COMPANY PROMOTION

LESSON 2

Definitions of a promoter
Promotion is conducted by persons who come up with the idea to form a company.
They are legally referred to as promoters.
It has been observed that a promoter is a person who carries up with the idea of
enterprise and participates in transforming the idea into a company.
He is said to be the person who prepares the documentations, registers the co. and
meets its preliminary expenses.
A promoter is any person who has taken some part in bringing a company into
existence or in procuring persons to join it as soon as it is technically formed.
The question as to who a promoter is one of fact and varies from case to case. In
the words of Bowen L.J. In Whaley bridge Calico printing Co Ltd V Green:
“The term promoter is a term not of law but of business it usefully sums up in a
single word a number of business operations familiar to the commercial world by
which a company is generally brought into existence. Although company law
recognizes the role played by a promoter the term still remains ill-defined and so is
the promoter’s relationships with the company in formation. He is therefore
described as an illegitimate child of the law; actively known but formally ignored.”
The legal position of a promoter
A promoter is not an agent of the company in formation as it does not legally exist.
This is because at common law, a person cannot be an agent for a non-existing
principal as it was held in Kelner V Baxter.
A promoter is also not a trustee of the company in formation as the beneficiary
does not exist. This was so held in Omnium Electric Palaces Ltd V Baines.

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 Promoters thus stand in a fiduciary position with regard to the
company in f ormation. In the words of Lord Cairns in Erlanger V
Sombrero propahte Co Ltd (The Sombrero case):
“They stand in my opinion, undoubtedly in a fiduciary position [as] they have on
their hands the creation and molding of the company. This is an equitable
relationship based on trust confidence and good faith; it imposes upon the
promoters certain equitable or fiduciary obligations”
Duties and obligations of promoters
Promoter’s duties fall into 2 broad categories; fiduciary and common law
Fiduciary duties
a. Duty to act bonafide: Promoters are bound to act in good faith in what they
consider to be the best interest of the company and all actions must be
guided by the principles of utmost good faith and fairness.
b. Proper accounting: Promoters are bound to explain the application of monies
or assets which come to their hands from the date they become promoters.
The account must be complete and honest.
c. Disclosure: As fiduciaries, promoters are bound to disclose personal interest
in transactions to avoid conflict of interest. Any secret profit made must be
disclosed failing which the promoter is liable to account for the same and the
contract may be rescinded by the company. Such disclosure may be made to
an independent board of directors or to all members in the prospectus.
In the Sombrero Case, persons who were in the process of forming a
company bought a lease in the West Indies for £55,000 so as to mine
phosphate deposits. They sold the lease to the company for £110,000 a fact
that they did not disclose. The facts came to light 8 months later and all the
directors were removed from office. The company sought to rescind the
contract for the non-disclosure and it was held that it was entitled to do so.

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 It was so held in Gluckstein V Baines (1900) where the plaintiff and 4
others bought certain premises for £140,000 and sold it to a company they
were forming for £180,000. The company had no independent board of
directors. Although the prospectus disclosed the £40,000 profit, it did not
disclose a further £20,000 the promoters had made on the premises. In
liquidation, the liquidator sought to recover £6,341 from Gluckstein as his
share of the secret profit. It was held that he was liable to account for the
non-disclosure.
Common law or General Duties

a. Determine and settle the company name.

b. To request or cause the registration of a company.

c. To prepare or cause the preparation of the constitutive documents.
d. To meet the preliminary expenses.
e. To secure the services of directors.
f. To prepare the prospectus if necessary.
g. To ensure that the company has an independent BOD
h. To acquire assets for use by the company.
i. To enter into business contracts on behalf of the company.
Remuneration of promoters
A promoter is neither entitled to remuneration for incorporating the company nor is
he entitled to recover the expenses incurred.
This is because there is no contractual relationship between the promoter and the
company.
Such a contract cannot exist at the company has no legal existence or capacity to
contract.

