As soon as a Company is incorporated, it becomes a separate legal entity in the eyes of the law, which can be sued in its own name and also sue someone in its own name. Cases in which the separate legal entity is not respected refer to the lifting of the corporate veil.
The principle of separate entity is often seen as a curtain between the company and its members. Therefore, for the purpose of protection of such members from the liability of Company, the veil is impassable like an iron curtain. Since an artificial person is incapable of doing anything illegal. We must therefore identify the person who is really guilty. This is called lifting the corporate veil.
Circumstances under which the Court may lift the Corporate Veil
Determination of character
Company is not a natural person with a mind but it may assume an enemy character when person in effective control of its affairs are residents in an enemy country or when the residents are acting under the direction and control of enemies. The leading case of this was Daimler Co. Ltd. Vs Continental Tyre & Rubber Co. Ltd, 1916. In this case, there was a Company named C which was incorporated in England. All the directors of Company C were the residents of Germany. This Company had the work of selling the motor tyre manufactured in Germany by a German Company. This German Company purchased the shares of Company C in bulk and. During First World War England vs Germany in 1914. Company C commenced an action to recover a debt. House of Lords held that the Company C was an enemy Company and was debarred (ban) from maintaining the action.
Where Company is a sham (false)
The Court will lift the veil where the Company is incorporated for some illegal or improper purpose. For example: – A man borrowed money 2.5 Lacs from the Company named Z. That man showed Company Z that he has invested money in three Companies (M, N & P). Later on, it was confirmed Z was the sole owner of all three Companies (M, N & P). The lending Company Z was permitted to attach the assets of all the three Companies (M, N & P) since they were created to Hood Wink (to cover the eyes of someone).
Prevention of Fraud or Improper Conduct
When it appears that the company was incorporated to avoid a contractual and statutory obligation, the court may ignore the separate entity of the company. The leading case of this was Gilford Motor Company Ltd. Vs Horne, 1933. In this case, there was a person named Horne who signed up an agreement with his employer that after the termination of the employment, he would not solicit (try to obtain) his employer’s customers for a certain period of time. But soon after the termination, he makes a company and sent out circulars to his former employer customers. An injunction (command) was granted against Horne by the Court.