TABLE OF CONTENT
- Introduction
1.1 The concept of incorporation
1.1.1 Lifting the veil
1.1.2 Authority on lifting the veil
1.2 Case scenario
2.0 The Concept of lifting the veil
3.0 Grounds for lifting the veil
4.0 Implication of lifting the corporate veil
5.0 Procedure for lifting the corporate veil
6.0 Conclusion
7.0 Recommendation
1.0 INTRODUCTION
1.1 The Concept of Incorporation
The doctrine of corporate veil and the concept of lifting the veil are quite fundamental to the practice of company law, and to a large extent shape the legal landscape of business entities in Nigeria. In the well celebrated case of House of Lords in the case of Salomon v. Salomon & Co Ltd (1897) AC 22 (HL), it became established that a corporation is a different entity from the owners, shareholders or directors. A corporation has a life of its own and characteristics of perpetual succession in the event of the death or retirements of the owners or the directors that were appointed through the memorandum and articles of association. Upon the incorporation of a company, it acquires capacity of artificial person as such it can own property, become a party to a contract, act in a tortuous manner and become tortuously liable, commit a crime, can sue and be sued, has a nationality and therefore becomes domicile in nature and even has rights that could be attributed to a natural person though artificial in character. A company acquires the characteristics of a distinct legal person upon incorporation.
Moreso in the case of Bolton (Engineering) Co. Ltd v Graham and Sons where Lord Denning likened the company to a human body with many parts. Thus, in spite of the fact that the status of incorporation shields the directing minds and members of the company from liability in actions of the company, there are situations when the veil worn upon a company will be disregarded.
A universal benefit of incorporation is the separate entity doctrine which shields the shareholders, directors and other operators from liability for corporate omissions. By the doctrine, the company’s debts are limited to the amount shareholders have paid or have agreed to pay to the company for its shares, in case of insolvency. Consequently, their other assets, homes, pension funds, cars, yachts, private jets will remain untouched.
If the company commits a civil or corporate crime such a company could be sued in its corporate name, if a judgment is obtained against such a corporation, it is only natural that the company complies with the decision of the court but where it fails, the veil covering the incorporation will be lifted to see those natural persons being the company and probably compel them to comply with the judgment of the court. A corporate veil could be lifted whenever the court wants to find out who is behind the fraudulent and improper conduct of a company.
1.1.1 Lifting the Veil
Lifting the veil of incorporation or “lifting the veil” means the setting aside of the principle that a company is a distinct and separate entity from its management and ownership for the purpose of extending civil or criminal liability to its management and/or ownership.
A corporate veil is a kind of iron curtain that keeps shareholders and the corporation apart and lets the members hide behind it. The idea is that the members and the firm are not the same is made clearer by this impenetrable iron curtain, which limits the possibility of anyone peeking behind the scenes. Therefore, the possibility of penetrating the corporate veil implies the ability to see behind the scenes or behind the distinct identity of the business to hold members accountable for any wrongdoing they may have committed and concealed behind the corporate curtain, as an exemption to the limited liability policy. Consequently, it is the legal action of putting personal culpability on directors, officials, and shareholders who would otherwise be exempt from the corporations.
1.1.2 Authority on Lifting the Veil
The law is clear on the concept of lifting the veil. It sees the corporation as an artificial person, invisible, intangible, and existing only in contemplation of the law, and when the reason for which the law deems the corporation as an artificial person is defaulted, then the veil of incorporation can be lifted. In the case of Adeyemi V. Lan and Baker Nigeria Ltd (2007) NWLR (pt.663) 33, the court held:
“there is nothing sacrosanct about the veil of incorporation. The decision in Salomon V. Salomon must not blind one to the essential facts of dependency and neither must it compel a court to engage in an exercise of finding of facts which is contrary to the true intentions or positions voluntarily created by the parties as distinct from an artificial or fictitious one. Thus, if it is discovered from the material before the court that a company is a creature of a biological person, be he a managing director, and it is a device or sham-mask by the eye of equity, the court must be ready and willing to open the veil incorporation to see the character behind it, if justice must be seen to be done.”
It is germane to note that there are two major ways in which the veil of incorporation can be lifted, and is either in accordance with the provisions of the statute or by the court in the interest of justice.
