Introduction

The doctrine of the corporate veil is a fundamental principle in corporate law recognising a company as a separate legal entity distinct from its shareholders. This legal separation serves to protect shareholders from personal liability for the company's debts and obligations. However, there are instances where courts disregard this separation in order to prevent misuse of the corporate form. In such cases, courts may either lift or pierce the corporate veil. While these terms are often used interchangeably, they serve distinct legal purposes and arise in different contexts, making it important to understand the nuances between them.

The case of GA Insurance Tanzania Limited v. Gold Shield Insurance Services (EA) Limited and others, Miscellaneous Commercial Application No. 16899 of 2024 (arising from Commercial Case No. 8 of 2020) provides a distinction and analysis between the two legal concepts, highlighting the different purposes they serve and examining how courts determine when and why to apply each principle.

Background of the case

In GA Insurance Tanzania Limited, the High Court of Tanzania (Honourable Justice Gonzi, J.) provided a well-reasoned clarification on the distinction between lifting and piercing the corporate veil. The application arose from the First Respondent's failure to satisfy a default judgment entered in Commercial Case No. 8 of 2020, concerning unremitted insurance premiums amounting to TZS 204,033,643.704. Despite extensive efforts to trace the company's assets through official searches at the Business Registration and Licensing Agency (BRELA), the Tanzania Revenue Authority (TRA) and land registries, no assets were discovered and the registered office was found to be occupied by an unrelated entity. The Applicant contended that the Second and Third Respondents being directors and shareholders were concealing the company's assets and abusing its separate legal personality to avoid compliance with the decree. Consequently, the Applicant prayed for the corporate veil to be lifted so that the directors could be held personally accountable. However, when making submissions, counsel for the Applicant sought an order to either pierce or lift the corporate veil, treating the two concepts as interchangeable, which prompted the court to see the need to distinguish the terms which are often conflated yet conceptually and legally distinct. Honourable Gonzi, J.'s judgment addressed this distinction in depth, offering much needed clarity on when and how each principle applies.

Piercing the corporate veil

The piercing of the corporate veil occurs when a creditor of a shareholder attempts to hold the corporation liable for the shareholder's debts. This principle applies particularly where a company was established primarily to evade a shareholder's pre-existing personal obligations. It is grounded in the evasion principle, which holds that when a controlling shareholder uses a company to circumvent personal legal responsibilities, the court may disregard the company's separate legal personality.

Honourable Gonzi, J. cited Ariel Mucha in his work "Piercing the Corporate Veil Doctrine under English Company Law after Prest v. Petrodel Resources Limited [2013] UKSC 34 Decision" (Allerhand Advocacy Project – 2016/2017 Edition) whereby the court reaffirmed that piercing the corporate veil requires clear proof that the company was deliberately formed to shield shareholders from their legal obligations. The evasion principle applies specifically in situations where a controlling shareholder manipulates the corporate structure to avoid fulfilling existing liabilities.

Lifting the corporate veil

In contrast to piercing the corporate veil, lifting the corporate veil occurs when a creditor of a corporation seeks to hold a shareholder personally liable for the company's debts.
Further citing the Supreme Court of the UK, in Prest v. Petrodel Resources Limited [2013] UKSC 34, where Lord Sumption JSC distinguished between piercing the corporate veil and applying the concealment principle, the presiding judge explained that the concealment principle does not disregard the corporate structure, rather it allows the court to look beyond it when a company or a series of companies is used to obscure the true identity of those controlling the business. In such cases, the court does not override the legal existence of the corporation but instead examines the reality behind the corporate structure to expose the individuals involved, provided their identity is legally relevant.

Thus, while piercing the corporate veil is justified under the evasion principle, where the corporate form is misused to escape legal obligations, lifting the corporate veil applies under the concealment principle, where the court seeks to reveal the actual parties behind a corporate facade without disregarding its legal existence.

Conclusion

While many cases may involve elements of both piercing and lifting the corporate veil, distinguishing between the concealment and evasion principles can be crucial in determining the appropriate legal outcome. This distinction, as emphasised in GA Insurance Tanzania Limited, assists courts in addressing the misuse of corporate entities, ensuring that corporate structures are not exploited to evade legal responsibilities or obscure the true identity of those in control.