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VOLUME 1 ISSUE 1

Name:- SHARMISHTHA SAHU & ROHIT YADAV

Edition:-Volume1Issue1

Title: Lifting Up Of Corporate Veil

Date of publication:- 28th November, 2020

Lifting Up Of Corporate Veil

- Everything you need to know

ABSTRACT:

The well-known principle of separate legal entity emerged in the case of Salomon V Salomon, in which the

company is different legal personality from its members. This is an age old principle which is generally

followed by the courts. The outcome of this principle is that there is animaginary veil between the company

and its members. That is to say, the company has a corporate personality which is distinct from its members.

But, there are a number of circumstances, where the Court will pierce the corporate veil or will disregard the

corporate veil to get to the persons behind the veil or to reveal the true character of the company. The

reasoning behind this is possibly that the law will not allow the corporate form to be misused or abused. In

such situationswhere the court feels that the corporate form of the company is being abused then it will cut

through the corporate veil and expose its true character and nature disregarding the Salomon principal

This paper attempts to explain how this doctrine has challenged the well accepted jurisprudence of „Separate

legal entity‟. It further provides numerous of the instances through case laws where lifting of the veil is

justified for the securing the ends of justice. Further, the author has tried to provide astudy from the

background of the doctrine to its present form.

Introduction:

Before getting into the concept of corporate veil, we must understand about company first. Company is

defined by various legal experts according to their own understanding. However, section 2(20) of the

Companies Act, 2013 defines the term company in the following words; „Company means a company

incorporated under this act or under any previous company law. Since, the definition is blurry and did not

deliver the true meaning so, a simpler meaning would be;

“It is a legal entity formed by an individual or a group of individuals to engage in and control a business,

commercial or industrial.”

The concept of Corporate veil distinguishes itself from the famous perception that creates a line between

company and its members and portrays company as a separate legal entity. The idea of company being a

separate legal entity independent from its members and shareholders which has its owns set of legal rights

and obligations was propounded in the well-known case of Saloman vSaloman& Company Ltd.i

The essence of separate corporate personality is one of the fundamentals of the company law and the basis

of all commercial and business activities and it is said to cast a veil upon its human elements, “the corporate

veil”. It is to be noted here that, the corporate veil is merely a metaphorical veil, which separates the

company from its members, while preventing arising of any liability on either side. Nonetheless, there are

situations where the law discards this veil worn out by a company. The act of performing the same is known

as „lifting the veil‟.

Background of the concept:

The principle of separate legal entity has its originfrom the judgement in Solomon's case1

which is still the most accepted law in company law. The court in this case had held that the

company and itsmembers are to be considered as separate beings and not as one single being.

The law provides that the company on incorporation gets the fictional legal identity capable to sue and of

being sued in its own name and capacity. However, the initial case that had recognized theconcept

sanctioned in Solomon's was theKondoli Tea Co. Ltd., Re.iiwherein it was held thatbetween the company

and the shareholders there exist aveil of incorporation.

The same principle was later restated in Lee v. Lee's Air Farming Ltdiii

. The separate legal

personality principle was extended in this case, and the court held that the company should be

treated distinctly from the people in the company.2

Additionally, in Chinranjilal Chaudhary v. Union of Indiaiv the Supreme Court held that a company also has

fundamental rights, which if infringed could be enforced in the court of law to be enforced by the company

itself not by its shareholder‟s. As a result, identifying the separate legal entity principle.

Meaning and concept of Lifting up of Corporate Veil:

According to the Black‟s Law dictionary, lifting up of corporate veil is defined as follows;

“the lawful act of imposing personal liability on otherwise exempted corporate officers, directors, or

shareholders for the corporation‟s wrongful acts.”3

As the name suggests, this principle puts a veil or curtain that separates the company from its members

allowing the company to sit in forward-facing position of the curtain while its members relaxes behind it.

This incorporeal curtain restricts the possibility of anyone to look behind the company and as a

consequence, making the concept stronger that the members and the company are not one and same. In such

1 Solomon v. Solomon and Co. Ltd., (1897) A.C 22 (H.L). 2 Floating Services Ltd. v. Scan FranscecoDipalola, [2004] 52 SCL 762 (Guj.).

