Legal Aspects of Business

I. Contract Laws
Types of Contracts
1. Specified Contracts

2. Based on Formation:
a) Express Contract - This means that if a proposal or a promise is expressed by listing the
terms in words – in writing or orally is said to be an Express Contract as long as it gets
acceptance from the other party.
b) Implied Contract - A contract in which the terms of the agreement are not expressed in
written or oral form is an implied contract.
c) Quasi Contract - A quasi-contract is not agreed upon by the two parties but it comes into
existence by a court order. It is thus enforced by the law which also creates it. Most of
the times the quasi-contract is created to stop any of the parties from taking unfair
advantage of the other.

3. Based on Validity:
a) Valid - A valid contract is a legally binding agreement that satisfies all the essential
elements of a contract. These essential elements include
an offer, acceptance, consideration, free consent, capacity, and a lawful object. A
contract that satisfies these elements is enforceable by law, and both parties must
fulfill their obligations under the contract.
b) Void - A void agreement is a contract that has no legal effect from the beginning. It is
null and void ab initio, which means it is not enforceable by law, and the parties
cannot be compelled to fulfil their obligations under the contract. Such contracts are
deemed void because they lack one or more essential elements required for a
contract to be valid.
▪ Coercion: "Coercion" is the committing, or threatening to commit, any act
forbidden by the Indian Penal Code (45 of 1860) or the unlawful detaining, or
threatening to detain, any property, to the prejudice of any person whatever,
with the intention of causing any person to enter into an agreement.
▪ Opposed to Public Policy: Public policy is not defined - none can do lawfully that
which has a tendency tone injurious to public or against public good which in
effect can be considered as policy of the law or policy in relation to law.
• Examples
1. Trading with alien enemy
2. Stifling prosecution- not to prosecute or withdraw pending prosecution
3. Maintenance and Champerty
Maintenance- give assistance (financial or otherwise) to enable a person to bring
or defend a legal proceeding, especially when the person giving the assistance
has no legal interest of his own in the subject matter.
 Champerty- one assists the other on an action for recovering money or property
and to share the proceeds not necessarily void if the assistance is in making a
reasonable claim and have a fair share of the proceeds or profit.
4. Transfer of public office and title [for monetary consideration]
5. Agreement to procure votes [for monetary consideration]
c) Voidable - A voidable agreement is a contract that is enforceable by law until one of
the parties decides to void the contract due to some defect or lack of free consent.
Such contracts are valid unless and until one of the parties decides to avoid them.
▪ Undue Influence: The recognition of abuse of affections or emotional duress as
effective defences is significant primarily for its willingness to acknowledge the
affectivity of relationships as a proper object of legal attention within the law of
contracts.
▪ Fraud: “Fraud” means and includes any of the following acts committed by a
party to a contract, or with his connivance, or by his agent, with intent to deceive
another party thereto of his agent, or to induce him to enter the contract: —
(1) the suggestion, as a fact, of that which is not true, by one who does not
believe it to be true.
(2) the active concealment of a fact by one having knowledge or belief of the fact;
(3) a promise made without any intention of performing it;
(4) any other act fitted to deceive.
(5) any such act or omission as the law specially declares to be fraudulent.
▪ Misinterpretation: “Misrepresentation” means and includes—
(1) the positive assertion, in a manner not warranted by the information of the
person making it, of that which is not true, though he believes it to be true.
(2) any breach of duty which, without an intent to deceive, gains an advantage to
the person committing it, or anyone claiming under him; by misleading another
to his prejudice, or to the prejudice of anyone claiming under him.
(3) causing, however innocently, a party to an agreement, to make a mistake as to
the substance of the thing which is the subject of the agreement.
d) Illegal - The term illegal agreement refers to any agreement that violates existing
laws in a particular field and is criminal. In addition to agreements that are illegal,
those that are immoral and contrary to public policy also fall under this heading.

Elements and Formation of a Contract

• Offer + consensus ad idem + Acceptance = Agreement
Formation of Contracts –
1) Offer:
❖ Offer must be made with an intention to create legal relations (not social agreement)
❖ It must be something capable of being accepted.
❖ The terms of the offer must be definite, unambiguous, and certain.
❖ Offer must be expressly communicated for the other party to know and accept.
❖ Offer cannot be such that non-compliance of the statement / terms of offer would
amount to acceptance.

