Company 101: Introduction to Corporate Veil

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What is the corporate veil?

A corporate veil is a layer of protection that is accorded to the shareholders of the company while they are managing the affairs of the company. The law states that when a company is incorporated:

  1. It is treated as a separate entity from its directors/ members/ shareholders (members of the company)1;
  2. Can sue and be sued2;
  3. Any lawsuits (both in litigation and enforcing a judgment) must be instituted against the corporation/ company and not against the members of the company personally3; and
  4. The company debts (in the event a judgment is enforced against the company) are limited to the amount the shareholders have paid/ agreed to pay to the company for its shares and what the assets that the company own- the personal assets of the members of the company cannot be touched in all circumstances4.

Generally, the courts are disinclined (very disinclined) to lift the corporate veil i.e. allowing others to sue the members of the company.

Why are the courts disinclined to lift the veil?

The protection is put in place to ensure that the members of the company (especially its directors and shareholders) are able to make decisions for the company without the constant fear of being sued by members of the public. By not lifting the veil,  it encourages the members of the company to take bold steps to advance the company for the benefit of the members of the company (provided that the decisions are made in good conscience/ good faith). As noted by the court5:

Judges exercise caution in the knowledge that every business has some elements of risk. Where a director takes commercial or financial steps which are in essence recommended by professionals it would be going too far against that background to come to the view that he is dishonest…”

A keen eye will tell you by now that this principle is not immune to abuse. There will be instances where members of the company blatantly use the protection accorded to commit fraud or improper conduct/ advance the company in a way that is not in the best interest of the company.

It is only in such instances the court will lift the corporate veil and hold the members of the company personally accountable for their actions. However, the threshold to do so is very high6.

Under what circumstances can a corporate veil be lifted?

In order to lift the corporate veil, the parties (who is seeking to lift it) must prove7:

  1. The piercing or lifting of a corporate veil is in the interest of justice; and
  2. There exist special circumstances to pierce or lift the corporate veil.

So what are considered special circumstances? While “special circumstances” are dependant on the facts of each case, the courts have recognized a number of factors that may lead to the lifting of the corporate veil8. Amongst them (whilst not exhaustive) are:

  1. Utilizing a dissolved company to carry out transactions with another party9;
  2. When there is a group enterprise i.e. there is a close nexus between parent and subsidiary company10;
  3. Where the sole purpose of incorporating the company is to commit fraud11; or
  4. Where there is unfairness/injustice12.

Therefore, the privileges accorded to the members of the corporation/ company should not be taken for granted and should be utilized with the responsibility to avoid the privilege of being abused/ exploited. Failing to do so will subject the members of the company personally liable as if the company was not present13.

Need to seek legal advice regarding Company Law?

1. Section 20, Companies Act 2016.
2. Section 21 (1)(a), Ibid.
3. Salomon v A Salomon & Co Ltd [1897] AC 22.
4. Salomon v A Salomon & Co Ltd [1897] AC 22.
5. Vibelko Nigeria Ltd and Another v Nigeria Deposit Insurance Corporation [2004-2006] 13 NBLR (Part II) 256.
6. Ben Hashem v Al Shayif (2008) EWHC 2380.
7. Law Kam Loy & Anor v Boltex Sdn Bhd [2015] 3 CLJ 355.
8. Ahmad Zahri Bin Mirza Abdul Hamid v Aims Cyberjaya Sdn Bhd [2020] MLJU 595.
9. RDS Bina v Ong Chin Hoe [2014] 11 MLJ 606.
10. Hotel Jaya Puri v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109.
11. Keller (M) Sdn Bhd v Ong Leong Chiou & Ors [2017] MLRHU 1.
12. Hotel Jaya Puri v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109.
13. Yeo Hwee Ying, Revisiting The Alter Ego Exception In Corporate Veil Piercing (2015) 27 SAcLJ 177.