INTRODUCTION

It is well established that upon incorporation, a company assumes a legal personality distinct from its founders, director or shareholders with perpetual succession. In Nigeria, a company obtains a separate personality upon its registration with the Corporate Affairs Commission (CAC). Thus, vested with the legal capacity to carry on business, enter into contracts, own properties, sue and be sued in its own name as though it were a natural person. Put simply, a company is empowered by the nature of its registration to do everything a person can do under the law through its officers

This principle is further established under Section 42 of the Companies and Allied Matters Act (CAMA) 2020, which provides that a company becomes a body corporate upon incorporation with all the powers of a natural person. The doctrine was first enunciated in the celebrated case of Salomon v Salomon & Co Ltd (1897) AC 22 to promote entrepreneurship, encourage investment and limit personal liability. However, this law further affirms that this principle must not be used as a shield for fraud or injustice,. The separation between the company and its members is referred to as the ‘corporate veil’.

The principle of piercing the corporate veil is a vital corrective intervention that was established due to the abuse of the principle of corporate personality. This is because a company, though a juristic person, is not a natural person. As such, it cannot make decisions for or carry on business by itself except through human beings who serve as the directing mind of the company.

The Principle of Corporate Personality

The principle of corporate personality was first propounded in Salomon v Salomon & Co Ltd (supra), where the House of Lords held that a properly incorporated company is separate from its shareholders even where an individual controls the majority of shares. The decision established that the company’s debts are its own and not those of its members. As such, the principle serves as the general rule.

This principle has been consistently applied in Nigeria over the years and is reflected in Section 42 of the Companies and Allied Matters Act 2020 which recognizes the company as a separate legal entity with perpetual succession and limited liability see Royal Pet. Co. Ltd. v. F.B.N. Ltd. Nigerian courts have repeatedly affirmed that once a company is legally incorporated, its personality cannot be ignored merely because it is controlled by a single individual or a small group of shareholders.

The Principle of Piercing the Corporate Veil as the Exception

The concept of ‘Piercing the corporate veil’ is the situation where a court disregards the separate legal personality of a company going beyond its corporate veil to hold its executives, directors or shareholders personally liable for corporate obligations and liabilities. It is an exception to the general rule established in Salomon v Salomon (supra)

The doctrine operates as a judicial and statutory intervention mechanism established to prevent the abuse of the protection granted to a company by its corporate personality. The “organic theory,” also known as “the directing mind and will theory” propounded by Lord Viscount Haldane in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705, provides the framework for the piercing of the corporate veil of a company. The theory stipulates that the Courts identify the individuals who act as the “directing mind and will” of the company, usually senior executives, directors or shareholders and hold them personally liable for the acts or omissions of the company where such acts are unlawful or fraudulent.

It is important to note that Courts do not take the piercing of the corporate veil of a company lightly, as doing so undermines the protection provided by the separate personality. Hence, caution is exercised in piercing the veil and the exception is applied only where it is necessary for the administration of justice. The rationale behind it is that the law will not allow the corporate structure to be used as an instrument of fraud, illegal activities or to evade legal obligation.

Legal Framework for the Piercing of the Veil of a Company under the Companies and Allied Matters Act 2020.

The Companies and Allied Matters Act 2020 makes statutory provisions for corporate personality and corporate veil piercing in Nigeria. Section 42 establishes separate legal personality while Sections 305, 316, 334, 433, 672, 729(3) and 862 of CAMA make provisions imposing personal liability on directors and officers of the company in certain situations.

Statutory lifting of the corporate veil may occur in cases of breach of directors’ fiduciary duties, misuse of company funds or property, secret profits made by company executives or conflict of interests, dividends paid out of the company’s capital, fraudulent trading, improper use of company name or seal, misstatements in prospectus or false statements in company documents. These provisions ensure that the company cannot be used by individuals to carry out unlawful conducts or businesses.

Grounds for Piercing the Corporate Veil

The courts in Nigeria recognize several grounds for piercing the corporate veil of a company. Fraud, however, remains the most common and major ground, especially where the company is used to deceive creditors or as a cover for illegal activities. These grounds are highlighted succinctly to include;

