According to the Institutes of Company Secretaries of India chapter 1 paragraph 1, a Company

is a corporate body and a legal person having status and personality distinct and separate from
the members constituting it.

Nkala and Nyapadi 1995 page 8-9 defines a company as a corporate with one or more persons
formed for a lawful purpose of carrying on business that has for its object the acquisition of
gain by that association, and which has been incorporated under the Companies Act or any
other law whose liability is limited by shares or by guarantee. In common law, a company is a
legal person or legal entity separate from, and capable of surviving beyond the lives of its
members.

According to Prof. Lindley, company is defined as, “An association of many persons who
contribute money or money’s worth to a common stock, and employ it in some common trade
or business (i.e., for a common purpose), and who share the profit or loss (as the case may be)
arising therefore.

A company is called body corporate because the persons composing it are made into one body
by incorporating it according to the law and clothing it with legal personality. The word
corporation is derived from the Latin word Corpus which means body and accordingly
corporation is a legal person created by a natural person other than natural birth and this is
why sometimes it is called artificial legal person. As a legal person a corporate is capable of
enjoying many rights and incurring many liabilities of a natural person.

An incorporated company owes its existence either to a Special Act of Parliament or to

company. In the legal sense, a company is an association of both natural and artificial persons
and is incorporated under the existing law of a country. Once a company is incorporated this
means that the company is now separate from its shareholders.

The general rule is that a company cannot buy it's own shares.

Characteristics of a company include:

Corporate Personality
By incorporation under Act, Chapter 23:31 the company is vested with a corporate personality
quite distinct from individuals who are its members. When a company is incorporated under
the Act it is vested with corporate personality so it redundant bears its own name, acts under
name, have a seal of its own and its assets are separate and distinct from those of its members.
It is a different person from members who compose it therefore it is capable of owning
property, incurring debts, borrowing money, having a bank account, employing people,
entering into contract, suing and being sued in the same manner as an individual. A shareholder
cannot be held liable for the acts of the company even if he holds virtually the entire share
capital. The company's liability are the legal responsibility of the company and the members
will not be liable for the company's debts.

The case of Salomon v. Salomon and Co. Ltd., (1897) A.C. 22

The one with a secured debenture is to be paid first. A creditor has to be paid first before
others.

Facts

Mr Salomon was a prosperous leather merchant and a boot manufacturer. He formed a limited
company consisting of himself, his wife, his daughter and his four sons as the shareholders, all
of whom subscribed to 1 share each so that the actual cash paid as capital was £7. Salomon
sold his business (which was perfectly solvent at that time), to the Company formed by him for
the sum of £38,782. The company’s nominal capital was £40,000 in £1 shares. In part payment
of the purchase money for the business sold to the company, debentures of the amount of
£10,000 secured by a floating charge on the company’s assets were issued to Salomon, who
also applied for and received an allotment of 20,000 £ 1 fully paid shares. The remaining
amount of £8,782 was paid to Salomon in cash. Salomon was the managing director and two of
his sons were other directors. However the company ran into difficulties and it ran into
liquidation. The total assets of the company amounted to £6050, its liabilities were £10,000
secured by debentures, £8,000 owing to unsecured trade creditors, who claimed the whole of
the company’s assets., £6,050, on the ground that, as the company was a mere ‘alias’ or agent
for Salomon, they were entitled to payment of their debts in priority to debentures. They
further pleaded that Salomon, as a principal beneficiary, was ultimately responsible for the
debts incurred by his agent or trustee on his behalf.

Ruling

Mr Salomon was paid first since he was a creditor with a secured debenture. It was held that
the company is a juristic person. The Court of Appeal, declaring the company to be a myth,
reasoned that Salomon had incorporated the company contrary to the true intent of the then
Companies Act, 1862, and that the latter had conducted the business as an agent of Salomon,
who should, therefore, be responsible for the debt incurred in the course of such agency.

Limited Liability

One of the advantages of doing business under the corporate form of legal entity is that the
liability of the members is limited. A company may be company limited by shares or a company
limited by guarantee. In company limited by shares, the liability of members is limited to the
unpaid value of the shares. In a company limited by guarantee the liability of members is
limited to such amount as the member may undertake to contribute to the assets of the
company in the event of its being wound up.

