COPPERSTONE UNIVERSITY

SCHOOL OF BUSINESS

NAME : MUTALE MBEBETA

SEMESTER : EIGHT (8)

STUDENT NO : CU-BBA-70-6777

PROGRAM : BACHELORS OF BUSINESS

ADMINISTRATION
COURSE : COMPANY LAW

LECTURER : DR CHITUMBO

ASSINGMENT : ONE (1)

QUESTION 1

(a).It is seen that a company as a person, has a legal identity of its own. An obvious consequence
is that the company in question may become liable for the actions of the company if the court
practice veil? What do you understand by veil? ( 10 marks)
(b). According to the company law, there are certain circumstances when the court of law
removes the veil so that members are not protected by veil, state and explain according to the
company law when veil can be removed by the court? (10 marks).

QUESTION TWO
What do you understand by contractual capacity and criminal liability in company law? ( 10
marks)

QUESTION THREE
Discuss on contract of Guarantee? What are the two terms of a guarantee according to company
law? ( 10 marks)
 SECTION A

The corporate veil definition is a legal concept that separates the actions of an organization to the

actions of the shareholder. In addition, it protects them from being liable for the company’s
actions. It does not necessarily mean that the protection is always in place. A court can also
determine whether they hold shareholders responsible for a company’s actions or not.

The Corporate Veil Theory is a legal concept which separates the identity of the company from its
members. Hence, the members are shielded from the liabilities arising out of the company’s
actions.

Therefore, if the company incurs debts or contravenes any laws, then the members are not liable
for those errors and enjoy corporate insulation. In simpler words, the shareholders are protected
from the acts of the company.

This brings us to some important questions:

1. If lifting or piercing the corporate veil possible?

2. If yes, then what are the scenarios and the rules that govern piercing the corporate veil?

Piercing the Corporate Veil means looking beyond the company as a legal person. Or,
disregarding the corporate identity and paying regard to humans instead.

In certain cases, the Courts ignore the company and concern themselves directly with the
members or managers of the company. This is called piercing the corporate veil. Usually, Courts
choose this option when the case involves a question of control rather than ownership.
 Piercing the Corporate Veil

“Piercing the corporate veil” refers to a circumstance in which courts set aside limited

liability and hold a company’s investors or directors personally liable for
the organization’s activities or debts. Corporate veil piercing is common in closed corporations.
While the laws vary from state to state, courts will generally abstain from piercing the corporate
veil unless there have been signs of serious misconduct.

B. Grounds under which Corporate veil is Lifted

1. Where the Company is a Sham (Fraud): Gilford Motor Company vs Horne (1933)

 Mr. Horne was a former Managing Director of Gilford Motor Home Company Ltd. His
employment contract stipulated a condition that he should not solicit customers of the company
once he leaves his job.
 Mr. Horne was fired from his position and job. Thereafter, he established a competing company
with his wife, himself, and one of his friends, who were the sole shareholders. The company
established by Horne has lower price tags than that of Gilford’s company.
 The shareholders started soliciting the customers of Gilford Motor Company. Gilford did not
have any legal restraints against Horne’s company, only Horne himself.
 Gilford filed or commenced proceedings against Horne individually, claiming that Horne’s
company was an attempt to evade legal obligations through soliciting customers.

It was held that the company was set up to evade Horne’s contractual obligations and was used
as an instrument of fraud to conceal Mr. Horne’s illegitimate actions. The court pierced the
corporate veil and ordered an injunction against Horne.[7]

2. Invocation of the principal of agency: RG Films Ltd (1953)

 An American company financed the production of a film in India in the name of a Britain
company.
 90% of the shares in the British Company was held by the president of an American Company.
The company had no business other than its registered office and it had no staff also.
 Thereafter, the film at the time of release was refused by the Board of Trade to register it as a
British film because the British company acted merely as an agent of an American company.

It was held that the decision was valid in the view of the fact that the British company acted
merely as a nominee of the American company. In this case, the Corporate veil was lifted and
declared that the doctrine of separate legal entity does not mean that the company will act as a
mere agent of the shareholders.[8]

3. Public Policy: Connors Bros vs Connors (1940) 

 In this case the acts done by the members of the company led the court to lift the corporate veil
to punish the offenders as the company had been formed to accomplish an act that is against the
public policy.
 The principle was applied against the managing director who made use of his position to
contrary to the public policy.

The House of Lords determined the character of the company as an enemy company because the
persons who were de facto who were residents of Germany, which was at war with the British
during that time.

The alien company was not allowed to proceed with the action, which was directly or indirectly
meant giving money to the enemy, thus was considered against the public policy.[9]

4. Determining True Character of the Company: Daimler Co. Ltd vs Continental Tyre and Rubber
Co. Ltd (1916)

 A private company was incorporated in England for the purpose of selling motor tires
manufactured in Germany and was a German company.
 The German company has almost all of the shares in their position and all the directors of the
company were Germans.
 During the First World War, the English company commenced an action for recovery of Trade
debt.
 The House of Lord held that the company was an enemy company for the purpose of trading
because its effective control or the management was in the hands of Germans.

