CHAPTER ONE Introduction 1. 1 Background One of the primary benefits of creating a corporate entity is to limit the liability of the shareholders. However, under certain circumstances the corporate entity may be disregarded. This is also known as piercing the corporate veil and is the most frequent method for holding the shareholders liable for the acts of a corporation. Corporate officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct.
Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. In order to pierce the corporate veil, third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible for extra-corporate actions. Under the doctrine of piercing the corporate veil, the courts may decide not observe the separation of the corporate entity from its stockholders, and it may deem the corporation’s acts to be those of the persons or organizations actually controlling the corporation.
This is based upon a finding by the court that the corporate form is used to perpetuate a fraud, circumvent a statute, or accomplish some other wrongful or inequitable purpose. A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud. If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners.
To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts. These measures help to ensure that the corporation will be treated as a separate entity. 1. 2 Research Problem The major question to be addressed is: What are the legal provisions, grounds and practices relating to the Doctrine of Lifting the Corporate Veil? And it is sufficiently utilized or not in the Nepalese context? 1. 3 Objectives The basic objectives of this paper are: 1. To describe the concept of Doctrine of Lifting the Corporate Veil. . To analyze the utilization situation of the doctrine in Nepalese Context. 1. 4 Justification The corporate entity is separate legal entity than its shareholders, directors and employees. The owners of the company will have only the limited liability extended to their enrolment in share holdings. But in certain conditions, the act of the company might be addressed due negligence or wilfull fraud. So it is clear that the company cannot act on its own and the act is carried by the directors. The doctrine is important to find out the actual scenario behind the name of the company.
So it is mostly important when the directors carry out the act which is done in the name of the company but is done for the sole benefit of the directors only or to carry out the acts that are not supposed to be done as per the law. 1. 5 Limitation This paper has been written only for academic purpose. this paper has been written on the base on library study and only on available documentary sources in given time frame. So the subject is not dealt with in great depth. Moreover, the time-limitation that required the paper to be submitted within a prescribed span of time limited detailed and exhaustive study and research on the topic.
The specific topic itself also poses some limitation, so the paper will only cover the basic conceptual part of the topic. This academic paper tries to give clear concept about the usage of the doctrine of Lifting the Corporate Veil in Nepalese context 1. 6 Organization of the study This paper is organized into six chapters. First chapter will be introductory where as second chapter will show the review of past literatures carried out by prominent researchers. Chapter three will show the methodology that is used in performing the research.
The remaining chapters will be analytically presented in its specific titles. The fourth chapter will show the conceptual framework about the topic, its relevant areas and general concepts. The fifth chapter will show the legal provisions and judicial decisions, application of the doctrine in Nepalese context. The sixth and final chapter provides conclusion of this paper. CHAPTER TWO Literature Review For the purpose of this study, detailed review of literature had been done. These studies were conducted in the national as well as international general concepts.
For the purpose of this study, article of renewed authors, various study reports prepared by concerning agencies, books on the related topic are reviewed for the support of this study. The Act itself has been taken as a tool for the completion of this study. The judgments of courts in various cases on this subject are also reviewed in the course of this study. Journals reports research papers, discussion papers and other issues published by respective institutions have tried to shed light on it. Literature, which have been reviewed are mentioned as below 2. 1Abolishing Veil Peircing
This article is written by Stephen Bainbridgen published in The Journal of Corporation Law available at www. legal dictionary. com. According to the writer, Courts traditionally require fraud, illegality, or misrepresentation before they will pierce the corporate veil. Courts also may ignore the corporate existence where the controlling shareholder or shareholders use the corporation as merely their instrumentality or alter ego, where the corporation is undercapitalized, and where the corporation ignores the formalities required by law or commingles its assets with those of a controlling shareholder or shareholders.
In addition, courts may refuse to recognize a separate corporate existence when doing so would violate a clearly defined statutory policy. Many times, a controlling shareholder is itself a corporation: the controlling shareholder is the parent corporation, and the controlled corporation is a subsidiary. In some circumstances courts may pierce the corporate veil protecting the parent and hold the parent liable for the subsidiary’s obligations.