1.2 CASE SCENARIO
Mr Niyi, a director at kokoka dynamic footprint ltd used the company’s fund for a fraudulent transaction. Kokoka dynamic footprint ltd, a shoe producing company was sued to court. AAA chambers a full service legal advisory top-tier law firm, providing legal expertise in the global business landscape representing the claimant discovered that it was a director of the company who was involved in such fraudulent transaction. AAA chambers tendered their evidence before the honorable court. The court accepted the evidence and lifted the veil of incorporation which Mr Niyi was using to protect himself.
2.0 The concept of lifting the corporate veil
Lifting the veil, also known as “piercing the corporate veil” refers to a situation in which courts put aside limited liability and hold a corporation’s shareholders or directors personally liable for the corporation’s actions or debts. Veil piercing is most common in close corporations. This provision prevents a shareholder from using control of a legal person to conceal a fraud, an abuse of rights or a violation of a rule of public order.
While the law varies by state, generally courts have a strong presumption against piercing the corporate veil and will only do so if there has been serious misconduct. Courts understand the benefits of limited liability, as it encourages development of public markets for stocks and thus helps make possible the liquidity and diversification benefits that investors receive from those markets.
As such, courts typically require corporations to engage in fairly egregious actions in order to justify piercing the corporate veil. Generally, this misconduct may include abusing the corporation or having undercapitalization at the time of incorporation.
This mechanism renders the separate legal personality of the company unenforceable against an injured third party, who can thus seek the personal liability of the shareholder who tries to evade it, by hiding under the company’s legal personality, and makes it possible to consider that the patrimony of the company and that of the shareholder form a whole.
In general, creditors have no recourse against corporate shareholders, as long as formalities are satisfied. When, however, the corporation is fraudulently created to escape liability, then creditors may pierce the corporate veil.
3.0 Grounds for lifting the veil
3.1 Statutory grounds
3.1.1 Having less than the required Members or Directors
It is an illegality for public company to have less than two persons in its membership. This is provided for in Section 118 of CAMA, which states that where a public company limited by shares or by guarantee, carries on business or its objects without having at least two members and does so for more than six months, every director or officer of the company, during the time that it so carries on business with only one or no member, is liable jointly and severally with the company for the debts of the company contracted during that period. As such, every director or officer in a public company must always ensure that the membership is above the statutory limit, otherwise if a company operates with less than two members for more than six months, he/she risks being held liable along with the company for any debts incurred during that period. Similarly, section 271 (3) of CAMA provides to the effect that a director or member of a company, not being a small company who knows that a company carries on business after the number of directors has fallen below two for more than 60 days is liable for all liabilities and debts incurred by the company during that period when the company so carried on business. It is worthy of note that this subsection does not limit it to only a director, but extends even to members of a company. However, be it a director or just a member, the condition is that such a person must have had the knowledge of the company operating with less than two directors. In addition, this situation is conditional upon the premise that such director or member has been in the knowledge of this for more than sixty days. Where these conditions are satisfied, the veil of incorporation will be lifted to hold liable the director or member of the company for the liabilities and debts of the company during that period when the company so carried on business with less than the required number.
3.1.2 Funding Political Parties
The law prohibits companies from funding political parties. Section 43 (2) of CAMA provides that A company shall not have or exercise power either directly or indirectly to make a donation or gift of any of its property or funds to a political party or political association, or for any political purpose, and if any company, in breach of this subsection makes any donation or gift of its property to a political party or political association, or for any political purpose, the officers in default and any member who voted for the breach shall be jointly and severally liable to refund to the company the sum or value of the donation or gift and in addition, every such officer or member commits an offence and is liable to a fine equal to the amount or value of the donation or gift. This section prohibits a company from giving or exercising power either directly or indirectly to make donation or gift of any of its property or funds to a political party or political association or for any political purpose. The breach of this subsection renders the officers in default and any member who voted for the breach jointly and severally liable to refund to the company the sum or value of the donation or gift and in addition, every such officer or member commits an offence and is liable to a fine equal to the amount or value of the donation or gift.
