We have learnt from our previous Financial Accounting and Business Law classes about the concept of “separate legal entity” in a public company. “separate legal entity””, is a legal concept that separates the corporation from its shareholders, and protects them from being personally liable for the company’s debts and other obligation. Though the “Limited Liability” is useful to retain the interests of the shareholders it is also sometimes misused.
In order to avoid any misuse, the doctrine of lifting the corporate veil has been introduced. The doctrine of lifting the corporate veil means ignoring the corporate nature of the body of individuals incorporated as a company, as a company in reality it is a group of person who are the beneficial owners of the property of the corporate body.
The classic example for this is Vijay Mallya and his Kingfisher Airlines. Vijay Mallya expanded and diversified from his liquor business by starting an airline in 2005 named Kingfisher airlines.
Until December 2011, Kingfisher Airlines had the second largest share in India’s domestic air travel market. However, the airline ran into continuous losses since its inception, ran high debts and finally closed its operations in 2012. It was believed that Vijay Mallya and his team failed to follow due diligence with the airline and that it was this deal that brought down his empire.
Vijay Mallya had borrowed money from many banks to allegedly fund KFA, but siphoned off the money to buy properties and teams across the world. He pledged the Kingfisher brand and borrowed further money.
When asked to repay the debt, Vijay Mallya used the separate legal entity concept and tried to escape saying “”I did not borrow a single rupee. The borrower was Kingfisher Airlines. Money was lost due to a genuine and sad business failure. Being held as guarantor is not fraud.”
But the Bankers filed the IA seeking lifting of corporate veil to pierce the protection against personal liability enjoyed by individuals controlling Kingfisher Finvest. The doctrine of Lifting of Corporate Veil means disregarding the corporate personality and looking behind the persons controlling the company.
We can now understand the importance and necessity for the doctrine for lifting of corporate veil through this example.
Business Management 