Lecture 3 - Lifting the Veil PDF

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Lifting the veil of corporation...

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LECTURE 4 LIFTING THE VEIL OF INCORPORATION

Lifting the veil describes a situation where the courts or legislation will describe the company and its directors or parent company etc as one and the same person. Thus lifting the veil or piercing the corporate veil is the process of imposing liability for corporate activity, in disregard of the corporate entity, on a person or entity other than the offending corporation itself. This doctrine represents an exception to the case of SALOMON which is the cornerstone of company law in Ghana and other commonwealth countries. Thus in some instances the law is prepared to disregard or look behind the corporate personality and (it is claimed) have regard to the ‘realities’ of the situation. Nevertheless, it does happen that a situation involving the company and its members or representatives is judged with the due consideration to the actual state of affairs pertaining within the company ‘behind’ the corporate entity. This may be done in two main forms:  By legislature  By the courts.

BY LEGISLATURE: Legislature itself does not specify that the veil of incorporation is being lifted. However, analysis by academics of certain statutory provisions have suggested that in certain cases it has the effect of not distinguishing between the company and its directors or other persons. While it is true that legislature recognizes the legal principles enshrined in SALOMON, there are other provisions in the Company Code which..................

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LEGISLATIVE INROADS: DIMBLEBY & SONS v NATIONAL UNION OF JOURNALISTS @ 435 The plaintiffs, owners of several local London newspapers, transferred the printing of their newspapers from their usual printers to P. Ltd. because of an industrial dispute. P. Ltd. was run by the same staff and from the same office as T. Ltd., an associated company with whom the defendant union, whose members included journalists employed by the plaintiffs, were in long standing dispute, as a result of which T. Ltd. had been "blacked." The journalists employed by the plaintiffs, acting on the union's instructions, refused to supply copy that was to be printed by P. Ltd. Following the issue of a writ against the union the plaintiffs applied for interlocutory injunctions restraining the union from issuing instructions to the plaintiffs' journalists to withhold copy and requiring the withdrawal of any instructions already issued. The judge held that since the purpose of the union's action was the disruption of the supply of goods to P. Ltd., who were an associated company and therefore not a party to the dispute between the union and T. Ltd., it was unlawful secondary action within the meaning of Employment Act 1980 and he granted the application.

LORD DIPLOCK: The reason why English statutory law, and that of all other trading countries, has long permitted the creation of corporations as artificial persons distinct from their individual shareholders and from that of any other corporation even though the shareholders of both corporations are identical, is to enable business to be undertaken with limited financial liability in the event of the business proving to be a failure. The ‘corporate veil’ in the case of companies incorporated under the Companies Act is drawn by statute and it can be pierced by some other statute if such other statute so provides; but in view of its raison d’être and its consistent recognition by the courts since SALOMON one would expect that any parliamentary intention to pierce the corporate veil would be expressed in clear and unequivocal language. I do not wholly exclude the possibility that even in the absence of express words stating that in specified circumstances one company, although separately incorporated, is to be BARBARA OKAI-TETTEY

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treated as sharing the same legal personality of another, a purposive construction of the statute may nevertheless lead inexorably to the conclusion that such must have been the intention of parliament.

1. Breach of the prescribed minimum members i.e.  SEC 8 of the Code – RIGHT TO FORM A COMPANY  SEC 38 of the Code – COMPANIES CEASING TO HAVE MEMBERS  ACT 180 of the Bodies Corporate Liquid Act – A COMPANY MAY BE WOUND UP IF IT HAS NO MEMBERS e.g. where a sole proprietor dies..............

