Good day to you all. You are welcome to BUL 501: Law of Business Associations I Class.

Please find below the course contents and recommended text books.

1. Course Contents
(a) Forms of business organizations; sole proprietorship, partnership, incorporated
companies, creation and incidents
(b) Formation of companies; certificate of incorporation; pre-incorporation contracts;
promoter’s liability.
(c) Memorandum of Association, doctrine of ultra-vires; alteration of memorandum and
the objects clause.
(d) Articles of Association; contractual effect of memorandum and articles, alteration of
articles.
(e) Doctrine of constructive notice and indoor management.
(f) Prospectus, statement in lieu of Prospectus, remedies, misrepresentation.

2. Recommended Text Books

a. Companies and Allied Matters Act 2020
b. Olakunle Orojo: Company Law and Practice in Nigeria
c. Gower: Company Law
d. Pennington: Company Law
e. Palma: Company Law
A. For the development of Company Law in Nigeria please read up Olakunle Orojo:
Company Law and Practice in Nigeria, pages 15 to 21.

B. CORPORATE LEGAL PERSONALITY

A company is defined as an association of persons aimed at carrying on business with

a view to making and sharing of profit. In legal theory a company has been defined as an
artificial person or legal entity created by or under the authority of the laws of a state or
nation, consisting of an association of numerous individuals, who subsist as a body
politic under a special denomination, which is regarded in law as having a personality and
existence distinct from that of the members and which is by the same authority vested
with capacity of continuous succession irrespective of changing of membership either in
perpetuity or for a limited time of years, and acting as a unit in matters relating to the
common purpose of the association within the scope, the powers and authorities vested
in such bodies by the law.

What distinguishes a company from other forms of business association is the fact of
incorporation or registration. Incorporation or registration of a company means no more
than an act of securing for a business concerned legal or corporate personality. On
incorporation the company becomes a distinct but artificial person from its human members
who as we know are natural person. The company then begins to have some rights and it is
subject to liabilities, disabilities or duties just as human beings. The promoters of the
proposed company usually prepare a number of documents most important of which
are the Memorandum and Articles of Association which are prescribed by the
Companies Act and present them to the Corporate Affairs Commission (C.A.C). The
documents are then registered and filed if they are in the prescribed form and on them is
indicated the fact of incorporation. Thus the company is born and human persons or natural
persons who subscribed to its memorandum of association become its members. See Ss1-16
of the Companies and Allied Matters Act 1990. Note S.7 which deals with functions of the
commission.

Because of its distinction of artificial personality a company is capable of owning

property, suing and being sued in its name among other things, just as human beings.
Incorporation then means among other things that persons dealing with the company must
look basically towards the company and not its members for the performance of the
company`s obligations.

Significance of Corporate Personality

Corporate personality is the most important of the fundamental principles of company

law. Translated into a simpler form, it means that on incorporation the company becomes
a legal entity distinct from its members. This concept is a creation of fiction which in itself is
one of the greatest devices of law through which men fit new legal norms into old principles
so as to regulate conduct without abandoning long standing principles.

Corporate personality is essentially a device to protect the creditors and other

persons dealing with the company by pre-determining who to hold responsible for the
company`s obligations. Its implications were fully grasped by the court and are seen in the
case of Salomon v. Aron Salomon & co. Ltd (1897) AC 22 which is the locus
classicus/foremost authority on the principle.

In that case Salomon who had for many years carried on a prosperous boot and
leather trade decided to form a limited liability company. He sold his business to the
company who as consideration allotted him 20001 shares of one pound each out of the
company` s issued shares of 20007. Ten thousand pound of the purchase money was paid to
Salomon by way of secured debenture (certificate of debt: a certificate that acknowledges the
existence of a debt of a particular amount owed to somebody) and a balance was paid in
cash. The remaining six of the company`s issued shares were held by Salomon`s five children
and his wife who were also his nominees. The company had some other unsecured creditors.
Later the company fell into financial difficulties and an order was made by the court for its
winding up. The assets of the company were just enough to pay Salomon`s secured
debentures leaving nothing to meet the unsecured creditors` place. The unsecured creditors
brought an action contending that the company was a sham and an agent or nominee for
Salomon who remained the real proprietor of the business and as such Salomon should be
liable to indemnify the company against its trade debt. The court held that the company was
validly formed and thus was a distinct person from Salomon and other share holders since
the Act merely required each member of the company to have at least one share and said
nothing about their being independent or there being a balance of power in the company.
Hence the business was that of the company who should be looked up to for the satisfaction
of its debt as the court put it bluntly and correctly; we submit:

“either the limited company was a legal entity or it was not. If it was, the business
belongs to it and not to Mr. Salomon. If it was not, there was no person and nothing
to be an agent at all; and it is impossible to say at the same time that there is a
company and there is not…”

The court went further to say as follows per Lord Macnaughten at pg. 51.
“The company is at law a different person altogether from the subscribers. . ..; and,
although 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
profit, the company is not in law the agent of the subscribers or trustee for them. Nor
are the subscribers as members liable, in any shape or form except to the extent and
in the manner provided by the Act”.

