Lifting the corporate veil cannot be done as a matter of routine and certainly the police cannot do that on its own to arrest a company founder, CEO or other directors over a commercial deal, said a legal expert.
He was referring to the arrest of Yogendra Vasupal, founder of Stayzilla an online homestay market place by the city police on Tuesday for not settling the dues of an advertising agency.
The basic tenet on which a company is incorporated under the Companies Act is that it is a separate legal entity different from its promoters and shareholders. The liability of the shareholders is limited to the capital they have invested and does not extend to their private assets, they said.
"The corporate veil cannot be lifted as a matter of routine. There are several parameters to be followed to lift the corporate veil. Normally corporate veil would be lifted in cases were the corporate structure is used for evasion of government taxes, to act against public interest," D. Varadarajan, Supreme Court advocate specialising in company/competition/insurance laws told IANS over phone from New Delhi on Thursday.
"Unpaid vendors would rank as unsecured creditors and their dues would be settled only after the settlement of government dues, secured creditors," a company secretary of a Mumbai based private company told IANS not wanting to be named in the report.
According to Varadarajan, there is no promoter shareholding threshold or shareholding index for lifting the corporate veil.
"Similarly for the sake of a commercial transaction the corporate veil cannot be lifted," Varadarajan added.
Queried about the recourse that a vendor who is also a start-up can have for recovering his dues from a wilful defaulter Varadarajan said: "Certainly it is a civil case and not a criminal one. The affected vendor can file a case in the courts for settling commercial disputes. Payment default is a business risk that a vendor faces."
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)