2. Breach of the prescribed number of directors i.e. a minimum of two is required  SEC 180(1) of the Code – NUMBER OF DIRECTORS  SEC 180(3) of the Code –NUMBER OF DIRECTORS AT LEAST 2

3. Trading for profits by a guaranteed company for distribution to members  SEC 10(1) of the Code – NOT SET UP FOR PROFITS  SEC 10(2) of the Code – CONSEQUENCES OF BREACH IN 10(1)  SEC 16(5) of the Code – CONTENTS OF REGULATIONS

4. Pre-mature trading  SEC 27 of the Code – COMMENCEMENT OF BUSINESS  SEC 29 of the Code – PENALTIES FOR BREACH OF SECTION 27 OR 28

5. Failure to satisfy the minimum capital requirements  SEC 28 of the Code – NEED TO SATISFY MINIMUM CAPITAL REQUIREMENT

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6. Failure to change a company’s name as directed  SEC 15(S) of the Code – CHANGE OF NAME  SEC 15(6) of the Code – DECISION FINAL Where there is a failure in this regard, then the company and any director aware of the default shall be liable to a fine.

7. Misdescription  SEC 121 of the Code – PUBLICATION OF THE NAME OF COMPANY This encompasses three parts i.e.  The company is to affix its name on the outside of its office and any other place it carries its business  Its name is to be engraved on the company’s seal  Its name should be accurately mentioned on its stationery, business letters and all negotiable instruments. ATKIN v WARDLE The English Companies Act of 1862 had a provision that every limited company under the Act shall have its name mentioned in legible characters in all Bills of Exchange purporting to be signed by or on behalf of the company. It also provided for the personal liability for any officer of the company who signs on behalf of the company any such bill of exchange which did not meet the requirements of the Act. A Bill of exchange was drawn by the plaintiffs and made payable to order and addressed to the “Salt Water Baths Company Ltd, South Shields” which was in fact registered as the “South Shields Salt Water Baths Company Ltd” which had no power to accept Bills of Exchange. The Bill was however accepted by the defendants who were officers of the Company and endorsed the company’s name as “South Shields Salt Water Baths Company”. NB! They omitted the words “LTD” from the title of the company!

The Court held that the two variations from the proper designation of the company BARBARA OKAI-TETTEY

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were sufficient to bring the defendants under the provisions of the Act which made them personally liable.

HENDON v ADELMAN

COWRIES FINANCE v PAKO BAY

After a change of name the company continued to use its stationery bearing its original name... This is an application by the plaintiff-applicant for summary judgment under ORDER 14 of the High Court Rules as amended against the defendant-respondent for an amount of money. The plaintiff took out a writ of summons for an order for the payment of the said amount among other reliefs. When service of the writ and statement of claim was effected on the defendant, a conditional appearance was entered on its behalf. On this application, the defendant filed a defence and an affidavit in opposition. The loan facility was to enable the company finance the export of lobster tails and was to be repaid within 30 days at an agreed interest rate of eight per cent and eventhough several demands had been made for the payment of the principal amount and the interest thereon, the defendant had failed to pay.

Counsel contended amongst other contentions that the approval of the registrar was not sought before the change of name from Akaba & Associates to Cowries Finance Ltd and that even after the said change, the plaintiff continued to transact business in the name of Akaba & Associates. To this the plaintiff exhibited a copy of the special resolution made by the company. SEC 15(5) of the Companies Code provides that ‘a company may, by special resolution and with the approval of the registrar signified in writing change its name. The exhibit was signed by another on behalf of the registrar. As such if the registrar did not give his approval, certainly his signature would not have appeared on the document. There is therefore no merit in the objection and as such it BARBARA OKAI-TETTEY

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was accordingly dismissed.

It was further contended that the company continued to do business in its original name, for support to this contention, a letter was cited which was written by the chief executive and on the letter was the letter head of Akaba & Associates. This letter was written after the special resolution had been passed. Where therefore a party has complied with the statutory provisions, does the mere fact that it fails to effect changes on its letter head negate the fact that there has been a compliance? I think not.

