LSP002: Lifting the Veil

Generally, there are two recognized persons in Law. A natural person and an artificial person. The former is a legal entity from birth(human beings) while the latter becomes a legal entity once it has been incorporated. (Companies, Associations, Societies) etc. The rationale behind this is that in law, a person is any being whom the law regards as capable of having rights and duties. For instance, Alhaji Dangote is a person and his company, The Dangote Group, is also a person. This is the principle known as Corporate Personality.

The locus classicus case of Salomon v. Salomon and Co Ltd (1897) A.C. 22 HL is the bedrock on which the jurisprudence of corporate personality is established. It outlined the principle which states that upon incorporation, a company has a separate entity from its directors and members, hence, the members are not liable for the misdeeds of the company. The effect of this is that the debts and obligations of a company would always be borne by the company itself and cannot be passed on to persons who are merely considered to be the directing will or mind of the company.

Like a fire on dry leaves during the harmattan season, the rule in Salomon v Salomon gained ground and further received another judicial blessing by Lord Denning in the English case of Bolton (Engineering) Company Ltd, v. Graham & Sons 1957 I Q B 159 at 172-173.

However, humans manipulative nature set in as people started using the veil of corporate personality blatantly as a cloak for fraud or improper conduct. Thus it became necessary for the Courts to take a scissor, cut through the veil, and look at the persons behind the company’s irregularities. This is known as Lifting the Veil or Piercing the Veil of Incorporation.

Basically, there are two ways in which the veil can be lifted. They are Judicial Exceptions and Statutory Exceptions. These exceptions enabled the Legislators and the Courts to forge a sledgehammer capable of cracking open the corporate shell. Our focus is on the judicial lifting of the Veil, particularly, the issue of fraud.

The Courts have been more than prepared to pierce the corporate veil when it feels that fraud is or could be perpetrated behind the veil. This is as a result that the Courts will not allow the principle in Salomon’s case to be used as an engine of fraud. Based on this background, Muntaka-Coomassie, JSC in Adeyemi V. Lan & Baker (Nig.) Ltd. (2000) 7 NWLR that: “it must be stated unequivocally 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 the company’s legal entity as distinct from its directors.” This decision was also affirmed in Aminu Musa Oyebanji v. The State (2015) LPELR-24751(SC). It’s also worthy to note that there are also foreign decisions in this aspect. The two classic cases of the fraud exception are Gilford Motor Company Ltd v. Horne and Jones v. Lipman.

On a positive outlook, the principle of Lifting the Veil instills discipline and encourages members, directors, and stakeholders in a company to act with utmost good faith in their dealings.

In conclusion, the principle of Lifting of the Veil can be likened to the concept of Individual Responsibility in the Presidential System of Government as everyone will be held accountable for his/her acts once it is proven that anyone uses the name of the Company to enter into a fraudulent activity. This means that the Courts in certain exceptional circumstances will ignore the principle of separate legal entity and will look into who are the real people behind a certain act and will make them liable, instead of the company as a whole.

Thank you for reading. See you next week.