It is trite law that upon incorporation, a company becomes a legal entity distinct from its members. However, circumstances may arise which may compel the courts to identify a company with its members. In such situations, the court may lift the veil of incorporation or crack open the incorporation shell to identify the company with its members in order to guard against injustice. The veil of incorporation may be lifted under the following circumstances:
- If after its membership was reduced below the statutory minimum, a company continues to carry on business for more than six months, every person who is a member (director or officer) during that time that business was so carried on after six months, and who knows that it is carrying on business with less than the required minimum number of members will be jointly and severally liable with the company for the debts contracted during that time. This is in line with the provisions of s.93 of the Companies and Allied Matters Act (CAMA), 1990.
- If it appears that during the winding-up of a company, hat the business of the company has been recklessly conducted or fraudulently conducted; those responsible may be held personally liable without limitation of liability for any of the company’s debts or liabilities. This is provided for under s.506 of CAMA.
- If the company’s name is not mentioned in Bills of Exchanges and other negotiable instruments (promissory notes, cheques, etc.) as required by s.631(1)(c) of CAMA, the officer or any person issuing such instrument on behalf of the company will be personally liable for the amount thereof.
- S. 336 of CAMA requires the group accounting and the separate profit and loss accounts of the holding company and its subsidiaries to be placed simultaneously before the general body. The effect of which is to show the relative financial dependence of the two companies, detracting from the concept of separate legal personality of each.
- There are instances where the court has to determine the character of a company in order to see whether it bears an enemy character or not. This was the position of the court in Daimler Co. Ltd V. Continental tyre & Rubber Co. Ltd is very instructive.
- The court may lift the veil of incorporation on the allegation of tax evasion, if the device of incorporation is used for defrauding the government (S. 2& 18 of the Company Income Tax Act, 1961).
- The court may lift the veil of incorporation on the allegation of commission of fraud by the company on others.