COMPANY AS A DISTINCT LEGAL PERSON

 

COMPANY AS A DISTINCT LEGAL PERSON

According to section 2(17) of the Companies Act 2017, incorporations are a result of registration under the company laws. To form a company it is a compulsory requirement to register that company. Section 9 also impose this obligation that an association, partnership or even an entity more than 20 number of member has to register itself as a company in order to carry on the business. The concept of incorporations by registration was introduced in 1844 and the doctrine of limited liability was initiated in 1855. In the case of Salomon v Salomon, the effect of incorporation and limited liability in giving a separate legal personality to the company was identified by the House of Lords.

The twin concepts of incorporation and limited liability attached to companies give the identity of a separate legal entity to the company. The company acquires two types of capacities that are the capacity to acquire rights and to have enforced them. The second is the capacity for the execution that enables it to meet obligations and duties. Just like a natural person a company has the following rights as a separate legal entity.

·         A company can own property

·         It can make a contract

·         It can be held liable for committing a tort

·         A company can sue for being a victim of tortuous behaviour

·         It can be held liable for committing a crime

·         It can sue and be sued

·         It can acquire nationality, domicile and has human rights claims

Concept of Limited Liability

Limited liability is a significant feature of a company that protects the shareholders from being entirely liable to the companies debts, yet they only become accountable to the extent of the amount of their share. Thus, an investor or a shareholder doesn’t become liable beyond the nominal amount of investment or share that is brought by the shareholder.

However, the limited liability is not always limited. There are some types of companies, such as an unlimited liability company the shareholder becomes liable to the whole debt of the company.  Section 98 even says that the liability of some of the directors can be unlimited. They are called contributors. Section 295 says that the contributors are liable to make further contributions during the winding up of the company, other than paying in addition to his liability.

Consequences of Separate Legal Personality of a Company

English law has divided the corporations into categories; corporate sole that includes positions in offices such as of Prime minister, President, king, and host of other officials. The second is the corporate aggregate that includes companies. It is in this sense that we speak of a corporation as a person and consider it a separate personality. In Islamic law, personality is called dhimmah. Giving a separate legal personality to companies under corporation is an ongoing debt. Some jurists called it unfamiliar to Islamic law and consider it violating the basic commercial principles of Islamic law. Yet, others say that anything which is not prohibited in Islam is permitted, and thus corporate personality should be operated under Islamic law.

·         A company is different from its Member

A company has is a separate legal person from its members in the eye of law. It has the ability of a sole trader to transfer his business into the registered company and shareholders can insulate themselves from the liabilities of the business. This point was figured out in the case Salomon v A Salomon & Co Ltd and the principle of separate legal personality is wholly applied after Salomon’s case.

Salomon v A Salomon & Co Ltd

The facts of the case are that Aron Salomon was carrying out a business as a leather merchant and boot manufacturer. He decided to form a limited company to purchase his company. He wished to get control over the conduct of his business thus he restricted the shareholders of the company to himself and to his family members. Aron and his two sons were appointed directors and every other seven members in the subscribes the memorandum for one each share. The business did not get profit and it wound up a few years later. The liquidators claimed that the companies business were in reality still in hands of Salomon and the company is merely designed to limit Salomon's liability. Therefore, Salomon should be ordered to indemnify the debts against the company and the payment of debentures should be postponed until the company’s other creditors are satisfied.

In the Trial Court, the judge held that though the company is registered as incorporation and it can’t be denied. The Court of Appeal gave the same decision. The House of Lords reversed the decision and held that Salomon is under no liability to the company and to the creditors because the company is a separate legal personality. Thereby his debentures were valid against the company.

·         A company can make a Valid Contract with one of Its members

This rule also confirms the separate personality of the members and the company. Section 205, 206, and 207 also approves that a valid contract can be formed between a company and a member. It is completely valid for a person to be in control of a company as a principal, shareholder, and sole director and at the same time as a servant employed by the company.

·         The Companies Property belongs to it, Not to the Members

 Being a separate legal person the company can have property and the property of the company is entirely a belonging of the company, not of its members. The shareholders, nor the creditors have an insurable interest in the assets of the company.

Macaura v Northern Assurance Co.

Macaura sold all the timber on his estate to Irish Canadian Sawmills Ltd. The company was held by Macaura and his nominees. Macura was also the unsecured creditor of the company. He brought an insurance policy in his own name covering the timber against the fire. 

On a claim against owing the insurance company, the court held that he stood on no legal relationship to the asset of the company.

·         Company’s Business is not the Business of the Member

A company’s business is not the business of the member even that member holds all the shares of the company.