This happens where the subsidiary loses its independent existence because the parent dominates the subsidiary’s affairs by participating in day-to-day operations, resolving important policy decisions, making business decisions without consulting the subsidiary’s directors or officers, and issuing instructions directly to the subsidiary’s employees or instructing its own employees to conduct the subsidiary’s business.
Courts following the instrumentality doctrine concentrate on finding three factors: (1) the people behind the corporation dominate the corporation’s finances and business practices so much that the corporate entity has no separate will or existence; (2) the control has resulted in a fraud or wrong, or a dishonest or unjust act; and (3) the control and harm directly caused the plaintiff’s injury or unjust loss.
The alter ego doctrine allows courts to pierce the corporate veil when two factors exist: (1) the shareholder or shareholders disregard the separate corporate entity and use the corporation as a tool for personal business, merging their separate entities with that of the corporation and making the corporation merely their alter ego; and (2) recognizing the corporation and shareholders as separate entities would give court approval to fraud or cause an unfair result. 2. 2 Piercing the Corporate Veil This article is written anonymous writer and is available at www. quickmba. com.
According to the writer, The corporate protection of limited liability can be lost through: 1. Piercing of the corporate veil A court may pierce through the veil of liability protection if the corporation does not follow proper corporate formalities, if it is undercapitalized, or if it can be shown that it is a sham that was set up to defraud. If the corporate formalities are not followed, the corporation may be deemed to not be functioning as a corporation, but rather, as the alter ego of the owners. To prevent the corporate veil from being pierced, it is important to keep minutes of the board meetings and to not co-mingle bank accounts.
These measures help to ensure that the corporation will be treated as a separate entity should it be sued. 2. Defective incorporation Suppose that a person forms a corporation and convinces two other people to invest. If the corporation later gets sued and it is discovered that the corporation had not been formed properly, the investors may not have limited liability due to defective incorporation. Individuals may be held personally liable if the corporation is not set up properly but proceeds to do business.
In such cases of defective incorporation, one can escape personal liability under certain conditions. For example, if a good-faith effort was made to incorporate and a substantial portion of the incorporation laws were followed, limited liability protection may be granted. 3. Improper signing of documents. When signing documents on behalf of a corporation, both the name of the corporation and the signer’s representative position in the corporation must be stated. 2. 3Piercing the corporate Veil This article is written anonymous writer and is available at www. residual-rewards. com.
According to the writer, Piercing the Corporate Veil can happen when: •corporate debt is knowingly incurred when the company is already insolvent; •required annual shareholders or board of directors meetings are not held, or other Corporate-Formalities are not observed; •corporate records, especially minutes of directors meetings, are not properly or adequately maintained; •shareholders remove unreasonable amounts of funds from the corporation, endangering its financial stability; •there is a pattern of consistent non-payment of dividends, or payment of excessive dividends; •there is a general commingling of corporate activity and/or funds and those of the person or persons who control the corporation; •there is a failure to maintain separate offices, the company has little or no other business and is only a facade for the activities of the dominant shareholder who is in fact, the corporate “alter ego. ” 2. Lifting the Corporate Veil in Commercial Arbitration This article is written by Ramesh Karkee, published in Business law journal and published by commercial law society, Kathmandu. According to the writer, the company has life of its own, can own property, can sue and be sued in its own name, has perpetual life and existence to name a few benefits of incorporation. It is a trite law that a rather hefty veil is drawn between these two that can be lifted only in a limited number of circumstances that seem to be fluctuating according to the current judicial thinking. 2. 4The Veil Doctrine in Company Law This article is written by Amin George Forji, available at www. residual-rewards. com.
According to the writer, the act of piercing the corporate veil until now remains one of the most controversial subjects in corporate law, and it would continue to remain so, even for the years to come. By and large, as discussed in the essay, the doctrine of piercing the corporate veil remains only an exceptional act orchestrated by courts of law. Courts are most prepared to respect the rule of corporate personality, that a company is a separate legal entity from it’s shareholders, having it’ own rights and duties, and can sue and be sued in it’s own name. As we move from jurisdiction to jurisdiction across the globe, it’s application narrows down to how that system of the law appreciates the subject.
