INTRODUCTION
The foundational concept of separate legal personality serves as the cornerstone of company law, defining how a company operates and exists. Widely regarded as a fundamental and enduring principle of corporate jurisprudence, it stands as a crucial element in the legal framework governing businesses. The principle of separate legal personality remains a prevailing and celebrated rule, notably established in the landmark case of Salomon v A Salomon & Co Ltd [1]
FACTS IN SALOMON V SALOMON
Salomon executed a transfer of his boot-making enterprise, originally functioning as a sole proprietorship, to the newly formed Salomon Ltd. The membership of this company included Salomon and his family members, with consideration for the transfer taking the form of shares and debentures carrying a floating charge as security against debt, tied to the company’s assets. Upon incorporation in 1892, Salomon received 20,001 shares, each valued at £1, as payment from A Salomon & Co Limited for his previous business. Additionally, he was issued £10,000 in debentures, leveraging these to secure a £5,000 advance from Edmund Broderip.
Following the company’s incorporation, a downturn in boot sales led to its failure, defaulting on debenture interest payments, particularly the half held by Broderip. Legal action ensued, prompting the company’s liquidation and the repayment of Broderip’s £5,000. With £1,055 in company assets remaining, Salomon sought this amount under the retained debentures. However, this move raised concerns about leaving nothing for unsecured creditors. The company’s liquidator contested honoring the floating charge and argued for holding Salomon accountable for the company’s debts, leading to legal proceedings initiated by Salomon.
ISSUE IN SALOMON V SALOMON
Salomon v Salomon & Co Ltd case was to determine if, notwithstanding the distinct legal identity of a company, an individual shareholder or controller could be held accountable for the company’s debts beyond the capital investment, leading to potential unlimited personal liability.
RULING IN SALOMON V SALOMON
The Court of Appeal, in asserting that the company was a mere illusion, argued that Salomon had established the company in contravention of the true intent of the Companies Act of 1862. The court contended that the company essentially operated as an agent of Salomon, and therefore, Salomon should bear responsibility for the debts incurred during this agency.
However, the House of Lords, in their subsequent appeal, overturned the previous ruling. They unanimously declared that, as the company was properly incorporated, it possessed an independent legal identity with rights and liabilities distinct from its owners. The House of Lords emphasized that the motives behind the creation of the company were irrelevant when determining its legal rights and liabilities. This decision solidified the legal concept of the “corporate veil,” establishing a distinct separation between the company and its owners/controllers.
IMPLICATIONS OF SALOMON V SALOMON
The Salomon v Salomon case has far-reaching implications for company law, and its principles have been foundational in shaping the corporate world. Below are some of its implications:
- Separate Legal Personality:
The case established the concept of separate legal personality for a company. This means that once a company is incorporated, it becomes a legal entity distinct from its incorporators, promoters, members or shareholders. The company can enter into contracts, own property, and incur liabilities in its own name. See the case of BUREAU OF PUBLIC ENTERPRISES & ANOR v. BFI GROUP CORPORATION (2022) LPELR-56791(CA) where Per MOHAMMED MUSTAPHA, JCA (Pp 8 – 8 Paras A – D) said
“The concept of corporate personality established since the decision in the celebrated case of Salomon Vs. Salomon and Company Ltd (1897) AC 22, has its foundation written in stone, on the belief that once a company is incorporated it becomes a separate person from the individuals who are its members, with capacity to enjoy legal rights and duties distinct from its members. It may own property in its own right and its assets, liabilities, rights and obligations are distinct from that of its members…”
See also KONKON CONGLOMERATE LTD & ORS v. NIPCO[2], FRN v. ATUCHE & ORS.[3]
- Limited Liability:
One of the significant implications is the concept of limited liability for shareholders. Shareholders are generally not personally responsible for the debts and obligations of the company. Their liability is limited to the amount unpaid on their shares. See WILLBROS WEST AFRICA, INC. & ORS v. MCDONNEL CONTRACT MINING LTD.[4]
- Creditor Protection:
The case reinforces the right of creditors by upholding the distinction between the company and its shareholders. The court clarified that creditors have recourse to the assets of the company in the event of insolvency or non-payment. Creditors can typically only look to the assets of the company to satisfy their claims, not the personal assets of individual shareholders.
- Corporate Structure:
The case supports the idea of using a corporate structure for business activities, allowing individuals to organize and conduct business through a separate legal entity. Corporate structure refers to the organization and arrangement of a company’s internal components, including its shareholders, directors, and officers. It outlines how decision-making authority, responsibilities, and ownership are distributed within the company. The structure of a corporation can significantly impact its operations, governance, and relationships with stakeholders. This separation facilitates business operations and encourages investment by limiting the personal risk of shareholders.
- Corporate Governance:
The case reinforces the importance of maintaining proper corporate governance and compliance. While a company is a separate legal entity, it must be operated in accordance with relevant laws and regulations.
THE EXCEPTION
While the Salomon v Salomon case established the general principle of corporate personality and limited liability, there are exceptions where the courts may “lift the corporate veil” and look beyond the separate legal identity of the company. The doctrine of lifting the corporate veil has been utilised by the Courts when it becomes necessary to expose the individual hiding behind the corporate entity for doing justice[5]. Some of the instances are:
- Fraudulent activities:
If a company is involved in fraudulent activities, and it can be demonstrated that the corporate structure is being used to perpetrate a fraud[6], the court may lift the corporate veil. This can expose the individuals behind the company to personal liability. In UABOI G. AGBEBAKU VS. THE STATE [7](P. 24, PARAS C – F), it was held per Otisi, JCA that: “It is also well settled that directors, officers and employees of a company can be held criminally liable for any criminal acts that they personally commit regardless of whether they were acting in furtherance of corporation’s interests.”
