UNIVERSITY OF ILORIN
FACULTY OF LAW
NAME: BELLO MUHAMMED OLADIMEJI
MATRIC NUMBER: 18/40IL040
LEVEL: 500
COURSE: COMPANY LAW (BUL 501)
FACULTY: LAW
ASSIGNMENT QUESTION
‘‘…. a company must be accorded its corporate status of a
separate entity from the biological person that runs it. The
consequence of which is to draw a veil of incorporation over
it and one is not ordinarily entitled to go behind to lift the
veil.’’ Do you agree?
ATTEMPT
The statement delves into the concept of corporate personality and the legal principle known
as ‘corporate veil’. Essentially, it emphasizes the separation between a company as a legal
entity and the individuals (the ‘‘biological persons’’) who own or manage it. This separation
creates a protective barrier, the ‘‘veil of incorporation,’’ which shields those individuals from
personal liability for the company’s actions or debts.
Human creativity, however, began to exploit the shield of corporate identity openly for
fraudulent or improper purposes. This compelled the Courts to investigate beyond the
corporate facade and uncover the individuals orchestrating the true gains from this legal
facade. The lifting of the corporate veil involves disregarding the corporate identity to reveal
the actual individuals controlling the company. Essentially, in cases of fraudulent or deceitful
exploitation of the corporate entity, those involved cannot seek refuge behind the corporate
facade. In such instances, the court intervenes by penetrating the corporate structure using the
principle known as "lifting or piercing the corporate veil." Despite the legal fiction of a
corporation being a distinct entity, in reality, it represents a collective of individuals who are
the true owners of all corporate assets. The case of United States v. Milwaukee
Refrigerator Co. summarized this stance.
Also, in the case of Littlewoods Mail Order Stores Ltd V. Inland Revenue Commrs,
Denning made the following observation: "The principle established in Salomon v. Salomon
and Salomon Co. Ltd needs close scrutiny. It's frequently believed to shroud the identity of a
limited liability company, preventing the Courts from peering through. However, that's not
accurate. Courts have the authority and frequently exercise the ability to lift the veil. They
have the power and frequently use it to uncover the truth. They examine to discover what
genuinely exists behind the facade."
The significance of this principle lies in the limited liability protection it offers to
shareholders, directors, and officers of a company. As a separate legal entity, the company is
responsible for its own debts and obligations. This means that in most cases, the personal
assets of the individuals involved in the company are protected from business-related
liabilities.
However, the statement also suggests that this separation is generally respected by the law,
and individuals are not typically entitled to ‘‘go behind’’ the corporate veil to hold these
individuals personally responsible for the company’s actions.
While this principle serves to protect individuals involved in legitimate business activities, it's
essential to note that there are instances where courts might "pierce the corporate veil." This
happens when there's evidence of fraudulent behavior, improper use of the corporate structure
to perpetrate wrongdoing, or when it's necessary to prevent injustice or unfairness.
"The primary benefit derived from incorporation, the root of all others, lies in the distinct
identity granted to the company. Yet, in practice, the affairs of this legal entity are
consistently conducted by certain individuals and for their advantage. Ultimately, it is these
individuals who truly reap the benefits of the corporate advantages, as although the law
considers a corporation a separate entity, in truth, it is an amalgamation of persons who
genuinely own all corporate assets. The Salomon case establishes that in matters concerning
property, actions taken, rights gained, or liabilities assumed, the identities of the natural
persons forming the company are disregarded. This principle of corporate identity forms the
foundational basis of corporate law. Instances exist where courts have successfully resisted
the urge to penetrate the corporate facade. However, this principle cannot be unreasonably
stretched. There are situations where the court will unveil the corporate structure to examine
the underlying realities. This can be explicitly permitted by statute or at the discretion of the
court itself."
Agreeing entirely with this statement might oversimplify the complexity of corporate law.
While the corporate veil is an essential principle providing legal protection, it's not an
absolute shield. Courts have the authority to disregard the separate legal personality of a
company in exceptional cases to ensure justice, prevent fraud, or protect the rights of
stakeholders who might otherwise suffer due to the misuse of the corporate form.
Therefore, while the principle of the corporate veil generally holds true and is vital for the
functioning of modern business, it's not an inviolable barrier. The law allows for exceptions
in certain circumstances where justice demands it. This ensures a balance between protecting
business interests and ensuring accountability and fairness within the legal system.
