CHAPTER ONE

GENERAL INTRODUCTION

1.1 Background of Study

Company law generally is a very broad area of law. To better understand the topic “Assessing the effectiveness of corporate veil piercing in insolvency cases under OHADA law”, it will be important to discuss the historical evolution of the corporate veil piercing.  Law is the mechanism that regulates relationships among individuals in society. Therefore, the validity of acts and omissions of those individuals are governed based on their reasonableness. All the acts and omissions that won’t cause any adverse effect on a person or society are held lawful, and any that interfere with the rights of others are held unlawful in legal systems. The law enforces certain duties and rights on individuals for the protection of mankind. Therefore, rights and duties form the basis of judging the legality of man’s act. However, legal sanctions can be enforced for unreasonable and unlawful acts as law liabilities, punishments, and consequences for acts committed. These legal sanctions are placed to regulate human conduct, which gives recognition to the concept of legal personality as law being concerned with regulating human conduct because, as jurisprudence, there cannot be rights and duties without a person.[1] The company’s concept of separate legal personality is also the creation of law, which developed throughout history. As per the law, a corporation is an artificial person created by the personification of a group of individuals. The theory of separate legal personality means that the company has its legal personality or identity as an actual person, which makes it gain separate legal recognition from its directors and shareholders or basically that a company can sue and can be sued in its name.[2]

The concept of a separate legal entity or the concept of the companies as a separate legal person has a long history that dates back to the 19th century and is still evolving With the gradual development of common law during the 1840-1880 period, this concept as a separated legal entity started to apply to large joint stock companies in many advancement number of fronts, as changing the nature of shares, refinement of commercial internal relationships, companies advancement in capital raise structural adaptations and many more, especially which change the nature of ownership distribution through shares and refinement to the internal relationships.

The company and investors served to separate the company as a separate legal entity from its shareholders. The theory of the separate legal personality of a company was first recognized in the year 1843 in the case of Foss V Harbottle[3]. But it was proved and later well established as a legal provision through the case of Salomon V Salomon And Co Ltd[4] in the year 1897. In order to understand separate legal personalities, it is therefore essential to examine this important case.

The case Salomon v Salomon Co Ltd [5]is the leading case on separate legal personality it is known as the famous case that established this concept of separate legal personality. Mr. Salomon had incorporated a company of which he was the majority shareholder as well as the principle creditor at the same time. An issue arose when the company went bankrupt and the procedure of insolvency was initiated by the liquidator. Since Mr. Salomon had secured debentures, the payment of his loans was to take precedence over the unsecured debts of the other creditors. However, since he was the majority shareholder and also the one who incorporated the company, the question arose if the priority of his debentures should be allowed as such.

In the initial judicial proceedings, the company was interpreted to act as an agent of Mr. Salomon, thus making the ruling against him and making him responsible for the unsecured debts of the other creditors. However, the House of Lords overturned this ruling and held that the company has a separate legal identity from that of its shareholders and due to this identity, the shareholders cannot be held liable for the actions taken in the course of business in the name of the company. The court also held that the company had seven members who were constituted with all due procedure, thus making the incorporation of the company legitimate. Just because Mr. Salomon was the primary handler of the business of the company does not mean he would be accountable for all its debts.

This firmly establishes the courts recognition of a company as a separate legal entity which is not liable for the debts of its owners. It is clear that through the judicial decisions and statutory provisions in the above case and in many other cases the court has established separate legal personality as a fundamental principle in company law.

The core function of this idea of separate legal personality gives rise to the term ‘entity shielding’.[6] The purpose of this concept is used to highlight that it entails shielding the assets of the entity , the corporation, from the creditors of the entity’s owners.[7]Although a juristic person is purely a legal concept and lacks physical existence, it nonetheless possesses its own legal personality. From this perspective, one may infer that a company should be capable of entering into contracts, owning property, delegating authority to agents, and assuming rights and responsibilities distinct from those of its directors and shareholders.[8]In essence, the incorporation of a company gives rise to the so called ‘corporate veil’. This metaphorical veil serves as a barrier between the company, recognized as a separate entity, and its members.

