RUNNING HEAD: COMPANY LAW

1. An introduction to the doctrine of ‘corporate veil’.

To begin with, the word company will be used in this paper to refer to a legal entity with an
identity different from that of its owners. It goes without saying that the owners in such an entity
are not held liable for the firm’s obligations in excess of the value of their investment therein. In
fact, a company is equal in law to a natural person.
In different legal systems, corporate law and company law mean the same thing. In either
circumstance, the term is used to denote the field of law concerning the creation and regulation
of companies or corporations and other business organizations.
The important thing to note however is that although a separate legal entity, a company or
corporation can only act through human agents that compose it.
Company is a legal person. Being a legal person company can only be created by law and
destroyed (dissolved) only in accordance with law. And that company is a legal person so that it
has legal personality which resembles in many ways with the personality of natural person.
According to Justice James “A company is an association of persons united for common object.”
According to Companies Act 2063:“Company means any company incorporated under this Act.”
Section 3 (1) of Company Act 2063 states “Any person desirous of undertaking any enterprise
with profit motive may, either singly or jointly with others, incorporate a company for the
attainment of one or more objects set forth in the MOA.

Characteristics of Company:

 Voluntary association: it is formed upon the consent of the members and not by the
compulsion.

• Legal entity: a company is established under the law and is regarded as a legal person.
The company can sell and buy movable and immovable property as a person under the
law. It can enter into a contract and may sue others and vice-versa.
• Perpetual succession: a company is a corporate body with a perpetual succession. Death
or insolvency of a shareholder does not affect the existence of the company. It may come
to an end only when it is liquidated in accordance with the company law.

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• Transferable shares: a general rule is that a shareholder of a company can transfer its
share to others legally.
• Limited liability: the liabilities of the shareholders of a company are limit. If the
company is unable to pay its debts and is put into liquidation, the members will not be
required to contribute more than they have actually paid or agreed to pay towards settling
its debts.

Corporate the lifting veil

• The term ‘lifting the corporate veil’ means ignoring the separate legal entity of the
company, and looking into the realities.
• It is an important doctrine in the company law according to which in certain
circumstances, the separate legal entity of the company is not taken into account.
• The company and its members are treated as one person.
• As we know that the chief characteristics of a company is that it is a separate legal entity
independent different from its members.
• Sometimes, it becomes necessary to find out the real person who control the company e.g
in cases when this corporate personality of the company is misused for fraudulent or
improper conduct or fraudulent or improper conduct or doing things against the public
policy.

Veil Doctrine as derivative from Separate legal personality concept

As aforementioned, a company once incorporated becomes a legal personality or a juristic entity

that has a separate and distinct identity from that of its owners or members, shareholder; and it’s
further empowered with its own rights, duties and obligations, can sue and be sued in its 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.9 Thus, creditors who have claims
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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.
The concept of limited liability was invented in England in the 17th century, and prior to this
period, people were scared to invest in companies because any partner in a general partnership
could be held responsible for all the debts of the corporation. As the capital needed to finance the
largest projects grew, and along with it the necessity of raising money, investors were reluctant
to invest because of the risk involved in essentially guaranteeing the entire debt of the business
entity.
In fact, the concept of separate legal personality goes hand in hand with the doctrine of limited
liability. The main importance of the limited liability concept is that it protects the company and
its members, as well as to facilitate commercial ventures in which the company may be
interested. The principle further act to attract and encourage corporate investment, much needed
in any society to speed up development.
In fact, corporate law requires that company owners respond to organizational realities of the
corporation as well as conforming with and making intelligible the treatment of organizations as
legal actors. In this sense, the conception of a corporation is analytical and ideological,
descriptive and prescriptive.
“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.

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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 company’s business in their personal capacities, or the court may attribute
rights and/or obligations of the members on to the company.
“Piercing the corporate veil”?
In this thesis piercing the corporate veil is defined as the means to ignore the corporation’s legal
personality and hold shareholders liable for the acts and obligations of the corporation.
Originally, company law in common law and civil law jurisdictions did not include an exception
to the corporate personality and limited liability. for example, a creditor that contracts with a
company is actually contracting with the company and not with the shareholders. Therefore, the
creditor and the company are the parties of the contracts, not the shareholders, who would be
regarded as third parties in this situation. The creditor, however, can seek personal guarantees
from shareholders in order to secure his credit. Consequently, if the company defaults, the
creditor can recover his credit from the shareholders without affecting the corporate personality.
This fact describes a means to deal ex-ante with liability issues. However, in corporate veil
issues, usually no preventative measures have been taken by the plaintiff, thus the lack of an
statutory exception to the corporate personality and shareholders limited liability creates a
difficult situation.
In conclusion and the doctrine is also known as “disregarding the corporate entity” and lifting
the corporate veil the ignoring the separate legal entity of the company, and looking into the
realities.