Types of Offers:
1) Express Offer: An "express offer" is one that is made using words, whether they be
spoken or written. This type of offer involves making a proposal via mail, phone, or
the internet. It becomes necessary to use language and words. The offeror expressly
makes the offer and communicates it to the offeree.
2) Implied Offer: Second type of offer defined by Section 9 of ICA, when the
communication is not through words and it becomes part of the conduct, then it can
be termed as an ‘Implied Offer’. An offer and its acceptance need not always be
formal, offer and acceptance can also be spelt out from the conduct of the parties
which covers not only their acts but also the omissions.
To give validity to such kinds of offers, the courts rely on the maxim “consensus ad
idem” which means “meeting of the minds”. It refers to the situation where there is a
common understanding in the formation of the contract.
3) Invitation to Offer: When a person expresses something to another person, to invite
him to make an offer, it is known as invitation to offer.
4) General or Specific Offer: A specific offer refers to an offer made to a specific
individual or group of individuals. It can only be accepted by the individual or group
of individuals to whom it is directed.
When an offer is made to the public, it is called a general offer and can be taken up
by any person who wishes to fulfil the terms of the offer. When an offer is accepted
by the individual to whom it is directed, the offeror and the offeree enter a contract.

2) Acceptance:
❖ Willingness shown by a possible acceptor.
❖ Willingness to be bound by the terms & conditions of the Offeror.
❖ Mirror image
❖ Intention to create relation.

Consideration:
A valuable consideration, in the sense of the law, may consist either in some right, interest,
profit or benefit accruing to the one party, or some forbearance, detriment, loss or
responsibility given, suffered, or undertaken by the other.
• An agreement without consideration is void.
• It must be an act of abstinence, forbearance or return of promise.
• It must be lawful.
• May be present, past, or future.
• Need not be adequate.
• Must be real not vague, indefinite, or illusory.
• Must not be something which the offeree is already bound to do.
• Must not be illegal- immoral opposed to public policy.

Discharge and Breach of Contracts

1) By Performance: Discharge by performance takes place when the parties to the
contract fulfil their obligations arising under the contract within the time and in the
manner prescribed. In such a case, the parties are discharged, and the contract
comes to an end.
2) By Agreement or Consent: As it is the agreement of the parties which binds them, so
by their further agreement or consent the contract may be terminated.
3) By Impossibility of Performance:
1. Destruction of subject-matter of contract.
2. Non-existence or non-occurrence of a particular state of things.
3. Death or incapacity for personal service.
4. Change of law or stepping in of a person with statutory authority.
5. Outbreak of war.
4) By Lapse of Time: A contract should be performed within a specified period, called
period of limitation. If it is not performed, and if no action is taken by the promisee
within the period of limitation. He is deprived of his remedy at law.
5) By Operation of Law:
a. By death (in the case of contracts for personal service).
b. By insolvency.
c. By unauthorised alteration of the terms of a written agreement.
d. By rights and liabilities becoming vested in the same person.
6) By Breach of Contract: Breach of contract means a braking of the obligation which a
contract imposes. It occurs when a party to the contract without lawful excuse does
not fulfil his contractual obligation or by his own act makes it impossible that he
should perform his obligation under it.
a) Actual Breach: Actual breach of contract occurs, when at the time when the
performance is due, one party fails or refuses to perform his obligation under the
contract. It also occurs when during the performance of the contract, one party
fails or refuses to perform his obligation under the contract.
b) Anticipatory Breach: It occurs when a party to an executory contract declares his
intention of not performing the contract before the performance is due.
Remedies:
• Rescind and refuse to perform
• Sue for Damages- liquidated /unliquidated (ordinary/general,
special, exemplary, or punitive and nominal)
• Sue for injunction
• Sue for specific performance
Specific Contracts
1) Agency:
a. An ‘agent’ is a person employed to do any act for another, or to represent
another in dealings with third person.
b. The person for whom such act is done, or who is so represented, is called the
‘principal’.
• Legal agreements between companies and agencies that outline the rights and
responsibilities of each party and other details of their partnership.
• Through this legal relationship between two people one person acts on behalf of the
other.
• The principal delegates his or her authority to the agent to act on behalf of the principal.
The actions and duties of both parties are governed by the terms of the contract.
Rights of an Agent:

• Right to remuneration
• Rights to lien
• Right of indemnification / compensation for lawful acts
• Right to be indemnified / compensated against consequences of acts done in good faith
• Non- liability of an employer of agent to do a criminal act
• Compensation to agent for injury caused by principal's neglect
Duties of an Agent:

• Conducting business according to principal's directions):

• Working with skill and diligence
• Rendering the proper accounts
• Communicating with the principal in cases of difficulty
• Repudiation of the transaction by the principal
• Not to deal with anyone without the knowledge of the principal
• Agent's duty to pay sum received on Principal’s behalf.

