LIFTING THE VEIL OF INCORPORATION  BY LEGISLATURE

1. INTRODUCTION
2. OBJECTIVES
3. MAIN CONTENT
4. CONCLUSION
5. SUMMARY
6. TUTOR MARKED ASSIGNMENT
7. REFERENCE/FURTHER READING

INTRODUCTION

The term lifting the real as we learnt in unit 3 is simply the term applied to situation when the separate legal entity of the company cannot be maintained. The courts have sometimes referred to this as lifting the veil’, “peeping behind the veil ‘pircing, ‘parting’ or ‘penetrating’ the corporate veil,there are two aspects of lifting the veil, the judicial and the legislative aspects. We have discussed the judicial aspects in unit 3, we now turn to the situation when the corporate veil will be lifted by the legislature. This means where the legislature has made specific provisions in the law that allows the corporate veil to be lifted.

OBJECTIVES

In this unit the student will learn circumstances when the veil of incorporation will be lifted by legislative provisions or statutes

MAIN CONTENT

It has always been recognized that “the legislature can forge a sledge hammer capable of cracking open the corporate shell” (per Delvin J in Bank Voor Handelen Scheepvaat N.V. v Slatford (1953) 1 QB 248 at 278. While agreeing that the veil of incorporation may be lifted under certain circumstances as provided in the law, it must be made clear that it is not as if for all times the company affairs and the people behind the company are totally shielded from public view. The legislature had always made it an essential aspect of corporate existence and limited liability that it should be accompanied by wide publicity, though third parties may not be allowed to proceed against the members of the company, but they are entitled to know the members of the company and their interests in it, they are also entitled to know who the officers of the company are, the constitution of the company, the capital of the company the accounts of the company, and generally all the registered documents of the company.

However, apart from the information that the law permits must be revealed to the public,  third parties may not be entitled to know beyond this, and therefore, it is as if a curtain is drawn over the affairs of the company that blocks access of outsiders to its internal affairs. Some authorities have distinguished between lifting the veil and lifting the curtain of incorporation, the fact is that at all times the legislature permits the veil to be lifted it is always for particular purpose in order to enforce the law or prevent the company from being used to deceive, perpetrate fraud or avoid legal obligation by those behind the incorporation.

We shall now turn our attention to examples of when the legislature by express and implied provisions allows the veil of incorporation to be lifted.

Reduction in Number of Members

Under section 93 of the CAMA 1990, ‘if a company carries on business without having at least two members and does so for more than six month, every director or officer of the company during the time that it so carries on business after those six months who knows that its carrying on business with only one or no member shall be liable jointly and severally with the company for the debts of the company contracted during that period.

This section does not operate to destroy the separate personality of the company, it will continue to operate as a separate legal entity even if there are no more members or the membership was less than the legal minimum. It is only the members that remain after six months that the creditors may sue personally for the debts of the company and not those that have withdrawn, and this is only if he knows that he is carrying on business with less than the required minimum and he is only liable for the debts contracted after the six months that he carried on business and incurred the debts. The effect of the section is that the liability attaches only to a member and not the director or officers of the company who is actually in control of the management of the company and who may be the one responsible for carrying on the business and who actually incurred the debt.

This section may be difficult to apply today basically because of the very many huddles one has to summon in its application. More so in modern times, since the only step to take to avoid the section is to ensure that the minimum membership do not fall below two for six months, the company will simply appoint a nominee to fill the vacancy. In the word of Gower “it constitutes an exception to the general rule of theoretical interest rather than practical importance.”

1. Fraudulent or Wrongful Trading: Another important example of statutory lifting the veil is offered in the provisions of section 506 of CAMA which was formally section 309 of the 1968 Companies Act. The act provides that,

“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 the company or any other person 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 thinks proper so to do, declare that any person who were knowingly parties to the carrying on of the business in manner aforesaid shall be 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.”

See also section 993 of the Companies Act 2006 U.K for the current English provision.

The provision recognizes that the separate personality can be used for fraudulent purposes. The ability of businessmen to use the company for fraudulent purpose is acknowledged, and therefore in order to prevent and or bring perpetrators to justice the legislature has allowed the veil to be lifted to enable the law see the persons behind the corporate veil.

