Lifting the corporate veil
The recognition that a company is a separate legal entity distinct from its shareholders is often expressed as the “veil of incorporation”. General principle, once a company is incorporated, the courts usually do not look behind the veil to inquire why the company was or who really controls it. However in certain situations, the court will ignore the separate legal personality of a company and look to the members/controllers of the company is “lifting the veil”.
This would involve treating the right or liabilities or activities of the company as the rights or liabilities or activities of its shareholders, for example treating the business od a company as that of its principal shareholder. Lifting the corporate veil is something expressly authorised by statute (statutory exceptions) and something it is adopted by the courts (judicial exception). STATUTORY EXCEPTIONS -When members become less than 2.
Companies Act 1956 states that “if at any remaining member has 6 months to find another member, after which the court will lift the corporate veil and hold the sole member liable for all debts of the company” Exceptions in this case: (a) If the sole member was not aware that he was the only remaining member; or (b) The sole member is a holding company owning the entire shares of the company concerned (a wholly owned company).
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If an officer of a company signs or issue or authorises the signing or issuance of certain instruments on behalf of the company, on which the company’s name does not appear properly -Section 121(2) Companies Act 1956 states that “such officer will be personally liable” The name of the company must appear in letters on all bill of exchange, promissory notes, cheques, negotiable instrument, endorsements and orders.
If the name of the company is not properly mentioned on any of these documents, the person who signed or issued the document is liable to the holder of the document for the amount due, unless the company pays upon the instrument. -If the company carries on its business for a fraudulent purpose: Section 304(1) and (5) Companies Act 1956 states that “where any business of the company has been carried put with intent to defraud creditor of the company, the court may make the persons who were knowingly a party to the fraudulent trading may be personally liable for debt or other liabilities of the company”.
At the time when a debt is contracted on behalf of a company, the officer of the company had no reasonable expectation that the company would be able to pay the debt: Section 303 (3) and 304(2) Companies Act 1956 states that “such officer will be personally liable”. In other word, that officer may be guilty of an offence and on conviction, he may be liable to pay of the whole or any part of the debt so contracted. -Transactions by a company which have the effect of avoiding or evading tax: Section 140(1) o Companies Act the Income Tax Act 1967 states that “give the right the Director-General of Inland Revenue to lift the corporate veil”