3.1.3Fraudulent or Reckless Trading
The Corporate veil will be lifted where it is discovered during winding up of a company that the business of the company has been carried on with fraudulent intent towards any creditor of the company to discover who is behind such reckless or fraudulent act. Section 672 (1) of CAMA provides as follows:
If, in the course of the winding up of a company, it appears that any business of the company has been carried on in a reckless manner or with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the court, on the application of the official receiver, or the liquidator, or any creditor or contributory of the company, may, if it deems proper to do so, declare that persons who were knowingly parties to the carrying on of the business in that manner, is personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company as the court may direct.
It is evident here that CAMA makes provision for personal responsibility for reckless or fraudulent trading by corporate managers. The provision is invoked where the persons responsible for managing the business of the company have been found guilty of dishonesty in the carrying of the business of the company. Thus, for a manager to incur personal liability in this circumstance, he must have actively participated in the management of the company in a fraudulent or reckless manner.
The corporate veil may also be lifted for fraudulent trading other than during winding up, this is provided for in Section740 of CAMA. A person is responsible for fraudulent trading under section 672 of CAMA if he is knowingly party to the carrying on of a company’s business either with intent to defraud creditors or for any other fraudulent purposes. Thus, veil of incorporation may be lifted when a person is found guilty of dishonesty in managing the business of the company. Invariably, the veil of incorporation may not be lifted against a director or a member of a company unless he must have actively participated in the management of the company so that a shareholder who knows nothing about the management of the company cannot be made personally liable for a company’s debt. Moreover, the particulars of the fraud alleged must be expressly set out. Fraud being an allegation of a criminal nature must be proved beyond reasonable doubt.
3.1.4 Publication of Company Name
Section 729 (1) of CAMA states that every company shall after incorporation ensure that it paints or affix and keep painted or affixed its name and registration number on the outside of every office or place in which its business is carried on, in a conspicuous position, in letters easily legible. Subsection (2) states that failure for the company to do so, it shall be liable to penalty prescribed in the Regulations for everyday during which the defaults continue, and every director and manager of the company are liable to the like penalty. This is another major instance where the veil of incorporation may be lifted to hold the company together with the director or manager of the company liable for failure to ensure that it paints or affix and keep painted or affixed the name of the company and its registration number outside every of the company’s office or place of business after incorporation.
3.1.5 Personal Liability of Directors and officers
Sec 316 CAMA also provides that where a company receives money by way of loan for specific purpose, receives money or other property by way of advance payment for the execution of a contract or project; or with intent to defraud, fails to apply the money or other property for the purpose for which it was received, every director or other officer of the company who is in default is personally liable to the party from whom the money or property was received for a refund of the money or property so received and not applied for the purpose for which it was received and nothing in this section affects the liability of the company itself.
3.1.6 Other Statutory Provisions on Lifting the Corporate Veil
Aside CAMA, other Nigerian Statutes also provide instances when the veil of incorporation may be lifted. Section 18 of the Failed Banks (Recovery of Debts) and Financial Malpractices in Banks Act therefore empowered the court to lift the corporate veil where an offence which has been committed by a body corporate under the Act is proved to have been committed with the connivance of or to be attributable to any neglect on the part of a director, manager, secretary or other similar officer of the body corporate, or any person purporting to act in any such capacity, he, as well as the body corporate, where practicable, shall be deemed to be guilty of that offence and shall be liable to be proceeded against and punished accordingly.
Furthermore, a corporate veil may be lifted where the directors or officers of the company want to hide under the corporate veil to pollute the environment. section 37 of the Federal Environmental Protection Act 2004 provides that where any offence against the FEPA Act or any regulations made has been committed by a body Corporate or by a member or a partnership or other firm or business, every director or officer of that body corporate or any member of the Partnership or any person concerned with the management of that business or firm shall, on conviction, be liable to a fine not exceeding N500,000.00 (five hundred thousand Naira) for such offence, and, in addition the body corporate, firm or partnership shall be directed to pay compensation for any damage resulting from such breach thereof or to repair and restore the polluted environmental area to an acceptable level as may be approved by the Federal Environmental Protection Agency. Section 20 of the Corrupt Practices and other Related Offences Act also provides to the effect that a public officer or other person found guilty of soliciting, offering or receiving gratification shall forfeit the gratification and pay a fine of not less than five times the sum or value of the gratification which is the subject matter of the offence where such gratification is capable of being valued or is of a pecuniary nature or ten thousand Naira, which is higher. In essence, corporate veil may be lifted to penalize an officer of a company if such officer solicits, offers or receives gratification in the name of a corporation as the corporate veil will not shield the officer from liability. Section 51 of the AMCON Act allows AMCON to hold individuals personally liable for the debts of companies if it is determined that they acted fraudulently, dishonestly, or with gross negligence. This provision seems to extend liability beyond the traditional confines of limited liability for shareholders. If it is determined that individuals, such as directors or officers, have engaged in fraudulent or dishonest actions leading to the financial distress of the company, Section 51 empowers AMCON to extend liability beyond the corporate veil. The above and many more are some of the instances that have been prescribed in the statutes where the veil of the incorporation could be lifted in Nigeria and the implication is that the members, directors, managers or officers of the company would be held liable for the conduct of the company.