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Promoters may be rewarded/ remuneration in other ways as follows:

The following are the usual ways of promoters receiving remuneration:

a. A promoter can sell overvalued assets to the company in formation in return
for a profit upon disclosing the fact to the company.
b. By taking fully or partly paid shares or debentures.
c. By taking a commission for selling shares
d. Promoters may be afforded the opportunity to take up extra shares at par
value after the market value has risen.
e. Traditionally, promoters have been rewarded by being offered either
deferred, founders or management shares.
f. Promoters may also be appointed as the initial directors of the company
PRE-INCORPORATION CONTRACTS/PRELIMINARY CONTRACTS
The promoter is obligated to bring the company in the legal existence and to ensure
its successful running, and in order to accomplish his obligation he may enter into
some contract on behalf of prospective company.
These types of contract are called ‘Pre-incorporation Contract'. In this type of
contract, the promoter furnishes the contract with interested person; and it would
be bilateral contract between them. But the remarkable part of this contract is that,
this contract helps the perspective company, who is not a party to the contract.
Rules governing pre-incorporation contracts
1. Before incorporation, a company has no capacity to contract as held in
Kelner V Baxter this is because a company has no legal existence
2. At common law, a person who purports to contract as an agent where he has
no principal existing at that particular time is personally liable on the
contract.

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 This was so held in Kelner V Baxter where 3 persons who were forming a
company ordered a large quantity of wine from plaintiff and signed the
contract as follows: “On behalf of Gravesend Royal Alexander Hotel Ltd”
The wine was supplied and consumed by the hotel business which
subsequently collapsed. The plaintiff sued the promoters in question and the
issue was who the contracting parties were. It was held that even though the
defendants had contracted as agents, they had no principal and were thus
personally liable on the contract. The Court was of the considered view that
it was necessary to hold the defendants liable to give effect of the contract
by stating:
“Where a contract is signed by one who professes to be signing as an agent,
but who has no principal existing at the time and the contract would be
altogether inoperative unless binding upon the one who signed it, he is
bound thereby and a stranger cannot, by a subsequent notification, relieve
him from such responsibility”
3. At common law a contract purportedly entered into by a nonexistent person
is void. This is because for a contract to come into existence there must be at
least two parties.
In Newborne V Sensoid (GB) Ltd, the plaintiff who was in the process of
forming a company contracted to supply the defendant company with a large
quantity of ham. He signed the contract as follows:
“Leopold Newborne London Ltd
Leopold Newborne, Director”.
Due to a drop in demand for ham, the company did not wish the same
supplied and Newborne sued. It was held that the purported contract was
void as one of the parties did not exist. In the words of Lord Goddard:
“This purports to be contract by the company; it doesn’t purport to be a
contract by Mr. Newborn. He does not purport to be selling his goods. The

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 only person who had any contract here was the company and Mr. Newborne
signature merely confirmed the company’s signature.”
4. At common law, a pre-incorporation contract cannot be ratified by the
company after incorporation as the company did not exist when the contract
was entered into. It was so held in Price V Kelsal (1959).
In Natal Land Co. Ltd V Pauline Colliery Syndicate where the respondent
company applied for specific performance of a contract entered into before
its incorporation, it was held that the contract was unenforceable as it was
incapable of being ratified by the company.
5. At common law, the mere adoption or confirmation by directors of a
contract entered into before incorporation creates no relationship whatsoever
between the company and the party. It was so held in North Sydney
Investments and Another V Higgins and Another.
6. At common law, a pre-incorporation contract is enforceable by or against the
company if after incorporation the company has entered into a new contract
similar to the previous agreement. It was so held in Howard V Patent Ivory
Manufacturing Co Ltd.
The new contract by the company may be express or implied by the conduct
of the company after incorporation.
Liability of promoters for pre-incorporation contracts
A company's promoter is liable on all contracts to which they are deemed to be a
party. This means they may also be entitled to enforce such contracts against the
other party and so they could transfer the right to enforce the contract to the
company .from the acts of the company when incorporated.”

