CHAPTER ONE INTRODUCTION 1.1 Conceptualization of Terms 1.1.

1 Corporate Personality According to West's Encyclopaedia of American Law (2nd Ed.) (2008), Corporate personality is defined as the distinct status of a business organization that has complied with law for its recognition as a legal entity and that has an independent legal existence from that of its officers, directors, and shareholders. Corporate personality encompasses the capacity of a corporation to have a name of its own, to sue and be sued, and to have the right to purchase, sell, lease, and mortgage its property in its own name. In addition, property cannot be taken away from a corporation without due process of law (http://legal-dictionary.thefreedictionary.com) Additionally, Feerick T. (2002) maintains that, the main consequence of incorporation is the incorporated thing (e.g. company) becomes a distinct legal entity: it is a legal person (i.e., capable of holding legal rights and having legal obligations) which exists separately from its members and controller(s). The above principle was illustrated in R v Arnaud (1846) 9 QB 806, where a registering authority refused to register a ship on the ground that some of the ships owners were foreigners. The ship was owned by a (British) chartered company whose members happened to include foreigners. The court ordered the registering authority to register the ship on the basis that the (British) company was the ships owner rather than the members of the company. The unanimous decision of the House of Lords in Salomon v Salomon & Co Ltd [1897] AC 22 (the facts are recited below) is often cited as the authority which settled the point that a company has a distinct legal personality. In Salomons case, Lord Halsbury LC said: The learned judges [below] appear to me not to have been absolutely certain in their own minds whether to treat the company as a real thing or not. If it was a real thing; if it had a legal existence, and if consequently the law attributed to it certain rights and liabilities in its constitution as a company, it appears to me to follow as a consequence that it is impossible to deny the validity of the contract into which it has entered

However, it should be noted that the House of Lords in Salomons case really only decided that Salomon & Co Ltd was a company duly incorporated under the Companies Act 1862 (UK) even though its seven shareholders were not truly independent: all of the statutory requirements were satisfied because the company had seven shareholders. At least four points follow from the proposition that incorporated companies have a separate legal personality: (1) Companys property is companys property; (2) Companys debt is companys debt; (3) Companies can contract with their members, directors and outsiders (and visa versa); and (4) Companies can commit torts and crimes. Organizations have legal personality. Historically in the United Kingdom, this meant that organizations such as religious orders and local authorities could hold property rights and could sue and be sued in their own right, without having to rely on the rights of the members of the organization. Over time, however, corporate personality came to be conferred on commercial ventures such as trading companies and roadway construction projects or parastatals (major statutory corporations) in which there was a public interest. By the mid nineteenth century, the difficulty involved in obtaining a grant of corporate status from parliament forced businesses to utilise the trust instrument to form "deed of settlement" companies. These companies were extremely complex legal entities that were sometimes used as instruments of fraud. In order to remedy this, a series of mid-nineteenth century Companies Acts were passed, creating a process whereby ordinary individuals could easily form a registered company with limited liability. As a result, within a few decades, the company went from being the privileged of a few to being almost a right (Chigbo C., 2009). 1.1.2 Lifting the Veil of Incorporation The application of the Salomon principle has mostly (remember Macaura v Northern Assurance Co Ltd [1925] AC 619) beneficial effects for shareholders. The price of this benefit is often paid by the companys creditors. In most situations this is as is intended by the Companies Acts. Sometimes, however, the legislature and the courts have intervened where the Salomon principle had the potential to be abused or has unjust consequences. This is known as lifting the veil of incorporation. That is, the courts or the legislature have decided that in certain circumstances the company will not be treated as a separate legal entity (Feerick T., 2002). Feerick T. (2002) furthermore comments that, one of the fundamental principles of company law is that a company has personality that is distinct from that of its shareholders. This rule was laid down by the House of Lords in Salomon v. Salomon & Co [1897] A.C. 22, in which it was held that even if one individual held almost all the shares and debentures in a company, and if the remaining shares were held on trust for him, the company is not to be regarded as a mere shadow of that individual. Lord MacNaughten statedm Ibid, at p. 51: 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 the trustee for them. Nor are subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the. (U. K. Companies Act 1862)

The rule in Salomon lies at the heart of corporate personality, and is the principal difference between companies and partnerships. However, there are situations in which the courts look beyond that personality to the members or directors of the company: in doing so they are said to lift or pierce the corporate veil. In law there is a doctrine of lifting the veil of incorporation, where the Courts may allow a creditor to recover a debt of a subsidiary company from a holding company or personally hold liable the directors or shareholders of the subsidiary company, if that subsidiary company has been used by the holding company or directors and shareholders to perpetuate fraud (PK, Mwanza-Daily News Online Edition Sunday September 11, 2011) Lifting the veil of incorporation can also be explained using the case of Manji v Masanja and Another (Civil Appeal No. 78 of 2002 ) [2005] TZCA 83 (15 November 2005): In the circumstances, it is our view that the respondents would be left with an empty decree as it were, against the company, Metro Investment Limited. Furthermore, it is apparent that the company's managing director was at the time the appellant, who, as said before was alleged to be involved in concealing the assets of the company. For this reason, we think it would not serve the interest of justice in this case to shield the appellant behind the veil of incorporation. In summary therefore, having regard to the relationship of the company at the time with the appellant as the managing director, the alleged concealing of the assets of the company by the appellant which was not denied by way of counter-affidavit, we are satisfied that this was a proper case in which to apply the principle of lifting the veil of incorporation. The learned judge cannot, in our view, be faulted in his decision to apply the principle Normally the test the Court adopts is whether there was a lack of formalities between the entities, coming ling of funds and assets, one of the companies was seriously under capitalized and if the veil is not lifted, it will sanction fraud or promote injustice. In short, lifting the veil of incorporation means the situation whereby the corporate personality is disregarded. It is an exception to the general law laid down in Salmon V. Salmon and Co. Ltd (1892) A.C 22 where is permitted by law to prevent the abuse of corporate personality i.e. it intends to prevent people from disobeyance of law. In this case, when the corporate personality is lifted the individual is held liable; no the company. (Seme, Y.B. 2010)