In essence, as derived from separate legal personality, limited liability safeguards shareholders from assuming the company’s liabilities.[9] Historically, ‘limited liability’ was not inherent to the corporate form, but it has evolved into a universal feature, underscoring its significance as both a contractual tool and a financing mechanism.[10] Limited liability functions as a form of ‘owner shielding’, which protects the assets of the firm’s owners from the claims of the firm’s creditors, contrasting with ‘entity shielding’, which protects the company’s assets from the creditors of its owners. Furthermore, Section 19(2) of the Companies Act explicitly states that shareholders, directors or incorporators are not personally liable for the company’s liabilities, except to the extent that is specified in the Companies Act or the company’s Memorandum of Incorporation provides for otherwise.[11] This concept of limited liability is common in company law regimes of most jurisdictions, fostering the growth and development of companies, which in turn drives economic prosperity by creating wealth and employment opportunities.

Therefore, the above facts establish the development of the concept of the company as a separate legal entity and its history of origin and how it is considered as a fundamental principle in company law. Also, more over through cases it establishes and proves the fact that judicial decisions or judicial proceedings and statutory provisions played a major role in identifying, and addressing inadequacies in company law. However, the doctrine of separate legal personality overtime became a problem following its abuse.

As aforementioned, the corporate veil as derived from corporate personality has a lot of privileges. However, these privileges are often times attempted to be misused by the members of a company to commit fraud and other illegal activities in the name of the company. This is done by the members so that in the situation where negative consequences of such fraudulent activity arise, the guilty members can separate themselves from it and instead make the company liable for those actions. This would be the typical situation in consideration of corporate personality.

However, in such situations, the law looks behind the corporate veil to identify the actions of the guilty members of the company. It is mostly because an artificial or fictitious person is not capable of committing fraudulent or illegal activities. This principle is known as the “piercing” or “lifting” of the corporate veil. Lifting of the corporate veil refers to the process of looking behind the company’s façade as an artificial and fictitious person to find the person liable for the actions committed in the name of the company. This principle uplifts the shield provided by corporate personality to the members of the company and holds the individual member or shareholder liable for their actions.

As held by the court of appeal in the case of Adams V Cape Industries Plc. (1990)[12], since a company is an artificial person and can only act through its human representative or agent, the corporate veil usually helps draw a line between the agent and the company for the actions taken in the course of business. The principle of lifting the corporate veil helps to see whether the actions undertaken by the human agents of the company were actually within the course of business or were those actions a misuse of the corporate façade. The context and application of corporate veil piercing however differs from one jurisdiction to another.

Until recently, Africa has suffered from outdated or incomplete legal systems which varied from one country to another. This gave rise to the legal uncertainty that, in turn, was a disincentive to investment in Africa.[13]The slowdown of economic activities in Africa South of the Sahara and Cameroon in particular around the late 1980s, called for a revamp of its economy to attract investors.[14] This was as a result of the fact that the investment climate was legally unattractive to investors. Most of these countries, especially those of the Franc Zone which is made up of France and 15  African states applied outdated laws on business matters which varied from country to country. This is evident by the fact that these laws had long been repealed and replaced in the countries of colonial masters. Conscious of this discrepancy of the legal divide, legal unification and creation of uniform laws have pre-occupied the Cameroonian legislator.[15] So far this has been realized in the uniform Penal Code,[16] Land Law,[17] some aspects of Family Law,[18] Labor Law,[19] a uniform judicial system[20] and today business law through the OHADA Uniform Acts.[21]

The project of creating the OHADA law (Organization Pour L’Harmonisation en Afrique du Droit Des Affaires)[22] in Franc Zone started in 1991. This idea of harmonizing legislation in several French-speaking African states was first discussed in a gathering of Ministers of Justice of Francophone Africa in May 1963. It was then laid aside for more than 25 years before it resurfaced in the early 1990s. Therefore, the creation of OHADA sprung from the political will to strengthen the African legal system by enacting a secure legal framework for the improvement of business in Africa, which was also indispensable for the development of the continent.[23]

This treaty enables the organization to regulate specific areas of law in member states. So far, OHADA has adopted nine Uniform Acts relating to business law in Africa. The permanent Secretariat draws up these treaties and proposes them to the Council of Ministers for adoption. Of great interest to this work is the Uniform Act on Commercial Companies and Economic Interest Groups (UACCEIG). In fact, the existence and normal functioning of companies are the propelling factor of developing the economies of the member states of OHADA. That is why they have adopted and published a voluminous Uniform Act of 920 Articles dealing with commercial companies.[24] This is the sole piece of legislation governing company activities in Cameroon and in other member states, adopted on 17 April 1997 in Cotonou and published in the Official journal of OHADA in Yaoundé on 11 October 1997. It has been revised by the new UA adopted on 30 January 2014 and published in the Official Gazette of OHADA on 4 February 2014 due to the weaknesses of the old law. It went operational on 4th May 2014. This means that these States have adopted the same legal framework which governs the internal organization of companies and their relationship with third parties. Consequently, companies established in the Contracting States to the Treaty are all identical in that they have the same “OHADA” nationality.[25] The new UA seeks to meet the needs of economic operators in the domain of setting up and managing a company at national and regional levels. In this perspective, significant changes will strengthen the protection and control of investors while outlining clearly, the liabilities of directors in a Private Limited Company, and thus, ensuring greater efficiency.

