BASICS of COMPANY LAW

CORPORATE VEIL
•  A concept that separates the
personality of a corporation from the
personality of its shareholders
•  A company is an ‘artificial person’ in
the eyes of law, separate from any or all
individuals involved in it
•  The liability of shareholders is limited up
to the extent of their respective shares
I.e. their other assets cannot be
acquired to pay off the debts of the
company
•  Salomon vs. Salomon
–  Salomon set up a shoe repair business
–  He transferred the business to a company owned
wholly by him, other than 6 shares held by his wife
and kids
–  Upon default on a payment the creditors sought to
have the veil between Salomon and his company
lifted
–  It was contested that the company was merely an
agent for Salomon
–  Held: as long as a company has been properly
incorporated, it is separate from its members
•  The case established the following:
–  A company CAN legitimately be set up to
shield its members/directors from liability
–  A one-man company with dormant
nominee members IS a valid company
–  Even if one person holds the majority
shares in a company he WILL be
considered distinct from the company
 Piercing the Veil
•  In some situations, courts may ignore the
limited liability status of a corporation and go
after its owners/shareholders/directors
•  The members will be held personally liable for
corporate debts
•  The banks will go to the members homes,
bank accounts, personal investments etc.
•  Courts may pierce the veil when:
–  There is no real separation between the company
and its owners;
–  The company's actions were wrongful or
fraudulent; and,
–  The creditors suffered an unjust cost.
 Types of Companies
•  The financial liability of limited company
members both shareholders and guarantors
is restricted to a fixed amount. Shareholders
are only liable to pay for the value of their
shares, and guarantors are only liable to pay
the sums of their guarantees. Above these
amounts, shareholders and guarantors are
not legally required to contribute any more
money toward company debts.
 Company Ltd. by Shares
–  The liability of the shareholders is limited by its
Memorandum of Association upto the maximum
amount of the paid up shares held by them
–  Each shareholder must have atleast 1 share in the
company
–  The number and value of issued shares creates a
company’s share capital
–  The value of the members shares determines how
much of the company they own, the amount of
control they have, the limit of their liability for
company debts, and the percentage of profits they
receive as dividends
Company Ltd. by Guarantee
–  Liability of the shareholders is limited upto such
amount as the members respectively undertake
(or guarantee) to the Memorandum to contribute to
the assets of the company is case the company is
wound up.
–  Usually set up by non-profit organizations and
charities
–  Each guarantor must agree to contribute a certain
amount of money towards the company debt in the
form of a ‘guarantee’
–  The sum of guarantee is the limit to the liability of
the guarantor
 REGISTRATION
•  Any 3 or more people for a public company
and any 1 or more people for a private
company, may by subscribing their names to
a Memorandum of Association, and
complying with other requirements of law,
form an incorporated company, with or
without limited liability
•  These documents need to be submitted to the
Registrar
–  Memorandum of Association
–  Articles
–  Agreement, if any, with any individual for their
appointment as manager or director
–  Statutory declaration of compliance
•  Once the name of the company is entered in
the Register of Companies, a Certificate of
Incorporation is issued
•  Upon incorporation, the company comes into
existence as a legal person distinct from its
members, capable of exercising all the
functions of an incorporated company, and
having perpetual succession and a common
seal
 Memorandum of
Association
•  The charter of the company which contains
the objectives of the company
•  Provide the maximum possible scope of the
operation of the company
•  In essence the memorandum restricts the
power of the company; anything that is done
outside what is contained in the memorandum
will be ultra vires i.e. beyond the powers of
the company
•  May only be altered according to the
procedure set out in the Act.
•  The memorandum of a company is to contain
the following:
–  The name of the company with the word ‘limited’
next to a public company and ‘private limited’
next to a private company;
–  The name of the province wherein the registered
office of the company is situated
–  The objects of the company and the territories to
which they extend i.e. the objects clause
–  Declaration to the effect that liability of the
members is limited
–  The amount of share capital with which the
company proposes to be registered and the
division of shares into fixed amounts
 Articles of Association
•  The memorandum of a company sets out the
scope/powers of the company, articles of
association govern the way in which this
scope/power is to be carried out and achieved
•  The Regulations which govern the
management and internal affairs of carrying on
business
•  They may contain the rights and duties of
directors and shareholders
•  The Articles of a company have to be
consistent with its memorandum
•  Can be altered by a special resolution
•  Remember: The memorandum and articles
shall, when registered, bind the company and
the members thereof to the same extent as if
they respectively had been signed by each
member and contained a covenant on the
part of each member to observe and be
bound by all the provisions of the
memorandum and of the articles
 Assignment
1.  Can a company sue and be sued in its own
name? Explain.
2.  What is the concept of a corporate veil and what
in which cases will it be lifted?
3.  What were the principles laid out in the Salomon
case?
4.  What is the difference between a company limited
by shares and guarantee?
5.  What is the difference between a memorandum
of association and the articles of association of a
company?
6.  What are the other things that are contained in a
memorandum of association other than objects
clause?