Wednesday, 11 July 2012

QUESTION
With reference to relevant authorities, discuss the concept of lifting the veil of incorporation in company law.

A negative consequence of incorporation is that the legal personality of the company may be disregarded in certain circumstances by a device known as lifting the veil or mask of incorporation. In such a situation the law looks at the people behind the company rather than the cloak of incorporation.[1] In Dunlop Nigerian Industries Ltd V Forward Nigerian Enterprises Ltd and Farore;[2] it was held that in particular circumstances e.g.; where the device of incorporation is used for some illegal or improper purpose, the court may disregard the principle that a company is an independent legal entity and lift the veil of corporate identity so that if it is proved that a person used a company he controls as a cloak for an improper transaction he may be made personally liable to a third party. Salomon’s case[3] is regarded as one where the courts refused to lift the veil of incorporation. Note that the legal technique of lifting the veil is recognized in two classes namely;
Statutory lifting of the veil  
(i) Members severally liable for debts where a business is carried on with fewer than the required number of members.
Under S.32 of the Companies Act, If at any time the number of members of a company is reduced, in the case of a private company, below two, or, in the case of any other company, below seven, and it carries on business for more than six months while the number is so reduced, every person who is a member of the company during the time that it so carries on business after those six months and is cognizant of the fact that it is carrying on business with fewer than two members, or seven members, as the case may be, is severally liable for the payment of the whole debts of the company contracted during that time, and may be severally sued for the payment of those debts.[4]

(ii) Where the company is not mentioned in the bill of exchange.
Under S. 109(2) of the Companies Act If a company does not paint or affix its name in the manner directed by this Act, the company and every officer of the company who is in default are liable to a fine not exceeding one hundred shillings, and if a company does not keep its name painted or affixed in the manner so directed, the company and every officer of the company who is in default are liable to a default fine.[5]

(iii) Holding and subsidiary companies.
Under S.150 (1) Where at the end of its financial year a company has subsidiaries, accounts or statements (in this Act referred to as “group accounts”) dealing as hereafter mentioned with the state of affairs and profit or loss of the company and the subsidiaries shall, subject to subsection (2), be laid before the company in general meeting when the company’s own balance sheet and profit and loss account are so laid.[6] Holding and subsidiary companies are regarded as one for accounting purposes, and the separate nature of the subsidiary company is ignored.[7]

(iv) Reckless or fraudulent trading.
Under S.327[8] it is stated that if during the winding up of a company it appears that any business of the company has been conducted recklessly or fraudulently, those responsible for such business may be held liable without limitation of liability for any of the company’s debts or liabilities.[9]

(v) Investigation into related companies.
Under S. 167 if an inspector appointed under section 165 or 166 to investigate the affairs of a company thinks it necessary for the purposes of his or her investigation to investigate also the affairs of any other body corporate which is or has at any relevant time been the company’s subsidiary or holding company or a subsidiary of its holding company or a holding company of its subsidiary, he or she shall have power to do so, and shall report on the affairs of the other body corporate so far as he or she thinks the results of his or her investigation of that body corporate are relevant to the investigation of the affairs of the first-mentioned company.[10] In Otong V Mogall it was held that the related company may be a corporate body with a subsidiary or holding relationship to the company under primary investigation.[11]

(vi) Taxation.
In Smith, Stone & Knight V Birmingham Corporation[12] it was held that the veil of incorporation may be lifted to ascertain where the control and management of the company is. This in the Ugandan context is done to ascertain whether it is a Ugandan Company for Income Tax purposes.[13]


Lifting the veil under case law

(a) Where the company acts as agent of the shareholders.
Where the shareholders of a company use the company as agent, they will be liable for the debts of the company.[14] In Re F.G (films) Ltd an American company provided all the funds for producing a film, which it sought to register as a British film on the ground that the film was produced by arrangement with a British company of which the American Company owned GBP90 of the GBP100 Capital. It was held that the British company was no more than a nominee or agent of the American Company which was the maker of the film.[15]

(b) Where the company has been deemed Trustee for Shareholders.
Although uncommon, the courts are prepared in some cases to hold that the company holds property in trust from the shareholders.[16] In Abbey Malvern Wells Ltd V Ministry of Local Government & Planning; all the shares of the company were held on charitable trusts. The articles of association provided that the relevant trustees would be the governing body of the company. It was held that the company held all its property on charitable trusts.[17] In Littlewoods Stores V IRC; Littlewoods which was the holding company bought a capital asset and vested it in a property holding company, which was its wholly-owned subsidiary. It the tried to get a tax advantage by arguing that the subsidiary was a separate legal personality. It was held that the tax advantage could not be allowed and the veil of incorporation was lifted on the ground that the subsidiary held the property on trust for the holding company.[18]