The court held that it would against public policy if there is a trade among them and hence it was
decided that the company will not be allowed to proceed with the action.[10]

5. Protection of Revenue (Tax Evasion): CIT vs Meenakshi Mills Ltd 

The corporate veil may be ignored if the company is formed merely to evade tax. In Income Tax
Commissioner, Madras vs Sri Meenakshi Mills, Madurai, the Supreme Court held that the
Income Tax authorities have a right in this case to lift the corporate veil.

Sir Dinshaw Maneckji Petit (1927)

 In this case the assessee was a wealthy man enjoying large dividends and interest income. He
formed 4 companies and agreed with each other to hold a block of investment as an agent for it.
 Income revived was credited in the accounts of the company but the company handed back the
amount to him as a pretended loan, like this, he divided his income into 4 parts so that he can
easily escape the tax liability.

It was held that the company was formed only with an intention to evade tax and the company
was nothing but the assessee himself. It did not do any business, except for helping the assessee
to evade tax and to have a separate legal entity to superficially receive the dividends and interest
and then to hand it to them to the assessee as pretended loans.[11]

Statutory Provisions in support of Lifting the Corporate Veil 

1. Reduction of number of members below the statutory minimum: If at any time the minimum
number of members of a company falls below two, in case of Private company or below seven,
 in case of Public company; then the company can carry on the business for a period of six
months while the number is so reduced, every person who is a member of the company during
the time that it still continues to carry on the business, knowing the fact that the minimum
number of members is reduced and the grace period of six months is also finished, then as the
case may be, the company and its members will be held liable and can sue an amount which they
made during those six months or else the company may be severally sued, therefore.
2. Failure to refund application fee: The directors of the company shall be jointly and severally
liable to repay the money (application money) with an interest of six percent per annum from the
date of expiry of one hundred and thirtieth day if they fail to repay the application money
without interest within one hundred and twenty days when the company fails to allot shares.

3. Misdescription of company’s name: An officer of an organization (company) who signs any bill
of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in
the recommended way, such official can be held personally liable to the holder of the bill of
trade, hundi, etc. except if it is properly paid by the company. 

4. Fraudulent trading: Under section 339 of the Companies Act, 2013, If in the course of the
winding-up of a company, it appears that any business of the company has been carried on with
intent to defraud creditors of the company or any other persons or for any fraudulent purpose, the
Tribunal, on the application of the Official Liquidator, or the Company Liquidator or any
creditor or contributory of the company, may, if it thinks it proper so to do, declare that any
person, who is or has been a director, manager, or officer of the company or any persons who
were knowingly parties to the carrying on of the business in the manner aforesaid shall be
personally responsible, without any limitation of liability, for all or any of the debts or other
liabilities of the company as the Tribunal may direct. Every person who had the knowledge of
such fraud will be punishable with imprisonment for a term which may extend to two years or
with a fine which can extend up to fifty thousand or with both.[12] 

5. For investigating company’s ownership: Under section 216 of the Companies Act, 2013, the
Central Government may appoint Inspectors to investigate and report on the membership of the
company for the purpose of determining the true individuals who are financially interested in the
company and who control its policy. Thus, the Central Government may ignore the Corporate
veil.

Conclusion

A company has a legal personality just like all other natural individuals, the only difference
between the two is that a company even with its legal personality cannot run or conduct its
affairs as a natural person does. The company acts on the concept of the corporate veil, this veil
when misused for fraudulent acts will reveal the true nature and real beneficiaries of the
company, thus, called the lifting of the corporate veil. The courts from time to time implemented
this rule and also brought in a few changes suitable for the situations and for future reference

OUESTION TWO

Contractual capacity is an individual’s faculty to sign binding contracts with other parties either
for himself or on behalf of a third party. It is a legal competence to step into an agreement.

What Does Contractual Capacity Mean?

The faculty to sign contracts is a very delicate responsibility since it allows an individual to
commit himself, legally speaking, to many different situations that can have financial, political or
personal consequences. This is the reason why contractual capacity has its boundaries and it can
never be assumed if the nature of the contract is a complex one.

From a business standpoint, not all individuals within a company should be considered fully
capacitated to sign contracts on behalf of the business. This is the reason why articles of
association and other legal documents that sustain the business’ corporate governance structure
clearly define who has the capacity to legally commit the company.

On the other hand, this faculty is also associated to the person’s well being at the moment of the
signature. Individuals with mental disabilities or severe psychological impairments are normally
considered unable to act on behalf of a third party and even for themselves. Also, a fairly
reasonable argument can be presented in court to rebuke a binding agreement signed by a person
under coercion.

Example

Perry is head of the Purchasing Department of a video production company. He is in charge of

buying everything required to stage filming procedures and he is also the person in charge of
keeping the office fully supplied. Recently, the company signed a big filming project with a
well-known music artist. Perry was involved in the negotiations along with the CEO of the
company, Marcus.

