Lifting the Corporate Veil

 

LIFTING THE CORPORATE VEIL OF THE COMPANY (Lifting the Veil)

Originating from the case of Salomon v A Salomon & Co Ltd. The  Corporate Veil notoriously known as the Salomon principle is a principle which provides that a company is essentially regarded as a legal person separate from its directors, shareholders, employees and agents.

This means as a separate legal entity, a company can be sued in its own name and own assets separately from its shareholders.

The corporate veil as drawn from the Salomon principle which separates the rights and duties of the company from the rights and duties of the shareholders and directors. Essentially, the corporate veil is a metaphoric veil with the company on one side of it and its directors and shareholders on the other and liability does not pass through.

However, what happens in cases where the Shareholders and or directors of the company through their personal conduct use the Company to carry out sham transactions and there arises the need to go against them direct? This is termed as “lifting the corporate veil” but what does it mean?

In the case of Salim Jamal & 2 others vs Uganda Oxygen Ltd & 2 others [1997] 11 KARL 38, the Supreme Court held that corporate personality cannot be used as cloak or mask for fraud. Where this is shown to be the case, the veil of incorporation may be lifted to ensure that justice is done and the court does not look helplessly in the face of such fraud.

 

There is limited principle of law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company’s legal personality.

The privileges accorded to companies must operate in accordance with the terms upon which they are granted. The doctrine of corporate veil piercing is premised on the basis that such privileges should work hand in glove with responsibility in order to avoid the possibility of abuse or exploitation. When there is a fracture in the proper operating parameters, the court may ascertain the realities of the situation by removing the corporate shield or veil in order to make the controller behind the company personally liable as if the company were not present.

 

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