High Court Clarifies When to Lift the Corporate Veil — Directors Personally Liable Where Corporate Personality Is Used to Evade Debts

Waboga David
6 minutes ago
5 min read

Introduction

The "heartbeat" of company law rotates under the principle that a corporation is a separate legal entity distinct from its members, shareholders, and directors. This doctrine, firmly established in Salomon v A. Salomon & Co. Ltd [1897] AC 22, recognizes that once a company is duly incorporated, it acquires its own legal personality, capable of owning property, entering contracts, suing, and being sued in its own name. The acts, liabilities, and obligations of the company are therefore, in law, separate from those of its directors or shareholders.

However, this legal separation is not absolute. Courts have, over time, developed the concept of “lifting” or “piercing the corporate veil” to look beyond the company’s distinct personality where the corporate form is abused. This exceptional remedy is typically invoked where directors, shareholders, or controlling individuals misuse the corporate structure as a façade for fraud, improper conduct, or to evade existing legal obligations.

In such instances, the law disregards the company’s independent personality to hold the wrongdoers personally accountable.

In practice, misuse of the corporate veil often manifests where directors divert company assets for personal gain, use the company to perpetrate fraud, or create multiple entities to conceal liability. Courts are therefore increasingly willing to interrogate the substance over the form of corporate arrangements, ensuring that the doctrine of separate legal personality does not become a shield for injustice or abuse of corporate power.

In a recent decision of M/s Dependable Outcomes Ltd v M/s Buildbase Contractors Ltd & 2 Others, Civil Suit No. 0262 of 2024, the Court reaffirmed this principle and emphasized that while incorporation confers distinct legal personality, it cannot be invoked to protect directors or shareholders who act dishonestly or in bad faith. The Court cautioned that the corporate veil will not be allowed to obscure the true actors behind fraudulent or oppressive conduct, thereby reinforcing the equitable limits of the Salomon principle within Uganda’s commercial jurisprudence.

Facts

In 2018, M/s Dependable Outcomes Ltd (the Plaintiff) supplied machine hire services to M/s Buildbase Contractors Ltd (the 1st Defendant) under a contract worth UGX 16,600,000. When Buildbase defaulted, the Plaintiff sued in the Chief Magistrate’s Court of Makindye (Civil Suit No. 235 of 2018) and obtained judgment for UGX 16,600,000, UGX 5,000,000 in general damages, and 24% interest.

The total decretal sum, including taxed costs of UGX 9,803,300, amounted to UGX 39,371,300.

The Plaintiff’s attempt to execute the decree was frustrated when Buildbase’s directors Eng. Ssembatya Patrick (2nd Defendant) and Nakitto Mariam (3rd Defendant) — allegedly emptied the company’s bank account following a garnishee order against Equity Bank and encumbered company assets through mortgages to block execution.

The Plaintiff thus filed a suit seeking:

To lift the corporate veil of Buildbase Contractors Ltd;
To hold the directors personally liable for the decree; and
To obtain execution against them jointly.

The Defendants opposed the suit, arguing that:

Buildbase is a legally independent entity capable of being sued and bearing its own debts;
The directors acted lawfully, and withdrawals were made in pursuit of legitimate business;
The Makindye Court lacked pecuniary jurisdiction since the award exceeded UGX 20 million; and
The current suit is barred under Section 34(1) of the Civil Procedure Act, which requires that all execution-related questions be determined by the executing court, not through a new suit.

Issues

Whether the Chief Magistrate’s Court of Makindye had pecuniary jurisdiction to entertain Civil Suit No. 235 of 2018.
Whether the present suit was barred under Section 34(1) of the Civil Procedure Act.
Whether the court should lift the corporate veil and hold the directors personally liable for the company’s debts.

Submissions

For the Plaintiff (M/s Avrax Advocates)

Invoked Section 20 of the Companies Act, empowering the High Court to lift the corporate veil where directors act improperly or fraudulently.Argued that the 2nd and 3rd Defendants were the “mind and will” of the company who used the corporate structure to defeat execution.

