Question

Limiting the liability of the owner(s) of a business is often the primary motive for using the corporate form. Under what circumstances may the use of a corporation not shield the owner(s) from al liabilities of the business?

Answer 1

When a corporate form of entity is established, the association is known by the name of the company and all the members are clothed together and protected in their individual obligations. However, this veil of corporate personality is used for some dishonest and fraudulent purpose. In that case, court will look into the reality and lift the corporate veil.

In the following cases, court has lifted the corporate veil-

1. Prevention of fraud and misconduct
   Where the medium of the company has been used for committing fraud or improper conduct, the court has lifted the veil and looked at the reality of the situation.
2. Company acting as an agent
   Where the company is in reality an agency or trust for someone else and the corporate facade is used to cover up that agency or trust.
3. Protection of public policy
   Where the doctrine conflicts with public policy, courts have lifted the corporate veil for protecting the public policy.
4. Enemy character of company
   Court will lift the corporate veil if the company has enemy character.
5. Evasion of taxes
   Where the veil has been used for evasion of taxes and duties, the court upheld the piercing of the veil to look into the real transaction.
6. To protect labour welfare organizations
   Where the purpose of company formation was to avoid the welfare legislation, the court will lift the corporate veil. Where it was found that the sole purpose for the formation of new company was to use it as a device to reduce the amount to be paid by way of bonus to workman, the court held the piercing of the veil to look at the transaction.
7. Use of corporate veil for hiding criminal activities
   Where the defendant use the corporate structure as a device to conceal his criminal activities (evasion of customs and excise duties), the court could lift the corporate veil and treat the assets of the company as the realizable property of the shareholder.
8. To punish the contempt of the court.