PERSONAL LIABILITY OF DIRECTORS FOR COMPANY’S WRONGS: PIERCING THE CORPORATE VEIL

1. What does the “Corporate Veil” mean?

The question of who to sue when a business entity commits a wrong is one of the threshold questions that a Nigerian lawyer to an aggrieved person must answer before filing a claim in a Nigerian court. The answer to this question is as crucial to the successful outcome as the nature of reliefs to seek, the forum of action, the length of demand or pre-action notice to give (if any) and other conditions precedent to fulfill in order to save the claim from being prematurely struck out on procedural objection(s). 

Generally, under Nigerian law, when a company commits a wrong, the company bears the liability because a company has its own corporate legal personality that is separate from the persons who run its affairs, so a company can sue and be sued in its corporate name. The separate corporate legal personality of a company is like a shield or veil which covers or protects or gives immunity to the directors, shareholders, secretaries and managers of a company from suffering personal liability for the action or inaction of the company. This protection is known as the “veil of incorporation” or “corporate veil”.

In other words, the veil of incorporation stems from the legal recognition of a company as a separate legal entity that is separate or distinct from its shareholders, directors or officers that manage the company’s affairs in order not to fix the individuals running the company’s affairs with personal liability arising from the company’s actions or inactions. This principle was firmly established in the landmark case of Salomon v. Salomon & Co. Ltd (1897) AC 22, where the House of Lords held that once a company is legally incorporated, it possesses its own legal personality, separate from those who formed it and that Mr. Salomon, who was the alter ego of the company, could not be personally liable for the debt incurred by his company, Salomon & Co. Limited.

In Nigeria, the doctrine of corporate veil or veil of incorporation is codified in Section 42 of the Companies and Allied Matters Act 2020 (as amended), and several judicial decisions have been handed down by the Nigerian court in several cases, including NBCI v. Integrated Gas Nigeria Ltd. (1999} 8 NWLR (Pt. 613) 119 at 129. In fact, in J&J Technologies Ltd. v YHQS (2015) 8 NWLR (Pt. 1460) 1 @ page 21 paragraphs C – E, the court held that even where a company has a sole director who is the sole signatory to the company’s bank account, the separate corporate personality of the company must still be recognized as distinct from the said director in order to excuse the director from personal liability.

2. What is Piercing the Veil of Incorporation?

There are exceptions to the above general law in which the individuals running a company’s affairs can be fixed with personal liability rather than pursuing corporate liability or where those behind the company can be held jointly liable with the company, as the case may be. The process of bypassing the company to fix the directors and or other officers with personal liability is what is known as “piercing the corporate veil” or “lifting the veil of incorporation”.

While the incorporation veil provides significant protection for a company’s officers (such as directors, shareholders and managers) the Nigeria courts and statutes may disregard the distinction between the corporate personality of a company and the individual personality of its officers in fixing the latter with personal liability, especially when justice or public policy so requires.

3. When Can the Corporate Veil be Pieced by the Court?

As already stated, lifting the veil of incorporation or piercing the corporate veil means the judicial act of imposing personal liability on otherwise immune corporate officers, directors or shareholders for the corporation’s wrongful act. The relevant question is when does the court bypass the company to hold its directors and other officers personally liable? It is safe to state broadly that the court would pierce the corporate veil when the interest of justice so demands. It is noteworthy that not all cases are suitable for piercing the corporate veil, for instance, the supreme court in Oboh v. N.F.L. Ltd. (2022) 5 NWLR (Pt. 1823) 283 @ 324 paragraphs A held that garnishee proceedings, being sui generis, do not envisage or admit procedures such as lifting the veil of incorporation.

Some of the peculiar circumstances under which the corporate veil can be pierced and personal liability will be imposed on the company’s directors and other officers are as follows:

(3a) Fraud, Stealing or Improper Conduct: 

The Nigerian Courts will not allow the use of a company as a cover to perpetrate fraud and, so, will lift or pierce the veil of incorporation and hold individuals running a company personally liable where the company is being used as a façade to commit fraud or other improper conduct. Please see the Nigerian case of Alade v Alic (Nig.) Ltd (2010) 19 NWLR (Pt. 1226) 111, where the court of Appeal held that one of the occasions when a veil of incorporation will be lifted is when the company is liable for fraud.