Ways of avoiding liability as a promoter for pre-incorporation contracts

There are various other ways for promoters to avoid liability for a pre-
incorporation contract.
(a) The contract remains as a draft (so not binding) until the company is formed.
The promoters are the directors, and the company has the power to enter the
contract. Once the company is formed, the directors take office and the company
enters into the contract.
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(b) If the contract has to be finalized before incorporation, it should contain a
clause that the personal liability of promoters is to cease if the company, when
formed, enters a new contract on identical terms. This is known as novation.
(c) A common way to avoid the problem concerning pre-incorporation contracts is
to buy a company 'off the shelf'. Even if a person contracts on behalf of the new
company before it is bought, the company should be able to ratify the contract
since it existed 'on the shelf' at the time the contract was made.
Remedies against promoters for breach of duty

The company or a third party may pursue any of the following remedies against the
promoters where appropriate for breach
i. Recession.
The company or third party who has dealt with a promoter in breach of his
fiduciary obligations may rescind the contract in question.
The essence of the remedy is to restore the parties to the position they were before
the contract.
Its grant or refusal is dictated by the principles of equity. The remedy is
unavailable where.

 The party entitled to it has slept on its rights for too long.

 The party entitled to it has expressly or impliedly affirmed or accepted

the contract.

 Third party rights have arisen on the contract.

 Restitutio in integrum is not possible.
In the Samborero case, it was held that the company was entitled to rescind the
contract for non-disclosure by the promoters.
Recovery of profit.
The company is entitled to recover any secret profit made by a promoter in his
promotional activities without disclosure.

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The same is recoverable under an action for money had and received as held in
Gluckstein V Barnes (1900) where Gluckstein was ordred to account for £6,341
which was a secret profit he had made as a promoter.
ii. Damages.
The company has an action in damages against a promoter for breach of duty
which is sustainable notwithstanding the absence of fraud. This action is an
alternative to an account.
In Re Leeds and Hanley Theater of Varieties Ltd, where a promoter had made a
secret profit of £12,000 and the company sued, the Court of appeal awarded the
same as damages.
Compensation
A third party who has suffered loss or damage by reason of subscribing for shares
or debentures of a company on the faith of a prospectus containing any untrue
statement is entitled to compensation for loss or damage by among others, every
person who was a promoter of the company.
iii. Public examination.
Under the Companies Act, if after the winding up order is made, the official
receiver makes a report to the Court to the effect that fraud has been committed in
the promotion or management of the company, the Court may, after examination of
the reports, appoint a date in which the promoters or any other persons involved
will be examined in Court on the matters relating to the promotion or management
of the company. The examination is under oath. The Court has jurisdiction to
assess the damages payable by any person found to have acted fraudulently.
CERTIFICATE OF INCORPORATION
If the constitutive documents are correctly prepared in accordance with the
provisions of the Companies Act, the Registrar shall register the company and
allocate to it a unique identifying number and is registered, the registrar grants a
certificate of incorporation and the company is formed from the date of
incorporation written in the certificate. The original copy of the certificate will be
given to the promoters and a copy remains in the company’s file.
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Content of a certificate of incorporation
 Name of the company
 Identifying number
 Date of incorporation
 The registrar signature
 Registrar’s seal

Circumstances When Certificate of Incorporation Can Be Withdrawn

Even though the certificate is conclusive for the purpose of incorporation, it does
not make an illegal object a legal one. For this reason, there are a number of cases
where the certificate of incorporation though duly issued had been withdrawn. It
can happen in the following situations:
i) Where it is discovered after the certificate of incorporation has been issued
by the registrar, that the company was formed with blasphemous objectives.
ii) In cases where it is discovered later that the objects of the company are
immoral, the certificate can be withdrawn. The registrar of companies
cancelled a company’s name which was Hooker ltd.
iii) Where the entity that was registered as a company is not a company in
nature
iv) Where the company to which the certificate has been issued turns out to be
an enemy of the state i.e. a company which belongs to or whose members
belong to a country that is at war with Kenya.

Effects of Registration
When a company is eventually registered and the certificate of incorporation is
issued it becomes a legal person
S.19 of the Companies Act provides that "from the date of incorporation mentioned
in the certificate of incorporation the subscribers to the memorandum of
association... shall be a body corporate by the name contained in the
memorandum".
The date mentioned (i.e. written) in the certificate of incorporation is the date from
which the company's legal existence commences.

