Reading list
- Part IV – Companies Act
- Chapter 5 (p.111) and Chapters 7 & 8 (pages 163 – 224) – Gower & Davies
- Case Law
A. Introduction
According to Gower QC, in Principles of Modern Company Law text;[1] “the fundamental attribute of corporate personality, from which indeed all the other consequences flow – is that the corporation is a legal entity distinct from its members. Hence it is capable of enjoying rights and of being subject to duties which are not the same as those enjoyed or borne by its members. In other words it has legal personality and is often described as an artificial person in contrast with a human being, a natural person.[2]
In Kuldeep Singh Sehra & Others vs Bullion Bank Ltd & 2 others[3] Mwera J, citing the case of Wallersteiner –Vs- Moir[4] to wit-
“It is a fundamental principle of our law that a company is a legal person, with its own corporate identity, separate and distinct from the Directors or Shareholders, and with its own property rights and interests to which alone it is entitled. If it is defrauded by a wrongdoer, the Company itself is the one person to sue for the damage. Such is the rule in Foss v Harbottle (1843)2 Hare 461.”
4.8. Limited Liability and
Lifting the Veil
In Shiawase Limited Floriello Davide v Pianesi
Gino[5] the
issue before the court was; whether commencement of an action on behalf of a
limited liability company should be by resolution. The court held that,
Commencement of an
action on behalf of a limited liability company must be authorized by a
resolution of the said company. To
redress any wrong done to the company or recover any moneys due to it, the
action should be brought by the company itself. Courts are reluctant to
interfere with the internal management of companies acting within their power,
and will interfere only where ultra vires
or fraudulent acts not amenable to rectification are complained of.
B.
The
Companies Act 2015
-
Part IV
of the Companies Act 2015
-
Companies
Capacity cannot be questioned on account of provision of its Constitution
(S.33) – No more challenges on ultra vires rule
-
Person
dealing with company in good faith not required to inquire into the powers of
the directors to bind the Company (S.34)
-
Limitations
though for contracts entered into by directors or a person connected with such
director (s.36). Contracts voidable
-
Liability
of directors though remains if they act beyond their powers
-
Contracts
made by Company (S.35) – ether by seal or on its behalf by a director or a
person authorized
-
Execution
of documents by Company (s.37) – a) by affixing seal witnessed by a director;
b) by signing by two signatories; c) by signing by a director in the presence
of witness who attests the signature
-
S.38 –
Company may have a Common Seal – not mandatory. If it does the provisions of
this section applies i.e name of the Company engraved on the seal in legible
Characters. Failure is an offence with a penalty of KES 500,000
-
Company
may authorize an attorney (s.40) and an
agent (s.42 (5)
-
S.44
Pre-incoporation Contracts – can be ratified otherwise the person making them
personally liable
-
S.46 –
Company must have a Registered Office. Any change must be notified to the
Registrar (s.47) and only takes effect after it has been registered by the Registrar.
New address take effect 14 days after the registration.
C. Characteristics
Of Company
-
On being incorporated, a company enjoys certain
advantages over other associations. Such advantages are termed as
characteristics of a company and are as follows:-
(i) Separate Legal
Entity
- The company is at law a
different person altogether from the subscribers to the memorandum of
association. The company’s money and property belong to the company
and not to the members or shareholders, similarly, the company’s debts are the
debts of the company and the shareholders cannot be compelled to pay
them. A company may contract with its members. This
principle of legal separate entity is clearly illustrated in the leading case
of Saloman v. Saloman& Co. Ltd.
Case Law: Saloman
vs. Saloman& Co. Ltd.
Saloman had a boot
business. He sold the business to a company named Saloman& Co.