In Oyebanji v. State (2015) 14 NWLR (Pt. 1479) 270, Baminco (Nig.) Limited contracted Associated Commodities and Foodstuff (Nigeria) Limited to import tyres, tubes and granulated sugar and paid a total of N1,180,593.75k to the Appellant (the Managing Director of the former company) in several installments on different dates. Following a default to import, Baminco (Nig.) Limited filed a criminal petition of stealing against the Appellant, the Managing Director of the contracted company. The argument on corporate legal personality to excuse the Appellant from personal liability was rejected by the court. In holding the Appellant guilty of stealing by conversion, the trial judge held as follows (see page 291, paragraphs C – E of the report):

“Learned counsel for the accused argued that the accused is not liable and that the company Baminco is liable. The role of a corporation is well stretched out by Viscount Haldane L. C. in Lennards Carrying Co. v. Asiatic Petroleum Co. Ltd. (1915) A.C. 705 when in delivering judgment he said @ pages 713 – 714.

“My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own, it’s active and directing will must consequently be sought in person of somebody who for some purpose may be called on again, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.”

In affirming the above, the Supreme Court held further that “The courts below rightly disregarded the corporate entity of the Baminco (Nig.) Limited and paid regard to the entities behind the legal façade or “veil” of incorporation in the cause of justice.” And @ page 292, paragraphs B – D, Galadima, JSC, who delivered the lead judgement, after quoting Denning LJ. in Bolton Engineering Co. Ltd. v. Graham & Sons. (1957) 1 QB 159 at 172 – 173, held as follows:

“In my respectful view, the veil of corporation ought to be lifted in the interest of justice and in the circumstance of this case. There can be no better instance when the corporate veil can be lifted, as in this case. The court will not allow a party to use its company as a cover to dupe, defraud or cheat innocent individual or a company who entered into lawful contract with it, only to be confronted with defence of the company’s legal entity as distinct from its directors. As it has been observed elsewhere, most companies in this country are owned and managed solely by an individual, while registering the members of his family as the shareholders. Such companies are nothing more than one-man businesses!(sic) Hence, there is the tendency to enter into contract in such a company’s name and later turn around to claim that he was not a party to the agreement since the company is a legal entity. See Akinwunmi Alade v. Alic (Nigeria) Ltd. & Anor (2010) 12 SC (Pt. 11) 59; (2010) 19 NWLR (Pt. 1226) 111.”

The Court of Appeal’s decision in Rowaye v. F.R.N. (2018) 18 NWLR (Pt. 1650) 21 @ page 65 paragraphs F, quoted Rhodes-Vivor, JSC in Oyebanji v. State (supra) as follows:
“There comes a time though, when that separateness is not maintained. For example, when fraud is committed by top officials of the company, and these officials want their fraudulent activities to appear as the acts of the company. In such situations, the judiciary decides that the separation of the personality of the company and the members is not to be maintained. This is done by lifting the veil of incorporation, or parting the veil of incorporation to see behind the veil who is responsible for the fraudulent acts.”

(3b) Agency Relationship: 

If a company is acting as an agent for its members or another entity, the Nigerian courts may lift the corporate veil to hold the principal members personally liable. In a Nigerian case, Marina Nominee Ltd v. Federal Board of Inland Revenue (1986) 2 NWLR (Pt. 20) 48, where the court examined the control exerted by shareholders to determine the true nature of the corporate entity.

In Int’l Offshore Const. Ltd. v. S.L.N. Ltd. (2003) 16 NWLR (Pt. 845) 157, the 1^st, 2^nd and 3^rd Appellants and their Managing Director and alter ego, Mr. Iyke Ejike (4^th Appellant) hired boats from the Respondent and incurred outstanding rent of $404,000. The Appellants argued, amongst others, that the 2^nd – 4^th Appellants have distinct legal personality different from the 1^st Appellant, that the use of the word “sister company” cannot be used as a cloak to lump them together relying on Salomon v. Salomon (1897) AC 22. The trial judge made the following finding of facts @ page 77 of the record of appeal (see page 179 – 180, paragraphs H – B):

“The evidence before me is to the effect that the 2^nd and 3^rd defendants are sister companies of the 4^th defendant, all under the control of the 4^th defendant and that the 4^th defendant uses the 1^st to 3^rd defendants companies interchangeably. I also hold that exhibit “A” was signed by the 4^th defendant but with the name of the 1^st defendant. Evidence was also led that the 4^th defendant also operates in the name of the 3^rd defendant.”