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The company's registration constitutes it "a body corporate". It becomes "a legal
person", whose name is the name chosen for it by its promoters and written in its
memorandum of association. The certificate of incorporation may therefore be
regarded as the company's birth certificate and the date written therein as the
company's birthday.

As legal person, the company becomes separate and distinct from its members. It
exists as a person and does all its things as any other legal person.
The idea that upon incorporation a company becomes a legal person was first laid
down in the case of Salomon vs. Salomon & Co. Ltd (1897)

Consequences of Incorporation /Characteristics of Company

1) Separate legal entity (independent corporate existence,): The Companies
Act provides for a separate legal existence of a company from its
shareholders. From the date of incorporation as mentioned in the certificate a
body corporate by the name contained in the MOA is formed. Such a body
corporate is capable of having perpetual succession, power to hold land, has
a common seal with liabilities of its members ltd as per the provision of the
Act.
A company is in law a distinct legal person existing independently of its
members. By incorporation therefore a company is vested with a corporate
person which is distinct and separate from the members who compose it.
In Salomon vs. Salomon & Co. Ltd (1897)
The company is at law a different person altogether from the subscriber of
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.
2) Limited liability: The fact that a registered company is a different person
altogether from the subscribers to its memorandum and its other members
means that the company's debts are not the debts of its members. If the
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, or
a creditor, may petition the High Court for an order to wind it up. During the

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 winding up the members will be called upon to pay the amount which is
unpaid on the shares they hold, if any, in the case of a company limited by
shares, or the amount prescribed by the memorandum, in the case of a
company limited by guarantee.
3) Perpetual succession: The term "Perpetual" means, among other things
"applicable, valid forever or for indefinite time".
A company’s existence may be terminated only by the legal process of
dissolution. The death or bankruptcy or retirement of a member does not
affect the co’s corporate existence. Its life is independent of the life of its
members. The company continues its operations so long as it fulfills the
requirements of the law under which it has been formed .
4) Owning of Property: The property of the company is not owned by the
members; directors or shareholders collectively. Being a legal person, a
company is capable of owning, enjoying and disposing of property in its
own name. Members have no direct propriety rights to the company’s
property. They don’t even have an insurable interest to the company’s
property.
This was explained in Macaura V. Northern Assurance Co. Ltd
Macaura got insurance policies - but in his own name, not the company's -
with Northern Assurance covering for fire. Two weeks later, there was a fire.
Northern Assurance refused to pay up because the timber was owned by the
company, and that because the company was a separate legal entity, it was
not required to pay Mr Macaura any money.
5) Capacity to sue and being sued: A company as a legal person can be sued
under its own name and not the shareholders’. Therefore, in suits by the
company, the company is the proper plaintiff and where the company is
sued, it is the proper defendant.
A member or members cannot institute legal proceedings to redress a wrong
to the company. The company as the injured party is, generally speaking, the
proper plaintiff. This is illustrated by the facts of, and the decision in, Foss v
Harbottle.
A member cannot be sued to redress a wrong by the company. This is
illustrated by Salomon v Salomon& Co Ltd in which it was held that

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 Salomon was not liable for the company's debts and should not therefore
have been sued to recover them.
6) Contractual Capacity: A company has full contractual capacity, and only
the company can enforce its contracts. The company’s ability to contract is
however subject to its MOA. Any transaction that is beyond its objectives or
purpose is ultra vires and therefore void.
7) Common seal: A company being an artificial person cannot sign
documents. The law therefore has provided for the use of a common seal,
with the name of company engraved on it, as a substitute for its signatures.
However, a company is not obliged to have one) and provides for its use for
the authentication of documents.
8) Transferability of shares: Members of public limited company are free to
transfer the shares held by them to anybody. Shares can be sold and
purchased through the stock exchange. However, in a private company such
transfer is restricted