- Agency or Alter Ego:
If a company is found to be an agent or alter ego of its shareholders rather than a separate entity, the court may disregard the corporate structure. This typically occurs when there is a lack of genuine independence between the company and its shareholders, and the company is being used as a mere facade. See the case of ADEYEMI VS LANBAKER (NIG) LTD[8], the Court made the point thus:
“There is nothing sacrosanct about the veil of incorporation of a company. Thus, if it is discovered from the materials before the Court that a company is the creature of a biological person be he a managing director or a director and that the company is a device or sham or mask which he holds before his face in an attempt to avoid recognition by the eyes of equity, the Court must be ready and willing to open the veil of incorporation to see the characters behind the company in order to do justice.“
- Public Policy Considerations:
Courts may lift the corporate veil in cases where it is necessary to prevent injustice or protect public policy. This can include situations where the corporate form is being abused to evade legal responsibilities or to engage in activities contrary to public welfare. See UBA PLC & ANOR v. ALPHACELL TECHNO LTD & ANOR[9] where the Court of Appeal per Mohammed Mustapha, JCA (Pp 8 – 11 Paras C – D) stated that
…It is very import to note that contrary to the vehement submissions of learned senior counsel, the action or conduct that may necessitate the lifting of the veil of incorporation is not limited to fraudulent conduct, as a matter of fact and law it extends to conduct likely to defeat public convenience or justifies wrong behavior.
EFFECT IN NIGERIA TODAY
The Companies and Allied Matters Act, 2020 (The Act) recognizes the legal personality of a company upon its incorporation[10] as established in this case of Salomon v. Salomon[11].
The landmark decision in the Salomon case has empowered numerous companies to operate with legal personhood, granting them the capacity to undertake activities akin to natural persons. This pivotal ruling has played a crucial role in shaping a well-structured corporate landscape, providing businesses with a formalized framework to conduct their operations. By establishing clear distinctions between the legal identity of a company and that of its owners, the concept of the “corporate veil” has fostered an environment where businesses can engage in various activities, enter into contracts, and assume liabilities, contributing to the development of a robust and organized corporate world. This legal precedent has not only facilitated commercial transactions but has also set the stage for the modern corporate sector to flourish in its multifaceted roles and responsibilities.
The Act also recognize the lifting of veil of incorporation to see those ‘behind the wheel’ where the act has been fraudulent or improper[12].
On November 2, 2023, the Corporate Affairs Commission (The Commission) pursuant to its powers under the Act[13], made a publication to the effect that the Commission shall from January 1, 2024 commence the full application of the penalties[14] provided by the Companies Regulations 2021 for failure to file annual returns. The Act imposes a penalty on Companies who fail to file its annual return as at when due.[15]
The Commission further stated that it shall proceed against Directors and Officers of struck-off and wound-up Companies for recovery of undischarged penalties against them.
The issue emanating from this publication is whether or not the Directors or Officers of a company are personally liable for penalties owed by a struck-off and wound-up company vis-à-vis the legal personality of a company.
The Companies and Allied Matters Act, 2020 has succinctly provided for the distinct legal personality of a company making it a separate entity from its owners or directors. Albeit, there are some instances or exceptions where the veil of incorporation will be lifted to see who really is ‘behind the wheel’ so that they can be held accountable for the actions or inaction (as the case may be) of the company. This was demonstrated in the case of OBOH & ANOR v. NIGERIA FOOTBALL LEAGUE LTD & ORS[16] Where the Court per stated as follows:
“The doctrine of lifting the corporate veil has been utilised by the Courts when it becomes necessary to expose the individual hiding behind the corporate entity for the purpose of doing justice”
Conclusion
In conclusion, the recent announcement by the Corporate Affairs Commission regarding the application of penalties for failure to file annual returns raises a significant question about the personal liability of Directors and Officers of struck-off and wound-up companies. The Companies and Allied Matters Act, 2020 clearly establishes the distinct legal personality of a company, emphasizing its separation from owners or directors. However, this legal principle is not absolute, and there exist instances, as exemplified in the case of OBOH & ANOR v. NIGERIA FOOTBALL LEAGUE LTD & ORS, where the courts may lift the corporate veil to hold individuals accountable for the actions or inaction of the company.
The Commission’s intention to pursue Directors and Officers for the recovery of undischarged penalties underscores the importance of adhering to corporate regulations and fulfilling statutory obligations. While the legal personality of a company generally shields its owners and directors from personal liability, it is essential for corporate stakeholders to be aware of the circumstances under which the corporate veil may be lifted.
[1] [1897] AC 22
[2] (2021) LPELR-52828(CA)
[3] (2022) LPELR-58733(CA)
[4] (2021) LPELR-54544(CA)
[5] OBOH & ANOR v. NIGERIA FOOTBALL LEAGUE LTD & ORS (2022) LPELR-56867(SC)
[6] Section 316 of CAMA 2020
[7] (2015) LPELR – 25763 (CA)
[8] (2000) 7 NWLR (Pt 663) 33
[9] (2022) LPELR-57378
[10] Section 42 of CAMA, 2020
[11] Supra
[12] Section 316 of CAMA, 2020
[13] Section 8(d) of CAMA, 2020
[14] Penalty prescribed by the Companies Regulation 2021;
Late filing of annual return for a private company other than a small company is 5,000 per year
Late filing of annual return for public company is 10,000 per year.
[15] Section 425 of CAMA, 2020
[16] (2022) LPELR-56867(SC)
