When Can the Corporate Veil be Lifted to Hold Company Directors Accountable?
An image of courtroom with people of the level of directors in the doc
By Kizito Namulanda
In Kenya, the corporate veil often shields company directors from personal liability. Yet a growing body of law and regulatory guidance suggests that persistent mismanagement—especially the non-remittance of statutory deductions like PAYE, NHIF/SHIF, and NSSF—can lift out that shield. In severe cases, courts may pierce the veil to hold directors personally responsible, suspend or disqualify them from managing companies, or even pursue criminal charges.
This article examines what triggers veil-piercing, how it fits within the Companies Act, the Insolvency Act, and the Employment Act, and what workers can expect when the veil is lifted.
What does “lifting the corporate veil” mean?
Lifting the corporate veil also known as piercing the veil is a legal concept used when the separate legal personality of a company is ignored to hold individuals (directors, officers) personally liable for corporate actions or debts. In practice, it can result in directors losing the protection of the corporate shield and facing personal financial and criminal exposure.
The legal framework that can justify veil-piercing
Companies Act (2015) – Section 225 (unfitness): When there is persistent failure to pay statutory debts, this can be treated as “operational unfitness.” The Attorney General or Official Receiver may seek a disqualification order against directors, banning them from managing any company for up to 15 years.
Insolvency Act – Section 506 (Wrongful trading): If a company trades while insolvent or continues to incur unpayable debts, directors can be liable for personal contributions to the company’s assets under the court’s order.
Tax and payroll offences:
i. Income Tax Act (Cap 470): Failing to deduct or remit PAYE can render directors personally liable and subject to prosecution if done knowingly
ii. SHIF/NSSF Acts: non-remittance attracts interest and penalties and knowingly enabling the omission can trigger personal liability for company officers.
Penal Code and related enforcement: Deliberate misappropriation of deductions shown on pay slips, including SACCO or pension contributions, can constitute theft or fraud, leading to criminal action.
Regulatory powers against directors: KRA, SASRA, RBA, and SACCO regulatory bodies can issue notices and take enforcement actions, sometimes freezing assets or pursuing director liability.
Circumstances that could necessitate veil-piercing
1. Repeated, deliberate non-remittance of statutory deductions: Deductions on payslips but non-remittance to authorities or funds (KRA PAYE, NHIF/SHIF, NSSF, SACCOs, pension schemes).
2. Fraudulent or quasi-fraudulent behavior: Using employee deductions as operating cash flow, with records that indicate intent to deprive workers of the funds or misreporting to regulators.
3. Systemic neglect amounting to “unfitness”: A long-running pattern of arrears in salaries and severance alongside unremitted deductions, signaling mismanagement of funds and breach of trust.
4. Insolvency signals: A company that continues to operate despite insolvency threats and accrues unpayable debts, suggesting directors knowingly risk creditors.
How the veil-piercing process works in practice
The trigger points for veil piercing are usually centered around investigations by regulatory authorities such as Kenya Revenue Authority (KRA), National Social Security Fund (NSSF), Social Health Insurance Fund(SHIF), SASRA, Retirement Benefits Authority (RBA) and court actions stemming from unremitted funds or deceptive practices.
It could also come through legal mechanisms such as applications for director disqualification under the Companies Act (Section 225), claims of wrongful trading under the Insolvency Act (Section 506) and Criminal prosecutions against directors and officers for acts of omission or fraud (as per the Income Tax Act, SHIF/NSSF Acts, and Penal Code).
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The writer is the Editor of KOLLEA HUB and the Lead Consultant & Founder of LANDA STORYTELLING HUB for setting and shaping narratives.
