In the case of Salomon Vs. Salomon & Co. Ltd. 1897
it was considered from the
Justice point of view a company is a legal person distinct from its members.
This principle is regarded as a veil/curtain/shield but not a wall between the
company and its members. The effect of this principle is that there is a
fictional veil and permitted to look at the person behind the veil.
According to this principle, when a company has been formed and registered under
the Companies Act, all dealing with the company will be in the name of the
company and the person behind the company will be disregarded however important
they may be.
Because of the human mentality, fraud or improper conduct started by using this
veil of corporate personality. So that it becomes necessary for courts to lift
the corporate veil and look at the person behind the company who are the real
beneficiaries of the corporate fiction.
Where the courts ignore the company and concern themselves directly with the
members or managers, the corporate veil may be said to have been lifted. Only in
appropriate circumstances, the courts are willing to lift the corporate veil and
that too when questions of control are involved rather than merely a question of
The corporate veil of a company will be lifted only in exceptional cases such as
Under statutory provisions:
Reduction of number of members below statutory minimum:
- In the case of a public company with less than seven members and three
- In the case of a private company with less than 2 members and 2
directors. Severally liable for the payment of whole debts of the company
contracted during that time and may be severally sued thereof.
Failure to refund application fee:
Under Section 39 of the Companies Act, 2013
the director of the company shall be jointly and severally liable to repay that
money with interest at the rate of 6% per annum from the expiry of the 133 days
if they fail to repay the application money without interest within 120 days
when the company fails to allot shares.
Mis-description of company's name:
Under Section 12 of the Companies Act, 2013
if an officer of a company signs, or authorizes to be signed, on behalf of the
company, any bill of exchange, hundi, promissory note, endorsement, cheque or
order for money or goods wherein its name is not mentioned, apart from penal
liability, the officer becomes personally liable on those instruments.
Under Section 339 of the Companies Act, 2013 every person knowingly a party to
the carrying on of the business in the manner aforesaid, shall be punishable
with imprisonment for a term which may extend to two years or with fine which
may extend to fifty thousand or with both.
Holding and Subsidiary Company:
Separation is ignored for the purpose of group
For investing in a company's ownership:
Under Section 216 of the Companies Act,
2013 the central government may appoint inspectors to investigate and report on
the membership of any company for the purpose of determining the true persons
who are financially interested in the company and who control its policy. Thus
the central government has authority to ignore the corporate veil.
Under Judicial interpretation:
- Protection of Revenue:
Under Section 179 of Income Tax Act, 1961 the corporate veil may be ignored
where the company has been formed merely for evading tax liability
- Prevention of fraud or improper conduct
- Determination of character of a company whether it is enemy
- Whether the company is a sham
- Innovation of the principle of Agency
- Public policy
Company Law is a wider concept based on commercial law. It states about all
legal rights, relation, and conduct of a persons, companies, organizations &
businesses and its formation, funding, governance & death of a corporation. This
act deals with the powers, privileges, obligations, objects and scope of the
companies. Which helps in economic growth and developments.