Best Corporate and Incorporation Lawyers in Jabalpur. Connect and Consult the Top Corporate and Incorporation Advocates in Jabalpur!

The transparent veil of companies: Principle of Lifting the Corporate VeilINTRODUCTIONA company cannot act for itself without its constituent members acting on behalf of it. However, a company is considered a person in the eyes of law. It is not given the status of a real person but of a juristic person. The identity of a company is separate from its constituent members but is of a different nature. The relation between the identity of a company and the identities of its members, is the added protection which the former imparts to the latter. The company acts as a veil behind which the members of a company can hide their faces, this leads to the perpetuation of fraudulent and illegal activities by the members of a company under the name of a company, thereby firing while putting one’s gun on someone else’s shoulder. To prevent such undesirable situations, eventually, the Doctrine of Lifting the Corporate Veil was devised. This doctrine and its various facets are discussed below at length.  WHAT IS A ‘COMPANY’?Before discussing the principle of lifting the corporate veil, it is important for us to understand the concept of a company, as the application of this principle is exclusive to the corporate world. The term ‘company’ is derived from the Latin term ‘companis’. If we break this term into its constituents, we get ‘com’ meaning ‘together’ and ‘panis’ meaning ‘bread’. Hence, it was used to denote a number of persons who dine together. This being the approach in the ancient times, has now been rendered irrelevant with times advancing. The said definition held good when human prospects were limited to filling their bellies. In the modern times, ‘company’ is recognized as a group of people working collectively for the fulfilment of a commercial activity.STATUTORY DEFINITIONThe term ‘Company’ is defined under Section 2 (20) of The Companies Act, 2013, wherein it is defined as, a “company incorporated under this Act or under any previous company law.” This definition is not exhaustive, but it is deliberately given an open-ended language to ensure its inclusivity. A company has a personality of its own, notwithstanding the board of directors which manage any company. The feature of a company being a distinct legal entity on its own, separate from the identities of the members constituting it, was established by the Hon’ble Supreme Court of India in case of Rustom Cavasjee Cooper vs. Union of India.WHAT IS THE PRINCIPLE OF ‘LIFTING THE CORPORATE VEIL’?It is now established that a company has a distinct identity from its constituent members. Problems arise when this position of the company is misused, it is in such cases where the line between a company and its members, has to be blurred. It is logical to say that though a company has a separate legal identity, it cannot act on its own. There have to be certain human agencies performing the functions of a company. When such human agencies, while working under the name of a company, actuate fraudulent or illegal transactions, or activities outside the purview of the company’s prospects, the respective persons cannot seek exemption from legal action against them, in the garb of working under the image of a company.EXAMPLE OF ‘LIFTING THE CORPORATE VEIL’Suppose directors or any others in charge of the company, start committing frauds, illegal activities, or undertaking prospects outside the purview of the objective/articles of the company, the distinction between the identities of the members of a company and a company; is blurred and the principle of lifting the corporate veil is implemented. The people engaging in such activities are held liable in their respective personal capacities. The identity of a company is disregarded in such situations to find out the real culprit of any offence committed under the name of a company. ORIGIN OF THIS DOCTRINEThe origin of this doctrine is in England. The English Law recognised the legal personality of a company in 1867, but it was in 1897 that the same was firmly established in the case of Saloman vs. Saloman & Co. Ltd.•   In the said case, Salomon was a shoe manufacturer. His business was in running in profits wherein he enjoyed substantial surplus over liabilities. He constituted a company named Saloman & Co. Ltd for the purpose of taking over his business and carrying it on. •   The seven subscribers to the Memorandum were Saloman himself, his daughter, his wife and four sons and they were the only members of the company thus constituted. •   Saloman, along with two of his sons, constituted the Board of Directors of the company. The business was transferred to the company for £ 40000. As payment, Saloman kept 20000 shares, valuing £ 1 each and debentures worth £ 10,000. These debentures were a proof that the company owed Salomon £ 10000 and created a charge on the company's assets. •   A share each was given to all the remaining member of his family. The said company witnessed liquidation within a year. The company’s assets amounting to £ 6,000 were insufficient to pay off the debentures, as a result of which, the ordinary investors did not receive anything•   The liquidator insisted to get the debentures cancelled, for the reason that the company was merely an agent of Salomon. •   The unsecured creditors contended that solely because the company was incorporated under the Act, it cannot be denied that it had no individual existence, separate from Salmon’s identity, as Salmon being the sole person behind the veil of the company, he was the managing director, the other directors too were his sons and thus, were under his control.