When are directors responsible for acts of Company?
Lifting of Corporate Veil
A company is a separate legal entity and is different from its directors and shareholders. A company is an artificial person and cannot run by itself. It needs humans for it. There are certain cases when inspite of being a separate legal entity, the courts holds directors responsible for the acts of Company
Many a times directors or shareholders take undue advantage of this distinction and commit frauds and illegal activities. They do it in the name of the company since it has a separate legal entity.
But in such exceptional conditions the Court or Law lifts the corporate veil. It considers both the company and its directors and shareholders as one single entity.
According to the general conception a company is a separate person and has a separate legal status. It is different from its members and enjoys this status.
However, such attribute will not be followed if the members or directors of a company are taking undue advantage of it.
Then the Courts will pierce or lift the corporate veil and reveal the true identity of the directors and its members.
The rationale behind the lifting is that law will not allow the directors or members to misuse the concept of separate legal entity and limited liability.
When is the veil lifted or When are directors responsible for acts of Company?
The veil is lifted only in exceptional cases. They are:
When it comes to frauds, courts are prepared to lift the corporate veil. Since late it has become a habit wherein people do registration of a private limited company and perform fraudulent activities in its name. They think that since they are different from the company, they will not be touched. Whereas thats just the opposite. In cases of frauds the corporate veil is pierced and all the defaulters are considered as one with the company.
Related party transactions
If a company performs frequent high-value transactions with related parties, that is, entities on which directors or key managerial personnel have substantial influence then there is a chance of fraud and tax evasion. Such matters if not disclosed properly lead to piercing of corporate veil.
If directors or members of a company perform illegal activities that are against national security then corporate veil is lifted.
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