2) Indemnity:
A contract by which one party promises to save the other from loss caused to him by the
conduct of the promisor himself, or by the conduct of any other person, is called a “contract
of indemnity”.

• It is made to protect the promisee from unanticipated losses.

• It could either be implemented by way of a clause in a contract or by having a
separate indemnity contract.
• There are two parties involved in the Contract of Indemnity. The two parties are:
▪ Indemnifier: Someone who protects against or compensates for the loss of the
damage received.
 ▪ Indemnified/Indemnity-holder: The other party who is compensated against the
loss suffered.
❖ Purpose of Indemnity clause / contract:

• To shift or allocate the risk, or cost from one party to another.

• More precisely it can be said business transaction between the two parties by
obligating one party to pay the expenses incurred by the other arty under certain
circumstances.
• The real significance of an indemnity clause is to protect the indemnified party
against the third-party lawsuits.
❖ Actions of a party that can be insured by way of indemnity clause:

• All lawsuits, actions or proceedings, demands, damages and liabilities.

• All claims, liabilities, losses, expenses and damages arising from a contract.
• Loss, damage, injury or accidental death from any cause to property or person
occasioned or contributed to any of your acts, omissions, neglect or breach or
default.

3) Bailment:
• A ‘bailment’ is the delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or otherwise
disposed of according to the directions of the person delivering them.
• The person delivering the goods is called the ‘bailor’. The person to whom they are
delivered is called the ‘bailee’.
• Bailment involves the transfer of the possession of the good, not the ownership.
• Possession refers to exercising control over the good and excluding any other person to
do the same.

4) Guarantee:
• A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability,
of a third person in case of his default.
• The person who gives the guarantee is called the ‘surety’;
• the person in respect of whose default the guarantee is given is called the ‘principal
debtor’, and the person to whom the guarantee is given is called the ‘creditor.’
• Primary contract between the creditor and the principal debtor leads to a secondary
Contract of Guarantee
• Principal Debtor – The one who borrows or is liable to pay and on whose default the
guarantee is given
• Creditor – The party who has given something of value to borrow and stands to receive
the payment for such a thing and to whom the guarantee is given
• Surety/Guarantor – The person who gives the guarantee to pay in case of default of the
principal debtor
• Contract of Guarantee is made with consent of all three parties involved
 5) Sale of Goods:
• Contract of the sale is an agreement between the buyer and the seller intending to
exchange property.
• The seller transfers or agrees to transfer the property in goods to a buyer for a price
(transfer of right)

II. Corporate Forms

Types of Business Entities
1) Sole Proprietorship: Most small businesses start out as sole proprietorships. The sole
proprietorship is a form of business that is owned, managed, and controlled by an
individual. He has day-to-day responsibility for running the business. He has to
arrange capital for the business, and he alone is responsible for its management. He
is therefore, entitled to the profits and must bear the loss of business. Sole
proprietorships own all the assets of the business. He also assumes complete
responsibility for any of its liabilities or debts. In the eyes of the law and the public,
the sole proprietor and the business are one and the same.

It is the simplest and most easily formed business organization. This is because not
much legal formality is required to establish it. For instance to start a factory, the
permission of the local authorities is sufficient. Similarly to start a restaurant, it is
only necessary to get the permission of local health authorities. Or again, to run a
grocery store, the proprietor has only to follow the rules laid down by local
administration.
➢ Features:
(i) Easy formation: A sole proprietorship business is easy to form where no legal
formality involved in setting up this type of organization. It is not governed by any
specific law. It is simply required that the business activity should be lawful and
should comply with the rules and regulations laid down by local authorities.
(ii) Better Control: In sole proprietary organisation, all the decisions relating to
business operations are taken by one person, which makes functioning of business
simple and easy. The sole proprietor can also bring about changes in the size and
nature of activity. This gives better control to business.
(iii) Sole beneficiary of profits: The sole proprietor is the only person to whom the
profits belong. There is a direct relation between effort and reward. This motivates
him to work hard and bear the risks of business.
(iv) Benefits of small-scale operations: The sole proprietorship is generally organized
for small-scale business. This helps the proprietor’s family members to be employed
in business. At the same time such a business is also entitled to certain concessions
from the government. For example, small industrial organisations can get electricity
and water supply at concessional rates on a priority basis.
 (v) Inexpensive Management: The sole proprietor does not appoint any specialists for
various functions. He personally supervises various activities and can avoid wastage
in the business.