•   It was decided by the House of Lords that the company was merely one man show and its existence was contrary to the spirit of what a company is to have as per Company Laws. Thus, the colourable exercise of rights by Salomon, lead the House of Lords to devise the concept of the ‘Doctrine of Lifting the Corporate Veil’.POSITION IN INDIAN LAWA glaring majority of Indian company law has been borrowed from English law, it qualifies to be called a replica of English Law, in the context of Company Law. The Salomon's case which has been discussed above; has been considered an authority in India, since the advent of the Doctrine of Lifting Corporate Veil in India.The Hon’ble Supreme Court of India in Tata Engineering Locomotive Co. Ltd. v. State of Bihar and others, stated that "the corporation in law stands equal to a natural person and is a legal entity on its own. The identity of a corporation is entirely separate from that of its shareholders; similarly, the creditors have no claim to assert over the assets of a company.In LIC of India v. Escorts Ltd, Justice Chinnappa Reddy had emphasised on the corporate veil being lifted where the associated companies are inextricably intertwined. After the Bhopal Gas tragedy case, the implementation of the doctrine lifting of the corporate veil has been escalated. The Doctrine of Lifting the Corporate Veil is not mentioned expressly in the text of Indian Company Law, but could be inferred from a number of provisions thereof. The doctrine has now become of precedential value, after being stated in a number of decisions by numerous courts of law in India. WHEN CAN THE CORPORATE VEIL BE LIFTED? I.                 STATUTORY PROVISIONSThe Companies Act 1956, provides for the circumstances wherein the corporate veil will be lifted and the constituent members or directors will be accounted liable for certain transactions. 1) Reduction of Membership (Section 45)ReferralSection 45 of the Act holds the members of a company individually liable for the payment of debts of the company if the number of members of the company is decreased below the statutory requirements i.e. two members for a private company and seven members for a public company. It is to be noted that section 45 does not destroy the separate identity of the company, it still remains a distinct legal entity. However, this provision applies only to those members who remain as members of the company continuously for a period more than 6 months after the membership falls below the defined statutory limits. 2) Failure to Deliver Share Certificate (Section 113)Subsection (2) of Section 113 states that if a company fails to deliver the share/debenture certificate within a period of 3 months from allotment and/or within 2 months of application for transfer, the concerned company as well as every officer of such company, who is at fault, shall be liable for punishment with fine up to Rs. 5000 per day till such fault continues.3) Holding and Subsidiary Company (Section 212)Section 212 of the Companies Act, 1956, states that in relation to financial disclosure; a true and fair view of the overall status of the group is to be put forth. Hence, the parent company should present its own individual financial statement and financial statements of its subsidiaries as well. It is to prevent the company from presenting a misleading picture depicting the financial statements of the company alone. The Companies (Amendment) Act, 2013The amendment to The Companies Act, 2013, too, brought in a number of provisions wherein the Doctrine of Lifting the Corporate Veil could be applied. 1). Misrepresentation in prospectus (Section 34 and 35)When there is misrepresentation in a prospectus, every promoter, director and any other such person who authorizes the issuance of a prospectus with misrepresentation, incurs a liability towards the ones who subscribed for shares, believing on statements which turned out to be untrue. 2). Failure to return application money (Section 39)In the case of issuance of shares by a company, if minimum subscription as mentioned in the prospectus has not been received, then the directors shall be personally liable to return the money with requisite interest if the application money is not repaid within a prescribed time period. 3). Fraudulent Conduct (Section 339)In the case of winding-up of a company, when it appears that any business of the company has been done with an intent to defraud the creditors of the company or any other person, or for any other fraudulent objective, persons who are knowingly the parties to such conduct of business activities may, if the Tribunal thinks it just to do so, be made personally liable, in their respective individual capabilities, devoid of any limitation as to any liability of the company.II)JUDICIAL INTERPRETATION: Under this subhead, the corporate veil is lifted by the courts in pursuance of 3 objectives. 