CHAPTER TWO

THE GROUNDS FOR LIFTING VEIL OF INCORPORATION

2.1 Overview When a creditor discovers that a debtor company is insolvent, the creditor will frequently want to recover the debt from a shareholder, director or associate of the insolvent company. There exist various statutory and common law mechanisms by which the corporate veil can be lifted and liability imposed on individuals or other companies. This chapter sets outs and discusses the grounds and mechanisms for lifting the veil of incorporation in the light of recent authorities and of the Companies Act 2002. There is no single basis on which the veil may be lifted, rather the cases fall into several loose categories, which are examined below: 2.2 Statutory Exceptions/Grounds There are certain statutory exceptions to the rule in Salomon which involve a director being made liable for debts of the company because of breach of the companies or insolvency legislation i.e. there are statutory grounds and judicial grounds for lifting veil of incorporation: For example, The Companies Act 2002, Income Taxi Act, Local Government Finance Act 1982, NSSF Act; all these provide for circumstances under which the veil of incorporation may be lifted e.g. reduction of members below statutory minimum, liability for misstatement in the offer document S. 51 of the companies Act 2002; irregular allotment by directors S. 55(3) of the Act and liability for failure to notify the Registrar of increase of share capital. 2.3 Judicial Grounds This is lifting of corporate veil by courts in which may be lifted in the following reasons: Public Interest, this may be done to find the persons who are guilty of disobeyance of law for example in the case of R.V. Nurdin Akasha (1995) TRL 227 Where the company is used as merely sham or dummy or cloak to escape legal liability. The case of Lipman (1962) IWLR Gilford Motor Co. Ltd V. Horn (1933) ch. 935 Where the company has got an enemy character (during war) e.g. Daimler Co. Ltd. V. Continental tyre and Rubber Co. Ltd (1916) 2 A. C 307 and also the case of Romania (1916) 1 A.C 124. Where the company avoids taxes, defeat public convenience or justify wrongs. For example in the case of A.R.V Commissioner of Income Tax 14 E.ATC 202; U.S. V. Milwakee Refrigeration Co. 141-247 (U.S.A)Where the notion of legal entity is used to defeat public convenience, justify wrong or defeat a crime, the law will regard the corporation as an association of persons Just and Equitable Winding Up, a petition may be presented to wind up a company on the grounds that it would be just and equitable to do so. This may involve lifting the veil of incorporation, for example to examine the basis on which the company was formed E.g. Ebrahimi v. Westbourne Galleries [1973] AC 360

Unfair Prejudice, The Courts powers apply where the companys affairs are being or have been conducted in a manner which is unfairly prejudicial to the interests of its members generally or of some part of its members (including at least himself)." The general proposition that the conduct of a parent company in control of a subsidiary can be relevant where a petition is presented by shareholders of a subsidiary is unsurprising7. It has also been held by the Court of Appeal: City branch Ltd v Rackind [2004] EWCA Civ. 815 that directors unfairly prejudicial conduct of a subsidiary may be actionable by shareholders of the parent under s.459 if the parent and subsidiary have directors in common. Third Party Costs Orders, the court has jurisdiction to make a costs order against a party to the proceedings in favour of a non-party (including the directors or shareholders of a litigant company). This has recently been applied by the Court of Appeal in the case of Alan Phillips Associates Ltd v Terence Edward Dowling [2007] EWCA Civ 64. A contract was accepted by a company on headed paper almost identical to that of a business run by Mr Phillips prior to incorporation. Mr Phillips wrongly issued proceedings in his own name and the company was then substituted as Claimant. The companys claim was dismissed and a third party costs order was made against Mr Phillips. More typical circumstances for a third party costs order arose in Goodwood Recoveries Ltd v Breen10 which held that where a non-party director could be described as the "real party" seeking his own benefit and controlling and/or funding the litigation, then even where he had acted in good faith or without any impropriety justice might demand that he be liable in costs. Similarly in CIBC Mellon Trust Co v Stolzenberg11 when the court held that there was no reason in principle why, if a shareholder (not being a director or other person duly authorised, appointed and legally obliged to act in the best interests of the company) funded, controlled and directed litigation by the company in order to promote or protect his own financial interest, the court should not make a costs order against him Failure to obtain a trading certificate, where a public company fails to obtain a trading certificate in addition to its certificate of incorporation before trading, the directors will be liable to the other parties in any transactions entered into by the company to indemnify them against any loss or damage suffered as a result of the companys failure to comply with its obligations. .