Ltd which he formed. There were seven members –his wife, daughter
and four sons who took £1 share each and Saloman himself took 20,000
shares. The price paid by the company to Saloman was £30,000, but
instead of paying him cash, the company gave him 20,000 fully paid shares of £1
each and £10,000 debentures. Owing to strike to the boot business the
company could not service the interest on loans and an action was instituted to
enforce his security against the assets of the company. Thereafter,
at the instance of unsecured creditors of the company, a liquidation order was
made and a liquidator appointed. The assets of the company amounted
to £6,000 only. Debts amounted to £10,000 due to Saloman and secured
by debentures and a further £7,000 due to unsecured creditors. The
unsecured creditors claimed that as Saloman& Co. Ltd was really the same
person as Saloman, he could not owe money to himself and that they should be
paid their £7,000 first.
It was held by the House of Lords
that Saloman was entitled to £6,000 as the company was an entirely separate
person from Saloman. The unsecured creditors got nothing.
Lord Macnaghten observed in this
case that;
“When the memorandum is duly
signed and registered, the subscribers are a body corporate. The
company is at law a different person altogether from the subscribers to the
memorandum and though it may be that after incorporation the business is
precisely the same as it was before and the same persons are managers and the
same hands receive the profits, the company is not in law the agent of the
subscribers or trustee for them”.
Saloman’s case established beyond
doubt, that in law a registered company is an entity distinct from its members,
even if one person holds all the shares in the company. There is no
difference in principle between a company consisting of only two shareholders
and a company consisting of two hundred members. In each case, a
company is a separate legal entity.
Case Law: Lee vs. Lee’s Air Farming Co. Ltd
(1960)
Of the 3000 shares in a company,
L held 2,999. He voted himself as the managing director. L was
killed in an air crash while working for the company. His widow
claimed compensation for personal injuries to her husband while in the course
of this employment. It was argued that no compensation was due
because L and Lee’s Air Farming Ltd were the same person.
The Privy Council applied
Saloman’s case and said that L was a separate person from the company he formed
and compensation was payable.
Case Law: People’s Pleasure Park vs. Rohleder &
Southeast
The articles contained
prohibition that title to land should never pass to a colored
person. The land was sold to a corporation all the members of which
were Negroes. It was held that the corporation was distinct from its
members and that the transfer was valid.
Case Law: A.L Underwood Ltd vs. Bank of Liverpool
Mr. Underwood had carried on
business as an engineering and machinery merchant. He converted the
business into a limited company and allotted one share to his wife.
Underwood as the sole director
received 45 cheques of the aggregated value of £8,502 drawn in favor of the
company. He endorsed them “ALU Ltd. ALU sole director”
and paid them into his personal account with the bank of Liverpool instead of
paying them into the company’s account with another bank. The Bank
of Liverpool, the defendants, without inquiring whether the company had a
separate banking account collected the cheques and credited Underwood with the
proceeds and honouredcheques drawn by him against them to pay his private
debts.
The court was of the opinion that
when doing what they had done, the Bank of Liverpool had treated Mr. Underwood
as being identical with the company by virtue of his peculiar position as the
beneficial owner of all the company’s shares and its sole director.
Consequently, the bank had
overlooked the materiality of the cheques being drawn in the company’s favor
and not Underwood’s favor.
In an action for conversion
brought by the company on behalf of a creditor to whom debentures had been
issued by the company it was held that the Bank of Liverpool was liable and
that it was precluded upon the following grounds from arguing that Underwood,
when paying the cheques into his own account, was acting within the scope of
his apparent authority as agent of the company:
(a) The
act of an agent paying his principal’s cheque in his own account was so unusual
as to put them on inquiry and they ought to have inquired whether the company
had a separate bank account and if it had why the cheques were not paid into
that account. The banks failure to make an inquiry amounted to
negligence.
(b) Underwood
when paying the cheques did not purport to act as the company’s agent but as
being himself the company and the bank so treated him.
In the course of his judgment,
Atkins L. J said:-
“The directors, whether
collectively or singly, do not have actual authority to steal the company’s
goods. Although he acted in capacity of a director he is a different
person from the company.”
Case Law: Macaura vs. Northern Assurance Co.
