Rethinking the Corporate Personality Principle in the Light of Contemporary Realities in Nigeria.
S.A. Osamolu*
Abstract
This article traces the growth of the principle of corporate personality through its development and concludes that in the face of modern realities, the principle ought to be reconsidered, especially while dealing with companies forming a group and while investigating commercial crimes and other dubious activities perpetrated while hiding under corporate personality.
1. Introduction
The corporate personality principle is, no doubt, the most pervasive principle and indeed, the functional cornerstone on which modern company law rests. It is an ancient principle that a corporation has a distinct personality separate from its members. Verifiable evidence links its origin to the statement of Sir Edward Coke early in the 17th Century when he said that “a corporation is something invisible, immortal, existing in the intendment and consideration of the law as a separate entity different from its members.”[1]A company was described as a “body of bodies; technically an artificial person composed of natural persons unless the context otherwise requires.”[2] Sometimes the members themselves may also be companies but ultimately there will be natural persons at the end of the chain. The separate legal personality of a limited liability company was firmly established by the English House of Lords in the case of Salomon v. Salomon & Co. Ltd.[3]
2. The facts of Salomon v Salomon:
Because of the pivotal importance of this case to the corporate personality principle in company law, the facts of the case will be summarized as follows:
Aron Salomon was a boot and shoe manufacturer trading as a successful sole trader in the East End of London for over 30 years. There was family pressure to give them a share in the business and he wished to extend the company. He formed a company and sold his business to the company. At the time, the legislation in England required a company to have a minimum of seven members. The members of A Salomon & Co Ltd were Salomon himself and six members of his family who held one share each as nominees.
The company fell upon hard times, went into receivership and liquidation. After the sale of the assets of the company, the liquidator ignored the company’s obligations under debentures held by Salomon on the ground that they were fraudulent. Both the Court of first instance and the Court of Appeal found in favour of the liquidator. The reasoning was based on the fact that the company was nothing but a one-man business which was considered as an abuse of the Company Act and a sham. On further appeal to the House of Lords, their Lordships rejected the rulings of the Courts below and held that a one-man business was not an abuse of the Act since all the relevant formalities had been complied with and the Act was silent on the question of beneficial interests and control.
The House of Lords held accordingly that A Salomon and Co Ltd was different from Salomon as an individual. In the words of Lord Macnaghten:[4]
The company is at law a different person altogether from the subscribers to the Memorandum and although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustees for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.[5]
The court, in Salomon’s case, was faced with a case of possible conflict between sanctions against fraud as well as abuses in companies on one hand and commercial necessity on the other. The House of Lords considered fraud a remote possibility and resolved the conflict in favour of what was considered an essential principle of commercial necessity. Corporate personality is therefore a necessary corollary of the limited liability principle enjoyed by the early joint stock companies.
The only rationale for the principle initially was to enable risky adventures to be embarked upon without the additional burden of personal liability of the traders. However in Salomon’s case, the House of Lords found it commercially expedient to encourage a trader or a group of small traders to utilize their capital in businesses conducted in the form of limited liability companies with little risk by making a distinction between the company and the men behind it.
It is important to note however, that although an incorporated company is a person at law, it is a juristic person. Distinguishing between juristic person and natural persons, the Court of Appeal[6] recently held that:
A juristic person is a creation of law, and unlike a natural person whose legal existence terminates at death, a juristic person is immortal as long as the law creating it allows its existence and it is only subject to demise in accordance with the law. A corporate body is a juristic person and would only die, if at all, in accordance with the provision of law.[7]
Recently, the Court of Appeal[8] restated the foregoing principle thus:
Once a company is incorporated under the relevant laws therefore, the company becomes a separate person from the individuals who are its members. It has capacity to enjoy legal rights and is subjected to legal duties which do not coincide with that of its members. Such a company is said to have legal personality and is always referred to as an artificial person. Consequently, it can sue and be sued in its own name. It may own property in its own right, and its assets, liabilities, rights; obligations are distinct from that of its members.