There is evidence that the company subsequently effected the change in its dealings with the respondent. The receipt issued to the defendant upon the issuance of the post-dated cheques, the name Cowries Finance Co Ltd appeared. The post-dated cheques were issued in the name of Akaba. If the defendant draws a cheque in favour of Akaba, and receives a document stating that Cowries Finances is acknowledging receipt, why did the defendant not raise an objection that the wrong party had received the amount on the fact of the cheque? It is my considered view that the defendant was made aware of the change well before the issuance of the writ and he cannot now be heard to complain.

 SEC 121(3) of the Code – PUBLICATION, NOT ENGRAVED  SEC 121(4) of the Code – PUBLICATION, SIGNING The above sections deal with the seal of a company and its negotiable instruments e.g. cheques issued by the company.  SEC 265 of the Code – CONTROL OF PUBLIC INVITATIONS OTHER LEGISLATION  FRAUDULENT TRADING SEC 26 of the Bodies Corporate (Official Liquidation) Act – BARBARA OKAI-TETTEY

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Thus if in the case of the official winding up of a company, it appears to the liquidator that any operations had been carried out with fraudulent intent, then the courts can declare that the director and others who knowingly carried on the business of the company shall be personally liable for any debts and liabilities incurred by the company. This constitutes lifting of the veil. RE WILLIAM C. LEITCH BROTHERS This is a clear example of fraudulent intent, in which the liquidator sought declarations that the director of the company had been knowingly a party to carrying on the business of the company with intent to defraud its creditors and he was therefore personally liable for all the company’s debts.

The company had owed around £6,500 for goods and it lacked the means to pay off these debts. Subsequently, the director ordered goods worth £6,000. These became subject to a charge contained in a debenture held by him. He also lent sums of money to the company which were paid off in part by the company. Later, he appointed a receiver on the ground that the company had defaulted on interest payments. The company’s account with the bank was overdrawn by around £800. He had guaranteed this sum and had deposited title deeds with the bank and the overdraft was subsequently paid. It also emerged that the goods which the director had ordered were greatly in excess of the company’s requirements.

In holding the director liable the court stated that “ … if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud ”

R v GRATHAM Section 332 of the English Companies Act of 1948 had provisions which cast personal liability on persons who carry out the business of a company with intent to defraud BARBARA OKAI-TETTEY

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creditors of the company. The appellant, who was a consultant in charge of a company’s administration and sole authorized signatory of its cheques, was tried with others on a count of fraudulent trading and convicted. He appealed against the conviction to the CA.

The court held that he took part in running a business which ordered potatoes continually from a supplier when they knew that there was no hope of the supplier being paid. The appeal was dismissed.

RE PATRICK & LYON The English Companies Act had certain provisions similar to that of section 26 of Act 180 of Ghana. The applicants were creditors of the company which was in liquidation. The first respondent was a director of the company from the time of incorporation. The company never made a trading profit. The first respondent had debentures by which a floating charge had been created for him. Later on the company in that same year was wound up and the appellant sought to challenge the first respondent’s right to be paid for his debentures as well as to make the first respondent liable for all the debts and liabilities of the company. He argued that the first respondent had taken part in the running of a business with intent to defraud creditors and that he had kept the company alive until he could be repaid his money owed to him (the first respondent) by the company.

The Court rejected the applicant’s claim and held that in the companies Act, the liability was for actual dishonesty. Again the court held that a company is insolvent only when it is unable to pay its debts as they become due. Again the court held that it was not proven that the company was carrying on business to defraud creditors.