3 Ed. Bryan Garner, Black’s Law Dictionary (9th edition, Thomas Reuters Publishers, USA 2008) p.1264

situations the law eliminates the personality it has given to such corporation. In the case of Littlewoods Mail

Order Stores Ltd v. I.R.C4 the court held that:

“The doctrine in Salomon v. Salomon & Co. Ltd has to be observed very cautiously. This

principle had hypothetically placed a veil over the company through which the courts cannot

see. But that is so not true. The courts can pullaway the veil. They can have a look on what

really lies behind that veil.5

Need of the concept:

A company is regarded as a legal person and it has its own rights and duties which are to be performed by its

shareholders and members but the whole thing is done in the name of the company.

On the contrary, it also gives a chance rather opportunityto the persons behind it to indulge in illegal and

inadequate acts by using the name of company or the veil or as a mere cover-up to accomplish their wrong

intentions without being caught. There were seen too many instances in which people have misused the

name of the company for committing frauds with the intention of avoiding liability which they could not

have in the normal course of action if they carried it on their individual capacity.

Thus, to punish the ones who abuse law according to their convenience the doctrine of lifting of corporate

veil emerged. In Cotton Corporation of India Ltd. v. G.C. Odusumathdv the court held that "having of the

veil is not acceptable in the eyes of law unless it is expressly provided by the Statute itself, or whereby the

reasons so invincible satisfy enough that lifting of the corporate veil is a must in order to prevent a fraud.

In United States V. Milwaukee Refrigerator Co.vi, it was observed that-

“A corporation is considered to have a separate legal entity as a general rule……but when the concept of

legal entity is used to conquest public convenience, justify wrong, defend fraud or protect crime, the law will

regard the corporation as an association of peoples.”

4 (1969) 1 WLR 1241

5 See, Joseph E.O Abugu, Foundations of Corporate Law(University of Lagos Press, Lagos, 2011)

Instances when this Corporate veil can be lifted:

It is relevant to look at instances rather examples, where the principle of „separate legal entity‟ can be

removed and personal liability on the members of the company be enforced. InInsurance Corporation of

India v. Escorts Limited and Othersvii

, the Supreme Court passed two major instances when the corporate

veil can be lifted. They are sought forth below –

1. Statutory provisions

2. Judicial interpretations

STATUTORY PROVISIONS

The court per Devlin in Bank Voor Handel v. Slatford6, the court held that “the legislature can forge a sledge

hammer capable of cracking open the corporate shell”.

There are several statutory provisions under the Companies and Allied Matters Act,19907 which enumerate

instances where the veil of incorporation could be lifted and the officers will be liable for the acts of the

company. Some of these instances would be discussed below.

1. Where the number of the directors or members fall below that required by law:

Section 93 of CAMA8 provides that: “if a company carries on business without having a minimum of

two members and continues to do so for more than 6 months, every director or officer of the company,

during the time that it so carries on business after those six months who know that it is carrying on

business with one or no member shall be liable jointly and severally with the company for the debts of

the company contracted during that period”.9

6 (1953) 1 Q.B. 248 @ 278 7 Cap 20 Law of the Federation of Nigeria (LFN) 2004 8 Section 93 Cap C20 LFN 2004

9Fadipe v. Manager of UBA

A similar provision is found in section 246(3) of CAMA which states that, a director or member who

has the knowledge that the company is carrying on business with one director for more than 60 days

shall be liable for all obligations and debts incurred by the company during that period when the

company so carries on business.In the case of Ohanenye&Ors v. Ohanenye and Sons Limited & Anor10

the court was faced with the challenge of determining whether the breach of Section 246 renders the

company illegal and thus not competent to bring a suit. The court held while reading section 246(1) 93

and 18 that using the purposive approach of statutory interpretation, it cannot be intention of the

lawmakers to make the company illegal or non-existent within the contemplation of the law instead it is

just an instance where the law allows the court to lift the veil of incorporation of the company and to

make the directors and members liable for the liabilities and debts incurred during the period of non-

compliance with the provision of the Act.

2. Where Donation to political party: Section 38(2) CAMA prohibits a company from giving or

exercising power either directly or indirectly to make donation or gift of any of its belongings or funds

to a political party or political association, or for any political purpose. If a company in breach of this

section makes. In the case of Olusegun Obasanjo v. Mohammed Dikko Yusuf,11

one of the issues for

determination was the provision of section 38(2) the court held that, section 38(2) of CAMA is valid

irrespective of the provisions of the Electoral Act in as much as it does not disobey the constitution.