Perpetual Succession

An incorporated company never dies, except when it is wound up as per law. A company, being
a separate legal person is unaffected by death or departure of any member and it remains the
same entity, despite total change in the membership. Perpetual succession, means that the
membership of a company may keep changing from time to time, but that shall not affect its
continuity. A company is a stable form of business organization. Its life does not depend upon
the death, insolvency or retirement of any or all shareholders or directors. Law creates it and
law alone can dissolve it. Members may come and go but the company can go on for ever.
“During the war all the member of one private company , while in general meeting, were killed
by a bomb. But the company survived; not even a hydrogen bomb could have destroyed i”. The
company may be compared with a flowing river where the water keeps on changing
continuously, still the identity of the river remains the same. Thus, a company has a perpetual
existence, irrespective of changes in its membership.

Separate Property

As a company is a legal person distinct from its members, it is capable of owning, enjoying and
disposing of property in its own name. Although its capital and assets are contributed by its
shareholders, they are not the private and joint owners of its property. The company is the real
person in which all its property is vested and by which it is controlled, managed and disposed
of.

Transferability of Shares

In a public company, the shares are freely transferable. The right to transfer shares is a
statutory right and it cannot be taken away by a provision in the articles. However, the articles
shall prescribe the manner in which such transfer of shares will be made and it may also contain
bona fide and reasonable restrictions on the right of members to transfer their shares. But
absolute restrictions on the rights of members to transfer their shares shall be ultra vires.
However, in the case of a private company, the articles shall restrict the right of member to
transfer their shares in companies with its statutory definition. In order to make the right to
transfer shares more effective, the shareholder can apply to the Central Government in case of
refusal by the company to register a transfer of shares.

Common Seal

Though a company has an artificial personality, it acts through human beings, who are called as
directors. They act as agents to the company but not to its members. All the acts of the
company are authorized by its “common seal”. The “common seal” is the official signature of
the company. Any document bearing the common seal of the company will be legally binding
on the company, but a document not bearing the common seal of the company will not be
binding on the company.

Capacity to Sue and be Sued

A company being a corporate body, it can sue and be sued in its own name. To sue means to
institute legal proceeding against a person or to bring a suit in a court. All legal proceedings
against a company are to be instituted in its own name. In the same way a company can bring
action in the court of law against anyone in its own name.

Contractual Rights

A company being a legal entity different from its members, can enter into contracts for the
conduct of the business in its own name. A shareholder cannot enforce a contract made by his
company; he is neither a party to the contract, nor be entitled to the benefit derived from it, as
a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on
contracts made by his company. The distinction between a company and its members is not
confined to the rules of privity but permeates the whole law of contract.

Limitation of Action

A company cannot go beyond the power stated in its Memorandum of Association. The
Memorandum of Association of the company regulates the powers and fixes the objects of the
company and provides the edifice upon which the entire structure of the company rests. The
actions and objects of the company are limited within the scope of its Memorandum of
Association. In order to enable it to carry out its actions without such restrictions and
limitations in most cases, sufficient powers are granted in the Memorandum of Association. But
once the powers have been laid down, it cannot go beyond such powers unless the
Memorandum of Association, itself altered prior to doing so.

Termination of Existence

A company, being an artificial juridical person, does not die a natural death. It is created by law,
carries on its affairs according to law throughout its life and ultimately is effaced by law.
Generally, the existence of a company is terminated by means of winding up. However, to avoid
winding up, sometimes companies adopt strategies like reorganisation, reconstruction and
amalgamation.
However there are situations where the principle of corporate personality is ignored or pierced
or lifted which are:

Lifting of Corporate Personality under Statutory Law

In the Company and Other Entities Act Chapter 24:3131 provides a Personal Liability of a
member where the business of the company is carried on with no members. It states that:

If a company has no members and carries on business for more than six months without
members, any person who knowingly causes it to do so shall be liable, jointly and severally with
the company, for all debts incurred by it after the six months have elapsed. ( Section 83 (2) ).

Section 68 of the Company and Other Entities Act Chapter 24:31 provides personal liability
members, directors and other persons will be liable for Fraudulent, reckless or grossly
negligent conduct of business. The section specifically states that as below

Section 68(3) If it appears to a court that any business of a company or private business
corporation was or is being carried on—

(a)recklessly; or

(b)with gross negligence; or

(c)with intent to defraud any person or for any fraudulent purpose; the court may declare that
—

(d)any of the past or present directors of the company or any other persons who were
knowingly parties to the carrying on of the business in such manner or in such circumstances; or

(e)any person who was knowingly a party to the carrying on of business of the private business
corporation in such manner or in such circumstances;

(hereinafter called an “impugned person”) shall be personally responsible, without limitation of

liability, for all or any of the debts or other liabilities of the company or private business
corporation as the court may direct, and the court may give such further orders as it considers
proper for the purpose of giving effect to the declaration and enforcing the liability, including
an order under subsection (4).

