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 Absa Bank v Enjoy Uganda, the High Court found that the Company had engaged in fraudulent trading and that the shareholders were hiding behind the corporate veil to frustrate its creditors. The decision is good news for creditors and prevents the abuse of the corporate structure.

Background

Enjoy Uganda (the "Company") was given a loan by Absa Bank (the "Bank") on which it defaulted, forcing the Bank to file a suit for recovery. The two directors of the Company then made a partial settlement of the loan. Later, however, a judgment was entered against the Company for the outstanding amount. The Bank failed to trace the Company's business premises or assets, and further investigations revealed that the Company's business outlets had been closed. The Company's last filed annual returns were five years old, and the Company's directors could not be reached by phone. The Bank then moved the court to lift the Company's corporate veil to allow for the execution of the judgment against its directors.

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 High Court to lift the corporate veil where a company or its directors are involved in tax evasion or fraud; or where the membership of a company falls below the statutory minimum. However, the court has interpreted this law as going beyond mere cases of tax evasion or fraud. The Act empowers courts to lift the veil when there is evidence to show that the corporate structure was used to purposely avoid or conceal liability. This may be done by showing that there was fraudulent misuse of the company structure and wrongdoing was committed "dehors" the company.

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:

  • 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.

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