1)Determination of characterThe corporate veil has been lifted by courts of law in the past to decipher the enemy character of a company. A company acquires an enemy character if it is controlled by enemy aliens. Thus, courts will lift the veil to find out the actual persons conducting the affairs of a company.  2)Determination of Residence for tax purposeCourts hold the authority to disregard corporate entity if it is used to evade tax obligations. The is the case landmark example of this situation is seen in the case of Dinshaw Maneckjee Petit, where the assessee was a rich man enjoying high dividend and interest income. He created four private companies and agreed with each of them to hold a share of investment as an agent for it. The income so received was credited in the bank accounts of the company but the company handed over the money to the bank as a pretended loan, to evade tax liability.3)FraudThe corporate existence of a company cannot be permitted to perpetrate fraud. In cases where the corporate existence is used for fraudulent purposes, to defraud creditors or to avoid legal liabilities, the courts shall lift the corporate veil to determine the realities behind it and strike down such transactions.  NEED FOR THE DOCTRINE OF ‘LIFTING THE CORPORATE VEIL’The doctrine of lifting the corporate veil becomes inevitable when dishonest people start using the corporate veil as aid or instrument to conceal illegalities and frauds in a company's activities. Thus, it then becomes compulsory for the legislature and courts to evolve by disregarding the conventional distinction between the identity of a company and its constituent members and pinpoint people who cause such illegalities behind the veil of a company.THE IDEOLOGY BEHIND THIS DOCTRINE The concept of the corporate veil is a building block of Company Law. This principle extends protection to those who exist and function from behind the veil of a company. Pickering stated that there exist two main reasons as to why there are exceptions to the separate identity doctrine.•   Firstly, he said that a company cannot be treated as an ordinary independent person in all circumstances, e.g. a company by itself cannot have a mens rea and therefore is not capable of committing any crime.•   Secondly, if there would have been no exceptions to the separate entity rule, the board of directors and members would be allowed to hide behind the shield of the company’s identity, which could potentially lead to perversions of justice. Thus, the doctrine of lifting the corporate veil is established and actuated in times of need as a flexible tool to ensure justice.CONCLUSIONThe doctrine is a potent weapon at the disposal of the Judiciary to pinpoint the defaulters seeking refuge behind the veil of a company’s identity. Defaulting members of a company do not anymore have the option of blaming the company for fraudulent and illegal transactions carried out by them. Legislatures of various countries have formulated punishments for such fraudulent and illegal activities, further helping in increasing the efficacy of this doctrine. It is thus safe to say that this doctrine has come to the rescue of transparency in businesses and has upscaled work ethics among corporates.

Chapter 1 - Introduction Lesson 1- Finance and it’s role. Business is all about money and money in business terms are euphemistically called as Finance which is nothing but better and sophisticated version of money. Actually, Finance has a bigger and more complex meaning and role than money. Money is just a nominal value or a unit of transaction whereas Finance is money plus management of money. The moment management gets associated with money it means the complete detail of money involved in a transaction, its history, present and future interpreted in multiple ways, ratios and features. Anh business person must have, to a certain degree, the understanding of finance as it helps in making big and small business decisions. Regardless of which department a person belongs to, he or she need to have a fair knowledge and understanding of some important concepts of Finance. And this hold true for lawyers as well, especially the lawyers who are employed with corporates as Inhouse Legal Counsels and Contract Managers.   Lesson 2 - Importance of knowledge of finance for Lawyers, Inhouse Counsels and Contract Managers Lawyers in corporate world, especially the Inhouse Counsels and Contract Mangers play a role bigger than what a normal advocate would play. These people have to wear multiple hat on top of the Lawyer’s hat. It is pertinent for a Corporate Counsel to know all about the applicable laws in his or her area of expertise but at the same time the moment one joins a company or an organization as a counsel, he or she has to know and understand the nuances of business by walking few steps beyond the legal world. The usual expectation of the business leaders and other team members from a counsel or a contract manager is that they would understand the underlying risk and help in building the revenue from every business transaction whether within the organization or outside. For a contractual transaction, a counsel or a contract manager is not only supposed to point the legal risk involved in the contract but also to highlight and provide solution, if any, on quantum of money involved, revenue management, money at risk management, service credit implication, invoice and credit cycle etc. It has been observed that a lawyer with finance understanding is always sought after and proves to be a great asset to an organization.   