3. Personal liabilities of directors: Section 290 of CAMA states that where a company receives

money by way of loan for specific purpose; or receives money or any other property by means of

advance payment for the performance of a contract or project; and with intent to deceive, fails to apply

the money or that property for the purpose for which it was received, every director or other officer of

the company who is in default shall be personally liable to the party from whom the money or property

was taken for a refund of that money or property so received and not applied for the purpose for which

it was received.12

Although, there have been cases on this provision, yet, it has not received the much

needed attention that it deserves.13

At this juncture, for the officers and members to be found personally liable, two things must be present:

First, money or any other property must have been given to the company as a loan or by way of

advance payment for the performance of a contract or project, and Second, that the company with intent

10(2016) LPELR-40458 (CA) 11(2004) 9 NWLR (Pt. 877) 144 12EmekaChianu, Company Law, (1st edition, Lawlords Publication, 2012) pp. 303 - 321; See, OlakunleOrjo, Company Law and

Practice in Nigeria (3rd edition, Mbeyi& Associates (Nig) Limited, 1991) p. 87 13 See, Public Finance Limited v. Jeifa(1998) 3 NWLR (pt. 543) 602; Vibelko (Nig) Limited v. Nigerian Deposit Insurance

Corporation (2006) 12 NWLR (Pt. 994) 280

to deceive has failed to apply the money for the purpose which it was received. The question that jumps

up here is: on whom does the burden of proof lies? The person who gives the money; or the company

who has received the money?

EmekaChianu holds that the lender proves that the loan was given for commercial purpose while the

onus to prove that the company had no intent to defraud would be shifted to the officer sued.14

This

interpretation given is based largely on convenience. The language of the section does not presuppose

that the company or any other officer should be the one to prove criminal intent. The general rule says

that „he who proclaims‟ must prove. Since the plaintiff believes that his funds have been

misappropriated fraudulent, he should prove this.

4. Publication of Company Name: Section 548(1) of CAMA states that every company shall after

incorporation ensure that it paints or affix and after painting and affixing ensures that remains painted

and affixed, the name and registration number on the outside of every office or place in which its

business is carried on, in a conspicuous position, in letter easily readable. Further, Section 548(2) states

that if the company fails to do so, it shall be liable to a fine of N 100 for not doing so; and every director

or manager of the company who willfully and knowingly gives permission or authorizes the default

shall be liable to the resembling penalty.

The above are some of the instances that have been prescribed in the statutes where the veil of the

corporation could be lifted and the consequence is that the directors, managers, or officers of the

company would be held liable for the conduct of the company. The rationalebehind this lifting the veil

in these situations is because of the company law principle that a company is an abstract person and so

human beings are required to act on behalf of the company. Therefore, in such circumstances where the

actions of human being contravene the Act, those members who are responsible or who knowingly

authorized these actions would be held liable.

JUDICIAL GROUNDS

Besides the statutory provisions, there are other situations/grounds also where the courts on its own

discretionhave lifted up the corporate veil. There are several instances and cases in point where the judiciary

has lifted the veil of incorporation. Some of them are: agency, fraud, and sham, public policy, guarantee etc.

All these are discussed in turnsand sought forth below:

14EmekaChianu, Company Law, (1st edition, Lawlords Publication, Abuja, 2012) p. 312

1. Protection of revenue: Under this instance the liability is imposed on persons behind the

company if illegal means is used for the protection of the revenue. In the famous case of Sir

DinshawManeckjee Petit, Re15

where Sir Dinshaw who was a millionaire; with the aim to avoid taxes

incorporated four different companies and accordingly put the amount in those companies. He was

utilizing this money by taking it as loan and was receiving tax benefits on the money as it being

invested in the company.16

The court held that, this is a just situation where it is necessary to see

who's behind the company, and thus lifting of corporate veil is absolutely justified in this situation as

to see the real transaction. Hence, in order to find the offender, the court lifted the veil/curtain which

is an exception to the separate legal personality principle.17

2. Prevention of fraud or improper conduct: In the case ofGilford Motor Company v.

Horneviii

, Horne has incorporated a company in his wife's name to solicit business from Gilford

Motors with which he had a contract under that he was delimitedfrom having the similar business.

The court held that although, his wife is the shareholder and Horne had no shares, yet he was the one

who is behind the company. He was using his wife's name to conduct the business which he

otherwise was prohibited from. Therefore, lifting of the curtain was very necessary to see who was

behind the company. Further, in Jones v. Lipmanixthe court allowed lifting of the corporate veil to

see why the company was incorporated thereby, treating the company and the person as one.

