Listing Of Corporate Veil

Listing Of Corporate Veil

LIFTING OF CORPORATE VEIL AND LIABILITY OF DIRECTORS INSOLVENCY & BANKRUPTCY CODE, 2016

Corporate Veil

The Corporate Veil Theory is a legal concept which separates the identity of the company from its members. Hence, the members are shielded from the liabilities arising out of the company’s actions.

Therefore, if the company incurs debts or contravenes any law, then the members are not liable for those errors and enjoy corporate insulation.

Origin

The legal fiction of “corporate veil” between the company and its owners/controllers was firmly created by House of Lords in Salomon v Salomon.

It held as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”

3. Thirdly, the accuracy of the tape recorded conversation is proved by eliminating the possibility of erasing the tape record.

A contemporaneous tape record of a relevant conversation is a relevant fact and is admissible under Section 8 of the Evidence Act. It is res gestae. It is also comparable to a photograph of a relevant incident. The tape recorded conversation is, therefore, a relevant fact and is admissible under Section 7 of the Evidence Act. Tape-recorded evidence is admissible provided that the originality and the authenticity of the tape are free from doubt.

B] (b) Section 48(1)(c)/44(1)(d) :

It uses the word "such person" wherein there seems no distinction between natural and legal person. Therefore, both directors and parent company can be brought in the ambit of the order passed under this section in case it is established that either of them have made benefits from such preferential transaction.

Directors are agents of the company to the extent they have been authorized to perform certain acts on behalf of the company. They owe no fiduciary or contractual duties or any duty of care to third parties who deal with the company and liability would arise only if they derive any personal benefit while purporting to act on behalf of the company. - Tristar Consultants vs. M/s. V Customer Services India Pvt. Ltd. & Anr.

In IDBI Bank Limited vs. Jaypee Infratech Limited, wherein the mortgage of land was in nature of asset stripping and entered into with the intent to defraud the creditors of the corporate debtor, it was declared as fraudulent, preferential and undervalued under S. 66, 43 and 45 was set aside by Allahabad NCLT as it was carried on during the period of two year preceding the commencement of insolvency.

Section 66-

1. Section 66(1) extends liability on "any person" who were knowingly party to such transaction, thereby bringing both directors and parent company under its ambit if it is proved before the adjudicating authority that either of them were knowingly party to such fraudulent/wrongful transaction. In case the same is proved, they may be called upon to make "such contribution" as the adjudicating authority deems fit.

2. Section 66 (2) unlike Section 48 and 66(1), specifies the extension of liability to the directors. The adjudicating authority may pass an order directing the director of the corporate debtor as the case may be to be liable for making such contributions to the assets of the corporate debtor as it may deem fit. Such extension of liability is subject to the fact that the director knew or ought to have known that there was no reasonable prospect of avoiding commencement of insolvency process and they failed to exercise due diligence in minimising the potential loss to the creditors.

3. (c) For the purpose of Section 66 (2), general presumption is in favour of the director i.e. it is presumed that they have exercised the due diligence as is reasonably expected out of a person carrying out the same function as are carried out by such director.