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
