Sole proprietorship masquerading as limited liability and the metaphorical veil

By Francis John ANIABA ESQ.

The corporate veil is one of the most enduring doctrines of modern company law. Rooted in Salomon v Salomon & Co Ltd [1897] AC 22 (HL), it establishes that a company is a legal person distinct from its members, capable of owning property, contracting, and bearing liabilities in its own right.

This principle is codified in Ghana under section 9 of the Companies Act 2019 (Act 992). It provides the foundation for limited liability, encouraging entrepreneurship, investment, and commercial risk-taking by limiting shareholder exposure to the unpaid value of their shares.

While separate corporate personality offers immense economic benefits, it can also be misused. In practice, individuals frequently exploit the veil to evade liabilities, particularly debts owed to creditors.

This abuse is particularly pronounced in closely held private companies, where directors and shareholders often overlap, statutory compliance is weak, and regulatory oversight minimal. In Ghana, empirical evidence suggests that more than 70 per cent of private companies fail to file annual returns, while over 60 per cent do not lodge audited accounts.¹

By contrast, public companies operate under greater scrutiny. They must comply with disclosure obligations under the Securities Industry Act 2016 (Act 929), undergo external audits, and are monitored by the Securities and Exchange Commission (SEC). Market forces and shareholder activism further discipline public firms, ensuring baseline protections for creditors.

Despite these stark structural differences, Ghanaian courts apply a uniform veil-piercing standard to both private and public companies. This paper argues that the current “one-size-fits-all” approach inadequately reflects the compliance gap between these company types. It proposes differentiated rules: a more flexible veil-lifting standard for private companies, where abuse is common, and a stricter threshold for public companies, where regulatory safeguards already exist.

Theoretical Framework: Creditor Protection and the Corporate Veil

The Salomon Principle and its Limits

The Salomon case confirmed that incorporation creates a separate legal entity distinct from its members.² Lord Macnaghten held that once validly incorporated, a company “is at law a different person altogether from the subscribers.” This doctrine entrenched limited liability and has since been adopted globally.

Yet, the doctrine’s absolutism has always been tempered. Courts recognise that the corporate veil may be pierced when it is used as a façade to perpetrate fraud, evade obligations, or conceal misconduct.³ The challenge lies not in whether to pierce the veil, but in when, how often, and under what evidentiary standard.

Creditor Protection in Legal Theory

Jennifer Payne and Louise Gullifer contend that creditor protection is essential for reducing opportunistic behaviour by insiders and ensuring risks are not unfairly externalised.? They distinguish between:

• Voluntary creditors, who can negotiate protections (e.g., secured lenders).
• Involuntary creditors, such as tort victims, who cannot bargain or protect themselves.

Because involuntary creditors are especially vulnerable, the law must provide safeguards beyond contract. Payne and Gullifer argue for a functional model of protection combining entry requirements (e.g., capitalisation), ongoing obligations (auditing and disclosure), and exit controls (wrongful trading liability).?

Paul Davies similarly argues that limited liability is economically justified in public companies where shareholders are numerous and dispersed.? However, in private companies where shareholders often overlap with directors, the risk of abuse is heightened. Strict veil-piercing thresholds in such contexts undermine creditor confidence.

Easterbrook and Fischel, from a law-and-economics perspective, argue that creditor protection is necessary to counterbalance the efficiency gains of limited liability.? Their view reinforces that judicial and statutory safeguards are essential in contexts where contractual discipline is weak, such as in private firms.

Ghanaian Legal and udicial Approaches

Statutory Framework

Ghana’s Companies Act 2019 (Act 992) and Corporate Insolvency and Restructuring Act 2020 (Act 1015) contain several creditor-protection measures:

• Section 122 – duty to maintain proper accounting records.
• Section 126–127 – requirement to prepare and file annual financial statements and have them audited.
• Section 133 – duty to file annual returns.
• Section 190–200 – fiduciary obligations of directors, including prohibition of unauthorised use of company property.
• Sections 117–118 of Act 1015 – liability for wrongful and fraudulent trading in insolvency contexts.

While these provisions are robust on paper, enforcement is weak. Many private companies fail to comply with filing obligations, yet face little sanction.

Ghanaian Case Law

In Morkor v Kuma [1999–2000] 2 GLR 533 (SC), the Supreme Court allowed veil piercing where a company was used to shield assets from execution of a judgment debt. The Court emphasised that separate personality cannot be used as an instrument of fraud.

In Gakpetor v Tetteh Steve & Ors (High Ct, Accra, 2022, unreported), the court refused to pierce the veil absent clear statutory breach, reflecting judicial restraint.

In Ghana Growth Fund Ltd v Talkai Co Ltd (High Ct, Accra, 2015, unreported), however, the veil was pierced where directors diverted loan funds through related-party transfers, deliberately frustrating creditor claims.

These cases highlight a doctrinal tension: while Ghanaian courts recognise exceptions for fraud and sham, they apply veil-piercing cautiously, often requiring creditors to meet high evidentiary thresholds.

Comparative Perspectives

United Kingdom

The UK pioneered separate corporate personality through Salomon. Its subsequent jurisprudence reflects caution in departing from that principle. In Gilford Motor Co Ltd v Horne [1933] Ch 935 and Jones v Lipman [1962] 1 WLR 832, the veil was pierced where companies were used as façades. By contrast, in Adams v Cape Industries plc [1990] Ch 433, the Court of Appeal refused to pierce the veil to enforce a foreign judgment, upholding corporate separateness.