(c) Where there has been fraud or improper conduct.
The veil of incorporation can be lifted where the corporate personality is used as a mask for fraud or illegality.[19] In Gilford Motor Company V Horne; the defendant was the plaintiff’s former employee. He agreed not to solicit its customers when he left the employment. He then formed a company which solicited the customers. Both the company and the defendant were held liable for breach of covenant not to solicit. The company the defendant formed was described as a mere cloak sham for the purpose of enabling him to commit a breach of covenant.[20] Further still in Jones V Lipman; the court ordered specific performance of the contract against both the defendant and company and the company was referred to as
the creature of the first defendant, a device and a sham, a mask which he holds before his face in attempt to avoid recognition by the eyes of equity.”[21] Emphasis supplied
In Bank of America National Trust & Savings Association V Niger International Development Corporation Ltd; consequent upon the defendant company’s failure to pay a judgment debt obtained against it by the plaintiff, its vehicle was attached pursuant to be plaintiff’s writ. Another company, which had practically the same members as the defendant company and directors belonging to the same family inter pleaded and claimed to have bought the vehicle from the defendant, bona fide and without knowledge of any court action and fro valuable consideration. Dosunmu J. held that where an alienation with intent to defraud the grantor’s creditors is made to company by an individual or another company and the grantor in either case is practically identical with the grantee company, the latter must be taken to have had full notice of the true nature of the transaction and cannot avail itself of the protection extended to a bona fide purchaser without notice, although the alienation is for valuable consideration.[22] In Wallersteiner V Moir; in a suit against Dr. Wallersteiner, he filed a defence out of time to claims against him as director for misfeasance connected with contravening the Companies Act. It was held that the various companies through which Dr. Wallersteiner operated were his puppets. Lord Denning M.R;
“I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures for whose doings he should be, and is, responsible.”[23]

(d) Cases of associated companies.
There are situations where the courts are prepared to treat a subsidiary company as an agent of the holding company and as conducting the latter’s business for it. In other situations the veil is lifted in tax vases in the interest of revenue. Others have nothing to do with revenue.[24] In Firestone Tyre & Rubber Company V Llewellin; it was held that although the English subsidiary was a separate legal entity, which was selling its own goods, the sales were the means by which the American parent company carried on its European business. In effect the parent company was trading in the United Kingdom through the agency of its subsidiary.[25] In the Roberta a parent company was held liable on a bill of lading signed on behalf of a wholly owned subsidiary.[26] In Smith, Stone & Knight V Birmingham Corporation, a parent company was held to be entitled to compensation on the compulsory acquisition of land owned by a wholly owned subsidiary.[27] Roskill C.J in the Albazero case, stated that “modern commerce is hampered and not helped by too rigid an adherence to the basic principle… where the group is in truth the party interested and injured, the law should not be too astute not to recognize the realities of the position.”[28] However, it is difficult to predict the criteria by which the courts would lift the veil in respect of associated companies. Ebbw Vale Case, where the court refused to lift the veil of incorporation because there was no express agency contract between the two affected companies.[29] The cases considered are difficult to reconcile with this case.

(e) Ratifying corporate Acts.
Normally, in law a company is bound only by resolution of its organs such as the board of directors or a duly constituted general meeting, or duly authorized agents. The issue therefore arises as to whether a resolution which is passed by members without a properly convened meeting of the board or members binds the company.[30] In Re George Newman Ltd, Lindley L.J indicated thus;
“Individual assents given separately may preclude those who have given them form complaining of what they have sanctioned, but for the purpose of binding a company in its corporate capacity, individual’s assents given separately are not equivalent to the assents of a meeting.”[31] The law looks at collective actions of directors or members in order to determine the acts of the company.[32]

(f) Determination of residence.
The court may look behind the veil of facade of the company and its place of registration in order to determine its residence. This is normally the place of its central management and control.[33] In Unit Construction Company Ltd V Bullock; three wholly owned subsidiaries of a company in the United Kingdom were registered in Kenya. The boards of the three subsidiaries were distinct from the board of parent company. Under the articles of association, directors’ meetings could not be held in the UK. It was held by the House of Lords reversing the court of appeal that for purposes of Kenyan law, the companies might also be resident in Kenya was irrelevant.[34] In De Beers Consolidated Mines V Howe; it was stated that a company resides for purposes of income tax where its real business is carried on. The real business is carried on where the central management and control actually abides.[35]

Conclusion     
In conclusion, liability under corporate undertakings is specifically on the corporate body. However there is an exception to this as seen in the veil of incorporation.
BIBLIOGRAPHY
TEXTS
1. Douglas Smith, Company Law, Butterworth Heinemann, 1999
2. David J. Bakibinga, Company Law in Uganda, Fountain Publishers
STATUTES
1. The Companies Act Cap 110
2. Income Tax Act of 1997










[1]. David J. Bakibinga, Company Law in Uganda, Fountain Publishers at pg. 8 
[2]. [1986] 2 NWLR 48
[3]. (1897) AC 22
[4]. Cap 110
[5]. Cap 110
[6]. Cap 110
[7]. David J. Bakibinga, Company Law in Uganda, Fountain Publishers at pg. 9
[8]. Companies Act Cap 110
[9]. Douglas Smith, Company Law, Butterworth Heinemann, 1999 at pg.25
[10]. Companies Act Cap 110
[11]. (1978) 4 FRCR 80
[12]. (1939) 16 ILT 371, (1939) 4 ALLER 116
[13]. Income Tax Act 1997
[14]. David J. Bakibinga at pg. 9
[15]. [1953] 1 WLR 483
[16]. David J. Bakibinga at pg. 9
[17]. (1951) Ch 728
[18]. [1969] 1 WLR 1241 CA
[19]. David J. Bakibinga at pg. 10
[20]. [1933] Ch.935
[21]. [1962] WLR 832
[22]. [ 1969] NCLR 268
[23]. [1974] 1 WLR 991-1013
[24]. David J. Bakibinga at pg.11
[25]. [1957] 1 WLR 464
[26]. [1937] LIL Rep.
[27]. (1939) 4 ALLER 116
[28]. [1975] 3 WLR 491
[29]. [1953] 1 WLR 483
[30]. David J. Bakibinga at pg.12
[31]. [1895] 1 Ch 674 C.A
[32]. David J. Bakibinga at pg.12
[33]. David J. Bakibinga at pg.12
[34]. [1960] A.C 351 H.L
[35]. [1906] A.C 455

No comments:

Post a Comment