CHAPTER THREE: The Legal Status of a Registered

Company

3.1Corporate personality

(a) According to Salomon vs Salomon the company is at law a

different person altogether from the subscribers to the memo, 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 a trustee for them.
(b) S. 15 (2) -The most important consequence of incorporation is that
the company acquires a corporate personality i.e. separate legal
status from those people who incorporate it (members).
(c) S. 21(1) the company acquires “the capacity of a natural person of
full capacity.”

Summary of corporate personality- Corporate personality is when upon

incorporation, a company assumes a legal personality distinct from its
members whereby the company becomes an artificial person with rights
and duties similar in many ways to those of a natural person. (Contrast
with corporate status and corporate democracy)

Some effects of incorporation

(a) Members of the company are not personally liable for the
company's debts as long as it is a going concern.

Naidoo vs. Madzi Import and Export and Chongwe [1985]

The plaintiff and the 2nd defendant formed the 1st defendant
company. The plaintiff and the 2nd defendant being directors and
shareholders. The 2nd defendant incurred some expenses in the
name of the company. The issue was whether or not the plaintiff
could recover those expenses from the 1st and the 2nd defendant.
Held: since the company is a distinct legal personality the expenses
could be recovered from it and not from the 2 nd defendant.
(Accounting principle of separate legal entity)

(b) The company’s property (assets) belongs to it and not its members
or creditors.

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 Macaura vs Northern Assurance Company Limited [1925]
The appellant owned a timber estate. He assigned it to a company
in return for the allotment by the company of fully paid up shares
to him. Later, he insured the timber in his own name against fire.
The timber was later destroyed by fire. He sought compensation
from the company. Held: the company was not obliged to
compensate him since he had no insurable interest in the timber
which belonged to the company. (Insuring property that does not
belong to you).

(c) Shareholders cannot validly pay money belonging to the company

into their personal accounts or draw money from its accounts for
their personal use. (Accounting principle of separate legal entity).
(d) A company is immortal, it does not come to an end coz of death of
one or all of its shareholders.
(e) A company is charged to tax on its own income and not as an
agent for its shareholders-Taxation Act.

3.2Lifting the corporate veil

a. The fundamental principle of English Company law was laid down in

the case of Salomon vs Salomon and Co. [1897] namely that a
company duly incorporated is a separate legal entity with its own
rights and obligations distinct from those of its shareholders.
Facts; Salomon incorporated his business as a limited company,
which consisted of seven members of his family and himself. He
held all the shares except seven, and also debentures to the value
of £10,000, representing a loan which the company borrowed from
him. The debentures entitled him to a first charge on the assets of
the company. Thus, when the company went into liquidation,
Salomon claimed that, as a debenture-holder, he was a ‘secured’
creditor. The other creditors claimed that Salomon and the company
were the same person, and that a man cannot owe himself money.
The House of Lords, however, held that a company, once
incorporated has a legal existence of its own, which was quite
independent of the existence of any individual member.

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 b. However there are instances where the law will depart from this
rule. The law goes behind the corporate veil (facade) to expose the
real actors.
c. There are two instances; 1- under an Act of Parliament 2-under
common law

(1) Lifting the corporate veil though Acts of Parliament

(a) Companies Act

1. One member carrying on the business of a company for 6
months, is liable jointly and severally with the company i.e.
where the number of members falls below two (S. 4 and 42).
2. If upon winding up, evidence is found that an officer of the
company contracted a debt knowing that the company would
be unable to pay it, he will be personally liable. (s. 337)
3. Where one is conducting company business with intent to
defraud creditors or anybody (S. 337)
4. The company must trade in its own name such that if an
officer signs a cheque or bill of exchange in his own name he
will be personally liable (S. 130)
5. Since a company cannot be imprisoned, any criminal liability
will fall on an individual officer of the company.

(b) Taxation Act

S. 119- where a company is liable to a penalty, every person who
at the time of the offence was an officer of the company will
also be liable to the same penalty.

(c) Trade Descriptions Act

Where a company is accused of an offence under this Act (such
as advertising at a lower price than at which the goods are
offered), and the offence is the result of default on the part of
one of the company’s employees, it is the employee who may be
convicted of the offence.

(2) Lifting the corporate veil under common law (by the courts)
Examples;
(i) Gilford Motor Company Limited vs Horne [1933] An
employee undertook not to solicit his employer’s customers
after the termination of his employment. Soon after

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 termination, he formed a company of which his wife and
another person were directors and shareholders. In violation of
the undertaking he sent out circulars to customers of his
former employer. Held: Company formed as a sham to get
around his obligation under the contract. An injunction was
granted against the circulars.
(ii) Where an individual controls a number of companies as
if they were his property, the court may ignore the distinction
between him and the companies, and hold him responsible for
their acts. Wellersteiner vs Moir [1974] The plaintiff was a
financier who controlled a number of business concerns. He
would keep the money at a bank, in which he was a chairman
and made most of the decisions himself. Held: although the
concerns were distinct legal entities, the court would lift the
veil of incorporation and treat them “as being creatures for
whose doings he should be responsible.”
(iii) The court may lift the veil of incorporation if it feels that
the company’s corporate personality is being used for illegal
purposes such as tax evasion and money laundering. Unit
Construction Company vs Bullock [1959] A holding company
in the UK created many subsidiaries in Kenya in order to
evade tax. Held: since the subsidiaries were managed in the
UK and were resident in that country, the parent company
would be liable to taxation in the UK.
(iv) In a group company situation, the court may lift the veil
by refusing to recognise that a holding company and its
subsidiaries are separate legal entities and holding them to be
a single economic unit; Smith, Stone and Knight vs
Birmingham Corporation.
(v) For security reasons such as during a period of war, the veil
of incorporation may be pierced to identify the true
nationality of a company; Daimler Company Limited vs
Continental Tyre and Rubber (GB) Limit

CHAPTER THREE: The Legal Status of a Registered Company

(A selection of non-factual past questions)
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1. What is meant by ‘lifting the corporate veil’? (5 marks- Dec 2004, June
2005 & Dec 2008)

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2. Though it is generally accepted that a limited company is a separate
legal entity distinct from its shareholders, there are instances when the
courts look behind the company as a legal person to discover who is
behind it. Outline four circumstances in which the courts may act in
the manner mentioned above. (8 marks- Dec 2001)
3. Mention three circumstances under which the veil of incorporation may
be lifted under the provisions of the Companies Act, 1984 (6 marks-
Dec 2004 & Dec 2008)
4. Discuss the legal principle expounded in the classic case of Salomon v
Salomon (5 marks- June 2005)
5. Discuss how the veil of incorporation may be lifted;
(a) Under statutory law (5 marks- June 2005)
(b) Under common law (5 marks- June 2005)
6. Define the following terms;
(c) Corporate personality (2 marks- Dec 2004 & Dec 2008)
(d) Corporate democracy (2 marks- Dec 2004 & Dec 2008)
(e) Corporate status (2 marks- Dec 2004 & Dec 2008)

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