Common law jurisdictions are examples par excellence where the piercing of the corporate veil has gained notoriety, and as the various cases indicate, courts under this system of the law generally appreciates every case by it’s merits. The above notwithstanding, there are general categories such as fraud, agency, sham or facade, unfairness and group enterprises; which are believed to be he most peculiar basis under which the common law courts would pierce he corporate veil. But these categories are just a guideline and by no means far from being exhaustive. CHAPTER THREE Methodology 3. 1 Research Design The researcher has been conducted on descriptive research design.
The purpose of design is to describe, analyze and review Nepalese Laws, Judicial decisions on the doctrine of Lifting of Corporate Veil. 3. 2 Sources and Nature of Data It is doctrinal research based on literature review of books, journals, and other reading materials. For the preparation of this research paper, the researcher has visited Kathmandu School of Law Library and Central Law Library. The internet websites are also searched in the course of this study. Both Primary and secondary data have been collected, utilized and analyzed for the fulfillment of the objective of this paper. 3. 3 Techniques of Data Collection This paper is conducted in doctrinal method so the researcher can not collect first hand data from non-doctrinal or empirical method.
It means the researcher collect and review the primary data like as Acts, case laws and secondary data like as books, articles and internet. 3. 4 Data Analysis and Presentation In this paper all data are presented in the form of description. The analysis of the application of doctrine, its general concept and Nepalese context are presented in their respective headings. CHAPTER FOUR Conceptual Framework 4. 1 Meaning and Definition of Company Company is a business organization which is established under the companies Act. It is established to carry on commercial enterprises to earn money through business. It is a legal person so it has separate corporate personality through Law.
One of the main motivations for forming a corporation or company is the limited liability it offers its shareholders. By this doctrine of limited liability, a shareholder can only lose only what he or she has contributed as shares to the corporate entity and nothing more. Company is more complicated form of association, with a large and fluctuating membership, requires a more elaborate organization, that is, should recognize that it constitutes a distinct legal person, subject to legal duties and entitled to legal rights separate to those from its members. A corporate body is, by the law equated to a physical individual, but it is not an individual.
The characterization of the corporate body as a living organism is a symbolic gesture, even where it is not simply a disguise for the legitimating of omnipotence of the state over the individual. Company is a group of persons who come together or who contribute money for some common objectives. Companies are created and sustained by an Act of state, they are given separate personality simply because this is a convenient from which the natural person behind the company may conduct their business. The word “company” is normally reserved for those associated for economic purpose to carry on a business for gain. Therefore company is a legal person, it is incorporated by the legal rules or statutes for its own purpose. It has its own identity, which is separated from its shareholders, directors and officers.
Companies carry on commercial enterprise, earn money, enter into contracts and can sue and are sued. Shareholders enjoy the benefit of limited liability; they are not personally liable for the debts or obligation. Company implies an association of a number of people united for the purpose of profit conducting certain business or objectives. However, this definition may not be appropriate since in accordance to the existing Companies Act, 2006, a single individual may also incorporate a company, and there may be profit not sharing company. Companies Act defines the term company as a company incorporated in accordance to this Act. 4. 2 Limited Liability
A corporation under Company law or corporate law is specifically referred to as a “legal person”- as a subject of rights and duties that is capable of owning real property, entering into contracts, and having the ability to sue and be sued in its own name. In other words, a corporation is a juristic person that in most instances is legally treated as a person, and empowered with the attributes to own its own property, execute contracts, as well as ability to sue and be sued. One of the main motivations for forming a corporation or company is the limited liability it offers its shareholders. By this doctrine of limited liability, a shareholder can only lose only what he or she has contributed as shares to the corporate entity and nothing more. No member is bound to contribute anything more than the nominal value of the shares held by him.
In a Partnership, on the other hand, the liability of the partners for the debts of the business is unlimited. They are bound to meet, without any limit, all the business obligations of the firm. 4. 3 Separate Legal Existence A company once incorporated becomes a legal personality or a juristic entity that has a separate and distinct identity from that of it’s owners or members, shareholder; and it’s further empowered with it’s own rights, duties and obligations, can sue and be sued in it’s own name, etc. The most important ingredient that flows from the separate legal personality clause is that of limited liability. It is aimed at giving investors minimum insurance in their business over their own private lives.