In affirming the above finding, the Court of Appeal (per Jega, JCA) at 179 – 180, paragraphs F – E of the report, held as follows:

“On issue No. 7 it is clear from the record before the court that … even though the 1^st to 3^rd appellants have different names, their operations and transactions are controlled and dictated by one personality under different nomenclatures, from the evidence presented before the court it is beyond dispute that the 4^th appellant is the controller, directing mind and alter-ego of the 1^st, 2^nd and 3^rd appellants. If he chooses to operate under different corporate names then he makes himself and those other corporate names which he operates with liable. It is the 4^th appellant that executed the agreement of hire of boats and in the agreement he signed for the 1^st appellant. The same 4^th appellant, Iyke Ejizu, admitted, acknowledged and promised to liquidate the outstanding debt from the agreement as aforesaid under the name of the 2^nd appellant. There is also evidence that the 4^th appellant also operates under the name of the 3^rd appellant.……. The law is that the corporate shell of an incorporated company can be cracked. There is no doubt that it was necessary to lift the corporate veil of the 1^st, 2^nd and 3^rd appellants upon uncontradicted evidence that the 4^th appellant operated with the three companies interchangeably in his dealing with the respondent whereby, he made use of the respondent’s boat without paying for such use……… In the instant appeal, there is no doubt that the interest of justice demands that the corporate veil of the 1^st, 2^nd and 3^rd appellants be lifted by the lower trial court, which was effected accordingly. I, therefore, resolved issue No. 7 in favour of the respondent against the appellants.

Also, in Nigeriate Ltd v. Dalami (Nigeria) Ltd. (1992) 7 NWLR (Pt. 253) 288 @ page 304, paragraph B, the Court of Appeal (per Salami, JCA) opined that even where the corporate nature of a company cannot be disregarded on the ground that it is a sham or façade, the corporate veil will nevertheless be pierced where evidence shows that “in its operations, it does not act on its own behalf as an independent trading unit but simply for and on behalf of the people by whom it has been called into existence”, quoting, with approval, the dictum of Scrutton, L.J. in Rainham Chemical Works Ltd. v. Belvedere Fish Guano Co. (1921) 2 A.C. 465 @ 475. Salami, JCA further held that “In the circumstance, I agree with the learned counsel for the applicant that the assets of the applicant are lumped together with assets of LOPIN Limited as well as those of some other companies masquerading under the name Obelawo Group of Companies which itself is not a corporate body that can sue and be sued. The respondent in short has not produced evidence of its separate and independent assets as a result of which its resources, both financial and material, can easily be diverted to meet exigencies which are of no immediate benefit to it and to the detriment of its own creditors.” 

Please note that fraud is a crime and, so, require proof beyond reasonable doubt and in the absence of such evidence of fraud, the corporate veil will not be pierced. It is, however, noteworthy that in FDB Financial Services Ltd. v. Adesola (2000) 8 NWLR (Pt. 668) 170, the Court of Appeal held that proof of fraud in itself does not negate or discountenances the protection offered by corporate legal personality when the appellate court held as follows: “I wish to say that even if fraud and/or illegality are(sic) discernible in the conduct of the affairs of the company, this in itself does not disregard the company’s separate personality since the court often imposes liability on the company as well…….. Undoubtedly, the 2nd defendant being the Managing Director comes within the category of those employees or members of the company whose acts are binding on the company see H. L. Bolton (Eng.) Co. Ltd v. T.J. Graham & Sons Ltd (1957) 1 QB 159. But it is not sufficient to say that because the 1^st defendant is acting through the 2^nd defendant the veil of the 1^st defendant can, for that reason, be lifted. There must be clear evidence of illegality or fraud for the veil to be lifted. In the instant case, it was not necessary to join the second appellant (Managing Director of the 1^st appellant) as a party to the suit since there was no evidence of fraud and he was merely an agent of the company. (Pp.183 – 184, paras. H – E; 185, paras. A – B)

