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Lifting the Corporate Veil Since a company is a legal person distinct from its members there is assumed to be a curtain, a veil

or a shield between the company and its members. The principle of separate legal entity was

established in the case of Salomon vs Salomon and company Ltd. Thus once a company is formed

there is a veil between the company and its members. Based on this principle it is not easy to go

behind the curtain and see who are the real persons composing the company.

There are however cases when the corporate veil has to be lifted to look at the individual members

who are in fact the real beneficial owners of all corporate property. Thus lifting corporate veil means

identification of a company with its members and when the corporate veil is lifted the individual

members may be held liable for its acts or entitled to its property.

Some of the instances when the corporate veil may be lifted include where it is for the benefit of

revenue, where it is essential to secure justice and where it is in public interests. The corporate veil

may be lifted by: -

a) The courts b) The statute

a) Lifting by the courts 1. Determination of the character of the company.

A company may be declared an enemy character when its directors are residents of an enemy

country. Therefore courts may lift the veil to ascertain the nationality of persons controlling the

company.

In Daimler company Ltd vs continental Tyres and rubber company Ltd 1916 AC 307 Daimler

company was sued by continental tyre company for recovery of a debt of Tyres supplied

continental tyres was incorporated in England for purpose of selling in England tyres made in

Germany. The shareholders of continental tyres were Germany except one and all directors were

Germany .

During the First World War continental tyres commenced an action to recover a debt from

Daimler. Daimler contested arguing that continental tyres was an enemy company. It was held that

continental tyres was an alien company and the payment of debt would amount to trading with an

enemy.

2. Prevention of fraud or improper conduct.

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The veil may also be lifted if a company is formed for a fraudlent purpose or to avoid legal

obligations.

Professor Leower says that the veil of a corporate body will be lifted where the corporate

personality is being blantantly used as a clock for fraud or improper conduct.

Case law Jones vs Limpman 1962

3. Where a company is a shaw. This refers to a situation where a company is formed and used for some illegal or improper purpose.

Case law Luniford motors Company Ltd vs Horne (1933)

4. Where the company is acting as the agent of the shareholders. When a company is acting as an agent of its shareholders or of another company, it will be liable for

its acts. There may be express agreement to the effect or an agreement (of agency) may be implied

from the circumstances of each particular case.

Case law relating to this is the F.G Film Ltd in Re (1953) I ALL E.R 615.

An American company financial the production of a film in India in the name of a British company.

The president of the British company, the board of trade of Great Britain refused to register the film

as a British film. The decision was held as a valid in view of the fact that British company acted

merely as the agent or nominee or the American company.

5. Protection of Revenue. This is especially the case when a company is formed to assist shareholders evade taxes. In such case

the shareholders may be held liable to pay income tax.

Case law illustrating is that of Sir Dinshaw Maneckfen Pefi Re AIR (1927) Bom 371.D.

6. Protecting public policy. Courts lift the corporate veil to protect the public policy and prevent transactions contrary to public

policy. Where there is a conflict between the separate entity principled and public policy the courts

ignore form and take into account the substance (Conners vs Connors Ltd (1940) for ALL ER 174).

Lifting by statute.

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1. When members fall below statutory minimum. As per section 33 of the Act, a business is not allowed to carry on business for more than six months if membership falls below seven

incase of a public company and below two in case of a private company. Anyone aware of the

fall of membership and continues to carry on business will be held liable for all debts of the

company contracted after six months.

2. Misdescription of the company. Sec 109 of the Act states that the name of the company must be fully and properly mentioned on all

documents issued by it. Where an officer of a company signs, on behalf of the company, a bill of

exchange, promissory note. Cheque, order for money or goods in which the companys name is not

mentioned the officer is personally liable to the holder of the bill of exchange.

Case law in this case, Hendon vs. Alderman (1973) 117s 631.

3. Holding and subsidiary companies. Although both holding and subsidiary companies are separate entities there are instances where a

subsidiary may loose its separate identity to a certain extent.

a) Where at the end of the financial year a company has subsidiaries, it may lay before the members in a general meeting not only its own account but also a set of

group accounts showing the profits and loss earned by the company and its

subsidiaries and their collective state of affairs at the sixth schedules.

b) Section 167 empowers the inspector appointed by the court to regard the subsidiary and the holding company as one entity for the purpose of investigation.

4. Investigation of company membership. Section 173 (s) empowers the registrar to appoint one or more competent inspectors to investigate

and report on the membership of any company for the purpose of determing the true persons who

are or have been financially interested in the success or failure of the company or able to control or

to influence the policy of the company. To investigate the corporate veil is lifted to ascertain the real

persons controlling it.

5. Take over Bids. Section 210 provides that where scheme or contract inviting the transfer of shares or class of shares

in the company to another company has been approved by the holders of not less than nine tenths

in the value of shares whose transfer is involved the transferee company may at any time within two

months after the making of the offer by the transferor company, give notice in the prescribed

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manner to any dissenting shareholder that it deserves to acquire his shares. This is illustrated in the

case Re Bufle press Ltd.

6. Fraudlent conduct of Business. Section 323 of companys Act in the course of winding up to a company it appears that any business

of the company has been carried on with intention to defraud creditors, the court may declare that

any person who were knowingly, parties to the carrying on such business are to be personally liable

for the debts and other liabilities of the company.

7. Prosecution of deliquent officers and members of company. Section 325 of Act if in the course of winding up of a company it appears that any past or present

officer or any member of the company has been guilty of any offence in relation to the company

then the court may declare such a person liable for his offence.