Hence, the most a member in the company can lose is the amount paid for the shares themselves and thus the value of his/her investment. Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors’ risk whilst, consequently, their potential for gain is unlimited. Evidently, corporations exist in part, in the first place to shield their shareholders from personal liabilities for the debts of that corporation. 4. 4 Salomon’s Case The case of Salomon V. Salomon & Co. commonly referred to as the Salomon case, is both the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil. The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr Salomon. 4. 4. 1 Facts and decision of the Salomon Case Mr Aron Salomon was a British leader merchant who for many years operated a sole proprietor business, specialized in manufacturing leather boots. In 1892, his son, also expressed interest in the businesses.
Salomon then decided to incorporate his businesses into a limited company, which is Salomon & Co. Ltd. However, there was a requirement at the time that for a company to incorporate into a limited company, at least seven persons must subscribe as shareholders or members. Salomon honored he clause by including his wife, four sons and daughter into the businesses, making two of his sons directors, and he himself managing director. Interestingly, Mr. Salomon owned 20,001 of the company’s 20,007 shares – the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost ? 39,000, of which ? 0,000 was a debt to him. He was thus simultaneously the company’s principal shareholder and its principal creditor. At the time of liquidation of the company, the liquidators argued that the debentures used by Mr. Salomon as security for the debt were invalid, and that they were based on fraud. Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors. The lord justices of appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr.
Salomon had been a mere scheme to enable him to carry on as before but with limited liability. However, the House of Lords later quashed that Court of Appeal (CA) ruling, upon critical interpretation of the 1862 Companies Act. The court unanimously ruled that there was nothing in the Act about whether the subscribers (i. e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law, the court ruled, and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders.
In other words, by the terms of the Salomon case, members of a company would not automatically, in their personal capacity, be entitled to the benefits nor would they be liable for the responsibilities or the obligations of the company. It thus had the effect that members’ rights and/or obligations were restricted to their share of the profits and capital invested. 4. 4. 2 Significance of the Salomon Case The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in Anglo-Saxon courts, or common law jurisdictions. The case is of particular significance in company law thus: Firstly, it established the canon that when a company acts, it does so in it’s own name and right, and not merely as an alias or agent of it’s owners.
For instance, in the later case of Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, Lord Sumner said the following: “Between the investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Assuming, of course, that the company is duly formed and is not a sham… the idea that it is mere machinery for affecting the purposes of the shareholders is a layman’s fallacy. It is a figure of speech, which cannot alter the legal aspect of the facts. Secondly, it established the important doctrine that shareholders under common law are not liable the company’s debts beyond their initial capital investment, and have no proprietary interest in the property of the company. This has been affirmed in later cases, such as in The King v Portus; ex parte Federated Clerks Union of Australia, where Latham CJ while deciding whether or not employees of a company owned by the Federal Government were not employed by the Federal Government ruled that: “The company…is a distinct person from its shareholders. The shareholders are not liable to creditors for the debts of the company. The shareholders do not own the property of the company…”” 4. 5 Lifting the Corporate Veil In reality, the business of the legal person is always carried on by, and for the benefit of, some individuals.
In the ultimate analysis, some human beings are the ultimate beneficiaries of the corporate advantages, for while, by fiction of law, a corporation is a distinct entity, yet in reality it is an association of person who are in fact the beneficial owners of all the corporate property. Lifting the veil of incorporation or better still; “Piercing the corporate veil” means that a court disregards the existence of the corporation because the owners failed to keep one or more corporate requirements and formalities. The lifting or piercing of the corporate veil is more or less a judicial act, hence it’s most concise meaning has been given by various judges.
Staughton LJ, for example, in Atlas Maritime Co SA v Avalon Maritime Ltd (No 1) defined the term thus: “To pierce the corporate veil is an expression that I would reserve for treating the rights and liabilities or activities of a company as the rights or liabilities or activities of its shareholders. To lift the corporate veil or look behind it, therefore should mean to have regard to the shareholding in a company for some legal purpose. ” Young J, in Pioneer Concrete Services Ltd v Yelnah Pty Ltd, on his part defined the expression “lifting the corporate veil” thus: “That although whenever each individual company is formed a separate legal personality is created, courts will on occasions, look behind the legal personality to the real controllers. ” The simplest way to summarize the veil principle is that it is the direct opposite of the limited liability concept.