What constitutes fraud: under the section, we must first determine what constitutes fraudulent trading, and what class of persons may be held liable for fraudulent trading. To establish intent, it has to be shown that the business of the company was being carried on in a reckless manner or with intent to defraud creditors of the company or creditors of any other person for any fraudulent purpose. Where it cannot be established that the trading was reckless or fraudulent the veil cannot be lifted, and the persons involved cannot be held  liable. In the case of Re Williams Leitch Bros. Ltd (1932) 2 Ch. 71 at 77, Maugham J explained the position of the law thus: “if a company continues to carry on business and to incur debt at a time when there is to the knowledge of the directors, no reasonable prospect of the creditors ever receiving payment of those debts, it is generally a proper inference that the company is carrying on business with intent to defraud.

Therefore, in his view, mere recklessness on the part of the persons concerned in carrying on the company’s business at the material time is sufficient to constitute fraud.  Fraud therefore may be inferred where there has not been a clear and deliberate intention to defraud in a particular case. But in Re Patrick & Lyon Ltd (1935) Ch. 786 at 790-1, the same judge gave a more rigid interpretation to the word fraud when he said, “there must be actual dishonesty, involving, according to the current notions of fair trading among commercial men, real moral shame.” This shows that the standard of proof may be inferred from the facts of each case and therefore the standard here is subjective moral blame, and there is no objective standard. In the Australian case of Hardie v Anson (1900) 105 LLR 451, the court held that the fact that a company continues to trade and to obtain goods on credit and to incur other liabilities without any reasonable prospect of being able to pay or provide payment therefore will not of itself show that the directors of the company have carried on the business with intent to defraud creditors. The intent to defraud must be express and not constructive or imputed.

The attitude of the Nigerian courts on the construction of this section is not yet clear, especially in view of the conflicting interpretations in the English and Australian decision. The interpretation in the Re Williams Leitch Bros case though is likely to be preferred because such interpretation makes it more difficult for anyone to involve himself in fraudulent trading without being caught; in fact the Jenkins Committee in 1962 had recommended the introduction of a remedy for reckless trading which was not accepted by government in England. The Cork committee was to successfully promote the amendment under the name of “wrongful trading”.

In Nigeria, the law still remains the same, and the section do not apply unless the company is in liquidation or winding-up also, the class of persons who may apply to the court are limited to (1) the official receiver (2) the liquidator (3) any creditor (4) contributory of the company. This helps in cases where the creditor or member feels aggrieved, without waiting for the official receiver, may sue the officers involved whether directors or not, and the section seems to cover all persons whether they are officers of the company or not who are involved in the fraud. In spite of all the very strict conditions precedent, it is an avenue to lift the veil of incorporation to strike at the persons behind the corporate veil afforded by legislation.

Misdescription

• Liability by company agents: On ordinary agency principles the officers of the company will make themselves personally liable, notwithstanding that they are in fact acting for the company, that is, if they chose to contract personally by failing to disclose that they are acting as agents of the company
• The Companies And Allied Matters Act 1990, had gone further to provite that if any director or manager of the company or other person acting on its behalf, must have the name of the company properlty described and painted on the outside of the offices of the company, also, have its name and registration number mentioned in legible characters in all business letters of the company and in all notices, advertisements and other official publications of the company, and in all bills of exchange, promissory notes, endorsements, cheques and order for money or goods purporting to be signed by or on behalf of the company and in all bills, parcels, invoices, receipts, and letters of credit of the company, failure of which the director or manager who knowingly and willfully authorizes or permits the default shall be liable personally. The result is that if the correct and full name of the company does not appear, the signatory will be personally liable to pay if the company does not, and it seems clear that it makes no difference that the third party concerned has not been misled by the description. See section 631 CAMA, see also section 349(4)Companies Act 1985 UK. The 2006 Companies Act U.K did not retain the section.

The rules on trading disclosures are linked to the doctrine of limited liability, the law ensures that the company status is sufficiently disclosed to outsiders dealing with it, in the words of Company Law Review Group, it is essential that the company’s legal identity… is revealed to all who have, or may wish to have, dealings with it so that they are warned as to its status and can discover all the other information which the company is required to reveal about itself.” (see Final Report J Para 11.52)

In essence, there are two aspects of the liability. The officer who knowingly misdescribes the company is liable both criminally and in civil proceedings. The holder of the bill of exchange, promissory note cheque or order for money or goods has the option to sue the officer for the money involved unless the company has paid for the loss.

