THE CONCEPTS OF CORPORATE PERSONALITY, LIMITED LIABILITY AND LIFTING THE VEILS OF INCORPORATIONS.
CORPORATE PERSONALITY vs LIMITED LIABILITY PRINCIPLE
Corporate personality refers to the fact that as far as the law is concerned a company personality really exists apart and different from its owners. Hence, the company is capable of enjoying rights and of being subject to duties which are not the same as those enjoyed by its members. In Karubo v Zach-Motison, the court held that an incorporated company is a different legal entity from the management of the company but recognized that a company vested with juristic personality lacks the natural or physical capacity to function as a human being, those who work in it do all things for and on behalf of the company.
Consequences of Incorporation
1. Limited Liability:
A company once incorporated becomes a separate legal entity or personality and the liability of the members are said to be limited. But there is a distinction between the two.
A company is said to be limited liability if the shareholders/members are liable for the debts of the company to the extent of their shares in the company. This means that the creditor can only get from a member the extent of the latter’s share in the company.
But however, that just as humans can have restrictions imposed on their legal personality (for example, in the case of children) so a company can have legal personality without limited liability if that is how it is conferred by statute. A company may still be formed today, that is, as registered unlimited company without limited liability. Where a company has unlimited liability, the creditors can push the liability on any person who has the capacity to pay the debt and it won’t matter that the company is a separate and distinct entity. Mobil producing unlimited is an example of an unlimited liability company.
It is important to state that under the CAMA, a complete absence of any liability is not permitted. A company is either limited liability or unlimited liability.
One obvious advantage of corporate personality is that it enables the property of the corporation to be more clearly distinguished or demarcated from that of its members.
In an unincorporated association or society, the property of the association is the joint property of all the members. In the case of a company, the assets do not belong to the shareholders. Thus, the creditors must go against the company and the company alone unless there is proof of fraud.
3. Corporate Litigation:
The company can sue and be sued in its own name.
4. Perpetual Succession:
Until dissolved, a company continues to exist and survives the death of all its directors and shareholders. Thus, members may come and go but the company can go on forever.
5. Transferable shares:
An incorporated company has the power to transfer shares. This power may be subject to restrictions but not prohibition. See S. 22(2), CAMA.
The company as distinct from a sole trader is able to raise funds more easily than a sole proprietorship, that is, through equity by asking people to invest. The company can even create the kind of debenture created by Mr Aron Salomon in Salomon v Salomon.
7. Compliance with companies’ legislation (S. 37, CAMA):
The concepts of corporate personality and limited liability were tested in the famous case of Salomon v Salomon. In that case, Salomon formed a company to buy his own business at a price to be paid in cash and debentures. All the shares were held by S., except six held by six members of his family. Debentures for 10,000 pounds were issued to S. In the winding up of the company, the House of Lords held that S was not, in the circumstances, liable to indemnify the company against the debts which its assets were insufficient to pay. Thus, the ruling upholds firmly the principle of corporate personality so that creditors of an insolvent company could not sue the company’s shareholders to pay up outstanding debts. (Note: S. 37 CAMA codifies the common law decision in Salomon v Salomon).
In Lee v Lee’s Air Farming, the Privy Council reasserted that a company is a separate legal entity, so that a director could still be under a contract of employment with the company he solely owned. The case concerns the veil of incorporation and separate legal personality. The appellant's husband held 99% of the company's shares. He was killed while on the job, due to a plane crash. Mrs Lee then claimed for compensation under the Workmen's compensation Act 1922. The Court of Appeal held that since the deceased was the governing director and had full control of the company, he could not also be an employee of the company. After appealing the case, it was ruled that an owner can also qualify to be an employee of the same business since the company was considered to be a separate legal person.
In Macaura v Northern Assurance, the owner of a timber estate sold all the timber to a company which was owned almost solely by him. He was the company's largest creditor. He insured the timber against fire, but in his own name. After the timber was destroyed by fire the insurance company refused the claim. The House of Lords held that in order to have an insurable interest in property a person must have a legal or equitable interest in that property. The claim failed as “the incorporator even if he holds all the shares is not the corporation… neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation”.
From the case of Salomon v Salomon, it is clear that the twin principles discussed above make the company (as an artificial device) an easy medium to perpetuate fraud. This leads us to the doctrine of lifting the veil of incorporations which was developed as a need to strike a reasonable balance between effecting the principle of corporate personality and the need to prevent perpetration of fraud.