They were both present when the agreement clauses were drafted but a few days after that the
artist’s manager called Perry to say the contract was ready to be signed and he scheduled the
signing date for tomorrow. Even though Perry was present during the negotiations he doesn’t
have the contractual capacity to sign the deal. Marcus, the CEO of the company, is the only one
who has that faculty. Perry politely clarified the situation to the agent and he called Marcus
immediately to inform him about the signing.

We hear the term “criminal liability” a lot in the context of criminal law, but what does it
actually mean?

WHAT DOES CRIMINAL LIABILITY MEAN?

In simplest terms, when you are “criminally liable,” it means you may be held legally
responsible for breaking the law. This can be potential or actual responsibility—meaning that
you actually committed the crime, or that you are simply suspected of committing it. If the
liability is proven in court, you will be held responsible for the crime and sentenced accordingly.

In cases of criminal liability, the government believes you may have committed a criminal act,
and the government prosecutes the case in court.

WHAT DETERMINES CRIMINAL LIABILITY?

In most cases (not all), criminal liability hinges on two elements: the actus reus (the actual act or
omission that violated the law) and the mens rea (the guilty state of mind, the intention to
commit).
In plain English, this means in order to prove that you are criminally liable, the prosecution must
prove “beyond a reasonable doubt” not only that you committed the crime, but that you intended
to do it. However, certain exceptions exist where “strict liability” is enforced, meaning that you
can be held liable for the crime regardless of your intentions. For example, you may be convicted
of selling alcohol to a minor whether or not you knew the person’s age.

You can also be ticketed for speeding even though you didn’t know you were exceeding the
speed limit. Your experienced criminal defense attorney can advise you on whether your alleged
offense is a strict liability offense.

QUESTION 3

Contract of Guarantee refers to a contractual arrangement in which one party gives a guarantee
for another regarding the fulfillment of a promise or repayment of the debt when the latter fails
to discharge the liability or perform the undertaking.

Kinds of guarantee

Contracts of guarantees may be classified into two types: Specific guarantee and continuing
guarantee. When a guarantee is given in respect of a single debt or specific transaction and is to
come to an end when the guaranteed debt is paid or the promise is duly performed, it is called a
specific or simple guarantee. However, a guarantee which extends to a series of transactions is
called a continuing guarantee (Section129). The surety’s liability, in this case, would continue till
all the transactions are completed or till the guarantor revokes the guarantee as to the future
transactions.

Illustrations
a) S is a bookseller who supplies a set of books to P, under the contract that if P does not pay for
the books, his friend K would make the payment. This is a contract of specific guarantee and K’s
liability would come to an end, the moment the price of the books is paid to S.

b) On M’s recommendation S, a wealthy landlord employs P as his estate manager. It was the
duty of P to collect rent every month from the tenants of S and remit the same to S before the
15th of each month. M, guarantee this arrangement and promises to make good any default made
by P. This is a contract of continuing guarantee.

Continuing guarantee

A continuing guarantee is defined under section 129 of the Indian Contract Act,1872. A

continuing guarantee is a type of guarantee which applies to a series of transactions. It applies to
all the transactions entered into by the principal debtor until it is revoked by the surety.
Therefore, Bankers always prefer to have a continuing guarantee so that the guarantor’s liability
is not limited to the original advances and would also extend to all subsequent debts.

The most important feature of a continuing guarantee is that it applies to a series of separable,
distinct transactions. Therefore, when a guarantee is given for an entire consideration, it cannot
be termed as a continuing guarantee.

Illustration

K gave his house to S on a lease for ten years on a specified lease rent. P guaranteed that S,
would fulfill his obligations. After seven years S stopped paying the lease rent. ‘K sued him for
the payment of rent. P then gave a notice revoking his guarantee for the remaining three years. P
would not be able to revoke the guarantee because the lease for ten years is an entire indivisible
consideration and cannot be classified as a series of transactions and hence is not a continuing
guarantee
 REFERENCES

ainbridge, S. M. (2002) ‘In Defense of the Shareholder Wealth Maximization Norm’, SSRN

Electronic Journal. doi: 10.2139/ssrn.303780.

Berle, A. A. and Means, G. C. (1968) ‘The New Concept of the Corporation’, in The modern
corporation and private property. Rev. ed. New York: Harcourt, Brace & World, pp. 309–313.

Berle Jr, A. A. (1932) ‘For Whom Corporate Managers Are Trustees: A Note’, Harvard Law
Review, 45(8), pp. 1365–1372. Available at: http://www.jstor.org/stable/1331920.

Blair, M. M. (no date) ‘The Four Functions of Corporate Personhood’, SSRN Working Paper
Series. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2037356.
Cataldo, B. F. (1953) ‘Limited Liability with One-Man Companies and Subsidiary
Corporations’, Law and contemporary problems, 18, pp. 473–504. Available at