The UK Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34 clarified that veil-piercing applies narrowly under the “evasion principle,” where an existing obligation is deliberately evaded through interposing a company.?

Statutory creditor protections, particularly wrongful trading under the Insolvency Act 1986 (s 214) and disclosure rules under the Companies Act 2006, provide stronger safeguards than veil-piercing.

Implication for Ghana: The UK’s narrow test assumes strong compliance and transparency—conditions often lacking in Ghana’s private sector. Wholesale adoption of this model could embolden misconduct in Ghanaian private companies.

Australia

Australian courts adopt a more flexible, creditor-protective stance. In Brick & Pipe Manufacturing v Williams [2011] NSWSC 123, directors were held personally liable for siphoning company funds. Australian law also prohibits insolvent trading (Corporations Act 2001, s 588G), making directors accountable where they incur debts knowing the company cannot pay.

Australian courts focus on substance over form: if a company is used to evade obligations or misuse assets, the veil may be lifted. This approach better accommodates contexts where private companies are less transparent.

Implication for Ghana: Ghana’s regulatory environment resembles Australia’s in terms of private company risks. A flexible, substance-over-form approach is more suitable than the rigid UK model.

Canada

Canadian courts balance restraint with equitable intervention. In Kosmopoulos v Constitution Insurance Co [1987] 1 SCR 2, the Supreme Court permitted veil lifting in a private company context. In Sea-Land Service v Pepper Source [1990] 3 SCR 49, the veil was pierced where subsidiaries were used to defeat creditors.

The Canada Business Corporations Act reinforces directors’ fiduciary duties, which courts rely on heavily for creditor protection.

Implication for Ghana: Canadian law demonstrates that equitable doctrines, combined with statutory duties, provide a principled yet flexible framework, especially for private firms.

Case for Reform in Ghana

The comparative analysis suggests that:

• Public companies, with stronger oversight, justify a stricter veil-piercing threshold.
• Private companies, prone to abuse, require a lower threshold to protect creditors.
• Directors’ statutory duties are crucial gateways for equitable intervention.

Judicial Reform

Courts should adopt a rebuttable presumption that the veil will be lifted where private companies persistently breach statutory obligations (e.g., failure to file returns for two years). Creditors should not have to prove fraud in such circumstances; non-compliance itself should be sufficient evidence of potential abuse.

Legislative Reform

Act 992 could be amended to insert provisions (e.g., ss 9A–9B) empowering courts to pierce the veil where:

• Private companies default on financial reporting obligations.
• Directors use company assets for personal benefit.
• Non-compliance prejudices creditor claims.

This would align Ghana with Australia’s Corporations Act 2001 and Canadian equitable doctrines.

Regulatory Enforcement

The Registrar of Companies, EOCO, and SEC must collaborate to enforce compliance. Measures could include:

• Automated penalties for late filings.
• Public blacklisting of chronic defaulters.
• Closer monitoring of related-party transactions.

Economic Justifications

Differentiated veil-piercing standards are not only doctrinally sound but economically necessary.

• Enhancing creditor confidence: Stronger protections in private firms reduce risk, encouraging banks and investors to lend at lower interest rates.
• Market stability: Preventing corporate abuse supports Ghana’s credit markets, reducing systemic risk.
• Compliance incentives: Firms that comply retain the shield of limited liability, while non-compliant ones face enhanced scrutiny.
• Efficient capital allocation: Creditors will channel funds towards compliant firms, promoting economic productivity.

Law-and-economics scholars such as Richard Posner argue that predictable enforcement of creditor rights lowers transaction costs and supports efficient capital markets.? Ghana’s proposed reforms align with this economic rationale

Conclusion

The corporate veil remains a cornerstone of company law, balancing entrepreneurial freedom with accountability. However, Ghana’s uniform veil-piercing doctrine inadequately reflects the compliance gap between public and private companies.

This paper argues that differentiated rules are necessary: a stricter threshold for public companies, but a more flexible approach for private companies where statutory breaches and abuse are rampant. By embedding these reforms in judicial practice, legislative amendments, and regulatory enforcement, Ghana can protect creditors without undermining legitimate enterprise.

Ultimately, the reform ensures that the corporate veil serves as a shield for honest business, not a sword for fraud and creditor evasion.

References

¹ Registrar of Companies, Annual Compliance Report (Accra, 2023).
² Salomon v A Salomon & Co Ltd [1897] AC 22 (HL).
³ Prest v Petrodel Resources Ltd [2013] UKSC 34, [2013] 2 AC 415.
? Jennifer Payne and Louise Gullifer, Corporate Finance Law: Principles and Policy (3rd edn, Hart Publishing 2020) 435.
? ibid 440.
? Paul Davies and Sarah Worthington, Gower’s Principles of Modern Company Law (10th edn, Sweet & Maxwell 2016) 512.
? Frank H Easterbrook and Daniel R Fischel, The Economic Structure of Corporate Law (Harvard University Press 1991) 41.
? Adams v Cape Industries plc [1990] Ch 433 (CA).
? Richard Posner, Economic Analysis of Law (10th edn, Aspen 2022) 512.

This article is a summary of the authors special paper presented to the University of Ghana School of law in pursuance of his LLM in Corporate and Commercial Law.

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