JUDICIAL AND STATUTORY PROVISION FOR LIFTING THE VEIL
FRAUDULENT OR IMPROPER CONDUCT: Courts are willing to lift the corporate veil if
they suspect or find evidence of fraud happening behind it. They won't permit the Salomon
principle to become a tool for fraudulent activities. Two notable cases demonstrating this
exception are Gilford Motor Company Ltd v. Horne and Jones v. Lipman. In the Gilford
case, Mr. Horne, an ex-employee, formed a limited company under his wife's name to solicit
customers from his former employer, breaching his employment contract. The Court of
Appeal determined that this new company was a ploy to conceal Mr. Horne's ongoing
business, labeling it a mere facade to hide his wrongdoing. Similarly, in Jones v. Lipman, a
man trying to avoid a specific performance order transferred his property to a company. The
judge, referring to the Gilford case, saw the company as a cover-up used by Mr. Lipman to
evade legal obligations, leading to a ruling enforcing the performance order against both Mr.
Lipman and the company.
TAX AVOIDANCE: Courts possess the authority to disregard the corporate entity if it's used
for tax evasion purposes. An example is Dinshaw Maneckjee Petit, Re, where a wealthy
individual divided income among several companies to lessen tax liability, leading the court
to view these entities as a mere facade created to evade super tax obligations.
ENEMY CHARACTER: If a company’s control resides in an enemy country during
conflicts, the court may investigate and declare the company as an enemy entity. For instance,
in Daimler Co. Ltd v. Continental Tyre And Rubber Co. Ltd, a company formed in
England, but controlled by Germans during World War I, was deemed an alien company,
preventing it from pursuing legal actions.
SHAM ENTITIES: The court intervenes when a company is established solely as a cloak or
hoax.
EVADE LEGAL OBLIGATIONS: If a company is used to sidestep legal responsibilities, the
court disregards its legal identity and treats it as non-existent.
SINGLE ECONOMIC ENTITY: In cases involving groups of enterprises, the court may lift
the veil to examine the economic reality of the entire group. This approach was evident in
D.H.N. Food Products Ltd. V. Tower Hamlets, where subsidiary companies were viewed as
part of the same economic entity deserving compensation.
AGENCY OR TRUST: When a company acts as an agent for its shareholders, the
shareholders might be held liable for the company's actions. The determination of agency
depends on the specific circumstances of each case.
AVOIDANCE OF WELFARE LEGISLATION: Courts delve behind attempts to circumvent
welfare legislation, aiming to reveal the true nature of the situation.
PUBLIC INTEREST: The court may lift the veil to safeguard public policy and prevent
transactions against public interest, especially when doing so is deemed just and aligned with
public policy objectives.
The Companies and Allied Matters Act (CAMA) provides statutory provisions that allow for
the lifting or piercing of the corporate veil in certain circumstances. Section 324 of CAMA
specifically addresses the circumstances under which the court may disregard the corporate
personality and look beyond the company's legal facade. This section grants the court
discretionary power to lift the corporate veil in situations involving fraud, improper conduct,
or where it's deemed just and equitable to do so. Additionally, Section 325 of CAMA further
outlines instances where a company's shareholders or directors can be held personally liable
for the company's obligations or debts, effectively piercing the corporate veil for
accountability purposes. These statutory provisions in CAMA offer the legal framework for
the Nigerian courts to lift the corporate veil under specific circumstances, ensuring
accountability and preventing abuse of the corporate structure.
Therefore, it's evident that forming a corporation doesn't always shield individuals from
personal liability in every situation. "Legitimate business using companies is permissible, but
the public is safeguarded against deceit and deception." The protection of a separate entity
exists only when it aligns with the fundamental principles supporting it. Those benefiting
from incorporation must ensure a sufficient capital structure for the company's scale. They
should refrain from depleting corporate assets or intertwining personal finances with those of
the corporation. Courts have, on occasions, used these actions as grounds to hold
shareholders accountable. The practice of piercing the corporate veil remains a contentious
topic in corporate law. Various grounds like fraud, agency relationships, facades, unfairness,
and group enterprises are seen as the primary reasons for courts to pierce the veil. However,
these categories are merely guidelines and do not cover all possible scenarios.