1. Fraud – The corporate veil may be lifted where a company is used as an instrument of fraud. Courts will disregard the company’s separate personality where it is established that the company was used to deceive creditors, conceal unlawful acts, make false representations, or perpetuate dishonest trading practices. In such circumstances, directors and controlling shareholders may be held personally liable for the fraudulent conduct carried out under the guise of incorporation.
2. Sham or Façade Company – Where a company exists merely as a sham, façade, or alter ego of its controllers rather than as a genuine independent business entity, courts may pierce the corporate veil. Nigerian courts are inclined to disregard the corporate structure where incorporation is used to conceal the true facts, evade liability, or shield individuals from responsibility for wrongful acts.
3. Tax Evasion – Courts will disregard corporate personality where the corporate structure is deliberately employed to evade tax obligations or avoid lawful tax liabilities. The law does not permit incorporation to serve as a device for circumventing statutory tax responsibilities.
4. Avoidance of Legal or Contractual Obligations – Where incorporation is used as a means of escaping existing legal duties, contractual commitments, or statutory obligations already owed by individuals, courts may pierce the veil to enforce such obligations against the persons behind the company.
5. Public Policy and Interest of Justice – The courts retain equitable jurisdiction to lift the corporate veil where maintaining the company’s separate legal personality would result in injustice or offend public policy. In appropriate cases, the interest of justice overrides strict adherence to the doctrine of separate corporate personality.
6. Fraudulent Trading – Under the Companies and Allied Matters Act (CAMA) 2020, directors and officers of a company may incur personal liability where the business of the company is carried on with intent to defraud creditors or for any fraudulent purpose. In such cases, the courts are empowered to lift the corporate veil and impose liability on the persons responsible.
7. Improper Use of Company Name –The improper or deceptive use of a company’s name, particularly where it violates statutory restrictions or falsely suggests governmental approval or affiliation, may justify disregarding the company’s separate legal identity and imposing liability on those responsible.
8. False Statements in Corporate Filings – Directors or officers who make false declarations or submit misleading statutory filings and corporate documents may be personally liable notwithstanding the company’s incorporation. Courts will not permit the corporate form to shield deliberate misrepresentation in official filings.
9. Company Used as an Instrument of Injustice – Courts may lift the corporate veil where preserving the separate legal personality of the company would shield wrongdoing, perpetuate injustice, or defeat the ends of justice. In such situations, the courts will look beyond the corporate structure to hold the real actors accountable.

While the doctrine of separate legal personality remains a fundamental principle of company law, it is not absolute. Nigerian courts and statutory provisions under CAMA 2020 recognize several exceptions where the corporate veil may be pierced to prevent fraud, injustice, and abuse of the corporate form. The doctrine, therefore, serves as an important safeguard against the misuse of incorporation as a tool for illegality or unfair advantage. The courts will also lift the veil in any instance highlighted above and even in more similar instances. The imaginary scale within which the court uses to determine the veil lifting is whether or not the corporate structure has been abused and if holding the individuals personally liable will aid in the administration of justice. The focus is always on preventing injustice rather than punishing legitimate business operations.

Fraudulent Trading and Directors’ Liability

Fraudulent trading is the most compelling statutory ground for piercing the corporate veil under the Companies and Allied Matters Act 2020. Where a company is carried on with intent to defraud creditors or for fraudulent purposes, the directors and officers may be held personally liable.

The main aim of this provision is to protect creditors and ensure that lawfully incorporated companies are not used as instruments of deception. Courts examine financial records, company transactions and directors’ conduct to determine whether there was a fraudulent intent. If it is determined that there was an intent to defraud, the corporate veil is lifted, and personal liability is imposed on those individuals responsible for the acts or omissions of the company.

Judicial Precedents in Nigeria

Nigerian courts have developed a steady approach to corporate veil piercing in judicial precedents, either upholding the separate personality principle or piercing the veil of the company. In Union Bank of Nigeria Ltd v Tropic Foods Ltd (1992) 3 NWLR (Pt. 227) 231 CA, the court emphasized that corporate personality cannot be used to perpetrate fraud or injustice. Likewise, in Adeyemi v Lan & Baker Nigeria Ltd (2000) 7 NWLR (Pt. 663) 33, the court pierced the corporate veil of the company to impose personal liability on directors or shareholders who use the company as a shield for fraudulent activities, breach of trust, or to evade legal obligations.

In the case of Marina Nominees Ltd v Federal Board of Inland Revenue (1986) 2 NWLR 48, the court recognized that where a company acts as an agent of its shareholders, the veil may be lifted to determine the true nature of the transaction. These cases show the recognition of the Nigerian courts to intervene where necessary.

It is important to note that the piercing of the corporate veil of a company is within the exclusive purview of the judiciary. It is noteworthy to state that certain enforcement agencies may, in the process of lifting the incorporation veil, lend a helping hand through their investigative mechanism; the Court still wield the ultimate power to make pronouncements where there is a liability on any officer of the company. Hence, only a court of competent jurisdiction can pierce the veil of a company and hold its executives personally liable.

Policy Considerations and Modern Trends

The doctrine of piercing the corporate veil raises important policy considerations. This is because the consideration for public policy and justice may justify veil-piercing when upholding the corporate form would lead to injustice, violate public policy principles or undermine the integrity of the legal system. In essence, the protection of creditors, investors and the public against corporate abuse will be ensured. However, veil piercing in every action may discourage investment and undermine the corporate personality of companies.

It is for this reason the Courts in Nigeria exercise caution and carefully determine such cases, ensuring that veil piercing is applied only in exceptional circumstances. This approach strikes a balance between ensuring justice and maintaining the legal protections and benefits associated with incorporation.

Conclusion and Recommendations

Piercing the corporate veil remains an essential safeguard in Nigerian company and commercial transactions. It ensures that the principle of separate legal personality does not become an instrument for fraud or illegal activities. The doctrine upholds the essence of corporate personality while encouraging lawful business practices.

Caution is recommended to be exercised by the courts in the application of veil piercing. There must also be a strict adherence to corporate and legal obligations by the directing minds of a company to avoid personal liability.

Disclaimer

The article provides general information relating to the legal issues around the corporate veil in Nigerian company and commercial transactions. It is meant for general information only. It is not, and should not be relied upon as legal advice. If you require any assistance or enquiry relating to the above subject, please contact info@regville.com or Regville Associates Key contacts for advisory on Corporate Governance via www.regville.com    

Sharon-Amaka Asiegbu Esq

B. Adejare Adegbite Esq