Under the OHADA uniform act on commercial companies and economic interest groups[26] the concept of corporate entity of corporations have been recognized and accommodated. It provides in its article 98 that; All companies shall have a legal personality with effect from the date of registration in the Trade and Personal Property Rights Register, except otherwise provided in this Uniform Act. From this, we noticed that all registered companies in the OHADA system are attributed legal personality from the date of registration. The separate personality of a company is a statutory privilege and it must be used for legitimate business purposes only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will not be allowed to take shelter behind the corporate personality. The Court will break through the corporate shell and apply the principle/doctrine of what is called as “lifting of or piercing the corporate veil”. Sometimes, however, that “veil” can be “pierced”. This occurs when its directors have acted illegally or they have otherwise assumed personal liability for a certain debt or contract. Statutes form the basis of the concept of lifting the corporate veil under OHADA Law. Some of its provisions reveal that shareholders and directors may be held liable for company’s debts or torts. Article 78 of the UACC is to the effect that:

Founding members, as well as the first directors, managers, managing directors or other initial members of the management organs of the company, shall be jointly and severally liable for torts arising either from the omission of a mandatory detail in the Articles of Association, or from the improper fulfillment of a prescribed formality in the formation of the company. Therefore, OHADA Law embraces the doctrine of piercing the corporate veil[27] which aids in the identification of who to be held criminally liable in the face of any offense.

In essence, the piercing of the corporate veil though inspired by French law is not explicitly defined but is implied from various provisions and case law principles under the OHADA legal framework. Although the UACC provides for corporate veil piercing, OHADA Uniform Act on Insolvency Proceedings (AUPCAP) [28]is the most prominent provision that allows for piercing of the corporate veil in cases of insolvency. It governs the treatment of insolvent companies and the rights of creditors. The Uniform Act addresses the personal liability of directors in cases of insolvency where it is demonstrated that the insolvency resulted from their actions or mismanagement.[29] This provision creates the legal foundation for piercing the corporate veil particularly when directors have committed fraud, negligence, or other wrongful acts that led to the company’s financial failure.

On the other hand, corporate veil piercing under common law originates not from statute, but from the courts’ equitable jurisdiction to prevent the misuse of legal personality. It represents an exceptional judicial mechanism developed to counteract abuse of the corporate form in situations where individuals exploit the legal separation between a company and its controllers to commit fraud, evade obligations, or perpetrate injustice. Its emergence is thus deeply rooted in the balance between two foundational legal principles: the sanctity of separate legal personality and the necessity to prevent its abuse in exceptional circumstances.

The foundational case of Salomon v A. Salomon & Co. Ltd firmly established the principle of separate legal personality in English common law, holding that once a company is legally incorporated, it becomes a distinct legal entity, separate from its shareholders and directors, even if the company is entirely controlled by one person[30]. This decision laid the groundwork for the modern doctrine of limited liability and underpins the legitimacy of corporate structures in capitalist economies. However, despite this rigid application of corporate personality, the courts soon recognized that the doctrine could be abused. In response, they crafted the doctrine of corporate veil piercing as a limited exception, enabling courts to look beyond the corporate entity in certain cases of fraud or manipulation.

The theoretical justification for piercing the corporate veil lies in the equitable nature of the remedy. Courts in equity have long held that legal form should not be used to defeat substantive rights or to shield misconduct. Thus, in Gilford Motor Co. Ltd v Horne, the court disregarded the corporate form where the company was created to conceal a breach of a non-compete agreement, identifying it as a “mere cloak or sham” to avoid contractual obligations[31]. Similarly, in Jones v Lipman, the court pierced the veil where a company was used to avoid specific performance of a contract for the sale of land, describing it as a device or sham designed to frustrate legal enforcement[32]. These early decisions illustrate the judicial willingness to pierce the veil when the company is used to perpetrate a fraud or evade pre-existing legal duties.