3.2 Judicial grounds
The courts have given its judicial blessings on the issue of lifting of the corporate veil. In such cases the court goes behind the corporate personality to the individual members or ignores the separate personality of each company in favor of the economic entity constituted by a group of associated companies. Thus, the court have authority to pierce the corporate veil and deal with the individual so involved in the unlawful act. Some of the instances where the court may lift the veil of incorporation are:
3.2.1 Fraud
One of the major instances where a corporate veil may be lifted in Nigeria is where a corporation is a mere cloak, sham or same is principally incorporated for the purpose of carrying out fraudulent transactions. The court therefore would not hesitate to use its judicial knife to pierce through the corporate veil so as to reveal the identity of those behind any fraud or improper conduct. It is therefore a common thing that the managers of companies have hidden under the corporate personality of their respective companies to commit fraud with the feeling that it is the company that would bear the burden. Thus, it is settled in Nigeria that where a company is discovered to have been formed as a mere cloak or sham to deceive the innocent third parties to fall prey of its fraudulent transaction, the courts will be prepared to lift the corporate veil of such company.
Thus, the company functioning as a tool for fraudulent purposes or engaging in fraud would therefore justify the lifting of the corporate veil and holding the members of the company personally liable. Moreover, lifting the corporate veil on the ground of fraud has been judicially blessed by the court in FDB Financial Services Ltd v Adesola (2000) 8 NWLR (PT. 608), where the Court of Appeal per Aderemi JCA held thus:
“I wish to state that in company law the consequence of recognizing the separate personality of a company is to draw a veil of incorporation over the company. One is therefore generally not entitled to go behind or lift this veil. However, since a statute will not be allowed to be used as an excuse to justify illegality or fraud. it is in the quest to avoid the normal consequences of the statute which may result in grave injustice that the courts, as occasion demands have to look behind, or pierce the corporate veil….”
Indeed, where the law will be employed as an instrument of fraud, the court will never hesitate to lift the corporate veil and this was the reasoning behind the decision in Gilford Motor Co Ltd v Horne [1933] ch 935, where the defendant had promised not to solicit after the company’s customers if his appointment with the company was terminated. He later formed a company to do the soliciting. The court held that the company was a mere device. Moreover, in the case of Adeyemi v Lan Baker (Nig) Ltd (2007) NWLR (pt. 663) 33, the court made it clear without ambiguity that if it is discovered from evidence before a court that a company is the creature of a biological person be he a managing director or a director and that the company is a device or mask which he holds before his face in an attempt to avoid recognition by the eyes of equity, the court of law must be ready and willing to open the veil of incorporation to see the characters behind the company. The Court went further to state that the court would not allow a party to use his company as a cover to dupe, cheat and /or defraud an innocent citizen who entered into a lawful contract with the company only to be confronted with the defense of the company’s legal entity as distinct from its directors. Thus, the courts in Nigeria have never hesitated to lift the veil of incorporation where there are instances of fraud or where the company is merely used as a sham or puppet of another. It is therefore a common principle in equity that it will never allow the law to be used as an instrument of fraud. It is important to note that the court should also be careful while considering lifting of a corporate veil.
Katureebe JSC in the case of Fredrick Zaabwe v Orient Bank Ltd &ors [2007] UGSC 21 (10 july 2007) stated that fraud entails any act of deceit and that an allegation of fraud needs to be fully and carefully inquired into. Fraud is therefore a serious matter, particularly where it is alleged that a person lost his property as a result of fraud committed upon him by others. Indeed, this implies that one can now easily move court to lift the veil whenever they can empirically point particular acts of fraud committed against them or any such other act that would really convince the court that corporate personality was being used as a vehicle of fraud.
