MOUNT KENYA UNIVERSITY MAISIBA M WYCLIFE BBM/2018/78755 BLW3103 COMPANY

LAW CAT ONE

Q. 01
a)The Concept of separate legal personality.
Separate Legal Personality (SLP).
This is the basic tenet on which company law is premised. Establishing the foundation of how a
company exists and functions, it is perceived as the most profound and steady rule of
corporate jurisprudence.
Case Law: Salomon v Salomon and co. ltd (1897).
Salomon transferred his business of boot making, initially run as a sole proprietorship, to a
company (Salomon Ltd.), incorporated with members comprising of himself and his family. The
price for such transfer was paid to Salomon by way of shares, and debentures having a floating
charge (security against debt) on the assets of the company. Later, when the company's business
failed and it went into liquidation, Salomon's right of recovery (secured through floating charge)
against the debentures stood prior to the claims of unsecured creditors, who would, thus, have
recovered nothing from the liquidation proceeds. To avoid such alleged unjust exclusion, the
liquidator, on behalf of the unsecured creditors, alleged that the company was sham, and was
essentially an agent of Salomon, therefore, Salomon being the principal, was personally liable for
its debt. The liquidator sought to overlook the separate personality of Salomon Ltd., distinct from
its member Salomon, so as to

make Salomon personally liable for the company's debt as if he continued to conduct the
business as a sole trader. ISSUE The case concerned claims of certain unsecured creditors in the
liquidation process of Salomon Ltd. A company in which Salomon was the majority shareholder,
and was sought to be made personally liable for the company's debt. Hence, the issue was
whether, regardless of the separate legal identity of a company, a shareholder could be held
liable for its debt, over and above the capital contribution, so as to expose such member to
unlimited personal liability. RULLING. 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. The
House of Lords, however, upon appeal, reversed the above ruling, and unanimously held that, as
the company was duly incorporated, it is an independent person with its rights and liabilities
appropriate to itself, and that "the motives of those who took part in the promotion of the
company are absolutely irrelevant in discussing what those rights and liabilities are". Thus, the
legal fiction of "corporate veil" between the company and its owners was firmly created by the
Salomon case.
Case laws where the ruling has been applied:
Commencing with the Salomon case, the rule of Separate legal personality (SLP) has been
followed as an uncompromising precedent in several subsequent cases, like the case of Macaura
v Northern Assurance Co., Lee v Lee's and Air Farming Limited
b) Cases and Application of the Doctrine of piercing of the corporate veil.
The doctrine is regarded as a curtain or shield between a company and its members. Notably,
similar to most legal principles, the overarching rule of separate legal entity (SLP) applies with
exceptions, where the courts may look through the veil to reach out to the insider members,
known as "lifting or piercing of the corporate veil". It is worthwhile here to refer to the case of
Adams v Cape Industries, which examined the common law grounds, primarily evolved through
the case law as an equitable remedy, namely; (a) Agency