2. Holding And Subsidiary Companies: It is now accepted as part of growth, that companies may develop by incorporating other companies in which it may have substantial or whole beneficial interest in the other companies, these new companies are better referred to as ‘subsidiaries’. While the parent company is regarded as a holding company, section 338 gives the meaning, of subsidiaries. A company is regarded as the subsidiary of another if (a) the company –

• is a member of it and controls the composition of its board of directors
• holds more than half in nominal value of its equity share capital or
• the first-mentioned company is a subsidiary of any company which is that others subsidiary

Section 336 of CAMA provides for the preparation of group financial statements by the holding company. The section provides, that “if at the end of a year a company has subsidiaries, the directors shall, as well as preparing individual accounts for that year, also prepare group financial statements being accounts or statements which deal with the state of affairs and profit or loss of the company and the subsidiaries.”

The effect of this provision is that the subsidiary is no longer regarded as a separate entity but the veil of incorporation is lifted when it comes to the issue of subsidiary as it treats the group as a whole and not as a district entity as it ought to be.

3. Power of Inspection: The Corporate Affairs Commission may appoint one or more competent inspectors to investigate the affairs of company and to report on them in such manner as it may direct. (section 314). While section 315 also empowers the commission to appoint inspectors to investigate the affairs of any company in Nigeria pursuant to the order of court.In the exercise of the powers conferred on the inspectors, the Inspector is invested with immense powers of investigations which will have the effect of lifting the veil or curtain of the corporation. Amongst other powers, the inspector may:-

• where he thinks it necessary for the purposes of his investigation to investigate also the affairs of another body corporate which is or at any relevant time has been the company’s subsidiary or holding company or a subsidiary of its holding company or a holding company of its subsidiary. See section 316
• he may request for all documents relevant to the investigation from the agents of the company being investigated
• the inspector may, if he has reasonable grounds for believing that a director or past director of the company had maintained an account into which his emoluments are paid, ask for the details of the accounts of the directors or officers involved. See section 318

4. Miscellaneous Statutory Examples: Many statutes made provisions when the corporate veil may be lifted if without doing so, the promoters or directors may avoid the provisions of the act, by the use of corporate personality principle, where for instance, corporate entity is used for the avoidance of tax. See Company Income Tax Act 1967, Income Tax Management Act 1961. In order to determine whether the Enterprises Promotion Act is complied with, with reference to sections 4,5,10 and 12 or whether Nigerians are being used to defeat the purpose of the Act, it would be necessary to look into the company to find out the real membership of the companies

CONCLUSION

It is the responsibility of the legislature to ensure that the principle of corporate personality should not be allowed to enable any person use the corporate entity to avoid legal obligations and break the law by the use of companies. The Companies Act itself has led the way by making provisions that seeks to lift the curtain of incorporation to make the officers of the company personally liable for the liability of the company. The occasions for doing this are scattered throughout the Act, but we have examined a few of them.

SUMMARY

The corporate veil may be lifted by the legislative in a variety of circumstances. The corporate veil will be lifted where it is discovered during liquidation that the directors of the company had operated the company in a fraudulent or reckless manner (section 506 CAMA where the company had traded below the legal minimum of two and has done this for six months, then any member who knowingly did this will be personally liable for the debts incerred during this period. Section 93 CAMA. Another instance is misdescription. Where  the company had been misdescribed or where the officers had failed to use the proper names of the company in transacting business, with third parties they will be personally liable to the third parties if the company refuse to pay, and they will also be criminally liable personally. Section 631 CAMA. Another important example of lifting the veil is in the area of Holding Companies. The law is that the holding company must prepare not only individual accounts giving a true and fair account of the entire group of companies. This effectively will lift the veil as to the persons behind the subsidiaries. See section 236 and 338 . We must also mention the fact that many statutes make provisions for lifting the veil of incorporation e.g. the Tax Laws.

TUTOR MARKED ASSIGNMENT

Discuss occasions when the legislature will permit the veil of incorporation to be lifted.