Despite the merits of the limited liability concept, there is the problematic that it can lead to the problem of over inclusion, to the disadvantage of the creditors. That is to say the concept is over protected by the law. When the veil is lifted, the owners’ personal assets are exposed to the litigation, just as if the business had been a sole proprietorship or general partnership. Common law courts have the lassitude or exclusive jurisdiction “lift” or “look beyond” the corporate veil at any time they want to examine the operating mechanism behind a company. This wide margin of interference given common law judges has led to the piercing of the corporate veil becoming one of the most litigated issues in corporate law.
As aforementioned, when the judges pierce the veil of incorporation, they accordingly proceed to treat the company’s members as if they were the owners of the company’s assets and as if they were conducting the companies business in their personal capacities, or the court may attribute rights and/or obligations of the members on to the company. 4. 7When the veil is lifted 1. Fraud The courts have been more that prepared to pierce the corporate veil when it fells that fraud is or could be perpetrated behind the veil. The courts will not allow the Solomon principal to be used as an engine of fraud. The two classic cases of the fraud exception are Gilford motor company ltd v. Horne and Jones v. Lipman . In the first case, Mr. Horne was an ex-employee of The Gilford motor company and his employment contract provided that he could not solicit the customers of the company. In order to defeat this he incorporated a limited company in his wife’s name and solicited the ustomers of the company. The company brought an action against him. The Court of appeal was of the view that “the company was formed as a device, a stratagem, in order to mask the effective carrying on of business of Mr. Horne” in this case it was clear that the main purpose of incorporating the new company was to perpetrate fraud. Thus the court of appeal regarded it as a mere sham to cloak his wrongdoings. In the second case of Jones v. Lipman a man contracted to sell his land and thereafter changed his mind in order to avoid an order of specific performance he transferred his property to a company. russel judge specifically referred to the judgments in Gilford v.
Horne and held that the company here was ” a mask which (Mr. Lipman) holds before his face in an attempt to avoid recognition by the eye of equity” he awarded specific performance both against Mr. Lipman and the company. Under no circumstances will the court allow the ant form of abuse of the corporate form and when such abuse occurs the courts will step in and Jennifer Payne in her article lists three aspects of fraud, which needs to be looked at before the corporate veil can be lifted which are ; A) What are the motives of the fraudulent person relevant- Whether some level of deception is necessary needs to be determined. In the case of Hilton v. lustile ltd the plaintiff and the defendant agreed to use a medium of a company in a tenancy arrangement in order to evade the application of the rent act 1977. The court of Appeal held that the plaintiff was not entitled to lift the veil since he had full knowledge of the matter at all times. However another interesting question that arises is what is the effect of deception on the other party. The issue came up for discussion in the case of Adams V. Cape industries plc. In considering whether the corporate form has been used in such a way as to justify the lifting of the corporate veil, the court stated that the correct test in relation to groups of companies was whether the company had been used as a “mere facade concealing the true facts” applying this test Slade J. aid that the “motives of the perpetrator may be highly material” in both the classic cases intention to deceive the plaintiff was very much present how ever it was not so in Adams V. Cape industries. So the point that needs to be determined is whether motive is necessary for the fraud exemption to exist. However to get any answer it is also important to find out the nature of legal right that is being denied to the plaintiff b) Is the character of the legal obligation being evaded relevant? What the court wants is to prevent limited companies from using the corporate form to evade a contractual or legal obligation. However one needs to question whether the nature of this obligation will affect the ability of the court to lift the corporate veil.