 SEC 90 of the Banking Act – Sometimes in order to determine the nationality of a company, the law looks to the share holding structure of the company. Thus the law goes behind the veil to identify BARBARA OKAI-TETTEY

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persons who own shares in the company. This Act further defines foreign banks in accordance with its shareholding structure. A Ghanaian bank is a bank incorporated in Ghana of which 60% or more of its share capital is held by Ghanaians.  SEC 40 of the Ghana Investment Promotion Centre Act – In Ghana any company who’s majority capital or financial input is owned by citizens in Ghana including the state and any statutory corporation. The legal effect of the lifting of the veil is that a company deemed to be a foreign investor must be registered with GIPC and the Bank of Ghana.  SEC 161 of the Internal Revenue Act – With this Act one can determine the residence of a company. Thus a company is a resident company if it is incorporated in Ghana or it has its management and control exercised in Ghana at any time during the year of assessment. DE BEERS CONSOLIDATED MINES v HOWE A company’s residence is where it ‘really keeps house and does its real business’: its ‘real business’ is carried on where the central management and control actually abides.

LORD LOREBURN: In applying the conception of residence to a company, we ought, I think, to proceed as nearly as we can upon the analogy of an individual. A company cannot eat or sleep, but it can keep house and do business. We ought, therefore, to see where it really keeps house and does business. An individual may be of foreign nationality, and yet reside in the UK. So may a company. Otherwise it might have its chief seat of management and its centre of trading in England under the protection of English law, and yet escape the appropriate taxation by the simple expedient of being registered abroad and distributing its dividends abroad. A company resides for the purposes of income tax where its real business is carried on. This is the true rule and the real business is carried on where the central management and control actually abides.

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It is a pure question of fact to be determined, not according to the construction of this or that regulation or by-law, but upon a scrutiny of the course of business and trading. In this case the head office was formally at Kimberley and the general meetings had always been held there. Also the profits have been made out of diamonds raised in South Africa and sold under annual contracts to a syndicate for delivery in South Africa upon terms of division of profits realized on resale between the company and the syndicate. And the annual contracts contain provisions for regulating the market in order to realize the best profits on resale.

Further, some of the directors and life governors lived in South Africa, and there are directors’ meetings at Kimberley as well as in London. But it is clearly established that the majority of directors and life governors live in England, that the directors meetings in London are the meetings where the real control is always exercised in practically all the important business of the company except the mining operations. London has always controlled the negotiation of the contracts with the diamond working and development of mines, the application of profits, and the appointment of directors. London has also always controlled matters that require to be determined by the majority of all the directors, which include all questions of expenditure except wages, materials, and suchlike at the mines, and a limited sum which may be spent by the directors at Kimberley.  The trade or business of the appellant company constituted one trade or business, and was carried on and exercised by the appellant company within the UK at their London office  The head and seat and directing power of affairs of the appellant company were at the office in London, from whence the chief operations of the company, both in the UK and elsewhere, were in fact controlled, managed and directed.

These conclusions of fact cannot be impugned and it follows that this company was resident within the UK for the purposes of income tax and must be assessed on that footing. Therefore the appeal failed.

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A company’s resides...where its real business is carried on...and the real business is carried on where the central management and control actually abides. Here the De Beers Company was incorporated in South Africa and its main trading operations were there. The controlling board of directors exercised its powers in the UK. The company was held to be resident there.

BY THE COURTS: Broadly speaking, the court adheres to the principles laid down in SALOMON v SALOMON. In certain circumstances the courts are prepared to ‘peer through the corporate veil’ to give effect to the reality behind the façade of a company or even ignore the separate existence of the legal person or, as it is termed to ‘lift the veil’. This was elaborated in the case of MORKOR. 1. SALOMON is recognized as the cornerstone of company law in Ghana. OWUSU v THORNE The 2nd defendant, RN Thorne, was one of the two directors of the 1 st defendant limited liability company. The plaintiff-applicant sued both the company and the director and applied for an order against the 2nd defendant to personally furnish security for appearance to answer such judgment and costs that might be given against the defendant company. The appeal was dismissed.

MENSA BOISON J: What the court has to determine in this motion is whether RN Thorne personally or the company is the 1st defendant in this case. the theory of legal personality of corporations has its own practical problems but it is clear that a limited company or corporation has legal existence apart from the directors and members, and it is in a few recognized exceptions that law lifts the ‘corporate veil’, as it has been put, and ...