It follows that a registered company has perpetual succession. Thus a change in membership or death of a member does not affect the existence of the company. It acquires its capital from its members through the sale of shares and invariably distributes the profits in form of dividends made from the utilization of the capital to its members. The consequence and effects of incorporation are set out in section 37 of Company and Allied Matters Act (CAMA) 2004 thus:
As from the date of incorporation mentioned in the certificate of incorporation, the subscribers of the memorandum together with such other persons as may, from time to time, become members of the company, shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the powers and functions of an incorporated company including the power to hold land, and having perpetual succession and a common seal , but with such liability on the part of the members to contribute to the asset of the company in the event of its being wound – up as is mentioned in this Act.
While delivering judgment in Salomon v Salomon,[9] Lord Macnaghten declared:
When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate ‘capable forthwith’… of exercising all the functions of an incorporated company. Those are strong words. The company attains maturity on its birth. There is no period of minority – no interval of incapacity. I cannot understand how a body corporate thus made ‘capable’ by statute can lose individuality by issuing the bulk of its capital to one person, whether he be a subscriber to the memorandum or not.
3. Lifting the veil:
One of the cardinal aftermaths of incorporation and the attendant notional legal fiction is that it casts a veil upon the company which no one is expected to ordinarily go behind.[10] No doubt, the principles laid down in Salomon’s case elicited immense public outrage as it was perceived by many as a devise that can be manipulated to perpetuate heinous corporate fraud and illegality. Over the years the courts have on occasions refused to apply the corporate personality principle. However, it is hardly predictable in what circumstance the veil of incorporation will be lifted.[11]
In Littlewoods Stores Ltd v I.B.C[12] Lord Denning M.R. stated:
The doctrine laid down in Salomon’s case has to be watched very carefully. It has been supposed to cast a veil over the personality of a limited liability company through which the Court cannot see. But that is not true. The Court can, and often do, draw aside the veil. They can and often do pull down the mask. They look to see what really lies behind.[13]
Reiterating the above point, Gower[14] said:
It has always been recognised that the legislature can forge a sledgehammer capable of cracking open shell and even without the aid of legislative sledgehammer the courts have sometimes been prepared to have a crack. In such cases the law goes behind the corporate personality of the individual members or ignores the separate personality of each company in favour of the economic entity constituted by a group of associated companies.
In Nigeria, like many other jurisdictions, the courts have occasionally refused to follow the decision laid down in Salomon v. Salomon. These instances are either provided by statutes or laid down in previous decisions of court. We shall now carefully consider some of these established instances.
- Reduction below statutory minimum number of members.[15]Under this head, the veil will be lifted:
If a company carries on business without having at least two members and does so for more than 6 months, every director or officer of the company during the time that it so carried on business after those 6 months who knows that it is carrying on business with only one or no member shall be liable and jointly and severally with the company for the debts of the company contracted during that period.
It has been suggested[16], and rightly so in the opinion of this writer, that section 93 merely prescribes the consequences that follows but does not create any offence.[17]The implication of this is that the fact that a company is operated with members below the prescribed statutory minimum will not in any way affect the corporate existence of the company or the obligation arising from so operating the company.[18]
3.2 Fraudulent trading: If, in the course of winding up a company, it appears that certain acts were done or business had been carried on with intent to defraud the creditors or for any other fraudulent purpose, the court may lift the veil of incorporation and make the individual persons involved personally liable for all or any of the debts of the company.[19]
- Misdescription of company: In any transaction involving a company, it is required that the name of the company be written in legible characters in all bills of exchange, promissory notes, endorsements and cheques issued by the company. Any officer of a company who flouts this provision will be personally liable unless the company decides otherwise.[20]
- Taxation: By virtue of section 18 of the Companies Income Tax Act,[21] the Federal Board of Inland Revenue may disregard artificial or fictitious transactions in group enterprises which affect payment of appropriate tax. The Board is empowered to look behind the veil and the individual members of the corporate group will be required to pay the correct tax.
3.3 Holding and subsidiary company: Commercial expediency sometimes permits the creation of a pyramid of inter-related companies, each of which is, technically speaking, independent[22] but in fact, part of a going concern presented by the group as a whole. A holding company, also known as a group company, is one which controls the composition of the board of directors of another. The inter-related companies are known as the subsidiaries.