Lesson 3- High level view of financial concepts – Balance Sheet and Profit and Loss Account BALANCE SHEET       The balance sheet tells us what the company owns (its assets), what it owes (its liabilities) and the value of the business to its stockholders (the shareholders' equity) as of a specific date. It's called a balance sheet because the two sides balance out. It can be elaborated like this:  a company has to pay for all the things it has (assets) by either borrowing money (liabilities) or getting it from shareholders (shareholders' equity). Balance sheet is a snapshot of a financial condition of a company. It tells the exact financial conditions at a particular point of time or date as mentioned on the balance sheet. The three major items on the balance sheet are Assets, Liabilities and Shareholders’ equity. The normal formula to balance out the items in a balance sheet is as follow; Total Assets = Total Liabilities + Shareholders’ Equity   Assets - Assets are economic resources that are expected to produce economic benefits for their owner   Liabilities _- Liabilities are obligations the company has to outside parties. Liabilities represent others' rights to the company's money or services. Examples include bank loans, debts to suppliers and debts to employees. Shareholders’ Equity - Shareholders' equity is the value of a business to its owners after all of its obligations have been met. It generally reflects the amount of capital the owners have invested, plus any profits generated that were subsequently reinvested in the company.   PROFIT AND LOSS ACCOUNT (INCOME STATEMENT) An income statement or profit and loss statement is a financial statement that reports a company's financial performance over a specific accounting period, usually a financial year. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. It also shows the net profit or loss incurred over a specific accounting period. Unlike the balance sheet, which covers one moment in time, the income statement provides performance information about a time period. The income statement is divided into two parts: operating and non-operating. The operating portion of the income statement discloses information about revenues and expenses that are a direct result of regular business operations. For example, if a business makes and sells aircraft, it should make money through the sale and/or production of aircraft. The non-operating section discloses revenue and expense information about activities that are not directly tied to a company's regular operations. Continuing with the same example, if the aircraft company investment securities, the gain from the sale is listed in the non-operating items section.   Chapter 2- Balance Sheet- Important Financial concepts Lesson 1 – Asset Assets are sometimes defined as resources or things of value that are owned by a company. Some examples of assets which are obvious and will be reported on a company's balance sheet include: cash, accounts receivable, inventory, investments, land, buildings, and equipment. An asset is an item that the company owns, with the expectation that it will yield future financial benefit. This benefit may be achieved through enhanced purchasing power (i.e., decreased expenses), revenue generation or cash receipts. There are broadly two types of Assets namely, Current Assets and Long Terms Assets. Current Assets - Current assets are those assets that you expect to either convert to cash or use within one year, or one operating cycle?whichever is longer. Examples of current assets include cash, accounts receivable and inventory (e.g., raw materials, work in progress, finished goods). Long Term Assets - Long-term assets are those that you use in the operation of your company and that will continue to offer benefit beyond a single year or operating cycle. Examples of long-term assets include buildings, machinery and equipment (also known as fixed or capital assets). Many long-term assets are amortized as they are used.   Lesson 2- Liability The opposite of assets are liabilities. Liabilities are amounts that the company owes and will have to settle in the future. Like Asset there are two kinds of liabilities namely Current Liabilities and Long Terms Liabilities. Current Liabilities - Current liabilities are those that are expected to be settled within one year, or one operating cycle?whichever is longer. Examples of current liabilities include accounts payable, demand loans and current portions of long-term liabilities.   Long Term Liabilities - Long-term liabilities include ongoing commitments such as loans, mortgages, debentures, finance leases and other long-term financing arrangements.   Lesson 3 – Shareholders’ equity Shareholder's Equity consists of two main things: The initial capitalization of the company (when the shares were first sold, plus extra share issues) and retained earnings, which is the amount of money the company has made over and above capitalization, which has not been re-distributed back to shareholders.   