tawandamusarurwaPart III
THIS week, we are going to conclude the conversation on exceptions to the corporate veil.
There is a lot of literature on the subject and it can be found online or in several decided cases on the matter.
Agency construction situations
These are situations when the court may be prepared to consider a company an agent of another.
In the case of Smith, Stone & Knight v Birmingham Corp, a holding company owned some business premises but did not carry out any business there.
However, its subsidiary did. Birmingham Corporation wanted to compulsorily acquire the land. The holding company demanded compensation.
The corporation argued that the holding company was not carrying out business on the premises and, therefore, suffered no loss.
As the subsidiary company, it was not entitled to compensation because the land did not belong to it. The corporation’s argument was clearly that either way, none of the two companies could claim compensation.
The court decided that the holding company was entitled to compensation because, even though it was not carrying out business at the premises, the subsidiary was doing so as an agent.
State interests
The court can regard a company an enemy where the majority shares are held by an enemy firm or by nationals of an enemy country, especially where the two nations are at war.
The leading case is that of Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd (1916) 2 AC 307.
The plaintiff company ie Continental Tyre and Rubber Company were incorporated in England for the purpose of selling in England tyres made in Germany by a German company, which held the bulk of the shares in the English company.
Except for one shareholder, the rest, including all the directors, were Germans resident in Germany.
After the outbreak of war between England and Germany in 1914, the plaintiff sued the defendant company — Daimler Company — for the payments of a trade debt.
The defendant company alleged that the plaintiff company was an alien enemy firm and that payments of the debt would amount to trading with the enemy. Although the plaintiff’s actions were dismissed on a procedural issue, the court agreed with the argument that a firm could be an alien enemy. The above scenarios are referred to as the common law exceptions to the veil.
Statutory exceptions
Other than the common law or judicial exceptions to the corporate veil, the legislature was provided for the situations where some of the characteristics of a company may be ignored.
The Companies and Other Business Entities Act is fraught with situations where the legislature is prepared to ignore the veil.
If at any time it appears that the business of a company was being carried out:
(a) recklessly, or
(b) with gross negligence, or
(c) with intent to defraud any person or for any fraudulent purposes, the court may — on the application of the master, or liquidator or
judicial manager or any creditor of, or a contributory company, if it thinks it proper to do so, declare that any of the past or present directors of the company or any other person, who were knowingly parties to the carrying on of the business in the manner or circumstances aforesaid, shall be personally responsible, without limitation of liability, for all or any of the debts or other liabilities of the firm, as the court may direct.
In terms of the relevant provisions of the Criminal Procedure and Evidence Act, if any offence has been committed for which a corporate body may be liable to prosecution, any director shall also be liable unless it can be shown he was not party to the offence.
In terms of the Income Tax Act, the Commissioner of Taxes is empowered to disregard the corporate form and tax members individually.
The new Companies Act provides for personal liability for directors, both civilly and criminally, for misstatements in the prospectus.
It also provides for personal liability for failure to keep a register and index of members.
We will close this series with a case study: Little Woods Mail Order Store v I.R.C. 1969.1. WCR 1241.
The issue the court had to decide was whether a wholly owned subsidiary company was regarded as a separate and independent entity from the parent company for the purposes of group account.
It was held that “The doctrine laid down in Salomon v Salomon has often been supposed to cast a veil over the personality of a limited company through which the courts cannot see.
“But that is not true. The courts can and often draw aside the veil.
“They can and often do pull off the mask. They look to see what really lies behind. The legislature has shown the way with group accounts and the rest, and the courts should follow suit.
“I think we should look and see it as it really is, the wholly owned subsidiary. It is a creature, a puppet in point of fact and it should be so regarded in point of law”.
I hope and trust that this series shed some light into the area of corporate personality.
LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis. They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.
Arthur Marara is a corporate law attorney practising law in Harare. He is also a notary public and conveyancer. He is also passionate about employment law, commercial law, family law and promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]
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