(b) Fraud (c) Façade or sham (d) Group enterprise (e) Injustice or unfairness. The exception has
been invoked widely by English courts, including in the recent cases of Caterpillar Financial
Services (UK) Limited v Saenz Corp Limited, Beckett Investment Management Group v Hall, Stone
& Rolls v Moore Stephens, Needless to mention, the journey of English law in defining the
contours of the Separate Legal Entity (SLP) doctrine and carving out these exceptions has been
quite topsy-turvy. Moreover, veil piercing is now also rampant as a statutory exception. The legal
fiction of corporate veil, thus established, enunciates that a company has a legal personality
separate and independent from the identity of its shareholders. Hence, any rights, obligations or
liabilities of a company are discrete from those of its shareholders, where the latter are
responsible only to the extent of their capital contributions, known as "limited liability". This
corporate fiction was devised to enable groups of individuals to pursue an economic purpose as a
single unit, without exposure to risks or liabilities in one's personal capacity. Accordingly, a
company can own property, execute contracts, raise debt, make investments and assume other
rights and obligations, independent of its members. Moreover, as companies can then sue and
be sued on its own name, it facilitates legal course too. Lastly, the most striking consequence of
Separate Legal Entity (SLP) is that a company survives even after the death of its members.
Why it did not stand in the Salomon case;
The House of Lords unanimously held that, as the company was duly incorporated, it is an
independent person with its rights and liabilities appropriate to itself, and that "the motives of
those who took part in the promotion of the company are absolutely irrelevant in discussing
what those rights and liabilities are". Thus, the legal fiction of "corporate veil" between the
company and its owners was firmly created by the Salomon case.
Q(2)
The Doctrine of Ultra Vires.
Once a company is incorporated under the companies act it cannot do anything beyond the
powers given in the memorandum of association (AOA) and anything so done is ultra vires. In
order to overcome the obstacles imposed by the ultra vires doctrine experts have come up with
types of object clauses commonly adopted by promoters;
1.Inflated object clause;
Promoters are free to state any imaginable business but if the main objective collapses the rest
become ultra vires.
2.Independent object clause;
Following challenges in court where the doctrine of ultra vires was applied when the first
objective came to an end the others were said to be subsidiary.to avoid the cumbersome inflated
and restrictions of interpretation of inflated object clause experts came up with the independent
object clause: in this clause many businesses can be listed and at the end of the clause the
experts may say “each of the forgoing clauses shall be in a way, unless otherwise provided be
construed together as forming part of or being dependent upon or shall in no way construed
together with any other clause here in contained but shall stand as if it severally formed an
object clause of an independent company”
3.
Subjective object clause
;
Still the independent objective clause faced challenges where courts declared some of the
company’s ultra vires despite the fact they had been listed in the object clause. The experts
simply say the company is free in any business which in the opinion of the directors which the
company can advantageously fit in and in the end of it they simply say the company can engage
in any other business in addition to the one listed.
Mischief it was to prevent;
●
A company which has main objective which is a subsidiary cannot continue to peruse them after
the main objective has come to an end.
●
Because of the challenges companies faced because of the end or non-profitability of the main
objectives, promoters have learnt to exercise care when drafting the object clause since it’s not
easy to foresee from the onset course of business.
QUESTION THREE.
The Doctrine Of Indoor Management.
The doctrine ensures the safety of various stakeholders in the company in the transactions that
they undertake. It is also known as Turquand’s rule. The other principle that is commonly
referred to in this context is the principle of constructive notice.

The principle of constructive notice protects the company from frivolous claims by outsiders. The
third party cannot claim to not having been notified of the Company’s procedures or practices if
they are a party to the Memorandum of association (MOA) and the Articles of association (AOA).
The doctrine of constructive notice is limited to the external position of the company. According to
this doctrine, persons dealing with the company need not inquire whether internal proceedings
relating to the contract are followed correctly, once they are satisfied that the transaction is in
accordance with the memorandum and articles of association. The person entering into a
transaction with the company only needed to satisfy that his proposed transaction is not
inconsistent with the articles and memorandum of the company. He is not bound to see the
internal irregularities of the company and if there are any internal irregularities then the
company will be liable as the person has acted in the good faith and he did not know about the
internal arrangement of the company.
Case law where this doctrine was applied: I}Royal British Bank V. Turquand
The directors of the company borrowed some money from the plaintiff. The article of company
provides for the borrowing of money on bonds but there was a necessary condition that a
resolution should be passed in general meeting. In this case shareholders claim that as there was
no such resolution passed in a general meeting so, the company was not bound to pay the
money. It was held that the company is bound to pay back the loan. As directors could borrow
but subjected to the resolution, so the plaintiff had the right to infer that the necessary
resolution must have been passed. It was held that Turquand can sue the company on the
strength of the bond. As he was entitled to assume that the necessary resolution had been
passed. Lord Hatherly observed- “Outsiders are bound to know the external position of the
company, but are not bound to know its indoor management.”
Exceptions To The Doctrine of Indoor Management

.
I)Where the outsider had knowledge of irregularity– The rule will not apply if the person dealing
with the company has slight knowledge about the lack of authority of person who is acting on
behalf of the company in this situation the doctrine will not apply.

II)Forgery The rule does not apply where a person relies upon a document that turns out to be
forged since nothing can validate forgery. A company can never be held bound for forgeries
committed by its officers. III)Negligence-The doctrine of indoor management, in no way, rewards
those who behave negligently. Thus, where an officer of a company does something which shall
not ordinarily be within his authority, the person dealing with him must make proper enquiries
and satisfy him as to the officer’s authority. If he fails to make an enquiry, he is estopped from
relying in the rule. IV)Where the company’s articles of association (AOA, prescribe a special
resolution which had not been passed. V)The person suing the company is an insider such as a
Director of the company.