2) Partnership: “Partnership” is the relation between persons who have agreed to share
the profits of a business carried on by all or any one of them acting for all. The
persons who have agreed to join in partnership are individually called “Partners” and
collectively a ‘firm’. A partnership firm can be formed with a minimum of two
partners, and it can have a maximum of twenty partners.
➢ Features:
(i) Existence of an agreement: Partnership is formed on the basis of an agreement
between two or more persons to carry on business. It does not arise out of the
operation of law as in the case of joint Hindu family business. The terms and
conditions of partnership are laid down in a document known as Partnership Deed.
(ii) Engagement in business: A partnership can be formed only on the basis of a
business activity. Its business may include any trade, industry or profession. Thus, a
partnership can engage in any occupation - production and/or distribution of goods
and services with a view to earning profits.
(iii) Sharing of profits and losses: In a partnership firm, partners are entitled to share
in the profits and are also to bear the losses, if any.
(iv) Agency relationship: The partnership business may be carried on by all or any of
the partners acting for all. Thus, each partner is a principal and so can act in his own
right. At the same time he can act on behalf of other partners as their agent. Thus,
every partner can bind the firm by his acts.
(v) Unlimited Liability: The liability of partners is unlimited as in the case of sole
proprietorship. In case some obligation arises then not only the partnership assets
but also the private property of the partners can be taken for the payment of
liabilities of the firm.
(vi) Common Management: Every partner has a right to take part in the running of
the business. It is not necessary for all partners to participate in the day-to-day
activities of the business but they are entitled to participate. Even if partnership
business is run by some partners, the consent of all other partners is necessary for
taking important decisions.

3) Limited Liability Partnership

4) Company: A company is an artificial person created by law, having separate entity,

with a perpetual succession and common seal
Factors Leading to Types of Business
❖ Nature of Business Activity

1) Sole Proprietorship:
• unconditional and owned and controlled by an individual
• full control over its business
• beneficiary of all profits
• All risks are to be borne by the sole proprietor.

2) Partnership:
• Formal arrangement by two or more parties to manage and operate a business and
share its profits.
• By way of partnership agreement
• For common goal and mutual benefit
• All partners are the owners as well as the agent of their firm i.e., acts of one partner
affects all.
• All partners can participate in management activities, decision making, and have the
right to control the business.
• I.E., all members share both profits and liabilities (legal and financial) equally
(partner’s personal assets also held accountable)
• Every partner is liable, jointly with all the other partners and severally for all acts of
the firm carried out while he is a partner.

3) Limited Liability Partnership:

Limited Partnership –

• limited control over the business,

• limited to their investment,
• are not associated with the everyday operations.
• Interest lies only in investing and taking their due profit share.

Limited Liability Partnership –

• It can continue its existence irrespective of changes in partners.
• Each partner is guarded against other partners’ legal and financial mistakes.

4) Incorporated Company:
• Registered type of entity with limited liability to the owners and shareholders –
Incorporated Company
• I.E., personal property of the owner(s) is protected, and this gives the owner(s)
• the ability to build business credit, get loans and raise capital.
❖ Scale of Operations

1) Sole Proprietorship: Small

2) Partnership or LLP: Neither small nor Large

3) Company: Large

❖ Capital Requirements

1) Sole Proprietorship: Require small investment.

2) Partnership: Require small investment.

3) Company: Require heavy investment

❖ Managerial Ability

1) Sole Proprietorship: Sole person responsible for decision making.

2) Partnership: Division of work among the partners / members

3) Company: Division of work best suited

❖ Degree of Control

1) Sole Proprietorship: Ownership, management, and control completely fused

2) Partnership: Management and control of business is jointly shared by partners

• Specific rights and responsibilities documented through the partnership deed
• All partners have equal voice in the management of partnership business except
w.r.t., the responsibilities divided amongst them
• However still legally accountable for another’s actions

3) Company: professional managers are required to handle the daily affairs

• Thereby creating a need for corporate structure and management
• management and control of the company business is entrusted to the Board
• Board members - the elected representatives of shareholders
❖ Degree of Risk and Ability

1) Sole Proprietorship: Carries small amount of risk with it as compared to

partnership or company.
• However, the sole proprietor would become personally liable for all the debts of the
business to the extent of their entire property.