In the classic cases the defendants sought to avoid the legal obligations that existed prior to their incorporation, the main motive of incorporation was to avoid the performance of the legal obligation in Adams v. Cape there was some discussion about the need to allow the veil to be lifted in order to prevent Cape avoiding publicity as to its involvement in the sale of asbestos to America and to prevent cape from having any practical benefit of the group’s asbestos trade in the states without the attendant risks of tortuous liability. However the tortuous liability was purely speculative. For the fraud exception to exist the defendant must deny the plaintiff some preexisting legal right. In case no legal right is existent the intention on part of the defendant to deceive the plaintiff must be speculative and hence less substantial in nature. f the legal right crystallizes before the incorporation of the company then the mental element is satisfied if however the reverse then question arises if whether in such circumstances the mental element can be satisfied. A suitable answer to this is if the legal right crystallizes after the incorporation but before the use of the corporate form to evade the legal right, the fraud exception should be satisfied C) Is the timing of the incorporation of the device company relevant? In Creasey v. Breachwood Motors Limited, the reason for the failure of the fraud exception was the timing of incorporation of the sham company. Here Mr. Creasey brought an action against wrongful dismissal against his employers BW. BW served a defence but four months later he was served a notice saying that the company was insolvent.
BM took over all the business except the plaintiff’s claim. The plaintiff obtained an order for damages and interest however before he received anything BW went was dissolved without going into liquidation. The plaintiff sought an order substituting BM for BW on the grounds of justice. In this case the facts may look similar to Adams v. Cape Industries however Richard Southwell sitting as distinguished Gilford and Horne and Jones v. Lipman on the basis that in those cases the sham companies are had been formed with the view to carry out the fraud . in the present case the device company BM was already in business and caring on it’s own business.
This a very controversial case and should have been decided on the basis of the classic cases as it should not matter whether device companies were created to avoid the legal obligation or whether they were in existence. Creasey should have been otherwise decided maybe on the grounds of justice. 2. Group Enterprises Sometimes in the case of group of enterprises the Solomon principal may not be adhered to and the court may lift the veil in order to look at the economic realities of the group itself. In the case of D. H. N. food products Ltd. V. Tower Hamlets it has been said that the courts may disregard Solomon’s case whenever it is just and equitable to do so.
In the above-mentioned case the court of appeal thought that the present case where it was one suitable for lifting the corporate veil. Here the three subsidiary companies were treated as a part of the same economic entity or group and were entitled to compensation. Lord Denning has remarked that ‘we know that in many respects a group of companies are treated together for the purpose of accounts, balance sheet, and profit and loss accounts. Gower too in his book says, “There is evidence of a general tendency to ignore the separate legal group” however whether the court will pierce the corporate veil depends on the facts of the case. The nature of shareholding and control would be indicators whether the court would pierce the corporate veil.
In the case of Woolfson the house of lords held that there was “no basis consonant with the principle upon which on the facts of this case the corporate veil can be pierced to the effect of holding Woolfson to be the true owner of Campbell’s business or the assets of solfred “the two subsidiary companies that were jointly claiming compensation for the value of the land and disturbance of business. The House of Lords in the above mentioned case had remarked “properly applied the principle that it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts” In the figurative sense facade denotes outward appearance especially one that is false or deceptive and imports pretence and concealment. That the corporator has complete control of the company is not enough to constitute the company as a mere facade rather that term suggests in the context the deliberate concealment of the identity and activities of the corporator.
The separate legal personality of the company, although a “technical point” is no matter of form it is a matter of substance and reality and the corporator ought not, on every occasion, to be relieved of the disadvantageous consequences of an arrangement voluntarily entered into by the corporator for reasons considered by the corporator to be of advantage to him. In particular “the group enterprise” concept must obviously be carefully limited so that companies who seek the advantages of separate corporate personality must generally accept the corresponding burdens and limitations. In some cases the corporate veil has not been lifted prime examples of that are Adams V. Cape Industries.
This was a case involving a foreign judgment against a company. the court in this case held that each company in the group is a separate entity. However one area where the courts have been particularly reluctant to recognize the concept of group entity is with relation with corporate debts. Though it is not possible to in absence of agency or trust to hold one group liable for the debts of another in America equitable doctrines are applied and in New Zealand as well as Ireland there are statutory provisions for pooling of assets. 3. Agency In the case of Bodrip v. Solomon Justice Vaughan Williams expressed that the company was nothing but an agent of Solomon ” That this business was Mr.
Solomon’s business and no one else’s; that he chose to employ as agent a limited company; that he is bound to indemnify that agent the company and that this agent, the company has lien on the assets………” however on appeal to the house of lords it was held that a company did not automatically become an agent of the shareholder even if it was a one man company and they other shareholders were dummies. A company having power to act as an agent may do so as an agent for its parent company or indeed for all or any of the individual members if it or they authorize it to do so. If so the parent company or the members will be bound by the acts of its agent so long as those acts are within actual or apparent scope of the authority.