Over time, the courts have developed distinct conceptual justifications for veil piercing, each reinforcing the idea that it should be applied only in limited and clearly defined circumstances. Among these are the fraud or sham theories, where the corporate structure is treated as a facade to conceal wrongdoing; the agency or alter ego theory, where the company is effectively treated as indistinguishable from its controller; and the evasion principle, which was definitively articulated by the United Kingdom Supreme Court in Prest v Petrodel Resources Ltd[33]. In that landmark decision, Lord Sumption clarified that veil piercing is permitted only in evasion cases where a company is deliberately interposed to evade existing legal obligations. By contrast, concealment cases, in which the company is used merely to obscure the real actors behind a transaction, do not justify piercing, although courts may “look behind” the corporate structure to determine the true facts without disregarding the legal entity.

The Prest decision narrowed the scope of veil piercing by rejecting vague and subjective standards such as the “interests of justice” or “fairness” as bases for lifting the corporate veil. Earlier decisions, such as Creasey v Breachwood Motors Ltd, had applied veil piercing where the court believed that justice demanded it, even absent clear legal misconduct[34]. However, this reasoning was later discredited, and higher courts emphasized that the doctrine must rest on clearly defined legal principles to maintain predictability and commercial certainty. Consequently, veil piercing in common law jurisdictions remains a doctrine of last resort, applied only where specific legal criteria are met, particularly in cases involving fraud, sham companies, or evasion of legal duty.

From a policy perspective, the theoretical foundations of veil piercing also reflect broader concerns about maintaining the integrity of the corporate form while preventing its misuse. Courts aim to uphold the reliability of incorporation and limited liability, which are essential to commercial life, while simultaneously ensuring that these privileges are not used to frustrate the law. This cautious approach ensures that the corporate veil is pierced only where there is compelling justification, thereby maintaining the balance between legal certainty and the pursuit of equitable outcomes.

In essence, the theoretical foundations of corporate veil piercing under common law rest on the principle that the corporate form, while generally sacrosanct, should not be allowed to shield fraudulent or wrongful conduct. The doctrine developed through case law as an equitable remedy to prevent abuse and preserve the rule of law. However, modern jurisprudence, especially following Prest, has confined the scope of the doctrine to specific, narrow grounds, ensuring that its application remains consistent with legal certainty and commercial integrity.

In insolvency contexts, doctrinal tightening has posed challenges. Creditors seeking to hold directors or shareholders liable for wrongful conduct now face a higher threshold, as courts are more inclined to rely on statutory provisions or equitable doctrines (such as resulting trusts or agency) rather than pierce the veil directly[35]

This dissertation investigates whether veil piercing remains a viable and effective remedy in insolvency cases. It examines whether the doctrine sufficiently deters abuse of the corporate form or whether its limited scope leaves creditors vulnerable to structural manipulation. The study also considers whether a more coherent and principled application of the doctrine or complementary reform might better serve the goals of justice and corporate accountability in insolvency.

1.2 Problem Statement

Corporate veil piercing in cases of insolvency which is occasionally invoked to hold shareholders or directors personally liable in cases of abuse is relatively rare and generally difficult to achieve, as Courts are typically very cautious when it comes to piercing the corporate veil. This is so because one of the foundational principles of corporate law is the separation of legal personality between a company and its shareholders as was established in Salomon v A Salomon & Co Ltd. This principle affirms that a duly incorporated company possesses its own legal identity distinct from its shareholders and directors. The rigidity of this principle underpins the corporate structure and hinders justice when the corporate form is manipulated to defeat creditors’ rights. In essence Courts may pierce the corporate veil in insolvency cases only if there is evidence of serious misconduct and basically not on the state of insolvency of the company. It is often a complex, discretionary, controversial and inconsistent legal procedure thereby leading to undesired outcomes for creditors who seek compensation following this procedure.

1.3. Research questions

This study seeks to address a main research question as well as specific research questions

1.3.1 Main research question

How effective is corporate veil piercing in protecting creditors during company insolvency?

1.3.2 Specific research questions

• Under what circumstances do courts pierce the corporate veil and on what grounds are directors personally liable?
• What is the procedure and the effects of corporate veil piercing in insolvency cases under OHADA law?
• How do corporate veil piercing and the establishment director liability protect creditors?
• What reforms or measures could improve creditor protection in insolvency cases?