3.2.2 Revenue Purposes
The court may also lift the corporate veil where it is used for tax evasion. The court will therefore not hesitate to look behind the corporate veil where it is used for the purpose of tax evasion. However, the veil would not be lifted where it would result to loss of revenue to the government. The determining factor is whether or not the particular act results into one illegally paying less tax than what was actually payable or escape the payment of tax altogether and where such acts are done by a company, the company could be held to have evaded taxes and hence liable. The question whether tax evasion can be a ground for lifting the corporate veil does not appear to have been explicitly addressed by the courts in Nigeria. Initially, the courts have displayed an apparent lack of judicial will to lift the veil in cases of tax evasion in Nigeria. For instance, in the case of Reiss & Co (Nigeria) Ltd v Federal Board of Inland Revenue, where the issue was whether the Federal Revenue Court could disregard the separate legal entity of the Nigerian subsidiary company for the purposes of taxing the profits of the expatriate parent company Reiss and Co (Amsterdam). Although, the court found out that there was a cloud of suspicion over the genuineness of the transactions between the foreign parent company and its local subsidiary, it nevertheless upheld the validity of the transaction on the basis of the separate legal entity principle of the two companies. However, with the enactment of section 92 and 94 of the Companies Income Tax Act, which empowered the court to lift the veil of incorporation on the allegation of tax evasion, if the device of incorporation is used for defrauding the government, the court appears to be proactive in matters relating to tax evasion. For instance, in the case of Seven Up Bottling Co Ltd v Lagos State Board of Internal Revenue (2000) 3 NWLR (pt 650) 565, the Court of Appeal held that failure to remit tax deducted from salaries and emoluments of its employees was a debt which is enforceable in the court of law.
3.2.3 Agency
This is another instance where the court can lift the veil of incorporation. The courts often use the basic principle of agency to lift the veil of incorporation where it can be established that the shareholders of the company acted as an agent of the company while dealing with the other party. This is however a question of fact in ascertaining when an agency relationship exists between the company and the shareholders. In essence, the court in such
cases would look at the facts of the cases to determine whether the company is acting as an agent for its shareholders or members. This can be inferred either from the express agreement or implied from the circumstances of each case. In the case of Akande v Omisade (1987) CLR 4 © (SC), the court held that if a company is formed for the express purpose of doing a wrongful or unlawful act, or if when formed those in control of the company indulge in unlawful or wrongful deed, the individuals as well as the company are responsible to those whom liability is legally owed and, in such circumstances, it may be said that the company is a sham, cloak, or alter-ego. Otherwise, the company should not be so termed as it is not owned by any shareholder. It is a legal entity distinct from the shareholders who constitute its membership. Thus, where a company is acting on behalf of its shareholders, the court can disregard the issue of separate legal personality of the company and hold the shareholders liable for the wrongful act.
3.2.4 Public Policy
The corporate veil may be lifted to protect public policy and prevent transactions contrary to public interest. The court will therefore lift the corporate veil where the conduct of the company is in conflict with public interest. In essence, corporate veil may be lifted and wrongdoers personally held liable for the act where in the face of the public, injustice will be done upon the application of the separate legal entity. In International Offshore Construction Ltd vs Shoreline Lifeboats Nigeria Ltd (2010) LLJR -SC, the Court of Appeal held that the corporate shell of an incorporated company can be cracked where the interest of justice so demands.
4.0 Implication of lifting the corporate veil
Lifting the corporate veil refers to a legal concept where courts look beyond the company’s separate legal personality to hold the individuals behind the corporation accountable for its actions. This can have significant implications for both the individuals involved and the corporate entity itself. Some of the key implications include:
4.0.1 Personal Liability: One of the primary implications is that individuals (such as directors, officers, or shareholders) may become personally liable for the debts, obligations, or wrongful acts of the corporation. This can lead to personal financial risk, including assets being seized or personal bankruptcy.
4.0.2 Deterrence of Misconduct: Lifting the veil can act as a deterrent against corporate misconduct. Knowing that personal liability might be imposed will make those in charge to adhere strictly to higher standards of honesty and compliance with the law.