Macaura, who owned an estate,
sold the whole of the timber on the estate to a company in consideration of the
allotment to him of 42,000 fully paid £1 shares. All the company’s
shares were held by him and his nominees, and he was also unsecured creditor of
the company for an amount of £19,000. Subsequent to the sale, he
effected insurance policies in his own name with the Northern Assurance company
covering timber against fire. Two weeks after, the policies were
effected, almost all the timber was destroyed in a fire. A claim
brought by him on the policies was dismissed by the House of Lords on the ground
that he had no insurable interest in the timber.
In the course of his judgment
Lord Summer said;-
“It is clear that the appellant
had no insurable interest in the timber described. It was not his
rather it belonged to the company. He owned almost all the shares in
the company and the company owed him a good deal of money, but neither as a
creditor nor as shareholder could he insure the company’s assets. The debt was
not exposed to fire, nor was the shares. His relation was to the company, not
to its goods”.
In this case, it is clear that
the company is very different from the subscribers and its assets cannot be
vested to the members. A member does not have interest in the property of the
company and should not be regarded as an agent or as a trustee.
Macaura owned almost all the
shares of the company, but the property of the company was not his and could
not insure it in his name.
(2) Perpetual
Succession
According to concise Oxford
Dictionary, ‘perpetual’ means inter alia, “applicable, valid for ever or for
indefinite time” while ‘succession’ means a following in order.
Unlike a natural person, a
company never dies. Its existence is not affected by death, lunacy
and insolvency of its members. A company is an immortal
person. Members may come and go, but the company continues in its
operation unless it is wound up. The existence of the company is not
affected by the death of all the shareholders. Thus where all the
members of a company were killed say by a bomb the company was deemed to
survive.
The perpetual succession occurs
because a company and its members are separate persons and so the company’s
legal life is not terminated by a member’s death.
(3) Limited
liability
The fact that a registered
company is a different person altogether from the subscribers to its memorandum
means that the company’s debts are not the debts of its members. If
a company has borrowed money, it and it alone is under an obligation to repay
the loan. The members are under no such obligation and cannot be
asked to repay the loan. In case a company is unable to pay its
debts the creditors may petition the High court for an order to wind it
up. During the winding up the members will be called upon to pay the
amount, if any, which is unpaid on the shares they hold incase of a company
limited by shares or the amount prescribed by the memorandum incase of a
company limited by guarantee.
A point to note is that a
company’s creditor cannot institute legal proceedings against the company’s
member inorder to recover from him what he owes the
company. This is because the member does not, legally, become
his debtor merely because the company is his debtor.
However see the Trust Bank case
(4) Common
Seal
As an artificial person it cannot
sign its name on the contract. So it functions with the help of a
seal. Common seal is used as a substitute for its
signature. Every company must have a seal with its name engraved on
it. Anything done under an agreement between the company and the
third party requires recognition of the company in the form of an official
seal.
(5) Capacity
to sue and be sued
Because a company is at law a
different person altogether from its members it follows that a wrong to, or by,
the company does not legally constitute a wrong to, or by, the company’s
members. Consequently;-
(a) A
member cannot institute legal proceedings to redress a wrong to the
company. The company as the injured party is generally speaking, the
proper plaintiff.
(b) A member
cannot be sued to redress a wrong by the company. This is
illustrated by Saloman v Saloman Co. Ltd
in which it was held that Saloman was not liable for the company’s failure to
repay the loans as agreed with its creditors and should not therefore have been
sued to recover them.
(6) Transferability
of shares
The shares of a company are
freely transferable and can be sold or purchased in the share
market. The shares or other interest of any member shall be movable
property transferable in the manner provided for in the articles of the company.
D. Lifting
the Corporate Veil
The general rule is that a
company is a legal person and is distinct from its members. The principle
is regarded as a curtain, a veil, or a shield between the company and its
members, thus protecting the latter from the liability of the
former. The veil is impassable as an iron curtain. But
when the notion of legal entity is used to defeat public convenience, justify
wrong, protect fraud or defend crime the law will regard the company as an
association of persons. In these cases the law disregards the
corporate entity and pays regards to the economic realities behind the legal
façade. The court may look behind the artificial person- the company and
take account of the personalities of natural persons- the cooperators.
These cases are exceptions to the
principle in Saloman v. Saloman& Co.
