The principle of separate legal personality is a fundamental concept in corporate law. It dictates that a company is considered a legal entity distinct from its owners, meaning that it has its rights, liabilities, and obligations. However, there are situations in which this principle doesn’t hold. In this article, we will explore seven exceptions to the principle of separate legal personality, shedding light on when a company’s veil can be pierced.
Thus, an incorporated company has the right to own a property, sue and be sued in its own name, and enjoys all the rights accruable to a natural person. A company therefore is separate from its members. The liability of the members is hence, limited only to the amount which they have expressly undertaken to be bound by during the occasion of winding up. See section 54 of CAMA 2020.
This is the principal notion of the doctrine of separate legal personality. It is on the basis of this security guaranteed by the law that third parties rely on to deal with companies. This doctrine was upheld in the locus classicus case of Salomon v Salomon.
In this case, the court held that the doctrine of separate legal personality is applicable to small companies as well.
Separate corporate personality of a company shields its members from liability. Thus, generally, in the case of any liability by the company, the company itself is proceeded against and not its members.
However, there are instances where the law ignores the veil of incorporation and proceed against the members of the company. This is known as lifting the veil of incorporation.
In Salomon v Salomon, the court noted that where a company operates outside the scope as permitted by the Act, the court has no other option that to lift the veil of incorporation and treat the company as nullity by proceeding against the members who perpetuate the unlawful act.
Exceptions to the Principle of Separate Legal Personality
1. Breach Of Conditions For The Registration Of A Company Limited By guarantee: A company limited by guarantee must not be registered for the object of carrying on business and distribution of its profit thereon. See section 26(3) of CAMA 2020.
A company in breach of the afore-stated provision shall have its officers and members who are aware of the breach, liable jointly and severally for the liabilities incurred during the time which they so carry on business.
The commission can also prescribe further punishment as they may deem fit in this regard. See section 26(11) of CAMA 2020.
Further, section 26(12) of CAMA 2020 provides that the total liability which a member of the company shall contribute in the occasion of winding up shall not be less than N100,000.
The breach of this provision is punishable under section 26(14) CAMA 2020 to the effect that the director and members who are aware of the breach shall be liable to such penalty which the commission may prescribe.
2. Reckless/fraudulent trading: By section 672(1) of CAMA 2020, in the course of winding up of the company, if it is realized that a person had carried on business under the company in a reckless manner or with intent to defraud the company’s creditors.
The court shall upon application by any of the creditors of liquidators, and if it considers it appropriate in the circumstance, order that such a person and the parties to the fraudulent act be liable without limitation, to all the liabilities of the company.
3. Minimum number of Directors: The law requires that the number of directors for big companies shall not be less than two at any time. See section 271(1) of CAMA 2020. Section 271(2) of the Act further prescribes that at any time when the number of directors goes below two, that more directors shall be appointed within one month to meet the requirement of section 271(1), and until that is done, the company shall not carry on business.
Section 271(3) of the Act then prescribes a penalty for the breach of this requirement to the effect that if the company carries on business after 60 days of the number of its directors falling below two, the directors and members who are cognizant of this fact shall be liable for the liabilities incurred by the company during the period it did business in contravention of this requirement.
4. Disclosure of persons with significant control: By section 119 (1) of CAMA 2020, the law requires every person who exercises significant control over the company to disclose the details of his interest in writing within 7 days of acquiring such influence.
CAMA defines “significant control” in its section 868 to include having up to 5% of voting right, shares or interest, having the power appoint or remove majority of the directors and exercising significant influence over a company or a trust firm.
Section 119 (5) then empowers the commission to prescribe such penalty as it deems fit on any person who fails to make such disclosure.
5. Holding and subsidiary companies: Section 379 of CAMA 2020 requires that a holding company shall in addition to preparing its own account or statements; prepare that of its subsidiaries as well which shall detail the affairs of the company, its profit and/or loss in compliance with section 388 of the Act.
Here, the law disregards the separate identity of a subsidiary company and treats it as one with holding company.
6. Publication Of Company Names: By the virtue of section 729 (2) of CAMA, the law mandates all companies to affix its name in eligible form in its place of business, and for all companies to ensure that the seal, signing of bills of exchange, invoice, cheque and all official bills of the company to bear the company’s registered name.
Failure to comply with this prescription at anytime is punishable to such penalty as the commission may prescribe, and the person who authorizes the issue of bills shall be liable to the holder to the amount thereon.
7. Investigation Of Related Companies: The Corporate Affairs Commission has the power to appoint an inspector for the investigation of a company.
In exercise of this power by the CAC and the appointed inspector, an investigation can be carried on in respect of a holding company as well as its subsidiaries.
In other words, an inspection being conducted in a holding company can be extended to its subsidiary and vice versa. See section 778 of CAMA 2020.
The import is that here, the law treats the two independent companies as thought they are one, thereby lifting the corporate veil of the other.
The Power Of The Court To Lift Corporate Veil
It is noteworthy that the court has the inherent power to lift the corporate veil of a company. There are instance where the court has actually lifted a company’s veil of incorporation. Thus, in Re FG (Films) Ltd, the court lifted a company’s veil of incorporation in order to prevent the evasion of legal obligation.
The court has also lifted the veil of incorporation in consideration of public policy and interest of justice. Thus, in Daimler Co v Continental Rubber, the court held that Continental Rubber was a German company, and that it was not safe to transact with an enemy country during the time of war.
Also, where the company is a sham, the court has held that its corporate veil can be lifted. Thus, in Lipman v Jones, Lipman had initiated an estate contract for the sale of house to Jones. He has a change of mind.
In order to avoid fulfilling the contract, he established another company and conveyed the house to a company belonging to him, as its owner. The court lifted the veil of incorporation and indicted Lipman as the one behind the operation of the company.
The court, thereon ordered specific performance for the estate contract to be completed as was undertaken by Lipman.
The instance of where corporate veil can be lifted is numerous and seems inexhaustible, since the court also has the power to lift the veil of incorporation.
Thus, asides the express provisions of the Companies and Allied Matters Act, the courts are minded by the rule that a company must operate in the confines of the law, or otherwise, those who are responsible for manning the company and may be the members, shall be personally liable beyond the extent of their undertaking.