(3c) Improper Mixing of Affairs: 

Where directors or shareholders fail to maintain a clear distinction between personal and corporate affairs, the veil may be lifted to prevent abuse. In Adeyemi v. Lan & Baker (Nig.) Ltd. (2000) 7 NWLR (Pt.663) 33, it was held as follows:-

“A party should not be allowed to benefit from its own wrong. This is encapsulated in the Latin maxim “Nullis commodium capere potest de injuria sua pria.”It is abundantly clear that the 2^nd respondent was responsible for the management of the 1st respondent’s company and on him fell squarely the responsibility of rendering proper accounts of the partnership business on behalf of the said 1^st respondent. It was as a result of this that the trial court rightly looked beneath the facade and lifted the veil of incorporation to discover the thread that ties the 1^st respondent and the 2^nd respondent together as parties in conspiracy to commit fraud and committing that fraud. The 2^nd respondent is therefore jointly and severally liable with the 1^st respondent to make good all sums improperly paid out or accrued due to his failure to exercise the care necessary in the running of the 1^st respondent.” (Italics supplied).

(3d) Evasion of Legal Obligation:

A company cannot be used to avoid existing legal obligations such as tax obligation or contractual obligation. In Alade v Alic (Nig.) Ltd (2010) 19 NWLR (Pt. 1226) 111, the court pierced the veil to prevent the misuse of the corporate structure to defraud creditors.

A corporate legal personality cannot be used as a cover to avoid a debt owed to a third party or unpaid tax. In Oyebanji v the State (2015) 14 NWLR (Pt. 1479) 270 @ 292 paragraph B, the Court stated that “a Court may lift the corporate veil where the corporate form is abused or misused in a transaction. Directors will be personally liable for debts arising from such transactions.”

In Adeyemi v. Lan & Baker (Nig.) Ltd. (2000) 7 NWLR (Pt. 663) 33 at 51, Per Muntaka-Coomassie, JSC @ 142 paragraphs C – E held that: ‘‘It must be stated unequivocally that this court as the last court of the land, will not allow a party to use his company as a cover to dupe, cheat and or defraud an innocent citizen who entered into a lawful contract with the company only to be confronted with the defence of the company’s legal entity as distinct from its directors.”

4. Statutory Grounds for Lifting the Corporate Veil

There are statutory provisions that fix an individual with personal liability either alone or in conjunction with the company they represent. These are usually laws with penal sanctions for companies and their officers. Some of these statutory provisions include the following:

(i.) Companies and Allied Matters Act, 2020 (“CAMA”)

(a) Section 93 of CAMA: This section governs the liability of company’s promoters who act fraudulently or recklessly.  The section provides as follows: “A person dealing with a company or with someone deriving title under the company, is entitled to make the following assumptions and the company and those deriving title under it shall be estopped from denying their truth that….” See Oboh v. N.F.L. Ltd. (2022) 5 NWLR (Pt. 1823) 283

(b) Section 118 of CAMA: If a company’s number of members falls below the required number and it continues to operate for more than six (6) months, the directors are jointly and severally liable for the company’s debts. The section provides as follows: “If a public company or a company limited by guarantee carries on business or its objects, without having at least two members and does so for more than six months, every director or officer of the company, during the time that it so carries on business with only one or no member, is liable jointly and severally with the company for the debts of the company contracted during that period”.

(c) Section 316 CAMA: If a company receives money or property for a specific purpose, but then misuses it, the directors are personally liable for the company’s debt. This is provided in section 316 which states as follows:

“Where a company—

a) receives money by way of loan for specific purpose ;

(b) receives money or other property by way of advance payment for the execution of a contract or project ; or

(c) with intent to defraud, fails to apply the money or other property for the purpose for which it was received, every director or other officer of the company who is in default is personally liable to the party from whom the money or property was received for a refund of the money or property so received and not applied for the purpose for which it was received and nothing in this section affects the liability of the company itself”.

