"The Veil" | You and the Law

By Dr. William Para Riviere

March 4, 2013

A fundamental principle of our law is that a registered company is a legal person separate and distinct from its members. That is to say, just as its several shareholders or its directors are held to be individual persons, each with his or her own legal personality, so, too, the registered company is held to be a corporate person with corporate personality of its own. This principle was first stated in the celebrated English case, Foss v. Harbottle, and is referred to in the language of the law as "the veil of incorporation."

A wide variety of legal effects flow from this principle. Included among them is that the property of the company belongs to the company itself, rather than to individual members. Thus, in an English case Maucaura v. Northern Assurance Co. Ltd., it was held that the largest shareholder did not have an insurable interest in the company's property. And the same ruling would apply where, as in our jurisdiction, it is lawful for a single shareholder to register a company. Further, neither the majority shareholder nor the sole shareholder of a company is entitled to deposit cheques payable to the company into their own banking accounts. Nor is it permissible for either of them to draw cheques for their private business upon the company's account. In the event, the one or the other may be charged with theft from "their" Company; in the case of a single-person company it would almost certainly be impossible to convict.

In the same vein, an employee is not entitled to bring an action for wrongful dismissal against the majority shareholder of a company which employed him or her. Nor is it lawful for a shareholder to file an action against an employee of a company for breach of the conditions under which that employee was employed.

Quite obviously, the principle of the veil establishes that a company's members are not liable for the company's debts. Instead, where the company is limited by shares, the amount which a member is required by law to contribute to the assets of the company (for purposes of debt payment) is no more than the amount which is owed on his or her shares. What this means is that where a member's shares are fully paid up there is normally no further liability to contribute to the company's assets.

The law will lift the veil of incorporation or, better yet, go behind it only in very exceptional situations. One such situation is where the Court's interpretation of the facts of the case is that the company was being used as a mask to disguise the business activities of its members. An instance of this is the use of the company to conduct fraudulent activities. In an English case, Wallersteiner v. Moir, for example, where a director of one company caused his company to make a loan to another company, the veil of the company making the loan was lifted. In doing so, Lord Denning held that on the facts the recipient company was a puppet to the director and, so, the loan should be treated as made to him. Further, the veil may be lifted, as in Re Bugle Press Ltd, where on the facts it was being used for an improper purpose. The facts of that case, summarized, were as follows. Company A made an offer to buy the shares of Company B. But the shares of Company A were held by the same person who held the majority shareholding in Company B. The intention was to force the minority shareholders in Company B to sell their shares to Company A. The Court held this to be an improper use of the veil of incorporation. It, therefore, went behind the veil of Company A to confront the individual membership.

The reluctance of the law to go behind the veil has serious implications for the uninformed man-on-the-street. Take the case of Mr. Ben Black. Mr. Ben Black is a model citizen who will not hesitate to assist a young person who wishes, through hard work, to make his way up in the world. Young Mr. Peterson knows this and approaches Mr. Black for assistance to open a business mainly to service motor vehicles, including to import spare parts. In particular, he would like Mr. Black to co-sign a loan for him from the People's Bank. Mr. Black thinks it over and considers the project to be a sound one. So, as collateral, that is to say, "security" for the loan, he puts up his 3-bedroom bungalow residence valued at $450,000.00, and places the Certificate of Title to the property in the custody of the Bank.

Interestingly, Mr. Peterson has contracted the loan in the name of Peterson Motors Inc., a Company which he had just registered as sole incorporator and Director. Mr. Black is aware of this fact; but he does not understand what this means under the law. He co-signs the loan documents in the belief that he is helping out young Mr. Peterson, the individual.

As fate would have it, Mr. Peterson, on behalf of his Company, pays a few installments on the loan and, then, defaults. Correspondence from the Bank is ignored, causing it to look towards co-maker, Mr. Black. The gentleman for health reasons has since taken up residence overseas and cannot be reached. Accordingly, the Bank goes to Court and obtains an order to sell the residence by public auction. The bungalow is sold at half its value. The Bank deducts the balance owed on the loan's principal together with outstanding interest and legal fees, and holds a miserly remainder in safekeeping for Mr. Black. Mr. Black gets the news that a family now occupies his house. He hurries back to the State and seeks legal advice as to what course of action is available to him.

The central issue to be considered is this: Against which person, if at all, does a cause of action by Mr. Black lie – the People's Bank, Mr. Peterson, or Peterson Motors Inc? In our opinion, no cause of action lies against the Bank as, in all the circumstances, it has acted properly. It is of no legal consequence that Mr. Black was the co-maker and not the Applicant for the loan. Neither is it of concern to the Court that the co-maker did not understand the implications of offering collateral in respect of a registered company. What is pertinent here is that the Bank entered into a contract jointly with Peterson Motors Inc. and Mr. Black. That contract was breached. Thereupon, it prayed the Court for an Order in terms of the remedy available to it under the law. It obtained the Order prayed, which Mr. Black neglected and failed to challenge. The Order was enforced.

As to liability by Mr. Peterson, it is submitted that on an interpretation of the law governing the concept of the veil of incorporation a reasonable Court would have the greatest difficulty in going behind the veil so as to target the individual member of Peterson Motors Inc. The Company was lawfully incorporated. There is no clear evidence that it was used as a mask to disguise the business activities of Mr. Peterson, the individual, as opposed to Peterson Motors Inc., the duly registered company. Nor do the facts point to Mr. Peterson's use of the Company for any improper purpose. Further, Mr. Black would certainly not find favour with the Court because of his unfamiliarity with the concept of the veil of incorporation. It is well known that "ignorance of the law is no excuse."

It is our view, then, that on the facts, and taking account of the law as earlier outlined, Peterson Motors Inc. would be the proper legal person against whom action may be taken. Mr. Black would be advised to commence proceedings against the Company for recovery of whatever monies he has lost, with interest thereon, as a result of the loan transaction which culminated in the sale "for peanuts" of his 3-bedroom bungalow.
Of course, in doing so, we are reminded that, Mr. Peterson as a member of the company may be lawfully claimed against for no more than the amount owed by him on his shares of the company. Nothing in law turns on the fact that Mr. Peterson and his wife are now the proud owners of a mansion valued on the market at $3 million. Or, that Mr. Peterson drives his own BMW and, his wife, her own LEXUS. Their assets are treated as separate and distinct from those of Peterson Motors Inc.

In these circumstances, assume, first of all, that Mr. Peterson, sole shareholder, has fully paid up his shares, that is to say, the shares of Peterson Motors Inc. Assume, further, that the Company has long since failed. And, what if its assets have been depleted to the extent that the value of its liabilities exceed that of its assets? In other words, assume that the Company owes more than it is worth. If these assumptions hold true, Mr. Black would almost certainly win his court case against Peterson Motors Inc. But his efforts to recover monies lost may well be in vain.