Question

can you please provide answer to this question for 10 marks

When can the corporate veil be lifted under the Corporations Act to make directors liable for

corporate debts?

Answer 1

Corporate veil is a legal concept that separates the personality of a corporation from the personalities of its shareholders and protects them from being personally liable for companys debt and other obligation

at times it may happen that corporate peronality of the company is used to commit frauds and improper or illegal acts . since an artificial person is not capable of doing anything illegal and fraudulent , the corporate veil might have to be removed to identify the persons who are really guilty , this is know as lifting of corporate veil , the major instances when a corporate veil is lifted is

1) officer in default - the term officer in default includes a managing director or a whole time director , the officers who are involved in wrongful or illegal acts are liable in respect of the offences committed by them .

2) reduction of membership - a public company requires atleast 7 members for its formation and a private company requires two members . however when a company has been formed without complying with this minimum requirement and continues to carry on its business , then each member who knows such fact is individually liable for debts contracted by the company during that time.

3) improper use of name - it provides for liabilities of the officer who signs the bill of exchange, hundi , promissory note , cheque under improper name of the company , such officer shall be holder of such bill of exchange . hundi , promissory note or cheque as the case may be , unless it is duly paid by the company

4) fraudulent conduct - if at the time of termination of the company it is found that activities of the company were carried to deceive the investors of the company then the individuals who had knowledge of such business would be personally liable for any loss caused to such investors as the court may direct

5) failure to refund application money - if the company fails to repay the application money to the applicants who were not alloted the shares within 130 days from the date of issue of prospectus , then the directors of a company are jointly and severally liable to repay the application money with interest . however this wont in effect the continuance of the company and its separate existence

6) fraud or improper conduct - the most common ground when the courts lift the corporate veil is when the members of the company are indulged in fraudulent acts.The intention behind it is to find the real interests of the members . the court held that the corporate veil of the company can be lifted in cases of criminal acts of fraud by officers of a company.

7 ) tax evasion -   Sometimes, the corporate veil is used for the purpose of tax evasion or in order to avoid any kind of tax obligation. It is not possible for the legislature to fill all the gaps in the law and thus it is important for the judiciary to interfere. In such cases, the courts lift the veil of the company to find out the real state of affairs of the company

8) company as an agent -  In every case where a company is acting as an agent for its shareholders, in such cases the principle of vicarious liability is applied, and the shareholders will be responsible for the acts of the company. The court in such cases would look at the facts of the cases to determine whether the company is acting an agent for its members or not. This can be inferred either from the agreement where it has been expressly mentioned or can be implied from the circumstances of each case.