There are a plethora of sections of CAMA 2020 fixing personal liability on members, directors and company secretary for any offence committed under the CAM in relation to, for example, the total liability of a company limited by guarantee (see Section 26(14) of CAMA), members’ right to copies of Memorandum and Articles of Association (see sections 47 and 48 of CAMA), default in giving notice to the CAC of court application or order (see section 65 of CAMA), default in delivering a statement of share capital (see section 74 of CAMA), etc.

(ii) The Pension Reform Act 2014: In addition to the penal sanction on a defaulting company, directors, managers, secretaries and other officers of a company are held personally liable for failing to act responsibly in preventing offences under the Act. Section 103 of the Act provides thus:

“an offence under the Act is committed by a body corporate, the body corporate or evert-

1. Directors, managers, secretaries or other officers of the body corporate;
2. Person who was purporting to act in such capacity mentioned in the paragraph (a) of the section,

Who had knowledge or believed to have had knowledge of the commission of the offence and who did not exercise due diligence to ensure compliance with this Act shall be deemed to have committed the offence and shall be proceeded against in accordance with this Act.

(iii) The Industrial Training Fraud Act 2011: Section 15 (3) of the Industrial Training Fraud Act 2011 stipulates as follows:

Any person who is found guilty of an offence under sub-section (2) of this section shall be liable on conviction;

• In the case of a body corporate to a fine N500,000.00 (Five Hundred Thousand Naira) for the first offence and N1,000,000.00 (One Million Naira) for each subsequent breach, and
• In the case of the Chief Executive, Secretary or other Principal Officers of the company, to a fine of N50,000.00 (Fifty Thousand Naira) or two years imprisonment for a first offence and three years imprisonment without option of fine for each subsequent offence.

(iv) Section 53 (1) of the Nigerian Data Protection Act 2023 provides as follows:

Where an offence has been committed by a body corporate or firm, the body corporate or firm, as well as principal officers of the body corporate or firm shall be deemed culpable, unless the principal officers prove that-

• The offence was committed without their consent or connivance; and
• They exercised diligence to prevent the commission of the offence.

(v) The Criminal Code Act: Section 35 of the Criminal Code Act, provides thus:

“35. A person, who being a member of a co-partnership corporation, or joint Stock Company, does or omits to do any act with respect to the property of the co-partnership, corporation, or company, which, if he were not a member of the co-partnership, corporation or company, would constitute an offence is criminally responsible to the extent as if he were not such member.”

5. Consequences of Lifting the Veil

The lifting of the corporate veil of a company fundamentally alters the principle of limited liability and/or may have significant legal and financial consequences for the directors, shareholders, company secretaries and managers of a company whose veil is lifted. Some of the known consequences are as follows:

(i) Personal Liability for Directors and Shareholders:  Once the veil is pierced, those behind the company such as directors or shareholders or company secretaries may be held personally liable for the company’s debts or wrongful actions. 

(ii) Denial of Corporate Privileges: Courts may revoke the benefits of incorporation for entities found to be abusing the corporate structure. The principle rests on the idea that the privileges and protections of incorporation, such as limited liability and separate legal personality, are granted by the state for legitimate business purposes. When these privileges are misused to perpetrate fraud, evade obligations, or violate public policy, the courts can intervene. The corporate veil is lifted to deny the wrongdoers the benefits of incorporation, holding them personally liable for their actions. This ensures the doctrine is not used as a vehicle for injustice. 

(iii) Restoration of Justice: Piercing the veil ensures that aggrieved parties, such as creditors or victims of fraudulent conduct, can seek remedies against those hiding behind the corporate entity. 

(iv) Disqualification of Directors: Directors may face disqualification under Nigerian laws such as CAMA 2020 if they are found liable or guilty for the reckless or fraudulent behaviour that leads to the lifting of the veil. See Ajayi v. SEC (2023) 6 NWLR (Pt. 1881) 533.

********************************************************************

Koriat & Co. is a full-service law firm in Lagos and Abuja advising and assisting corporate and individual clients on company incorporation, regulatory licences and regulatory compliance. We also provide company secretarial services to our corporate clients across Nigeria. We are also experienced in dispute resolution practice through litigation and arbitration.

The above information is not intended as legal advice for any particular reader. If you have any questions, please contact us via admin@koriatlaw.com or 09067842241.