The veil of incorporation is a legal concept that separates the company from its shareholders. The liabilities of the company do not ordinarily fall to the shareholders except in limited circumstances.
In
Background
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The court lifted the corporate veil and granted leave to the Bank to proceed with the execution of a decree against the Company's directors. According to the court, the Bank had shown that the Company had perpetrated fraud. This finding was based on records at the Companies Registry, which indicated that the year in which the Company had last filed its annual returns happened to be the same year in which it had taken out the loan and also ceased business operations. The directors had also used personal resources to effect part payment of the loan after the suit was filed. The directors had also closed the business at the known address without filing a notice of change of address. Based on these actions, the court held that the directors had not been engaged in honest enterprise.
Lifting the veil under the Companies Act
The Companies Act (the "Act") allows the
The court also held that the veil of incorporation covers wrongful and fraudulent trading by the directors to the extent that it results in deception and defrauding of the company creditors. The key difference between fraudulent trading and wrongful trading is the intent involved. Fraudulent trading is a premeditated act, committed with the intention of defrauding creditors, while wrongful trading occurs when the company continues to trade and run up debts when knowingly insolvent, but there is no proven dishonesty or malicious intent involved.
The court further held that using the corporate status for a fraudulent purpose may be proved by showing:
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The directors paid for personal expenses out of the business;
- Directors paid for business expenses personally;
- Commingling of personal affairs with the operations of the business occurred;
- Major decisions of the business are not memorialised with minutes approving the transactions;
- The absence of memorialised meetings of directors and annual shareholder meetings;
- The failure to maintain accurate and complete financial records; and
- The failure to file all required tax returns and annual returns.
Conclusion
This decision should be welcomed by creditors such as banks. It re-emphasises the need for companies to keep the company's finances separate from personal accounts, maintain accurate financial records, as well as maintain compliance with annual returns and tax filings. Failure to implement these principles may point to fraudulent misuse of the corporate structure and may expose the shareholders to liability.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Phillip Karugaba
ENSafrica
Foreshore
Tel: 11269 7600
Fax: 10596 6176
E-mail: afaber@ensafrica.com
URL: www.ENSafrica.com
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