There are two areas that allow a company’s veil of
incorporation to be lifted thus exposing the members to liability.
These can be found in Common Law and in Statute
At Common Law
Illegality
At common law, if a company engaged in an illegal
business e.g. terrorism, the Courts have held that the veil could be lifted,
This is now codified in a number of statutes such as the Anti Money Laundering
and Proceeds of Crime Act, Environmental Management Act, Tax procedure Act.
Where
Company is acting as an agent of members
This instance can be described by the case of Daimler Co -vs- Continental Tyres – German Co. In this case, a company was incorporated in England to sell tires made in Germany by a German company. The shareholders were all German except one who was born in Germany and had become a naturalized British citizen.
After the outbreak of the first
world war between England and Germany, continental tire being the German
company did not pay any amount claiming that it would amount to trading with an
enemy nation thus violating trading with enemy act 1914. The secretary
initiated an action against the same. The same was adjudged in favor of the
German company meaning that the company had an enemy character. The secretary
approached the house of lords against the decision of the court of appeal.
The house of lords allowed the appeal and held that though the company is a separate artificial person from its shareholders when the shareholders or the agents who are having the control of the company are from the enemy country, then the company will assume an enemy character and not otherwise.
The court thought that the character of individual shareholders cannot affect the character of the company when everything is at peace or when it is not wartime, but when it is wartime, the agents or anyone who is taking instructions from such shareholders who is from an enemy country is important to consider to determine the character of the company as a whole. The court very strongly held that in this case, it is presumed that the company had enemy character, being the secretary holding just 1 share out of 25000 shares who is from England and the rest being from Germany, the court held that the onus is one the company to prove that the secretary was not taking orders from other shareholders from an enemy country.
The Ratio decidendi, in this case, is that
the Court established that the action and character of the shareholders can
influence the actions of that particular company and the company can acquire
enemy character because if the shareholders who are from the enemy country take
decisions for the company[1].
Further reference can be found in the case of Firestone Tires Co -vs- Llewellyn.
Improper conduct/Fraud
A company’s veil may be lifted due to improper or fraudulent conduct. In the case of Jones -vs- Lippman Jones agreed to sell land to Lippman. He changed his mind. He thereafter formed a company and transferred the land to the company in a bid to avoid the sale.
The Company refused to
transfer the land to Lippman. The matter went before the Court for specific
performance, the Court, in ordering specific performance ruled that: “the
defendant company is the creature of the first defendant, a device and a sham,
a mask which he holds before his face in an attempt to avoid recognition by the
eye of equity.”
Another instance where a Company was used as a sham is to be found in the case of Gilford Motors Company -vs- Horne.
For the protection of revenue
For tax purposes and for purposes of discharging various
tax burdens a Company’s veil may be lifted to prevent tax evasion.
By way
of Statute
A company’s
veil will be lifted if it is trading in a name other than its registered name
A company’s
veil can be lifted if the Company failed to publish names as prescribed
/required by Act.
For
purpose of group accounts, group of company, the Act requires each of the
members be dissolved and accounts done separately before the group.
Investigating
membership- a company’s veil may be lifted by the state when undertaking investigations
and inspections under the Companies Act. This can also appear in the investigations
of affairs of the company by the registrar of Companies or the Court. If the registrar has reason
to believe the company is being used for improper use. The veil may lifted for
investigation
Failure
to file relevant tax returns;
A company’s
veil may be lifted during takeovers and mergers where approvals are required-
who are the significant shareholders as the Competition Authority considers
this.
The veil
of a company may be lifted during Dissolution/consolidation, especially where
part of issued share capital has not been paid up.
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