It is a well-established principle that a company has a separate legal personality from its shareholders. In very limited circumstances, the courts can ‘pierce the corporate veil’, putting to one side the company’s separate legal personality and holding that its shareholders are subject to the legal consequences of the company’s acts.
The English courts have only permitted the corporate veil to be pierced, or lifted, in a handful of cases in over a century, often where the company was used as a ‘puppet’ to disguise the fraudulent activities of the individual ‘puppeteers’ controlling it. This can be important because individual ‘puppeteers’ may have more funds to satisfy a judgment than the company, which is often insolvent by the time the fraud is uncovered. However, it was never precisely clear when the corporate veil may be pierced and what limitations there were on such an exercise.
The law has progressed immensely from Salomon v Salomon. Recently, in a large fraud case, one English judge held that the corporate veil should be pierced and there was no reason why the ‘puppeteer’ should not be held to be a party to a contract entered into by the ‘puppet’ company he controlled. This was a controversial decision, as some commentators suggested that it extended the principle of piercing the corporate veil one step too far.
The Supreme Court in UK has now considered this issue afresh and today handed down an important judgment on this issue. In the case of VTB Capital plc v Nutritek International Corporation & others [2013] UKSC 5, the Supreme Court has unanimously held that it was against authority and principle to pierce the corporate veil in order to hold that those who misused the company (the ‘puppeteers’) were parties to the contracts entered into by that company (the ‘puppet’) when none of the parties intended that to be the case. The Court refused to rule on the argument that piercing the corporate veil could never be justified.
Although this decision firmly limits the effect of piercing the corporate veil, the principle itself remains intact. This is significant for any fraud case where corporate entities are being used as a device or facade to conceal the liability of controlling individuals; particularly so in a jurisdiction which does not recognise the concept of group corporate liability.
In Mezu v CB (Nig) Limited the Supreme Court recently restated fraud as an exception to the longstanding company law principle of corporate personality.
Mezu International Limited obtained a loan from the respondent (Cooperative & Commerce Bank Nig Plc). The loan was secured with one of three adjacent plots of land belonging to its majority shareholder and chief executive officer, Sebastian Mezu (the appellant). When Mezu International defaulted on the loan, the first respondent sold all three properties belonging to Mezu, despite the fact that only one of the three plots had been mortgaged for the loan facility. The appellant challenged the sale by instituting an action against the first and second respondents, seeking the following:
At trial, the appellant adduced evidence to show that he owned the three plots of land, one of which he had mortgaged in favour of the first respondent as security for the loan advanced to Mezu International. The mortgage deed in respect of one plot covered by Instrument 48/48/806 had been executed between the appellant and the first respondent, and at no material time had Mezu International been party to the deed. When Mezu International failed to liquidate the debt after repeated demands for repayment, the first respondent exercised its right of sale under the deed and sold the plot used as collateral (along with the two adjacent plots of land) to the second respondent.
The appellant testified that the property in question belonged to him and not Mezu International, and that as he was not personally indebted to the first respondent, his properties could not be sold to liquidate debts incurred by Mezu International. During Mezu’s cross examination, an affidavit which he had earlier deposed in a previous suit where he had affirmed that the properties in question (ie, Plots 6, 8, and 10) belonged to Mezu International Ltd – contradictory to his subsequent assertions – was tendered and admitted.
The trial court dismissed the appellant’s claim and affirmed the legality of the sale of the properties to the second respondent. The court of appeal also dismissed Mezu’s appeal.
Mezu appealed to the Supreme Court. In dismissing his appeal and affirming the lower courts’ judgments, the Supreme Court held that the appellant and Mezu International were one and the same, as Mezu was crafting and executing the company’s transactions, while hiding behind the guise of the existence of a limited liability company, different from the promoters and officers of the company. The court further held that the situation was akin to that which Lord Justice Russell in Jones v Lipman described as “a devise and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eyes of equity”.
Although the doctrine of separate legal entity of a company is sacrosanct, there are occasions when the law allows lifting of the corporate veil; some such occasions have been enshrined in the Companies and Allied Matters Act. One such occasion is when founders hide under the cloak of a separate corporate entity in perpetuating fraud, as in the present case.
With respect to the two properties not mortgaged by Mezu, he was nonetheless prevented from challenging the sale based on the contradiction between the statements that he had made under oath and his subsequent claims.
Over time, a number of exceptions to the principle in Salomon v Salomon have surfaced through common law, with some now codified in the Companies and Allied Matters Act.
The corporate veil may be lifted on grounds of public policy – for example, during periods of war in order to ascertain whether the promoter of a company is an alien or enemy.
Another instance is fraud by an owner or promoter seeking to use a corporate structure to evade fiduciary or legal obligations. This usually occurs in cases where the company owner or promoter attempts to avoid liability to its creditors, as recognised in Gilford Motor Co v Horne.
Another instance recognised by common law is where one company acts as an agent of another or a parent or subsidiary for the purposes of avoiding existing obligations.
Where the courts find that the corporate structure has been used to promote the owners or directors’ personal interests, they will readily pierce the corporate veil, as was the case in Gencor ACP Ltd v Dalby.
The Supreme Court’s decision in Mezu v CB (Nig) Limited demonstrates a commitment to lifting the corporate veil where there is an abuse of the doctrine. In this case, it was for the purpose of preventing the company’s alter ego from evading its obligations.
The doctrine is revisited in today’s times where companies are at cross roads with compliance on one hand and drive for go getting business on the other hand.
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