Incorporation and Its Limits

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Lifting the Corporate Veil in Nigerian Company Law

In company law, incorporation creates one of the most powerful legal ideas that a company is a separate legal person distinct from its members. This principle was firmly established in Salomon v Salomon & Co Ltd (1897) AC 22 (HL) and remains the foundation of modern corporate law.

Once incorporated, a company acquires its own legal personality. It can own property, enter contracts, incur liabilities, and sue or be sued in its own name. It also enjoys perpetual succession, meaning its existence is not affected by changes in membership.

This principle has been consistently reinforced. In Bolton (Engineering) Co Ltd v Graham & Sons [1956] 3 All ER 624, the company was likened to a human body with different organs performing different functions. Similarly, in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd (1915) AC 705, the court recognised that although a company is an abstraction, it acts through human agents.

The effect of incorporation is significant. It shields shareholders and directors from personal liability. In Hyacinth Orji v Ezeani Anyanso (2000) 2 NWLR (Pt 643) 19, the court held that where a director contracts in the name of the company, it is the company not the director that is liable, unless personal liability is expressly assumed.

However, this protection is not absolute. Where the corporate structure is abused, the law permits the courts or statutes to lift the corporate veil.

What Does “Lifting the Veil” Mean?

Lifting the corporate veil simply means disregarding the company’s separate legal personality in order to hold those behind it personally liable.

As a general rule, courts are reluctant to do this. In FDB Financial Services Ltd v Adesola (2000) 8 NWLR (Pt 668) 170, the court emphasised that one is ordinarily not entitled to go behind the corporate veil.

However, where justice demands it, the veil will be lifted. In Adeyemi v Lan & Baker Nigeria Ltd (2007) NWLR (Pt 663) 33, the court made it clear that there is “nothing sacrosanct” about the corporate veil, especially where it is used as a mask for wrongdoing.

Grounds for Lifting the Corporate Veil

The veil may be lifted in two broad ways:

Statutory intervention (under CAMA and other laws)

Judicial intervention (based on equitable principles)

1. Statutory Grounds

(a) Fraudulent or Reckless Trading

Under section 672(1) of CAMA 2020, where a company’s business is carried on fraudulently or recklessly, the court may declare those responsible personally liable for the company’s debts.

This ensures that directors who knowingly engage in dishonest conduct cannot hide behind the company structure.

Similarly, section 740 CAMA 2020 extends liability for fraudulent conduct even outside winding-up proceedings.

(b) Political Donations

By virtue of section 43(2) of CAMA 2020, companies are prohibited from donating funds to political parties.

Any officer or member involved in such a breach becomes personally liable and must refund the amount.

(c) Insufficient Members or Directors

Under section 118 CAMA 2020, a public company must maintain at least two members. If it operates below this number for more than six months, directors become personally liable for debts incurred during that period.

Similarly, section 271(3) CAMA 2020 imposes liability where a company operates with fewer than two directors for over 60 days, provided the individual had knowledge of the situation.

(d) Misapplication of Company Funds

Under section 316 CAMA 2020, where funds are obtained for a specific purpose and are fraudulently misapplied, directors or officers responsible become personally liable to refund the money.

(e) Failure to Disclose Company Name

Section 729 CAMA 2020 requires companies to display their name and registration number. Failure to comply attracts penalties for both the company and its officers.

(f) Other Statutory Instances

Other Nigerian statutes also permit veil lifting:

Section 18, Failed Banks Act liability for financial misconduct

Section 37, Federal Environmental Protection Act 2004 liability for environmental offences

Section 20, ICPC Act liability for corruption

Section 51, AMCON Act liability for fraudulent or negligent financial conduct

2. Judicial Grounds

(a) Agency

Where a company acts as an agent of its members, the court may lift the veil.

In Akande v Omisade (1987) 2 NWLR (Pt 55) 155, the court held that where a company is used to carry out wrongful acts, both the company and the individuals behind it may be held liable.

(b) Public Policy

The veil may be lifted to prevent injustice or protect public interest.

In International Offshore Construction Ltd v Shoreline Lifeboats Nigeria Ltd (2010) LLJR-SC, the court affirmed that corporate personality may be disregarded where justice requires it.

(c) Fraud

Fraud remains the most common ground for lifting the veil.

In FDB Financial Services Ltd v Adesola (2000) 8 NWLR (Pt 608), the court held that the veil will be lifted where it is used to perpetrate fraud.

Similarly, in Adeyemi v Lan & Baker Nigeria Ltd (2007) NWLR (Pt 663) 33, the court emphasised that a company used as a “mask” for fraud will not be protected.

Even earlier, in Gilford Motor Co Ltd v Horne [1933] Ch 935, the court pierced the veil where a company was used to evade contractual obligations.

(d) Revenue and Tax Evasion

Courts may also lift the veil where it is used to evade tax obligations.

Although earlier decisions such as Reiss & Co (Nig) Ltd v FIRS (1977) NCLR 443 upheld corporate personality, modern statutes like the Companies Income Tax Act now empower courts to intervene.

In Seven Up Bottling Co Ltd v Lagos State Board of Internal Revenue (2000) 3 NWLR (Pt 650) 565, failure to remit tax was treated as an enforceable debt.

Implications of Lifting the Veil

1. Prevention of Abuse

Lifting the veil acts as a safeguard against the abuse of the corporate structure. In some cases, individuals may use the corporate entity as a shield to escape liability for wrongful acts, such as defrauding creditors or evading taxes.

2. Personal Liability

One of the most significant consequences of lifting the corporate veil is that it places individuals such as directors, officers, and sometimes shareholders at risk of personal liability for the corporation’s debts, obligations, and any wrongful acts it commits. In the typical corporate structure, these individuals benefit from a “limited liability” status, meaning their personal assets are protected from corporate creditors and legal claims. However, when the veil is lifted, the legal barrier that separates the personal and corporate identities is removed.

3. Deterrence

Lifting the corporate veil serves as a powerful deterrent against corporate misconduct by holding individuals accountable for wrongful actions undertaken under the company’s banner. When directors, officers, and shareholders know that they cannot hide behind the corporate structure for protection, they are more likely to adhere to a high standard of ethical behaviour and comply rigorously with legal requirements.

Conclusion

The doctrine of separate legal personality, established in Salomon v Salomon & Co Ltd , remains central to company law. It promotes investment, protects shareholders, and enables business growth.

However, this protection is not without limits. Where the corporate structure is used as a tool for fraud, illegality, or injustice, Nigerian law through both statutes and judicial decisions permits the veil to be lifted.

In doing so, the law strikes a careful balance: preserving the benefits of incorporation while ensuring that it is not used as a vehicle for abuse.

The content of this article is intended solely for general guidance and does not amount to legal advice. Readers are advised to seek professional legal counsel tailored to their specific circumstances.