1.4. Research hypothesis

This work assumes that the application of cooperate veil piercing in cases of insolvency is insufficiently effective due to its restrictive and inconsistent judicial application and the inefficiency of the particular legal frame work addressing the issue.

1.5. Research objectives

This study seeks to address main and specific research objectives

1.5.1 Main research objective

To evaluate the effectiveness of corporate veil piercing as a mechanism for protecting creditors interests during company insolvency.

1.5.2 Specific research objectives

• To identify and analyze the circumstances under which courts pierce the corporate veil and the legal grounds for establishing directors’ liability.
• To examine the procedure and effects of corporate veil piercing in insolvency cases.
• To evaluate how corporate veil piercing and director liability contribute to creditor protection.
• To make recommendations for legal reforms that can further enhance creditor protection in insolvency cases.

[1] Isuru Dissanayaka, “evolution of corporate personality principle within the ambit of commercial law.” Research Gate, 2024, available at researchgate.net

[2] Lateacher.net.2021. separate legal personilty.available online at:https://www.lawteacher.net/free-law-essays/company-law/separate-legal-personality.

[3] Foss v Harbottle(1843)67 ER 189

[4]  Salomon v Salomon Co Ltd [1897] AC 22.

[5] Ibid                                                                                 

[6] John Amour et Al,” the essential elements of corporate law: what is corporate law?” Harvard John M. Olin Discussion Paper Series, 2009, No.643 6-7.

[7] Ibid

[8] Amour, J. “shareholder liability for corporate debts: a historical perspective.” Cambridge Law Journal, 2000, 59(3), 570-595.

[9] Davies Paul, L,” introduction to company law”, Oxford University Press, New York, 2002, P. 11.

[10] Payal kessow. “piercing the corporate veil: exploring legal implications and corporate accountability.” Doctoral thesis university of Cape Town. Available at:https://scholar.google.com

[11] Companies act 2008 section 19(2).

[12] Adams V Cape Industries Plc. (1990) Ch. 433.

[13] Boris, M. et Al,” business law in africa; ohada and the harmonization process”, 2nd edition, London GMB publishing ltd, 2007, P.x.

[14] Njikam, N.S,” the applicability of ohada law in anglophone cameroon: problems and prospects”, Annales De La Faculté De Science Juridique Et Politique, Université De Dschang, 2002, P.23.

[15] Tabe Tabe S,” Some antipodal hurdles that beset the uniform working of the ohada uniform acts in cameroon”, Annales De La Faculté De Science Juridique Et Politique, Université De Dschang Tome.6 Numeros Special Droit Ohada Presses Universitaires D’Afrique (PUA), 2002,Pp.33-43.

[16] Law No 2016/07 of 12 July 2016 relating to the penal code.

[17] Ordinance No 74-1 of 6^th July 1974

[18] Ordinance No 81-02 0f June 1981.

[19] Law No 92-007 of 14^th august 1992.

[20] Law No 2006/015 of 29 December 2006 as amended.

[21] The OHADA uniform acts were enacted pursuant to the treaty of October 17, 1993 regarding the organization for the harmonization of African business law.

[22] Loosely translated in English as the Organization for the Harmonization of Business Law in Africa.

[23] Penda, J.A et Al,” the roadmap of the harmonization of business law in Africa”, www.ohada.com,Pp.4-6

[24] Anoukaha, F et Al, “the law governing commercial companies in the OHADA zone: a comparative study with Ghanaian and Nigerian laws”, France Juriscope, 2010, P.3.

[25] OHADA key innovations of the revised uniform act of 30 January 2014. Available online at www.pwc.fr.

[26] Herein after referred to as UA relating to companies or UACC or UACCEIG.

[27] Nguefack, Daonzeu G,” La responsabilité sociale des entreprises dans l’espace OHADA” thèse de doctorat en droit des affaires et de l’entreprise, Université De Dschang 2019.

[28] Uniform Act On Insolvency Proceedings 2015                                                   

[29] Ibid article 190.

[30] Op.cit. note 4

[31] Gilford Motor Co. Ltd v Horne [1933] Ch. 935.

[32] Jones v Lipman [1962] 1 WLR 832.

[33] Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415.

[34] Creasey v Breachwood Motors Ltd [1993] BCLC 480.                                 

[35] Amour, J. “shareholder liability for corporate debts: a historical perspective.” cambridge law journal, 2000, 59(3), 570-595.