Where the prescribed group accounts, reflecting such matters as the balance sheet showing the true and fair view of the general state of affairs, profit and loss of the holding company as well as the subsidiaries is not prepared, the directors will be personally liable to a fine or imprisonment if convicted.[23]
3.6 Reduction in the number of Directors below statutory minimum: Section 246 (1) of CAMA requires every company incorporated in Nigeria from the inception of the Act to have a minimum of two directors, while companies which came into existence before the Act must comply with this requirement within six months of the coming into effect of the Act. A person who carries on business in defiance of this provision will be personally liable for the debt or liability of the company for such period of default.[24]
Where a company having shares alters its shares by consolidation, conversion of shares into stocks, sub-division of the company shares into shares of smaller amount, cancellation of un-issued shares,[25] other than reduction under section 105, the company must notify CAC within one month of the alteration.[26]Failure to notify the commission as required renders, in addition to the company itself, every officer of the company liable to a fine.[27]
Diversion of money received by a company as loan or advance for the execution of a particular project with intent to defraud the company renders the individual directors or officer personally liable to the party from whom such loan or advanced was received.[28]
One of the statutory functions of the Corporate Affairs Commission is investigation into the affairs of a company.[29] Any inspector appointed by the Commission may need to lift the veil of incorporation to discharge the investigative duty.
Anti-Corruption legislations: Apart from the copious provisions of CAMA on circumstances when the veil of incorporation will be lifted, recent events in Nigeria have led to the enactment of series of legislations which have provided instances when some agencies of government are empowered to go behind the corporate veil of companies to prosecute corrupt practices[30], culpability in the mismanagement of failed banks,[31] economic and financial crimes[32], to mention a few.
4. Lifting the Veil under Case Law:
In addition to the statutory instances when the veil of incorporation will be lifted, the courts have also made inroads into the corporate personality principle. The case law exceptions to the corporate personality principle will be examined under two broad heads.
- Fraud or improper conduct: In the words of a learned writer[33]:
…the courts will not hesitate to remove the veil of incorporation where they discover that the company is a ‘sham’ or as Lord Justice Harman put it , ‘nothing but a little hut…’ whose legal existence was like ‘the walls of Jericho’ put up to carry on an illegal or fraudulent business.
Commenting on the failure of the appellate court in Adeniji v The State[34] to lift the veil of incorporation on the ground of fraud, learned commentator, Akanki bemoaned the reluctance of the courts in Nigeria thus:
When, oh, when are we going to stop treating with sacrosanctity a rule that can be grossly abused as Salomon v Salomon is being gradually abused in Nigeria?…The principle of corporate personality, though fundamental in company law, was never meant to be sacrosanct to the extent that it could be used to protect crime, fraud or unethical commercial practice.[35]
4.2. Compelling Public interest: Whenever a compelling interest of the general public competes with any principle of law, including corporate personality, no matter how efficacious, the courts will, on policy ground, set aside the principle and do justice according to the reality on ground. For instance in a war situation, the court may disregard the corporate personality principle to examine the status of the individual shareholders whether or not they are ‘alien enemies’[36]. This proposition was buttressed by the Court of Appeal’s obiter dictum in Adeniji v. The State[37] thus:
The court will always use its power to pierce the corporate veil if it is necessary to achieve justice irrespective of the legal efficacy of the concept of the corporate situation under consideration.
5. Application of the rule in Salomon v Salomon to Parent –Subsidiary companies:
The application of the rule in Salomon v Salomon in Nigeria, subject to the foregoing exceptions when the veil of incorporation may be lifted under statute and case law is almost absolute. Generally, attention is still focused on the distinct corporate identities of parent – subsidiary companies in terms of contribution to the liability of a subsidiary company by parent company in the event of winding up. It is humbly submitted that this position is not in keeping with commercial expediency and contemporary global trend of group enterprises as will be discussed below.
The House of the Lords in Woolfson v Strathclyde R.C[38] followed the rule in Salomon v Salomonin holding that a parent company cannot be held liable for the indebtedness of a subsidiary. Also in D. H.N Food Distributors v Tower Hamlets L.B.C.the Court affirmed the centrality of Salomon’s case in company law theory and refused to distinguish between a one man company and a wholly owned subsidiary within a group, unless the company is a mere façade used to conceal true facts. The court held that it is a fundamental principle:
Long established and now unchangeable by judicial decision… that each company in a group of companies (a relatively modern concept) is a separate legal entity possessed of separate legal rights and liabilities so that the rights of one company in a group cannot be exercised by another company in that group….[39]
In Warri Refining & Petrochemical Company Ltd., NNPC v Onwo[40]it was held that although the Warri Refining and petrochemical company was a subsidiary of the NNPC, it is a separate legal personality, being an autonomous company with its corporate headquarters at Ekpan, Warri.
