulent or illicit activities or to circumvent the law
If a business is established for illegal or improper reasons, such as evading the law, the Courts may choose to lift or pierce the corporate veil.