Lifting the Veil of Incorporation

A company is a legal person and is distinct from its members. This principle is
regarded as a curtain, a veil or shield between the company and its members. This
principle of separate legal entity was established in Salomon vs. Salomon & Co.
Ltd. This precedent has been followed in a number of cases and it has come to be
regarded as a fundamental principle in company law.
This shows that once a company is registered under the Act, there is a veil between
the company and its members. This veil is a partition or curtain between the
company and its members. Following this principle the courts in most cases have
refused to go behind the curtain and see who are the real persons composing the
company.
But sometimes the necessity of the situation may compel the authorities to
disregard the corporate legal entity and look to individual members who are in fact
the real beneficiaries of all corporate property, and this is what is referred to as
“lifting or piercing the corporate veil”
Thus the doctrine of lifting or piercing the corporate veil may be understood as the
identification of a company with its members and when the corporate veil is lifted

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the individual members may be held liable for its acts or entitled to its property.

The general rule is that a company entity and the corporate veil will be disregarded
only in exceptional cases. There cases are exceptions in Salomon .V. Salomon co
ltd. The courts will lift the corporate veil
i) where it is essential to secure justice,
ii) where it is in the public interest to do so or
iii) where it is for the benefit of revenue

Such instances may arise under statutory provisions or case law.

Lifting By Statute
a) Membership fallen below statutory minimum: When a company carries
on business for more than 6 months during which the company's
membership had fallen below the statutory minimum, seven in the case of a
public company ,every person knowing of the fact that the membership had
so fallen is severally liable for the debts of the company contracted during
that period. This section is regarded as an instance of "lifting the veil"
because it modifies the principle established in Salomon v Salomon & Co
Ltd that a member is not liable for the company's debts, and permits the
company's creditors to sue him directly in order to recover the debts.
Liability under the section may arise on the death of a member if the death
reduces the membership below the statutory minimum for the particular
company and:
No transferee is registered as a new member, and
N.B this section limits a member’s liability to debts contracted after the six
months. It does not make the member liable for any debts incurred during
the six months which follow the reduction of membership .
b) Non-publication of a Company's Name: The Companies Act requires a
company's officers and other agents to write its name on its seal, letters,
business documents and negotiable instruments. This is to be done primarily
for the benefit of third parties who might contract with a limited company
without realising that it is a limited company.

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 Any officer or agent of the company who does not comply with the aforesaid
statutory requirements shall be liable to a fine and shall further be personally
liable to the holder of any bill of exchange, promissory note, cheque or order
for goods which did not bear the company's correct name, unless the amount
due thereon is duly paid by the company. The imposition of personal
liability on the company's agent is what is regarded, in a somewhat loose
sense, as “lifting the veil of incorporation".
c) Group Accounts (holding and subsidiary companies): In practice it is
common for a company to create an organisation of inter-related companies
each of which is theoretically a separate entity but in reality part of one
concern represented by the group as a whole. Such is particularly the case
when one company is the parent or holding company and the rest are its
subsidiaries.
A company is deemed to be a subsidiary of another if;
 That other company either; is a member of it and controls the
composition of its board of directors or
 Holds more than half in nominal value of its equity share capital or
 The first mentioned company is a subsidiary of any company which is
that other’s subsidiary.
Where at the end of the financial year a company has subsidiaries, the
accounts dealing with the profit and loss of the company and subsidiaries
should be laid before the company in general meeting when the company’s
own balance sheet and profit and loss account are also laid. This means that
group accounts must be laid before the general meeting.
The group accounts should consist of a consolidated balance sheet for the
company and subsidiary and also of a consolidated profit and loss account
dealing with the profit and loss account of a company.
The treatment of these accounts in a consolidated form qualify an old rule
that each company constitutes a separate legal entity. The statute here
recognises enterprise entity rather than corporate entity i.e. the veil of
incorporation will be lifted so that they will not be regarded as separate legal
entities but will be treated as a group .