But there is no presumption of any such relationship in the absence of an express agreement between the parties it will be difficult to establish one. In cape attempt to do so failed. Incases where the agency agreement holds good and the parties concerned have expressly agreed to such a agreement them the corporate veil shall be lifted and the principal shall be liable for the a acts of the agent. 4. Trust The courts may pierce the corporate veil to look at the characteristics of the shareholders. In the case of Abbey and Planning the court lifted the corporate veil. In this case a school was run life a company but the shares were held by trustees on educational charitable trusts. They pierced the veil in order to look into the terms on which the trustee held the shares. 5. Tort
Usually the English courts have not lifted the veil on the ground of tort it is a phenomenon not witnessed in most common law jurisdictions apart from Canada. 6. Enemy character- In times of war the court is prepared to lift the corporate veil and determine the nature of shareholding as it did in the Daimler case where germen shareholders held the shares of an English company during the time of world war 1. 7. Tax- At times tax legislations warrant the lifting of the corporate veil. The courts are prepared to disregard the separate legal personality of companies in case of tax evasions or liberal schemes of tax avoidance without any necessary legislative authority. CHAPTER FIVE Legal Provision Relating Lifting the Corporate Veil 5. 1 Company Act 2063
The Company Act 2063 of Nepal provides various grounds when the corporate veil could be pierced by the courts. The act has provided the grounds on the basis of misconduct and malafide intension of the person working behind the company. The related provisions are as follows: •Section 17(2): If, prior to the incorporation of a company, any person carries on any transaction or borrows money on behalf of the company, such person shall be personally liable for any contract related with the transaction so carried on, subject to Sub-section (3). •Section 24(2): The directors who have signed the prospectus as referred to in Sub-section (1) shall be liable for the matters mentioned in that prospectus . Section 24(3): If any published prospectus contains false statements made maliciously or deliberately and any person sustains any loss or damage by reason of his/her subscription of securities on the faith of that prospectus, the directors who have signed that prospectus shall be personally liable to pay compensation for the actual loss or damage so sustained . •Section 26(3): If any person fails to indicate the name of the company while signing, on behalf of the company, the documents mentioned in Subsection •Section 46(7): If a register maintained under Sub-section (6) is found to have recorded a false matter in a manner to affect the right and interest of a person, such securities registrar, his/her director, officer and employee Section 58(7): If the list of creditors submitted pursuant to subsection (4) is found to contain any false statement or omission, the director of the company who submits such list and the officer who signs such list shall be liable to punishment under this Act. •Section 59(4): If a company is insolvent, and where an application is made by a creditor whose name is said to be omitted from the list of creditors submitted to the Court , along with the proof of omission of his name, the Court may, if it thinks fit, settle a list of shareholders who are liable to pay to the company the amount required for the repayment of loan of such creditor and issue an order to make calls on shares held by the shareholders settled on such list as if they were ordinary contributors in an insolvency process of the company. Section 60: Directors to be responsible in the case o f loss of net worth of company: (1) If the net worth of a public company is reduced to half the paid–up capital or less than that the directors shall prepare an appropriate strategy for the interest of the company and shareholders, as well, within thirty five days of the knowledge of this matter, and present a separate resolution thereon at the general meeting toe held immediately after the knowledge of such matter. Provided, however, that where approval of the general meeting is required to implement such strategy, the extra-ordinary general meeting shall be called promptly. (2) The directors of company who fail to prepare strategy or to present a resolution at the general meeting pursuant to Sub-section (1) or who knowingly permit the existence of the situation where such meeting is not called shall be liable to punishment under this Act. 3) If it is held that the net worth of company has been reduced as mentioned in Sub-section (1) as a result of mala fide intention or malicious recklessness of any director, the director who commits such act shall also be liable to pay compensation for the same. •Section 81: Fine to be imposed in case of failure to submit returns •Section 102: Prohibition on giving false statements by officers: If any officer, knowingly giving false statements in a general meeting of a company, about the actual financial situation of the company, encourage to distribute higher dividend to the shareholders of the company than that can be distributed from the profits, thereby affecting the capital of the company, the officer giving such false