The law is settled that a company is a legal entity distinct from its shareholders subject to very limited exceptions. It has rights and liabilities of its own which are distinct from those of it shareholders. The Locus Classicus of SALOMN v SALOMON & Co LTD (1897) AC 22. In MACAURA v NORTHERN ASSURANCE (1925) AC 619, the House of Lord re-emphasized this principle, that the Sole owner and controller of a company did not even have an insurable interest in property of the company, although economically he was liable to suffer by its destruction. These principles are the starting point for the elaborate restrictions imposed by Common law on a wide range of transactions, which have the direct or indirect effect of distributing capital to shareholders. The Separate Personality of a company is sometimes described as a fiction, and in some sense it is, but the fiction is the whole foundation of the company law practice and insolvency.
There are however instance created by law and equity where the court will disregard the separate legal personality, it means, “ Piercing the Corporate Veil”. It is an expression rather indiscriminately used to describe a number of different scenarios. Generally speaking it means disregarding the separate personality of the company. There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally and in addition to the company, for something that he has done as its agent or as a joint actor, if the arrangements in relation to the property are such as to make the company its controller’s nominee or trustee for that purpose. Equitable remedies, such as an injunction or specific performance may be available to compel the controller whose personal legal responsibility is engaged to exercise his control in a particular way.
Legal systems across the world recognize the separate corporate legal personality while acknowledging some limits to its logical implications. In Civil Law jurisdictions, the juridical basis of the exceptions is generally the concept of abuse of rights, to which the International Court of Justice was referring in Re: Barcelona Traction, Light and Power Co Ltd (1970) ICJ 3 when it derived from municipal law a limited principle permitting the piercing of the corporate veil in cases of misuse, fraud, malfeasance or evasion of legal obligation.
Common law has no general doctrine of this kind, but it has variety of specific principles, which achieve the same result in some cases. One of these principles is that the law defines the incidents of most legal relationships between persons (natural or artificial) on the fundamental assumption that their dealings are honest. The same legal incidents will not necessarily apply if they are not. The principle was stated in its most absolute form by Lord Denning LJ in LAZARUS ESTATE LTD v BEASLEY (1956) 1 QB 702, 712
“ No Court in this land will allow a person to keep an advantage which he has obtained by fraud. No judgment of a court, no order of minister, can be allowed to stand if it has been obtained by fraud. Fraud unravels everything. The court is careful not to find fraud unless distinctly pleaded and proved; but once it is proved, it vitiates judgments, contracts and all transactions whatsoever…”
Albeit so, almost all the modern analyses of the general principles have taken similar positions that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere façade concealing the true facts. See ADAMS v CAPE INDUSTRIES PLC (1990) Ch 433.
The jurisprudence of extending liability to the individuals especially if the company is a one-man and the alter ego is the majority shareholder has developed in Matrimonial Causes proceedings. See NICHOLAS v NICHOLAS (1984) FLR 285. MUBARAK v MUBARAK (2001).
In BEN HASHEM v AL SHAYIF (2009) 1 FLR 115, the difference between the approach taken in the family division and in other divisions of the High Court arose in a particular acute form, because he was hearing the claim for ancillary relief in conjunction with proceedings in the Chancery Division. In the family division, the wife was seeking an order transferring to her a property which she was occupying but which was owned by a company controlled by the husband, while in the chancery proceedings the company was seeking a possession order in respect of the same property. After reminding himself of what he had in A v. A and conducting a careful review of both family and non-family cases, Munby J formulated six principles at paragraph 159- 164 which he considered could be derived from them:
- ownership and control of a company were not enough to justify piercing the corporate veil
- the court cannot pierce the corporate veil, even in the absence of third party interests in the company merely because it is thought to be necessary in the interest of justice;
- the corporate veil can be pierced only if there is some impropriety;
- the impropriety in question must, as Sir Andrew Morritt has said in Trustor, be linked to the use of the company structure to avoid or conceal liability
- to justify piercing the corporate veil, there must be both control of the company by the wrongdoer(s) and impropriety, that is (mis)use of the company by them as a device and façade to conceal their wrongdoing” and
- the company may be a façade even though it was not originally incorporated with any deceptive intent, provided that it is being used for the purpose of deception at the time of the relevant transaction.
The global consensus is that courts of law in limited circumstance can pierce the veil if there is an abuse by the shareholder or directors or where there is apparent impropriety. In addition, legal scholars have however advocated the possibility of holding shareholders liable for the company’s debts as well. In 2014, Two Nordic Supreme Courts; Finland and Sweden (in NJA 2014 s 877 (NJA 2014:75) have in within a quick succession, handed down landmark decisions, in which the corporate veil of a limited liability company has been pierced in accordance with the alter ego theory and the shareholders have been held liable for companies debt. The both Courts set out the prerequisite for piecing the corporate veil on the basis of the following:
(i). A loss must have occurred.
(ii). A limited liability company must have been used in an artificial and reprehensible way as a means to avoid a payment liability for its shareholder.
(iii). There must be a casual link between the loss and the cause
(iv) it must be possible to identify the shareholder with the limited liability company.
These prerequisites must co-exist simultaneously for the corporate veil to be pierced.
The alter ago theory was also applied by the Nigeria Courts in FAIRLINE PHARMACEUTICAL INDUSTRIES LTD v TRUST ADJUSTERS NIG LTD (2012) LPELR -20860 (CA).
Paradoxically, in the case of PREST v PETRODEL RESOURCES LTD (2013) UKSC Justice Sumption QC, (a case involving Nigeria Couples) the Trial Court judge Moylan J decline to pierce the corporate veil under the general law without some relevant impropriety. The Supreme Court upheld that finding, although held the husband to be the owner of the company and was trying to evade liability. Reference was made to a façade very provocatively page 14 thus:
“ ….a façade or sham beg too many questions to provide a satisfactory answer. It seems to that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In these cases the court is not disregarding the façade, but only looking behind it to discover the facts which the corporate structure is concealing.
The Nigeria Supreme court gave credence to the façade theory in ALADE v ALIC (NIG) LTD (2010) 19 NWLR Pt 1226 pg 111 at 127 para E-F thus:
“ it must be stated that this court as the last court of the land will not allow a party to use his company as a cover to dupe, cheat and or defraud an innocent citizen who entered into a lawful contract with the company only to be confronted with the defence of company’s legal entity as distinct from its directors. Most companies in this country are owned and managed solely by an individual, while registering the members of his family as shareholders. Such companies are nothing more than one-man-business. Hence the tendering of there to enter into contract in such company name and later turn around to claim that he was not a party to the agreement since the company is a legal entity”
It is the writer submission that other than the statutory exceptions created by relevant enabling laws, the emerging trend globally is that there is a limited principle which applies when a person under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may pierce then pierce the corporate veil for purpose, and only for the purpose of depriving the company or its controller of the advantage that they would otherwise have obtained by the separate legal personality. The principle has been recognized far more often that it has been applied, but the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding it for being a façade.