3. Determination of enemy character: It is an undisputed fact that a company is an artificial

person, and for this very reason it can't be regarded as either a friend oran enemy for that matter in its

own capacity. But, sometimes during wars it becomes remarkably important to know who are the

guiding minds of a company to secure the safety of one's nation. Therefore, during such times it is

justified to lift the veil to see who's behind the company. In Daimler Company Ltd. v. Continental

Tyre and Rubber Co. (Great Britain) Ltd.xDaimler Co. Ltd. was a company incorporated in United

Kingdom but its directors were German nationals. The Continental Tyre Co. being a British company

wanted to avoid the contract with Daimler company because of a war. The issue here was, whether a

company can be treated as an enemy? The court held, in order to determine the character of the

company lifting of corporate veil is necessary and only then one can see the minds behind the

company. Therefore, on being asserted that the directors of the company were German nationals after

court lifted the veil, Continental Tyre Co. could terminate the contract.

15Maneckjee Petit, Re, AIR 1927, Bom. 371. 16

Hendon v. Adelman, (1973) New Delhi LR. 17 3 CIT v. Sri Meenakshi Mills Ltd., AIR 1967 SC 819

4. Agency: This is another instance where the court can lift the veil of incorporation to solve the

issues between shareholders and the agents.18

The courts frequently use the basic principle of agency

to lift the veil of corporation. In the case of Re F.G. Films Ltdxi, an American film company wanting

to enjoy the privileges accorded to British-made films incorporated a company in England. The

company had a capital of £ 100 divided into £ 1 each, 90 of which were held by an American and 10

by a Briton. The company was wholly financed by the American company with £ 80,000. The court

lifted the veil of incorporation to determine the shareholders and held that the company was merely

an agent of the American company and cannot properly be described as a British company.

5. Illegality: The court will lift the veil of incorporation where the purpose it is used for is illegality.

This is because a company cannot be used to execute illegal acts. In the case of Merchandise

Transport Ltd v. British Transport Commissionxii

, where the parent company wanted to obtain

licenses for its vehicles and after studying the regulations for obtaining licenses, discovered that it

would not achieve success if the application was made on its own behalf. It consequently, transferred

the vehicles into its subsidiary company which then applied for the license but the licensing

authorities declined to grant it because it was held that both companies constituted a single

profitmaking unit. In this case, even though the parent company planned to defeat the purpose of the

regulation, yet, the court refused them. The court further held that a company would not be permitted

to be used for illegal purposes.

18

All Answers ltd, 'A Company is a Legal Entity' (Nov. 9 , 2020, 3:45 PM), <https://www.lawteacher.net/free-law-

essays/company-law/a-company-is-a-legal-entity-company-law-essay.php?vref=1>

CONCLUSION:

The author is of the opinion that the courts have applied right reasoning while deciding the matter in

such situations. Therefore, the researcher is in complete agreement with the concept of the doctrine

of lifting of the corporate veil for as much as the veil is domineering, so is punishing the wrongdoers

who hide themselves behind the corporate veil to obtain undue benefits. In conclusion, this law is

made to check that no one should get benefitted from their own wrong.In as much as the

companycovers itself with a shield so that the officers and directors can hide behind it from being

seen, nevertheless, there are exceptions to this principle of separate legal personality.

i Solomon v. Solomon and Co. Ltd., (1897) A.C 22 (H.L).

iiKondoli Tea Co. Ltd., Re., ILR [1886].

iii Lee v. Lee's Air Farming Ltd., [1960] 3 All. ER 420 (PC).

ivChinranjilal Chaudhary v. Union of India, [1951] 21 Comp. Cas. 33 (SC). v Cotton Corporation of India Ltd. v. G.C. Odusumathd, [1992] 22 SCL 228 (Kar.).

vi United States V. Milwaukee Refrigerator Transit Co., 142 Fed.247.

vii Insurance Corporation of India v. Escorts Limited and Others, (1986) 1 SCC 264.

viii Gilford Motor Company v. Horne, [1933] 1 CH 935.

ix Jones v. Lipman, [1962] 1 All. ER 442.

x Daimler Company Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd., [1916] 2 AC 307.

xi Re F. G. Films Ltd., [1953] 1 WLR 483.

xiiMerchandise Transport Ltd v. British Transport Commission, [1982] 2 QB 173