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 d) Investigation of Company's Affairs: The act gives an inspector appointed
by the court powers to investigate the affairs of that company's subsidiary, or
holding company, if the inspector thinks it necessary to do so for the purpose
of his investigation. An investigation instituted pursuant to this power
would be regarded, in a loose sense, as an instance of "lifting the veil"
because the order to investigate a company sufficed to investigate the
company's member, or vice versa, as if they were one entity. generally
speaking, a company and its member (in this case, the holding company) are
altogether separate entities and a court order to investigate the affairs of a
subsidiary company would not authorise an investigation of its holding
company, and vice versa.

e) Investigation of Company's Membership: The Act empowers the registrar

to appoint one or more competent inspectors to investigate and report on the
membership of any company for the purpose of determining the true persons
who are or have been financially interested in the success or failure of the
company or able to control or materially to influence the policy of the
company.
For the purpose of that investigation, subsection the Act confers on the
inspector, or inspectors, power to investigate the membership of the
company’s subsidiary or holding company for the same purpose. A company
and its subsidiary, or subsidiaries, are thereby regarded as one entity for the
purpose of the investigation, and the veil of incorporation thereby lifted .
f) Take-over bids: where a scheme or contract involving the transfer of shares
or any class of shares in a company to another company has been approved
by the holders of not less than nine-tenths in value of the shares whose
transfer is involved the transferee company may, at any time within two
months after the expiration of four months after the making of the offer by
the transferee company, give notice in the prescribed manner to any
dissenting shareholder that it desires to acquire his shares. The dissenting
shareholder must then apply to the court within one month from the date on
which the notice was given for an order restraining the transferee company
from compulsorily acquiring his shares. The court order may, in an
appropriate situation, lift the veil of incorporation. This is illustrated by Re:
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 Bugle Press Ltd
Bugle Press Ltd had an issued capital of 10,000 pounds 1 shares, of which
Jackson held 4,500, Shaw held 4,500 and Treby held 1,000. Jackson and
Shaw then incorporated new company, called Jackson and Shaw (Holdings)
ltd, with an issued capital of 100 shares, of which each of them held 50
shares. This company then made an offer to the shareholders of Bugle Press
Ltd, which was accepted by Jackson and Shaw but rejected by Treby. The
company then served a notice to Treby stating that it wished to buy his
shares. Treby then applied to court for an order restraining the intended
purchase on the ground that it amounted to an expropriation of his interests
in that the shareholders of Jackson and Shaw (Holdings) ltd were the same
persons who held 90% of the shares in Bugle Press Ltd. And who had
purported to accept the offer. The application succeeded.
The court regarded the offer made by Jackson and Shaw (Holdings) ltd as
having been made by Jackson and Shaw as individuals and thereby lifting
the veil of incorporation by treating the company and its members as one
entity for purposes of accepting of the offer.
g) Fraudulent Trading: If, in the course of the winding up of a company, it
appears that any business of the company has been carried on with intent to
defraud creditors of the company or creditors of any other person, or for any
fraudulent purpose, the court, on the application of the official receiver or
the liquidator or any creditor or contributory of the company may, if it thinks
proper so to do, declare that any persons who were knowingly parties to the
carrying on of the business in manner aforesaid shall be personally
responsible, for all or any of the debts or other liabilities of the company as
the court may direct.

Lifting the veil under Case Law

1) Fraud & Improper Conduct: Where there is fraud or improper conduct,
the courts will immediately disregard the corporate entity of the company.
Examples are found in those situations in which a company is formed for a
fraudulent purpose or to facilitate the evasion of legal obligations. In Re
Bugle Press Limited the court ruled the actions of the majority shareholders

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 actions was a bare faced attempt to evade the fundamental principle of
company law which forbids the majority unless the articles provide to
expropriate the minority shareholders.
Gilford Motor Co. v. Horne (1933): 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.

2) Agency, trustee or nominee: In Salomon's case, the court stated that "the
company is not in law the agent of the subscribers". However "Under the
ordinary rules of law, a parent company and a subsidiary company, even a
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”.
From this statement, it can be inferred that, if a court held that a company
acted in a particular instance as an agent of its holding company, the veil of
incorporation would have been lifted.