Ltd are two fold:
(1) Lifting by courts
(2) Lifting by
statutes
(1) Lifting
by courts
Courts while executing their
inherent jurisdiction to do justice and fairness may lift a company’s veil so
as to meet the ends of justice. The court may lift the veil because
of the following reasons:-
(i) Determination
of character
A company may assume an enemy
character when persons in de facto
control of its affairs are residents of an enemy country. In such cases, the
court may, in its discretion, examine the character of persons in real control
of the company, disregard the corporate fiction and declare the company to be
an enemy company.
Case Law: Daimler Co Ltd vs. Continental Tyre&
Rubber Co. Ltd (1916)
A company was incorporated in
England with a capital of £25,000 in £1 shares for the purpose of selling in
England tyres made in Germany by a German company, which held the bulk of
shares in the English company. The holders of the remaining shares
(except one) and all the directors were Germans resident in
Germany. The one share was registered in the name of the secretary,
who was born in Germany, but resided in England and had become a naturalized
British subject. After the outbreak of the war between England and
Germany, an action was commenced in the name of the English company on the
instructions of the secretary, for a payment of trade debt. One of
the defenses was that the company was an alien company and that payment of the
debt would be trading with the enemy.
In his judgment, Lord Parker
stated:
“My Lords, the truth is that
considerations which govern civil liability and rights of property in time of
peace differ radically from those which govern enemy character in time of
war. The law on the subject may be summarized in the following
propositions:
(a) A
company incorporated in the UK is a legal entity, a creation of law with the
status and capacity which the law confers. It is not a natural
person with mind or conscience.
(b) Such
a company can only act through agents properly authorized and as long as it is
carrying on business in this country through agents so authorized and residing
in this country, it is prima facie to be regarded as a friend.
(c) Such
a company may, however, assume an enemy character. This will be the
case if its agents or the persons in defacto
control of its affairs are resident in an enemy country or taking instructions
from or acting under the control of enemies.
(d) The
character of individual shareholders cannot itself affect the character of the
company in times of peace. The enemy character of individual
shareholders and their conduct may however, be very material on the question of
whether the company’s agents in defacto
control of its affairs are infact adhering to, taking instructions from or
acting under the control of enemies. This will vary with the number
of shareholders who are enemies and the value of their
holdings. Given in the case the fact that the secretary held one
share only out of 25,000 shares and was the only shareholder who was not an
enemy might well suggest that he was acting under the control of, taking his
instructions from, or adhering to the enemies.
(ii) Prevention
of fraud and improper conduct
The court will lift the veil
where the device of incorporation is used for some illegal or improper
purpose. The courts have intervened on numerous occasions and lifted
the veil inorder to circumvent a fraudulent or improper design by a bunch of
scheming promoters or shareholders.
Case Law: Jones vs. Lipman
Lipman agreed to sell freehold
land with registered title to the plaintiff (Jones) for £5,250. Pending
completion he sold and transferred the land to the defendant company (having a
capital £100, which he acquired and of which he and a clerk were sole
shareholders and directors), for £3000 of which 1,564 was borrowed by the
defendant company from a bank and the rest owing to him.
In an action by the plaintiff for
specific performance, it was held that, the defendant company was a cloak for
Lipman.
The Lord Lawrence in his judgment
stated that the defendant company is the creature of Lipman, a device and a
sham, a mask which he holds before his face in an attempt to avoid recognition
by the eye of equity. The proper order to make is an order on both
the defendants specifically to perform the agreement between the plaintiffs and
Lipman.
(iii) Where the company is a sham
The court also lifts the veil
where a company is a mere cloak or a sham. The following case illustrates the
point:
Case: Gilford Motor Co. v. Horne [1933] Ch. 935
Here the Defendant was a former
employee of the plaintiff company and had covenanted not to solicit the
plaintiff’s customers. He formed a company to run a competing business. The company did the solicitation. The defendant argued that he had not breached
his agreement with the plaintiffs because the solicitation was undertaken by a
company which was a separate legal entity from him.