Section 28 of the Company and Other Entities Act Chapter 24:31 provides a personal liability of
an officer for the Provisions in connection with use of names by registered business entities.
The section specifically states that:

Section 28(2) Every registered business entity—

(a)shall have its name engraved in legible characters on itsseal, if any; and

(b)shall have its name mentioned in legible charactersin all its business papers.

Section 28(4) Any officer or member of a registered business entity or any person on its behalf
who—

(a)uses or permits the use of a seal, purporting to be a seal of the entity, on which its name is
not engraved as required in subsection (2)(a); or

(b)issues or permits the issue of any business paper of the entity, or signs or endorses or
permits to be signed or endorsed on behalf of the entity any bill of exchange, promissory note,
cheque or order for money or goods on which the entity’s name is not mentioned as required in
subsection (2) (b);

shall be guilty of an offence and liable to a fine not exceeding level three and shall further be
personally liable to the holder of the bill of exchange, promissory note, cheque or order for
money or goods for the amount thereof, unless it is duly paid by the registered business entity
concerned.

In terms of Criminal Procedure and Evidence Act Section 385(3), if any offences has been
committed for which a corporate body may be liable for prosecution, any director, officer e.t.c
shall also be liable unless it can be shown he was not part to the offence.

In terms of the Income Tax Act Chapter 23:06 states that the commissioner of taxes is
empowered to disregard the corporate form and tax members individually.
The company's act provides for person's liability, for directors both civil and criminal for mis
statements in the prospectus.

Under Common law

Ever since the decision in Salomon v. Salomon & Co. Ltd., (1897) A.C. 22, normally Courts are
reluctant or at least very cautious to lift the principle of corporate personality to see the real
persons behind it. Nevertheless, Courts have found it necessary to disregard the separate
personality of a company in the following situations:

Fraud Situation

Where the corporate personality has been used for commission of fraud or improper conduct.
In such a situation, Courts have lifted the veil and looked at the realities of the situation.

Agency Construction Situation

These are situations when the court may be prepared to consider a company an agent of
another.

In the case of SMITH,STONE&KNIGHT V BURMINGHAM CORP, a holding company owned some

business premises but did not carry on business there. Its subsidiary company did. Birmingham
Corporation wanted to compulsorily acquire the land. The holding company demanded
compensation. The corporation argued that the holding company was not carrying on business
on the premises and therefore suffered no loss. As the subsidiary company, it was not entitled
to compensation because the land did not belong to it. (The corporations argument was clearly
that either way, none of the two companies could claim compensation! The court decided that
the holding company was entitled to compensation because even though it was not carrying on
business at the premises, subsidiary company was doing so as an agent.

Conflicts with Public Policy

The court can regard a company as an enemy where the majority shares are held by an enemy
company or by nationals of an enemy country, especially where the two countries are at war.

Abuse of Corporate Personality

Where it is found that a company has abused its corporate personality for an unjust and
inequitable purpose, the court would not hesitate to lift the corporate personality. Further, the
corporate personality could be lifted when acts of a corporation are allegedly opposed to
justice, convenience and interests of revenue or workmen or are against public interest.

Case: Gilford Motors Vs Horne Co Ltd (1933)

Where the company has been formed to avoid the legal liability or where there is an attempted
use of the corporate personality to mask the breach of a cabinet.

Facts

Horne was a former managing director of Gilford Motors Company Ltd. Subject to a covenant
which prevented him from soliciting Gilford Motors Company Ltd customers, he formed a
company by the name JHH Ltd and formed business similar to that of Gilford Motors Company
Ltd dealing with the Gilford Motors Company Ltd customers. Gilford Motors Company Ltd
applied for an interdict and restrained of the breach of the covenant.

Held

It was held that an interdict be granted against Hornes and his company. It was said that a
former director of a company who had bound himself by a restraint of a trade clause would not
escape it's operation by hiding behind a company formed as a mere sham for the purpose of
enabling him to commit the breach of his covenant.
Companies act 24:31

Nkala and Nyapadi 1995 p.8-9

Nanette Chadwick and Peter Volp1986, p.13

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