2) Partnership: Partners are individually and jointly responsible for the liabilities of
the partnership firm

3) Company: Payment of debt can be imposed only to the limit of the company’s
assets
• A shareholder/member/partner may lose the money invested in the company, but
they cannot be forced to contribute additional funds out of their own pocket to
satisfy the business debts of the company.

❖ Stability of Business

1) Sole Proprietorship: dependent on incidents related to illness of owner / their

death → derailing the business / complete shutdown.

2) Partnership: Can also be terminated by the death, insolvency, insanity,

retirement, admission, expulsion→ making them unstable.

3) Company: Life of a Company and Limited Liability Partnerships is not dependent

upon the life of its members/partners.

❖ Flexibility of Administration

1) Sole Proprietorship: easy change in administration least inconvenience and loss

2) Partnership: Minimum difficulty in causing change in administration

3) Company: Large scale activities and rigid administration structure make change
difficult

❖ Sharing of Profits

1) Sole Proprietorship: All the profits of business in the hands of one

2) Partnership: Sharing of profits

 3) Company: Distribution of profits amongst shareholders in proportion to their
shareholding (at the discretion of the Board of Directors)

❖ Cost, Procedure and Government Regulation

1) Sole Proprietorship: Has no direct government regulation except for meeting

taxation liabilities.
• Requires the technical competence and business acumen of the owner

2) Partnership: written partnership deed needed for registration of the firm and for
tax authorities.

3) Company: created by law, dissolved by law, and operate under the express
provisions of the law
• Completion of legal formalities creation / closure / insolvency of the company

❖ Tax Implication

1) Sole Proprietorship and General Partnership: Tax liability is dependent on the

extent of profits.
• However, the liability of the owner(s) is unlimited.
2) Company and LLP: the liability of shareholders is limited to the value of shares
purchased.
• In case of companies or LLPs, tax liability could be higher.

❖ Geographic Mobility

1) Sole Proprietorship and General Partnership: Local market, a seasonal product

or perishable goods, or is meant to cater to a specific city or locality.

2) Company and LLP: Proposed market for the product or service is across India

❖ Transferability of Ownership

1) Sole Proprietorship: being a one-person entity does not lend itself to

transferability of ownership as the owner himself enjoys the profits and suffers
the losses in his business.

2) Partnership: If a partner exits, existing partners may decide to induct a new

partner with benefits of ownership and share of profits or losses.
 3) Company: Transfer of ownership is by transfer of shareholding by any person or
group of persons in favor of another person or group of persons.

❖ Managerial Needs

1) Sole Proprietorship: Small scale concerns catering to local needs – manageable

by one person.

2) Partnership: Concerns catering to various business functions on small to medium

scale.

3) Company: Concerns pertaining on a large-scale basis which would especially

require the services of specialists to manage various departments.

❖ Secrecy

1) Sole Proprietorship: Entrepreneurs may prefer sole proprietorship to be the sole

repository of such secret.

2) Partnership: In a Partnership decision of whom to disclose such a secret and to

what extent, will have to be carefully decided

3) Company: secrecy may be restricted to the manufacturing process, or the way

business is conducted.
• Certain aspects of the business such as its board of directors, shareholding, financial
statements, and other information which are statutorily required to be placed in
public domain are accessible to any person.

❖ Independence

1) Sole Proprietorship and Partnership: Have minimal government interference.

2) Company: Subject to strict government regulation

Distinction between Company and Partnership

• Existence of Company Act 2013, Partnership Act, 1932 and Limited Liability
Partnership Act, 2008
• application of law of agency, each partner becoming an agent of the other in the
latter case
 • Partnerships are more suitable for a small body of persons having trust and
confidence in each other.
• Companies are complicated form of association, with a large and fluctuating
membership.
• Companies requires a more elaborate organization thereby requiring a corporate
personality on the association, that is, should recognize that it constitutes a distinct
legal person, subject to legal duties and entitled to legal rights separate from those of
its members.

Characteristics of a Company

• association of persons for some common object or objects.