The court held that the
defendant’s company was a mere cloak or sham and that it was the defendant
himself through this device who was soliciting the plaintiff’s customers. An injunction was granted against the both
the defendant and the company not to solicit the plaintiff’s customers.
(iv) Where the company is acting as the agent of the shareholders
One of the ratio decidendi in Saloman’s case was that “the company is not in
law an agent of the subscribers. Under the ordinary rules of law, a
parent company and a subsidiary company even 100% subsidiary company are
distinct legal entities, and in the absence of an agency contract between the
two companies, one cannot be said to be the agent of the other.
If a court held that a company
acted in particular instance as an agent of its holding company the veil of
incorporation would have been lifted.
Case Law: Firestone Tyre& Rubber vs. Llewellyn
An American company formed a
wholly-owned subsidiary company in England to manufacture and sell its brand of
tyres in Europe. The distributors sent their orders to the
subsidiary direct and the orders were met without any consultation with the
American company. The subsidiary received the money for the tyres
sold to the distributors and after deducting its manufacturing expenses plus 5
percent, it forwarded the balance of the money to the American
company. All the directors resided in England except one who was the
president of American company and they managed the subsidiaries affairs free
from day-to-day control by the American company.
It was held that the American
company was carrying on business in England through its English subsidiary
‘acting as its agent’ and it was consequently liable to pay UK tax.
(iv) Protection
of Revenue
The courts may disregard the
corporate entity of a company where it is used for tax evasion or to circumvent
tax obligation. Further, where it is desired to establish for tax
purposes in what country a company is resident the court will lift the veil and
find out where the control management is and that determines the residential
status.
(2) Lifting
Under the Provisions of the Companies Act
(i) Membership fallen below statutory minimum
(ii) Non-publication
of a Company’s Name (Section 38)
(iii) Group Accounts
(iv) Investigation of company’s
affairs
(v) Investigation of
company’s membership
(vi) Takeover bids
(vii) Fraudulent
trading
E. PRE-INCORPORATION
CONTRACTS
That when the company is
registered, it is not bound by pre-incorporation contracts.
In a Case Law, it was stated that
a solicitor prepared the memorandum and articles of association and paid all
the necessary registration fees on the instructions of persons who later became
directors. He claimed his fees and expenses on the liquidation of
the company. The court of appeal held that the company was not
liable to pay the solicitor cost, though it had taken the benefit of its work.
(ii) That
the company when registered cannot ratify the agreement. The company
was not a principal with contractual capacity at the time when the contract was
made. A contract can be ratified only when it is made by an agent
for a principal who is in existence and who is competent to contract at the
time when the contract is made.
Case Law: Natal Land Co. Ltd vs. Pauline Colliery Syndicate Ltd (1904)
N company agreed with Mrs. Carrey
an agent of a syndicate before its incorporation that N company would grant a
mining lease to the syndicate. The syndicate was incorporated as
Pauline Colliery. Pauline Company discovered coal whereupon Natal
Land Co. Ltd refused to grant the lease.
It was held that there was no
binding contract between Natal Land Co. Ltd and Pauline Company as the latter
was not in existence when the contract was signed.
If the company were allowed to
ratify the contract it would mean that it contracted on the date the contract
was formed. This in effect would mean that the company contracted
before it was formed. If the company wishes to revive the abortive
contract it must make a fresh offer and if the offer is accepted by the other
party, a contract will come into existence from the moment of acceptance.
(iii) That
if the agent undertook any liability under the agreement he would be personally
liable notwithstanding that he is described in the agreement as an agent and
that the company may have attempted to ratify the agreement.
Case Law: Kelner vs. Baxter (1866)
An agreement was made between
K& B. B was acting on behalf of the proposed hotel
company. Wine supplied under the contract was used by the company
which had “ratified” the agreement after incorporation. The company
went into liquidation before paying the debt.
It was held that B was personally
liable and no ratification could release him from his liability.
The promoters of a company,
before its incorporation entered into an agreement with P to buy a plot of land
on behalf of the company. After incorporation the company refused to
buy the said land. Has P any remedy either against the promoter or
against the company?
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