It is humbly submitted that this straight-jacketed application of the rule in Salomon v Salomon as reiterated in Marina Nominees Ltd. v F.B.I.R[41] is no longer in keeping with modern global trend. In the Marina Nominees Case,the Supreme Court held that Marina Nominees was not an agent of Peat Marwick but a company with separate legal entity even though the latter held controlling shares in the former. The Supreme Court referred to and adopted the reasoning of Atkinson J. in Smith Stone & Knight Ltd. v Birmingham Corporation[42], where he said:
It is settled that the mere fact that a man holds all the shares in a company does not make the company his agent for the carrying on (of) the business.
The emphasis in most jurisdictions now is to consider subsidiaries and their parent company together as a corporate group.[43] It is surely time for statute to break corporate veil and make parent corporations, in certain circumstances, liable for some at least of the debts and liabilities of subsidiaries. According to Lord Wedderburn:[44]
… We speak, teach, litigate and legislate about company Law. But predominant reality is not today the company. It is the corporate Group….
It is the outside creditors[45] that are made to suffer from the effect of the rule in Salomon v Salomon. Developments in Europe[46] and the United States of American have gone further. In France, Germany and the United States of America, parent companies are responsible for the debts of their subsidiary companies. The boundaries of the rule in Salomon v. Salomonmust now be clearly defined. Modern commercial transactions would be seriously affected by the rule in Salomon v Salomon. According to Gower:
If the law insists on always treating each company as a wholly distinct entity, ignoring the fact that the group is the true economic unit, the results will sometimes be nonsensical.
The concept of “Agency” is an organic concept and its utility has never been doubted in this area of company Law. Since the case of Salomon v Salomon, the courts have gone a long way towards recognizing the need to pierce the corporate veil and hold companies as agents of its shareholders, the courts have however shown restraint in applying the agency concept where the relationship of holding-subsidiary is established. It is submitted that, by treating a company as the agent of its controllers, the court is not in fact lifting the corporate veil. Indeed, the finding of an agency is a complete affirmation of the corporate entity principle since the relationship demands two legally recognizable parties.
It is submitted that the time has come when our law must reflect the global trend by treating all companies within a group as part of the same entity, this is a pragmatic way of recognizing the real business units of interlocked companies, rather than the arbitrary legal unit of the single company on the simplistic basis of the decision in Salomon v Salomon.
6. Conclusion
Contemporary commercial exigencies require that this time-honoured principle of company law be critically viewed and no more as a sacrosanct principle in the light of modern threats to global commerce and the economy of nations such as corruption, terrorism and other vices which may be cloaked with legal personality through incorporation. The spate and scope of corporate crimes has never loomed larger globally. In Nigeria, the Economic and Financial Crimes Commission, the Independent Corrupt Practices Commission as well as other security agencies must synergize with institutions such as the Corporate Affairs Commission, Securities and Exchange Commission, the Central Bank to mention a few with the aim of unmasking criminal activities perpetrated behind corporate masks so as to sanitize the economy and enhance economic growth, peace and security in Nigeria.
* LL.B (Hons.), LL.M, B.L, Deputy Director (Acad.) & Head of Department, Corporate Law Practice Department, Nigerian Law School, Bwari, FCT.
[1] Sutton Hospital Case (1612) 10 Coke Rep. 22b. p. 32.
[2] Harry G Henn and J A Alexander, Corporations (3rd edition 1983), p.145.
[3] (1897) AC 22.
[4] Ibid. at p.51.
[5] See: Macaura v Northern Assurance Co. Ltd (1925) AC 619 and Lee v. Lee’s Air Farming Ltd (1961) AC 12.
[6] In Commercial Bank (Credit Lyonnais) Nig. Ltd v Okoli (2009) 5 NWLR (pt.1135) 446 at 460 – 462.
