In legal terms, a Company is seen as a distinct legal entity separate from its members. This means that, under normal circumstances, the court does not delve into the identities of individual shareholders forming the Company. The protective barrier between the Company and its individual shareholders and directors is commonly known as the “veil of incorporation.”
Lifting the Corporate Veil
This legal concept refers to the scenario in which the owners of a corporation lose the limited liability protection provided by having a corporation. It occurs when the law is willing to scrutinize the reality behind the Company’s façade. In such instances, the personal assets of the shareholders/owners may be used to settle business debts and liabilities.
Various situations outlined in the Companies Act can lead to the lifting of the veil, as follows:
(a) Membership Falling Below Statutory Minimum (Section 33) If a Company’s membership falls below the statutory minimum for six months, a member becomes personally liable for the Company’s debts incurred during that period, provided they were aware of the reduced membership.
(b) Non-Publication of a Company’s Name (Section 109) Failure to adhere to the statutory requirement of displaying the Company’s name on its seal, letters, business documents, and negotiable instruments may result in personal liability for the Company’s officer. This non-compliance is considered lifting the veil of incorporation.
(c) Group Accounts (Section 150) A Company with subsidiaries must present statements on the state of affairs and profit or loss of both the Company and its subsidiaries during the general meeting.
(d) Investigation of Company’s Affairs (Section 167) An inspector appointed by the court has the power to investigate the affairs of a Company’s subsidiary or holding Company, considering them as one entity for the purpose of the investigation.
(e) Investigation of Company’s Membership (Section 173) The Registrar can appoint inspectors to investigate and report on the membership of any Company to determine the true persons financially interested in the Company.
(f) Takeover Bids (Section 210) When a scheme or contract involving the transfer of shares to another Company is approved, dissenting shareholders may seek a court order restraining the transferee Company. In certain situations, the court order may lift the veil of incorporation.
(g) Fraudulent Trading (Section 323) If, during the winding-up of a Company, it is found that the business was carried out with fraudulent intent, the court may hold individuals responsible for the Company’s debts without limitation of liability.
The outlined reasons provide a comprehensive overview of circumstances that may prompt the court to unveil the incorporation screen between the Company and its members.