4.0.3 Prevention of Abuse: It helps prevent the abuse of the corporate structure to shield oneself from liability. For example, if a company is used to defraud creditors or evade legal obligations like taxes, lifting the veil can ensure that the individuals responsible are held accountable.
4.0.4 Impact on Corporate Governance: Companies may need to review and strengthen their corporate governance practices. Knowing that improper actions could result in personal liability might lead to more diligent oversight and adherence to legal and ethical standards.
4.0.5 Legal and Financial Uncertainty: For businesses, lifting the corporate veil can introduce uncertainty in terms of liability. This can affect investment decisions, as potential investors may perceive higher risks associated with the personal liabilities of company executives.
4.0.6 Influence on Corporate Structure: Companies might reassess their organizational structures and practices to minimize the risk of veil lifting. This could lead to more robust compliance and risk management systems.
4.0.7 Legal Precedents: The decision to lift the veil sets important legal precedents. It influences how courts interpret and enforce laws related to corporate responsibility and accountability, shaping legal standards.
4.0.8 Impact on Corporate Credit: The potential for personal liability might affect a company’s ability to secure loans or attract investors, as lenders and investors may be concerned about the risks associated with the personal financial stability of the company’s leaders.
4.0.9 Reputational Damage: Lifting the veil can cause significant reputational damage to both the corporation and the individuals involved. This can impact business relationships and customer trust.
4.0.10Regulatory and Compliance Measures: Companies might face increased regulatory scrutiny and need to enhance their compliance measures to avoid situations where veil lifting could occur.
5.0 Procedure for lifting the corporate veil
Lifting the corporate veil is a complex legal procedure involving the following steps:
1.Identifying the issues
Fraud or Misrepresentation: Demonstrating that the corporation is being used as a vehicle for fraud or to perpetuate a wrongdoing.
Avoidance of Legal Obligations: Showing that the company is used to evade legal duties or liabilities like payment of taxes.
Improper Conduct: Evidence that the corporate structure is being abused for personal gain or to shield individuals from liability.
Alter Ego Doctrine: Proving that the corporation is merely an alter ego of its shareholders or directors, meaning there is such unity between the entity and individuals that separating them would be unjust.
- Gathering Evidence
Document Review: Collecting relevant documents, including financial records, contracts, and correspondence.
Witness Testimonies: Obtaining statements from individuals who can provide insight into the operations and management of the corporation.
Expert Opinions: Consulting financial or legal experts to support the claims of misuse or misconduct.
- Filing a Claim
Legal Action: Initiating a lawsuit or legal proceeding where veil lifting is sought. This is usually done by filing a petition or complaint in a court of competent jurisdiction.
Jurisdiction: Ensuring that the court has the jurisdiction to hear the matter and that the venue is appropriate.
- Legal Argumentation
Presentation of Case: Arguing before the court on why the corporate veil should be lifted. This involves presenting evidence and legal arguments to show that the criteria for veil lifting are met.
Burden of Proof: The party seeking to lift the veil typically carries the burden of proof to establish that the corporate entity is being misused in a manner that justifies lifting the veil.
- Court’s Decision
Judicial Review: The court evaluates the evidence and arguments presented. It will determine if lifting the veil is warranted based on legal standards and precedents.
Order for Relief: If the court decides to lift the veil, it will issue an order holding the individuals behind the corporation personally liable for the company’s obligations or misconduct.
6.0 Conclusion
In analyzing the concept of “lifting the veil” within the context of Nigeria, it is evident that this action holds profound implications for transparency, governance, and accountability. the principle of Lifting of the Veil can be likened to the concept of Individual Responsibility in the Presidential System of Government as everyone will be held accountable for his/her acts once it is proven that anyone uses the name of the Company to enter into a fraudulent activity.
This implies that, in certain extraordinary situations, the courts will disregard the idea of a distinct legal entity and instead hold the real persons responsible for an act, rather than the business as a whole.
7.0 Recommendation
- To remove ambiguity and subjective interpretation of the law, there should be specific statutory provisions on the concept of lifting the veil.
- CAMA should expressly provide for the doctrine of Lifting the corporate veil by defining circumstances where the court may lift the corporate veil.
- There should be public notice (e.g) publication in the official gazette and national news papers when a director leaves a company in order to avoid fraud.
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