• purposes - economic purposes, i.e., to carry on a business for gain.
• a voluntary association of persons who have come together for carrying on some
business and sharing the profits therefrom.
• Indian Law provides two main types of organisations for such associations:
▪ ‘partnership’ and
▪ ‘company’.

Incorporation of a Company
• Both documents should be filed with the Registrar of the Companies (ROC) along
with the company incorporation form.
• Memorandum of Association
 ▪ MOA is the first step towards creation of a Company.
▪ It Contains details of the company’s constitution and is the foundation of the
company’s structure.
▪ It lays down the scope of the company’s activities, objectives for which it is
formed, and determine the scope of its authority and its relationship with the
outside world.
▪ The company members must subscribe to the MOA at the time of formation
of the Company by inscribing their mark or signature on the document as
attestation or approval of its contents.
▪ The contents of the MoA and the Companies Act, 2013.
• Articles of Association
▪ Rules and regulations that govern the management and internal affairs and
the conduct of its business.
▪ Defines a company’s scope of work, objectives, rules and internal
management.
▪ The AOA is subordinate to the MOA of a company and is governed by the
MOA.

➢ The memorandum contains the fundamental conditions upon which the company is
allowed to be incorporated alone. They are conditions introduced for the benefit of
the creditors, and the outside public, as well as of the shareholders. The articles of
association are the internal regulations of the company.
Contents of MOA

• Name clause
• Registered office clause
• Object clause
• Liability clause
• Capital clause

Contents of AOA

• Details regarding the share capital

• Details of director’s qualification, appointment, powers, remuneration, duties etc.
• Rules regarding company dividends and reserves
• Details regarding company accounts and audit
• Provisions relating to the company’s borrowing powers
• Provisions relating to conducting meetings
• Process of winding up of the company
Corporate Veil
The company is at law a different person altogether from the subscribers. And though it may
be that after incorporation the business is precisely the same as it was before and the same
persons are managers and the same hands receive the proceeds, the company is not in law,
the agent of the subscribers or trustee for them. Nor are the subscribers as members liable,
in any shape or form, except to the extent and in the manner provided by the Act.
• A company has a legal personality separate and independent from the identity of its
shareholders.
• Any rights, obligations, or liabilities of a company are separate from those of its
shareholders, where the latter are responsible only to the extent of their capital
contributions, known as “limited liability”.
• This corporate fiction was devised to enable groups of individuals to pursue an
economic purpose as a single unit, without exposure to risks or liabilities in one’s
personal capacity.
• Accordingly, a company can own property, execute contracts, raise debt, make
investments, and assume other rights and obligations, independent of its members.
• Moreover, as companies can then sue and be sued in their own name, it facilitates
legal courses too.
• Lastly, a company survives the death of its members as well.

Piercing the Corporate Veil

• Refers to looking beyond the company as a legal person or disregarding the corporate
identity and focusing on the humans instead.
• Courts choose to ignore the artificial personality and look towards the humans
involved when the case involves a question of control rather than ownership.
• Piercing the corporate veil leads to losing out on the ‘limited liability’ feature that the
owners of a corporation enjoyed.

Reasons for piercing the corporate veil:

1] To Determine the Character of the Company
• There are cases where the Courts need to understand if the company is an enemy or
friend. In such cases, the Courts adopt the test of control.
• When the public interest is in jeopardy. If the affairs of a company are under the
control of people from an enemy country, then the company might be an enemy too.
 In such cases, the Court may examine the character of the humans who are at the
helm of affairs of the company.
2] To Protect Revenue or Tax
• In matters concerning evasion or circumvention of taxes, duties, etc., the Court might
disregard the corporate entity.
• If a company is trying to evade taxes, then piercing the corporate veil allows the
Court to understand the real owner of the income of the company and make the said
person liable for legitimate taxes.
3] If trying to avoid a Legal Obligation
• The members of a company can create another company/subsidiary company to
avoid certain legal obligations.
• Here, piercing the corporate veil allows the Courts to understand the real
transactions running in the background.
4] Forming Subsidiaries to act as Agents
• The basis of the formation of a company is to act as an agent or trustee of its
members or of another company. In such cases, the company loses its individuality in
favour of its principal. Also, the principal is liable for the acts of such a company.
5] A company formed for fraud or improper conduct or to defeat the law
• If a company is formed for some illegal or improper purposes like defeating the law,
the Courts might decide to lift or pierce the corporate veil