CORPORATE
VEIL OR PIERCING THE
The theory of separate
corporate personality is the basic principle based on which the corporation is
formed. However, in some cases, the legal personality of a company or a
corporate personality is disregarded and the court looks behind the corporate
veil of the company in order to decipher the realities of the situation. It is important because sometimes the natural persons in the company
do illegal acts and hide behind the corporate veil of the company. The factor
of limited liability in such cases can lead to injustice. Thus, when limited
liability is unjustly used to defeat public interest, justify wrong, protect
fraud or defend crime at that time the piercing of corporate veil is used to
punish the real offender. Lifting the corporate veil is sometimes expressly
authorized by the statutes but most of the time the Courts use it.
·
When
a company becomes an Enemy Company at times of war
During wars, a company
of the enemy company and corporate personality veil is used by the court to
uplift the corporate veil to figure out the enemy behind the corporation. The
uplifting of the corporate veil helps the courts to determine whether a company
is to be characterised as an enemy company.
Daimler Co.Ltd v
Continental Tyre and Rubber Co.Ltd
The appellant company was held by Germans but was incorporate in England..
Only one share was held by the Secretary of the company who was residing in
England. During the period of World War I, the company brought the suit for
recovery of debt.
The House of Lords held
the company to be an enemy company for purpose of trading thus can’t sue. The
company was debarred from maintaining action because the enemy could not be
allowed to trade in the grab of a company.
·
When
Company Acting as an Agency of its member
According to the law a
company can be an agent of one of its members or can appoint a member as an
agent. In such situations, the courts goes behind the corporate veil to
establish the existence of agency behind the veil.
F.G Films Ltd.
The applicant company
had a film Monsoon that was registered as a British film to avail the benefits
under the Cinematography film Act. The Board of Trade refused to give the
benefit because most of the shares in the film were hold by the American
company. The applicant company was merely acting as an agency.
In this case the rule
made held that an American company obtains the benefits provided to a British
company by merely setting up some subsidiary.
·
When
the Company is used to perpetrate a fraud
The corporate veil is
used to uplift when behind the veil of corporate personality the natural
persons were involved in fraud.
Darby, ex pm Brougham
Darby and Gyde were
involved in many fraud cases and both were undischarged bankrupts. They
registered a company named City of London Investment Corporation Ltd. The
profit of the company was entitled to Darby and Gyde because they both were the
only directors. They sold a license and
a plant to Welsh Slate Quarries. The Welsh Slate Quarries went into liquidation
and claimed the bankruptcy of Darby for the Secret profit that he made as a
promoter. Darby argued that it was not he but the corporation who had been a
promoter. The court didn’t favor the argument of Darby.
·
When
company is used to evade Contractual Obligations
The has used the
technique of piercing of corporate veil to prevent deliberate avoidance of
contractual obligations.
Gilford Motor Co. v
Horne
Horne was the managing
director of the company. He was under obligation not to solicit or entice away
from the customers of the company. He formed a new company to carry the same
business. The new company solicited the old companies' customers. The court made
Horne liable for merely using the clock to enable the defendant to breach his
agreement.
·
When
the Statutory law wants the Veil to be lifted
Section
15, 397, 398, 399, and 500 of the companies Act has guided to
use of the technique of uplifting the veil in order to make the person guilty
in real liable for his actions.
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