Shareholder's Equity is neither an asset nor a liability: it is used to purchase assets and to reduce liabilities, and is simply a measure of assets minus liabilities that is necessary to make the accounting equation balance. Chapter 3- Profit and Loss Account – Important Financial Concepts Lesson 1- Revenue (Top line) Revenue for a company is the total amount of money received by the company for goods sold or services provided during a certain period of time usually a year. It is the amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is also called as the "top line" or "gross income" figure from which costs are subtracted to determine net income Lesson 2- Expenses An expense is defined as an outflow of money or assets to another individual or company as payment for an item or service. It is the money spent or cost incurred in an organization's efforts to generate revenue, representing the cost of doing business. Expenses may be in the form of actual cash payments (such as wages and salaries), a computed expired portion (depreciation) of an asset, or an amount taken out of earnings (such as bad debts).   Lesson 3- Gross Profit Gross profit is a company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit is important because it reflects the core profitability of a company before overhead costs, and it illustrates the financial success of a product or service.   Lesson 4- Operating Profit The difference between revenues and costs generated by ordinary operations, before deducting interest, taxes, investment gains/losses and various non-recurring items. Operating profit is the profit earned from a firm's normal core business operations. This value does not include any profit earned from the firm's investments, such as earnings from firms in which the company has partial interest, and the before the deductions of applicable interest and taxes owed.   Lesson 5-  Profit before Tax Profit before tax (PBT) is a profitability measure that looks at a company's profits before the company has to pay corporate income tax by deducting all expenses from revenue including interest expenses and operating expenses except for income tax.   Lesson 6- Profit After Tax (PAT) The net amount earned by a business after all taxation related expenses have been deducted. The profit after tax is often a better assessment of what a business is really earning and hence can use in its operations than its total revenues. It is also called as Net Income After Tax or “Bottom Line”. Lesson 7- Gross Margin Gross margin is a company's total sales revenue minus its cost of goods sold (COGS), divided by total sales revenue, expressed as a percentage.     Chapter 4 – Financial concepts used in Service Contracts -I Lesson 1 – Total Contract Value Total contract value (TCV) represents the full value of a customer contract. It includes both recurring and one-time payments. It is the maximum amount that can be generated from a contract in a normal business scenario. Lesson 2 – Client Budget Client Budget is not an important financial term from Contracts point of view but is important from sales point of view as the knowledge of client budget helps in packaging the solution and offerings in a way that appears lucrative to the Client. Knowledge of client budget helps in creating the contract winning proposal. Lesson 3- Committed Revenue Usually it is Committed Monthly Recurring Revenue (CMRR). Committed Monthly Recurring Revenue is the value of recurring portion of subscription revenue. For term-based subscription businesses, this is the portion of subscription revenue that is recognized each month. In layman’s language, it is the minimum amount that a service provider would get from the Customer each month. Lesson 4- Cost In business, cost is usually a monetary valuation of (1) effort, (2) material, (3) resources, (4) time and utilities consumed, (5) risks incurred, and (6) opportunity forgone in production and delivery of a good or service. Lesson 5- Cash Flow In accounting, cash flow is the difference in amount of cash available at the beginning of a period (opening balance) and the amount at the end of that period (closing balance). It is called positive if the closing balance is higher than the opening balance, otherwise called negative.   Lesson 7- Margin (Engagement/ Realised) Margin is the difference between a product or service's selling price and its cost of production or to the ratio between a company's revenues and expenses. For a service contract margin is the amount of revenue that the service would generate minus the cost incurred in delivering the services. There are two kinds of margin for a service contract and which defines the financial success of that contract. Engagement Margin - It is the theoretical margin that one expects while starting a service contract. Realized Margin- Is the actual margin that one realizes at the end of service contract or the financial year. Historically it has been observed that Realized margin is always less than the engagement margin for Service Contracts due to cost escalations.   