3) Determination of the enemy character: A company may assume an enemy

character when persons in de facto control of its affairs are residents in an
enemy country. In such a case, the Court may examine the character of
persons in real control of the company, and declare the company to be an
enemy company. In Daimler Co. Ltd V. Continental Tyre and Rubber Co.
Ltd, A company was incorporated in England 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, residing in Germany. During

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 the First World War, the English company commenced action for recovery
of a trade debt. Held, the company was an alien company and the payment
of debt to it would amount to trading with the enemy, and therefore, the
company was not allowed to proceed with the action.
4) Protection of revenue: The court may also lift the corporate veil in the
interests of revenue. The court will not hesitate to look behind the corporate
veil where it is found that the company has been formed for evasion of taxes.
In such cases, the individual shareholders may be held liable to pay income
tax.

Advantages of Incorporation
1) Limited Liability: since a corporation is a separate person from the
members, its members are not liable for its debts. In the absence of any
provisions to the contrary the members are completely free from any
personal liability. In a company limited by shares the member’s liability is
limited to the amount unpaid on the shares whereas in a company limited by
guarantee the member’s liability is limited to the amount they guaranteed to
pay.
2) Holding Property: Corporate personality enables the property of the
association to be distinguishable from that of the members. In an
incorporated association, the property of the association is the joint property
of all the members although their rights therein may differ from their rights
to separate property because the joint property must be dealt with according
to the rules of the society and no individual member can claim any particular
asset to that property.
3) Suing and Being Sued: As a legal person, a company can take action in its
own name to enforce its legal rights. Conversely it may be sued for breach
of its legal duties. The only restriction on a company’s right to sue is that it
must always be represented by a lawyer in all its actions.
4) Transferability Of Shares The Shares in a company are moveable
property transferable in the manner provided by the Articles of Association
of the Company. Shares can therefore be transferred from one person to
another without the consent of the members.

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 N.B.this transferability only relates to public companies and not private
companies.
5) Borrowing Facilities: in practice companies can raise their capital by
borrowing much more easily than the sole trader or partnership. This is
enabled by the device of the ‘floating charge’ a floating charge.
6) Separate Legal Entity: a company is a separate entity from its members
and its members and its existence is not affected by the death, insanity or
bankruptcy of a meme. I.e. a company has perpetual succession. Members
will always come and go but the company will continue to exist.
7) Control: the control of a company can be secured by the acquisition of the
majority of the company’s shares which carry the voting power.
8) Expert Management: since a company carries a business on a large scale
and has huge financial resources, it can afford the services of the experts.
This will lead towards professionalism of management which is necessary
for the efficient management of any business
9) Public Confidence: the formation and running of a company is regulated by
the provisions of the Companies Act and various other Acts. The provisions
regarding appointment and remuneration of directors, compulsory audit and
publication of accounts, protection of minority shareholders and so on has
created greater public confidence.
10) Social advantages: a company is also beneficial from the society
point of view. It mobilises the scattered savings of the public and invests
them in sound industrial and commercial ventures. It provides employment
to a large number of people.
Disadvantages of incorporation
1) Formalities: Too many formalities required in the formation of the
company. A registered company is characterised by formalities from
incorporation to dissolution.
2) Publicity: There is maximum publicity of the company’s affairs. There is no
secrecy regarding the affairs of a company. Once the Memorandum and
Articles of Association and the Prospectus have been filed with the registrar
of companies, they become public documents open to the inspection of the

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 public. This wide publicity may open the company to economic sabotage by
its rivals.
3) Costly: the registered company is the most expensive business association to
form and maintain. The expenses include search fees, legal fees, registration
fees and stamp duty. A company must pay directors allowances and
remunerate its auditors.
4) Administration: the administration of a company must comply with the
Companies Act. Requirements pertain to the holding of general and statutory
meetings and returns of annual accounts. The accounts report and audit
report also require expenses.
5) Inflexibility: a company can only carry on the business specified i its object
clause of the Memorandum of Association. The operation of the doctrine of
ultra vires hinders the company from investing in other forms of business
which might be more profitable.
6) Taxation: a company must pay corporate tax which is higher than other
business forms thereby reducing the amount of profit available to the
shareholders as dividends.

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