LIFTING THE VEIL OF A CORPORATION
The doctrine simply identifies the circumstances where the court would refuse to apply the corporate personality principle. We must identify the legal basis for the lifting of the veil of incorporation by the Nigerian courts. There is the challenge of being able to determine when the court would lift the veil of an incorporation. However, there are clear-cut cases. There are times where it is expedient for the law to apply the corporate personality principle. However, when should the law pull back from this principle? It is when the justice of the case demands so.
At some point in time in the history of Company law, there seemed to be a high propensity to use the corporate form for fraud. Quite a number of English cases were clear cut cases of fraud/certainly a fraudulent intent to avoid contractual obligation.
By the concept of ‘lifting the veil’, we mean there are circumstances where the courts are prepared to pierce the corporate veil to combat fraud and the courts will not allow the principle espoused in Salomon’s case be used as an engine of fraud. In Gilford Motor v Horne, Horne was at one time the Managing Director of Gilford Motors. One of the terms of his employment contract was that, in the event that he leaves the Company, he will not solicit the customers of the Company. Eventually Mr. Horne left the Company and setup his own Company by the name of JM Horne & Co Ltd. through which he had business dealings with the previous Company’s clients. Gilford Motors sued Mr. Horne. Horne’s claimed that it was not him that was doing the business but the Company and that under Company Law they were two different people. However, the court was not convinced and lifted the veil of incorporation. In this instance, Mr. Horne was just trying to hide behind a corporate veil to steal business from his former employer. Where a fraud is perpetrated, the Court will lift the corporate veil. Similarly, in Jones v Lipman, the defendant had contracted to sell land to the plaintiff. The defendant was now trying to prevent the plaintiff from obtaining specific performance of the contract so he conveyed the land to a company formed for this express purpose which was owned and controlled by him. The defendant argued that the company as a separate legal person was a bonafide purchaser for value without notice of the land and so specific performance could not now be ordered over the land. The court ignored the corporate veil for the purpose of the defendant’s argument. He followed the reasoning in Gilford v Horne and ordered specific performance against both the defendant and the company which now held the land. But in the Nigerian case of FDB FINANCIAL SERVICES v ADESOLA, the court noted that even if fraud and/or illegality is discernible in the conduct of the affairs of a company, this in itself does not disregard the company’s separate personality since the court often imposes liability on the company as well. There must be clear evidence of illegality or fraud for the veil to be lifted. In the instant case, it was not necessary to join the MD of the company as a party to the suit since there was no evidence of fraud and he was merely an agent of the company.
Another area the concept of lifting the veil of a corporation is also relevant was trust. Occasionally, the court may pierce the corporate veil to look at the characteristics of the shareholders. In Abbey Malvern Wells v Minister of Local Government & Planning, a school was carried on in the form of a company but the shares were held by trustees on educational charitable trust. The court was prepared to pierce the corporate veil and look at the terms on which the trustees held the shares.
There are also cases where no fraud was involved but at the time of war, the courts were prepared to lift or pierce the corporate veil to see who the controlling share-holders of the company are. In Daimler v Continental Tyre & Rubber, a company was incorporated in England for the purpose of selling their tyres manufactured in Germany by a German company. Its majority shareholders and all the directors were Germans. On declaration of war between England and Germany in 1914, the persons in control of its affairs became alien enemies and accordingly the company was declared to be an enemy company. During the war period, the company filed a suit to recover trade debt, which was dismissed by the court and observed that such payment would be a trading with an enemy company and to allow alien enemies to trade under the corporate façade will be against public policy.
There has also been an attempt to extend the principle of lifting the veil with respect to group structures. Lord Denning sought to apply this principle in cases where there is a holding company with many subsidiaries where the parent company has lots of creditors. He propounded (using his single economic unit theory) that the creditors should be able to jump the fence and attack the parent company. DHN FOOD DISTRIBUTORS v TOWER HAMLETS one case where, on the basis that a company should be compensated for loss of its business under a compulsory acquisition order, a group was recognised as a single economic entity. In that case, DHN imported groceries and provision and had a cash-and-carry grocery business. Its premises were owned by its subsidiary which was called Bronze. It had a warehouse in Malmesbury Road, in Bow, the East End of London. Bronze’s directors were DHN’s. Bronze had no business and the only asset were the premises, of which DHN was the licensee. Another wholly owned subsidiary, called DHN Food Transport Ltd, owned the vehicles. In 1970 Tower Hamlets London Borough Council compulsorily acquired the premises to build houses. As a result, DHN had to close down. Compensation was already paid to Bronze, one and a half times the land value. DHN could only get compensation too if it had more than a license interest. The Lands Tribunal held no further compensation was payable. The Court of Appeal held that DHN and Bronze were part of a single economic entity. Therefore as if DHN had owned the land itself, it was entitled to compensation for the loss of business. But in Woolfson v Strathclyde RC, the DFN’s case was not followed. The courts in these cases regarded the decision in DFN as an aberration and that a separate entity principle was unchallengeable by judicial decision. In fact, in the landmark English Court of Appeal case Adams v Cape Industries Plc. the case law on Salomon was subject to a complete review. This case involved liability within a group of companies. The claimant, Adams, sought to ignore the separate legal personality of a parent (Cape) and its subsidiary company and to hold the parent liable for the obligations of the subsidiary. The court had to determine whether the case of Salomon could be disregarded in the interest of justice. It was held that “the court is not free to disregard the principles of Salomon v A. Salomon & Co Ltd merely because the justice so requires.” Thus, the principle in Salomon remains almost if not totally inviolable.