[7] See also: Kowa v Alkali (1999) 9 NWLR (pt. 620) 601; Ibrahim v N.U.B. Ltd (2004) 11 NWLR (Pt. 885) 537.
[8] In New Resources International Ltd & Anor v Oranusi (2011) 2 NWLR (pt.1230) 102 at 107.
[9] Above, note 3 at p. 125.
[10] FDB Financial Services Ltd v Adesola (2000)8 NWLR (Pt. 668)170 at 183.
[11] See: C. Ryan: Farrar’s Company Law, (4th ed.), (London: Butterworths, 1998), p. 69.
[12] (1969) 1 WLR 1241.
[13] This dictum was applied with approval in Public Finance Securities Ltd v Jefia (1998) 3 NWLR (Pt.543) 602 at 614 per Rowland JCA.
[14] L.C.B. Gower, Principles of Modern Company Law, (3rd ed.) (London: Sweet & Maxwell, 1969).
[15] Section 93, CAMA.
[16] Akintunde Emiola, Nigerian Company Law, p.120.
[17] See: Paul Iro v Robert Park & Ors. (1978) 1 All NLR (pt.2) 474 at 480.
[18] See: Jarvis Motors (Harrow) Ltd. & Anor. v Carabott & Anor. (1963) 3 All E.R. 89.
[19] Section 506, CAMA. See also: Re William C. Leitch Bros. Ltd. (1932) 2 Ch. 71
[20] See: Nathaniel Abiodun Adeniji v State (1992) 4 NWLR (pt. 234) p. 248.
[21] Cap C 21, Laws of the Federation of Nigeria, (LFN) 2004.
[22] Section 338(1), CAMA. See also: African Continental Seaways Ltd v Nigerian Dredging & General Works Ltd (1977) 5 SC 235; Marina Nominees Ltd v. Federal Board of Inland Revenue (1986)2 NWLR (Pt.20) 48 at 63.
[23] CAMA, Cap C 20, LFN, 2004, s. 336.
[24] Ibid., s. 246(2)-(3).
[25] Ibid., s. 100(1)(a)-(d).
[26] Ibid., s. 101(1)(e).
[27] Ibid., s. 101(2).
[28] Ibid., s. 249.
[29] Ibid., ss. 7(1) (c); 314 to 330.
[30] Under the Corrupt Practices and Other Related Offences Act, Cap.C31, LFN, 2004.
[31] See: Section 3(3), Failed Banks (Recovery of Debts) And Financial Malpractices in Banks Decree No. 18 of 1994.
[32] Under the Economic and Financial Crimes Commission (Establishment) Act No.1, 2004.
[33] Akintunde Emiola, above, note 16 at p.125. See also: Bank of America National Trust & Savings Association v Niger International Development Corporation (1969) NCLR 268.
[34] Above, note 20.
[35] E.O. Akanki, “Lifting the Corporate Veil: Adeniji v The State in Perspective,” in E.O. Akanki (ed) Unilag Readings in Law (Lagos: Faculty of Law, University of Lagos, 1999), p. 73 at 130.
[36] See: Daimler Co. Ltd v Continent Tyre & Rubber Co. Ltd (1953) 1 WLR 453.
[37] (1992) 4 NWLR (pt. ) 248.
[38] (1978) S.L.T 159.
[39] The Albazero (1985) 3 W.L.R 491, per Roskill L.J. at p. 521.
[40] (1999) 12 NWLR (pt. 630), 312 at 327.
[41] Marina Nominees Ltd. v F.B.I.R (1986)2 NWLR, (pt. 20) 48.
[42] (1939) 4 All E.R. 116.
[43] See: Gower, above, note 14.
[44] See: Modern Law Review vol. 47 at p. 90-92.
[45] See: Multinational Gas and Petrochemical Co., v Multinational Gas and Petrochemical ServicesLtd (1983)2 All E.R 563,See also M. Whincup: “’Inequitable Incorporation: The Abuse of a Privilege,” (1981) 2 The Company Lawyer 158, and A Landers “A unified Approach to parent, subsidiary and Affiliate Question in Bankruptcy” (1975) 42 Chicago Law Review, 589.
[46] See: Cohn and Simitis “Lifting the Veil in Company Laws of the European Continent” (1973) 12 L.C.L Q. 189.