Lesson 7 – Net Present value (NPV) Net present value is a calculation that compares the amount invested today to the present value of the future cash receipts from the investment. In other words, the amount invested is compared to the future cash amounts after they are discounted by a specified rate of return. For a service contract, the NPV is the present value of the all future revenues that can be generated out of the contract. There is a complex formula to calculate the NPV. Lesson 8 – Profit Dilution or Leakage Profit leakage is a loss of profits due to the difference between actual prices and prices on invoices. Businesses set target prices and figure their financial projections based on those prices. But due to increase in cost or some exceptional events like change in tax the actual cost may go up and thus reduce the profit. Lesson 9- Deferred Expenses The term "deferred expense" is used to describe a payment that has been made, but it won't be reported as an expense until a future accounting period. This method of accounting helps in making the current cash flow positive and reflects more profit for the current financial year but reduces the profit margin for future. Lesson 10- Credit Period The credit period is the number of days that a customer is allowed to wait before paying an invoice. The concept is important because it indicates the amount of working capital that a business is willing to invest in its accounts receivable in order to generate sales. Lesson 11-  Invoice and Invoice date An invoice is a commercial document that itemizes a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal, and provide information on the available methods of payment. An invoice is also known as a bill or sales invoice.   What is important here is that in a service contract the credit period counting can start from either "date of issue" of invoice or "date of receipt" of invoice as per the agreed terms. Lesson 12- Credit Rating Credit rating is an analysis of the credit risks associated with a financial instrument or a financial entity. It is a rating given to a particular entity based on the credentials and the extent to which the financial statements of the entity are sound, in terms of borrowing and lending that has been done in the past. Why is it important for a service contract? It is important since a service provider gives a credit to a customer in the sense that money is paid to the service provider after few days, usually a month (credit period).   Chapter 5 – Financial concepts used in Service Contracts -II Lesson 1- Internal Rate of Return (IRR) Internal rate of return (IRR) is the interest rate at which the net present value of all the cash flows (both positive and negative) from a project or investment equal zero. Internal rate of return is used to evaluate the attractiveness of a project or investment. Lesson 2- First Financial Year Revenue (FFYR) First Financial Year Revenue is the total amount of revenue that will be generated in the current financial year. If the FFYR is more in percentage terms compared to the total revenue then it means that more money is getting realized in the project soon. Lesson 3- Cost of Living Adjustment (COLA). The cost of living adjustment is an increase in income that keeps up with the cost of living. It's often applied to wages, salaries and benefits. In long term service contracts running for more than say 5 years or so the COLA is applied to mitigate the inflation risk associated with the project. Lesson 4- Forex Risk Foreign exchange risk (also known as FX risk, exchange rate risk or currency risk) is a financial risk that exists when a financial transaction is denominated in a currency other than that of the base currency of the company.   When two or more currencies are involved in a service contract say the billing is done in USD and booking in some other local currency then in such cases there will be a risk associated with USD versus local currency rate.   Lesson 5- Pricing (Fixed and Variable) Pricing for a service contract has two denominations, fixed or variable. When it is fixed it means that for a contract the total amount to be paid by the customer for the services are already agreed and within that limit the agreed services or goods will be delivered. When it is variable it means that the total amount to be paid by the customer is dependent on what service or goods are consumed by the customer. In usual parlance, the variable pricing is also known as “Time and Material” pricing.   Lesson 6- Performance Bank Guarantee A performance bank guarantee provides a secure promise of compensation of a set amount in the event that a seller does not meet delivery terms or other provisions in the contract. The purpose of this sort of guarantee is to solidify the contractual connection between a seller and buyer. Lesson 7- Capex Capital expenditure or capital expense ("CAPEX") is an expense where the benefit continues over a long period, rather than being exhausted in a short period. Such expenditure is of a non-recurring nature and results in acquisition of permanent assets. It is thus distinct from a recurring expense. Lesson 8 – Opex An operating expense, operating expenditure, operational expense, operational expenditure (OPEX) is an ongoing cost for running a product, business, or system. Lesson 9- Service Credit Service credits (or service level credits) are a mechanism by which amounts are deducted from the amounts to be paid under the contract to the supplier if actual supplier performance fails to meet the performance standards set in the service levels Lesson 10– Earn back Earn backs are the received amounts from the already paid penalty or service credit, which is earned back by a service provider after delivering or maintaining the service level at more than expected levels.