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Business Environment and Law-Nature Of Company And Formation

Lifting Of The Corporate Veil: - Nature Of Company And Formation

   Posted On :  08.05.2018 06:36 am

In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and are responsible for the perpetration of fraud.

Lifting Of The Corporate Veil:
 
 
In case of a dishonest and fraudulent use of the facility of incorporation, the law lifts the corporate veil and identifies the persons (members) who are behind the scene and are responsible for the perpetration of fraud. The concept of lifting the corporate veil is a changing concept. The veil of corporate personality, even though not lifted sometimes, is becoming more and more transparent in modern jurisprudence.
 
The following are some such cases:
 
 
            For the protection of revenue.
 
            Where the company is acting as agent of the shareholders,
 
            Where a company has been formed by certain persons to avoid their own valid contractual obligation,

             Where a company has been formed for some fraudulent purpose or is a “sham”,
 
            Where a company formed is against public interest or public policy,
 
 
            Where the holding company holds 100 per cent shares in a subsidiary company and the latter is created only for purposes of holding companyWhere the number of members falls below statutory minimum (Section 45)
 
            Where prospectus includes a fraudulent misrepresentation.
 
            Where a negotiable instrument is signed by an officer of a company [Section 147 (4)(c)].
 
            Holding and Subsidiary Companies (Secs. 212 – 213).
 
            Investigation into related companies (Section 239).
 
            For investigation of ownership of a company. (Sec 247).
 
            Where in the course of winding of a company (Section 542).
 
            Where breach of economic offence is involved.
 
            Where company is used as medium to avoid welfare legislation.
 
            Where device of incorporation is used for some illegal or improper purpose.
 
            To Punish for contempt of Court
 
            For determination of technical competence of company.
 
            Where company is a mere sham or cloak.
 
 

Illegal Association: 


(Section 11) No company, association or partnership consisting of more than 10 persons for the purpose of carrying on the business of banking and more than 20 persons for the purpose of carrying on any other business can be formed, unless it is registered under the Companies Act or is formed in pursuance of some other Indian Law. Thus, if such an association is formed and not registered under the Companies Act, it will be regarded as an ‘Illegal association’ although none of the objects for which it may have been formed is illegal. However, Section 11 does not apply in the following cases: Stock Exchange, Association ‘Not for Profit-making’, Joint Hindu Family.
 

Effects of an Illegal Association: 


Following are the effects of an illegal association: 

1. Every member is personally liable for all liabilities incurred in the business.
2. Members are punishable with fine which may extend up to Rs.10,000.
3. Such an association cannot enter into any contract.
4. Such an association cannot sue any of its members or any outsider, not even if the association is subsequently registered as a company.
5. It cannot be sued by a member or an outsider for any debts due to it because it cannot contract any debt.
6. It cannot be wound up even under the provisions relating to winding up of un-registered companies.
7. While an unregistered firm can be dissolved, an illegal association cannot be dissolved because law does not recognize its very existence.
8. The illegality of an illegal association cannot be cured by subsequent reduction in the number of its members.
9. The profits made by an illegal association are, however, liable to assessment to income-tax.

 

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