Asserted that the directors deliberately emptied company accounts and encumbered assets to frustrate satisfaction of the decree.

Cited authorities allowing courts to pierce the veil in the interest of justice where directors abuse corporate personality.

For the Defendants (M/s Nuwajuna Associated Advocates)

Contended that this matter falls within the exclusive purview of Section 34 CPA, and a new suit is procedurally barred.

Argued there was no evidence of fraud or proof that directors transferred assets to evade payment.

Claimed the Makindye Chief Magistrate lacked jurisdiction as the total award (UGX 21 million) exceeded her limit.

Cited Francis Micah v Nuwa Walakira (SCCA No. 24 of 1994) and Tumuramye Julius v Shengli Construction Ltd, emphasizing that all execution matters must be handled by the executing court.

Legal Representation

Plaintiff: M/s Avrax Advocates

Defendants: M/s Nuwajuna Associated Advocates

Court’s Findings and Reasoning

1. On Pecuniary Jurisdiction

Justice Kinobe held that the Chief Magistrate’s Court of Makindye had proper jurisdiction. The principal claim was UGX 16.6 million, and the award of UGX 5 million in damages did not exceed the statutory pecuniary limit of UGX 20 million under Section 207(1)(b) of the Magistrates Courts Act.

“The subject matter was UGX 16,600,000. The award of damages at UGX 5,000,000 did not exceed the pecuniary jurisdiction of the magistrate. I find no merit in this preliminary objection.”

2. On Section 34(1) CPA — Whether a Separate Suit Is Barred

The Court held that Section 34 CPA is a directive to the court, not a bar to parties filing a suit. It aims to save judicial time and costs but does not invalidate proceedings filed by plaint.

“It is my understanding that this provision does not dictate the nature of proceedings whether by application or plaint… It is instructive to court and not the parties.”

Relying on Sinba (K) Ltd & 4 Ors v Uganda Broadcasting Corporation (SCCA No. 03 of 2014) and Francis Micah v Nuwa Walakira (SCCA No. 24 of 1994), the judge emphasized that the section permits courts to treat execution proceedings as a suit, and hence, this suit was properly before court.

3. On Lifting the Corporate Veil

The Court revisited the doctrine of corporate personality under Salomon v Salomon & Co. Ltd [1897] AC 22, affirming that while a company is distinct from its shareholders, the veil may be lifted in exceptional circumstances.

Quoting Beatrice Odongo & Anor v Tamp Engineering Consultants Ltd (CACA No. 8 of 2020) and ABSA Bank (U) Ltd v Enjoy Uganda Ltd (HCMA No. 1243 of 2023), the court observed that directors can be held personally liable where the company is used as a façade to perpetrate injustice.

“A corporation will be looked upon as a legal entity as a general rule, but when the notion of legal entity is used to defeat public conscience, justify wrong, protect fraud or defend crime, the law will regard the corporation as an association of persons.”

Justice Kinobe noted that Section 18 of the Companies Act, empowers the High Court to lift the veil in cases involving fraud, tax evasion, or improper conduct. The list of grounds in that section is not exhaustive, and the veil may also be pierced to prevent flagrant injustice.

Holding

The Chief Magistrate’s Court had jurisdiction in Civil Suit No. 235 of 2018.
The suit is not barred under Section 34 CPA.
The High Court has discretion to lift the corporate veil where directors misuse corporate personality to evade lawful obligations.
The directors’ conduct, including frustrating execution through bank withdrawals and asset encumbrance, warranted judicial scrutiny under the principles of equity and fair dealing.

Key Takeaways

While a company is distinct from its shareholders, courts will disregard that distinction where the entity is used as a tool of deception or injustice.
Section 34 CPA Is Directive, Not Prohibitive
Parties may approach the High Court by plaint to address execution-related grievances where justice so demands.
Jurisdiction Depends on the Subject Matter, Not Total Awards
Damages added to a principal claim do not necessarily oust a magistrate’s jurisdiction if the total remains within statutory limits.
Directors Must Act in Good Faith
Using corporate structures to frustrate lawful decrees exposes directors to personal liability under Section 18 of the Companies Act.