statements shall be personally liable for such act. Section 104(2): where any person does any transaction with a company in good faith, such transaction shall be binding for the company; and nothing contained in memorandum of association, articles of association of the company or in any resolution adopted by the general meeting or in any agreement concluded between the company and its shareholder shall be deemed to have made any limitation in or restriction on the authority of the director or the authorized person to do such transaction. •Section 108(6): Where there is a default in complying with the provisions made in this Act in respect of the preparation of books of account and annual financial statements of a company, the director or officer him/herself, during whose tenure the annual financial statements and other reports have been prepared, shall be responsible under this Act. Section 109(9): The officers who prepare any false annual financial statements, reports of board of directors and other returns and reports required to be prepared pursuant to this Act and the directors who approve the same shall be liable to punishment under this Act. •Section 136(9): ) If any debt to be repaid by or any liability to be performed/discharged by the company of which registration has been canceled pursuant to this Section cannot be settled from the assets, rights, or benefits devolved on the shareholders pursuant to Sub-section (8), the shareholders, directors or officers who were involved in the management of such company and responsible for giving rise to the situation as referred to in Sub-section (1) shall personally bear such remaining loan or liability. Section 139: Remedy for act done against rights and interests of shareholders •Section 160: Punishment with fine not exceeding fifty thousand rupees or with imprisonment for a term not exceeding two years or with both •Section 161: Punishment with fine not exceeding fifty thousand rupees •Section 162: Punishment with fine not exceeding twenty thousand rupees •Section 163: Realization of amount of loss: If a director, officer of an company or a person causes any loss or damage to the company or shareholder or creditor or any other person by committing an offense punishable under this Act or by violating any provision contains in this Act or the memorandum of association or articles of association or consensus agreement, the aggrieved company, shareholder, creditor or any person shall be entitled to have realized the amount of such loss or damage.
He /She shall personally bear the amount of such loss or damage 5. 2 Application of the doctrine in Nepalese Context The application of the doctrine of lifting the corporate veil in Nepal could be analysed in the jurisdiction of Courts as well as Arbitrators. 5. 2. 1 Application by Courts Nepalese Courts have highly utilized the doctrine and pierced through the corporate personality basically in the cases of wilfull misconduct, malafide intension and due negligence of the directors and shareholders. Generally in the cases where financial transactions are involved and the directors have ruin the companies without fulfilling the due course of law, the directors are penalized personally.
In some cases we have also found that the company is closed without going into liquidation and fulfilling the legal requirements. Even there are cases where the company could not be found at the place authorized and they just quit the company. In these matters the court have lifted the corporate veil and transferred the liability of the company beyond the limited share holdings. 5. 2. 2 Application by Arbitrators In the cases of Arbitration, the arbitrators generally do not show the practice of taking the doctrine into their jurisdiction. In one case, Nepal Airlines v. Harati Travels and Tours (P) Ltd. , Arbitrator had lifted the corporate veil and make the directors personally liable on the financial atter but later Appeal Court had sent back the award for re-awarding due to lack of jurisdiction of Arbitrator to lift the corporate veil. CHAPTER SIX Conclusion 6. Conclusion Corporate officers, directors and controlling shareholders have a general fiduciary duty of loyalty and care which should govern all their corporate conduct. Unless they breach that duty by gross negligence or acts in bad faith, they usually will have no personal liability to third parties. In order to pierce the corporate veil, third parties have to show personal wrongful conduct on the part of a company official or director to hold them personally responsible for extra-corporate actions. The veil principle is that it is the direct opposite of the limited liability concept.
Despite the merits of the limited liability concept, there is the problematic that it can lead to the problem of over inclusion, to the disadvantage of the creditors. That is to say the concept is over protected by the law. When the veil is lifted, the owners’ personal assets are exposed to the litigation, just as if the business had been a sole proprietorship or general partnership. Nepalese Company Act 2063 has provided various grounds when the corporate veil could be pierced by the courts. The act has provided the grounds on the basis of misconduct and malafide intension of the person working behind the company. In Nepal, the courts have the practice to lift the corporate veil but it is not seemed to be practiced by the Arbitrators.