The doctrine of piercing the corporate veil: Its legal and judicial recognition in Ethiopia

Author:Endalew Lijalem Enyew
Position:LL.B (Hawassa University), LL.M (Addis Ababa University)
Pages:77-114
SUMMARY

Upon acquisition of legal personality a company enjoys certain attributes such as limited liability. While the separate legal personality of a company enables it to enjoy rights and assume obligations quite different from its members, the limited liability of shareholders refers to the fact that the company alone is liable for its debts. However, such privilege of limited liability may not always ... (see full summary)

 
FREE EXCERPT
THE DOCTRINE OF PIERCING THE CORPORATE
VEIL: ITS LEGAL AND JUDICIAL RECOGNITION IN
ETHIOPIA
Endalew Lijalem Enyew
Abstract:
Upon acquisition of legal personality a company enjoys certain attributes such
as limited liability. While the separate legal personality of a company enables it
to enjoy rights and assume obligations quite different from its members, the
limited liability of shareholders refers to the fact that the company alone is
liable for its debts. However, such privilege of limited liability may not always
exist when the legal personality of a company is abused and used for
illegitimate or unlawful purposes and other reasons. This article examines some
of the grounds by which the corporate veil can be pierced under Ethiopian law
and the role of courts in recognizing the doctrine. Based on the analysis of the
relevant legislative provisions and some court cases, it is found that Ethiopian
company law, though not sufficient, provides some clear grounds of piercing
the corporate veil and certain possible grounds which may call for the
application of the doctrine. It is also argued that Ethiopian courts should apply
the doctrine of piercing the corporate veil, through the purposive interpretation
of the statutory provisions, if doing so produces equitable results and fairness.
Key Words:
Company, corporate veil, piercing the veil, Ethiopia
DOI http://dx.doi.org/10.4314/mlr.v6i1.3
_____________
Introduction
The separate legal personality of a company renders it a juridical person distinct
from its shareholders. The other attribute of a company is limited liability of
share holders in which the company will alone be liable for the debts it incurs.
That is, if the company becomes unable to pay its debts, the members of that
LL.B (Hawassa University), LL.M (Addis Ababa University); and currently studying
MPhil in Peace and Conflict Transformation, at Tromsø University, Norway. I would
like to thank Zekarias Keneea (Associate professor) for his continuous and unreserved
advice, and Elias N. Stebek (Assistant Professor) for his comments and corrections
which constitutes the final version of this Article. Email:
<netsuhfiker@gmail.com> or <lijendalew558@yahoo.com>
78 MIZAN LAW REVIEW Vol. 6 No.1, June 2012
company will not have to contribute towards paying the company’s debts out of
their private funds.
The attribute of limited liability of a company is known as the corporate veil
or shell, due to the protection it offers to the shareholders by protecting or
keeping them from the reach of outsiders (creditors). However, such privilege of
limited liability may not always exist when, inter alia, the legal personality of a
company is abused and used for illegitimate or unlawful purposes. If it is shown
that the legal personality has been abused and used to the detriment of third
parties (creditors), the theory of legal personality will be disregarded and it is
looked upon as a collection of persons instead of a collection of capital.
Consequently, the individual member(s), director(s) and manager(s) will be held
liable for the wrongs caused through the use of the legal entity. This process is
known as piercing or lifting the corporate veil.
Based on legislative analysis, interview, and case analysis, this article tries to
explore some possible grounds by which the corporate veil can be pierced under
Ethiopian law and the role of courts in recognizing and applying the doctrine.
The first section of the article deals with the basic attributes of a company. The
second section deals with the meaning and origin of the doctrine of piercing the
corporate veil, followed by a discussion on the grounds for piercing the
corporate veil in some foreign laws, both in the common and civil law legal
systems. The fourth section explores some possible grounds of piercing the
corporate veil under Ethiopian company law and the role of Ethiopian courts in
this regard. Finally section five forwards conclusions.
1. The Basic Attributes of a Company
Gogna defines a company1 as “a voluntary association of persons formed to
achieve some common objectives, having a separate legal entity, independent
and separate from its members, with a perpetual succession and a common seal,
and with capital divisible into transferable shares.”2 Although Ethiopian law
does not expressly define a company, it is possible to understand what a
1
While the term ‘Company’ is used in the Ethiopian legal system, the term
‘Corporation’ is commonly used in the common law legal system though it is broader
in concept which includes public enterprises. Since the doctrine of piercing the
corporate veil is of common law origin, the term corporation is seldom used in this
article particularly in sections dealing about foreign laws and not to confuse it with the
term company. However, the term company is exclusively used in the sections dealing
with the legal and judicial recognition of the doctrine in Ethiopia.
2 Gogna, P.P.S (2004), A Textbook of Company Law (New Delhi: S. Chand & Company
Ltd.), p.9.
THE DOCTRINE OF PIERCING THE CORPORATE VEIL: ITS LEGAL AND JUDICIAL RECOGNITION IN ETHIOPIA 79
company is through its major attributes, namely, separate legal personality and
limited liability of shareholders\members.
1.1. Separate legal personality
When a company fulfils the requirements laid down for its formation, the law
considers it as a person. That is, in the eyes of the law, it is a person capable of
enjoying rights and assuming obligations quite different from the physical
persons who brought it into existence or who may be its members at any given
time.3 The rights and obligations of the individual members are not those of the
company and vice versa.
The decision of the House of Lords in the case of Salomon v. Salomon & Co.
Ltd [1897] which revised the decisions of the Higher Court and the Court of
Appeal marks the beginning of the judicial acceptance of the company as a
separate legal entity. The facts in Salomon V. a Salomon & Co. Ltd are given
below (as stated in Stephen Griffin, Company law: fundamental principles).4
The proprietor of a small but successful business, Mr. Salomon, formed a
business as a limited company in accordance with the registration provisions
contained within the Companies Act 1862. Section 6 of the Act provided that
“seven or more persons together could form a business provided that it was
associated for a lawful purpose.”5
The seven subscribers to the Salomon & Co. Ltd were Mr. Salomon, his wife
and their five children. The company, A Salomon & Co. Ltd, purchased Mr.
Salomon’s business in a solvent state for a consideration to a value of
approximately £39,000. Mr. Salomon received £20,000 a fully paid-up £1
shares, an issue of debentures to the value of £10,0006. The remaining six
members of Salomon’s family were each allotted a £1 share in the company.7
Unfortunately, a Salomon & Co. Ltd did not prosper. Mr. Salomon’s
debentures were transferred to Mr. Broderip in return for £5000; this amount
was then pumped back to the company by Mr. Salomon. Despite further efforts
on the part of Mr. Salomon to keep the company afloat, less than a year after its
3 Seifu Teklemariam (1968), Piercing the corporate veil: its application to private
limited companies and share companies in Ethiopia, Senior Thesis, Faculty of Law,
Haile Selassie I University, (unpublished), p. 4.
4 Griffin Stephen (2004), Company law: fundamental principles, (4th ed.), Pearson
Longman, p. 6.
5 Ibid, Salomon v A Salomon & Co Ltd [1897] AC 22 (House of Lords).
6 A debenture acknowledges a loan or other credit agreement between the company and
its creditors and is normally secured against the assets of the company. In Salomon’s
case the debenture was secured by means of a floating charge and took the remainder
of the sale price in cash.
7 Griffin Stephen, supra note 6, p. 6.

To continue reading

REQUEST YOUR TRIAL