There is a general tendency to lift the veil of incorporation when there is a liability in tort to attack the parent company by the English courts. In Connelly v RTZ Corporation, Mr Connelly mined uranium in Namibia for RTZ’s wholly owned subsidiary, Rossing Uranium Ltd. He developed cancer, squamous-cell carcinoma of the larynx, from uranium ore dust and sued RTZ, alleging that it played a role in setting its subsidiary’s health and safety procedures, and therefore owed him a duty of care. RTZ argued Mr Connelly should sue the subsidiary only and was limited to an action in Namibia. This case was determined in the House of Lords in favour of Mr Connelly. See also Lubbe v Cape Industries where the House of Lords postulated that it is possible to show that a parent company owes a direct duty of care in tort to anybody injured by a subsidiary company in a group.
There are at least about 3-5 instances in CAMA where in appropriate circumstances, the law would lift the veil. Although the CAMA does not say “lifting the veil”, common sense would tell you that it is lifting the veil. The first is S. 290 CAMA which deals with personal liability of directors and officers. The section is to the effect that where a company is loaned a sum of money to be used for the execution of a contract or project and with intent to defraud it fails to apply the money for the purpose for which it was received, every officer of the company who is in default shall be personally liable to the lender. In Public Finance Securities v Jefia, the respondent made several deposit placements which totalled 3.5 million naira with the appellant company on the assurance and warranty of the 2nd appellant (the Chairman and MD of the company) that upon maturity, the respondent would be paid. The appellants never made good their intention to pay the respondent at the appropriate time, hence the institution of the suit by the respondent. The 2nd appellant when called fabricated a sham defence “that the 1st defendant in common with other Banks and Investment Companies, suffered a decline in business fortunes due to political crises and orchestrated blackmail by some fraudulent staffers”. The court held that by S. 290 CAMA, where the Chairman and MD of a company through his assurance and warranty induces a person to place funds with his company, it will be unacceptable as a defence for the failure to repay the funds, if he relies on low productivity. A situation of this nature amounted to constructive fraud. Also, in Alade v Alic, X, Y and Z formed a partnership to trade on produce with X being a company and Y, the MD. The agreement was masterminded by Y. With a view to jump start the partnership, Z borrowed a sum from a bank but Y used the substantial part of the money to settle the indebtedness of X. The court held that Y was jointly and severally liable for the breach of partnership agreement since he was the alter ego and prime mover behind X.
We also have S. 93 CAMA which is to the effect that where a company carries on business for a period of more six months while its membership is below the legal minimum of two (2), every director or officer of the company during that period will be liable jointly and severally with the company for the debts of the company contracted during that period.S. 506 CAMA is to the effect that if in the course of winding up a company, it appears that any business of the company carried has been carried on in a reckless manner or with intent to defraud creditors of the company…., the court has a discretion to declare that any persons who were knowingly involved are responsible for all or any of the debts or other liabilities of the company. In Sameindir v Bola Adedipe, the appellant’s company contracted with the respondent to help sell their stock-fish and to pay the proceeds into a designated account of which he was a signatory. He now caused another account to be opened of which he was also a signatory and into which the proceeds of the stock-fish was diverted. The Respondent original investors who imported the stock-fish didn’t get any of the proceeds of the sale. The Court of Appeal relying on S. 290 CAMA which is to the effect that where a company receives money and fails to apply it for the purpose for which it was received, the directors must be held personally liable. The Court further stated that there is no doubt that the persons behind the company are not phantoms; they are flesh and blood who have been unmasked. The Appellant was denied the use of corporate veil to perpetuate fraud.