It must be noted that the decision in Salomon`s case is not a license to an

unscrupulous promoter to defraud a company promoted by him. Had Salomon made a
profit from the sale which he concealed from his fellow shareholders, the position
would have been different. And the decision is justifiable on the ground that there was
no fraud and the creditors dealing with the company had the freedom to make
inquiries as to the company`s financial position

In Salomon`s case there was no evidence of fraudulent or sharp practice. The

business was properly valid. All the facts surrounding the transaction were disclosed
to all interested parties as required by the Act.

Note that Salomon`s case revealed that the advantages of incorporation are open to
sole traders, partnerships as well as large public company. See Lee v. Lee`s Air Farming
Limited (1960)3 ALR 420; Macaura v. Northern Assurance Company Limited (1925) A.C.
619. In Lee v. Lee`s Air Farming, Ltd. The appellant`s husband, L formed the respondent
company for the purpose of carrying on the business of aerial top dressing. Of the 3,000
shares forming the nominal share capital L was allotted 2999 shares. He was appointed
governing director of the respondent company and pursuant to Article of the articles of
association he was employed as chief pilot of the company at the salary arranged by him.
The respondent company owned an aircraft equipped for top-dressing and L was a duly
qualified pilot. L was killed while piloting the aircraft during the course of aerial top
dressing and the appellant claimed compensation under the Newzealand workers
Compensation Act out of which the employer was liable to pay compensation. Held L. was a
“worker within the meaning of S.2 of the Act and the appellant was entitled to compensation
under the Act, since L`s special position as governing director and principal shareholder did
not preclude him from making on the company`s behalf a contract of employment with
himself, nor preclude him from entering into, or working in the capacity of servant under a
contract of service with the company.
 Advantages of Incorporation (Consequences)

Some consequences flow from incorporation.

The most important of these is the legal personality bestowed on the company from which
other consequences/advantages flow

(1) limited liability. When obligations are incurred on behalf of an incorporated company,
the company is directly liable although it may thereafter be able to obtain contribution from
its members or shareholders. This is the case with some modern public corporations. In the
case of a company registered under the Companies and Allied Matters Act there is no
complete absorption from liability. Under S.21 of that Act liability is either limited by shares
or guarantee. Where liability is limited by shares the shareholder is called upon to pay
whatever remains unpaid out of the nominal value of the shares held by him whenever the
company is in need of capital. In the case of a company limited by guarantee a member of the
company is called upon to pay the sum of money he has undertaken to pay in the event of the
company winding up or if the winding up takes place within a year after he has ceased to be
a member of the company.

Note however that there are unlimited liability companies where the members are
personal guarantors of the company`s debt without any limit to their liability. In the case of
unincorporated associations, the association not being a legal person may not be held liable
whereas the actual officials who act on its behalf or the individual members who have actual
or apparent authority to bind the association are normally held liable and the liability is
usually unlimited. They remain liable to the extent of their property, unless liability is
expressly or impliedly restricted to the extent of the assets of the association. The position of
members of partnership is the same. Each member is an agent of all the others and acts done
in carrying on, in normal way, the business of the kind carried on by the firm bind the
partners. Other members are absorbed from liability only if the creditor knows of the
limitation placed on the acting partners` authority. Note however that under the limited
partnership concept partners who put money into debenture without taking part in
management have their liability limited to their financial contribution while managing
partners have unlimited liability.

(2) Property

Property of incorporated association belongs to it and not to the members. It does not
hold such property as a trustee or an agent for its members who in turn have no proprietary
interest in the property of the company. Hence the property of the company is available for
the satisfaction of its obligations. Note that unlike a partnership where a change in
membership may cause a division of its assets among its members, the property of an
incorporated company is not affected by a change in membership. At best the shares of
outgoing members may be transferred.
(3) Sueing and Being Sued

An incorporated company, being a legal person may sue in its name to enforce its
legal rights and be sued for a breach of its legal duties. A company therefore is subject to
contractual tort and criminal liabilities. In the same vein a company may enter into contract
in its own name. Whereas the law has made it possible for a partnership to sue and be sued in
its name in a limited number of cases it is still unclear who to sue in other incorporated
bodies like clubs and learned societies. Even in the case of partnership it may be desirable to
join members or its agents who are not easy to ascertain. Usually, agents of such
unincorporated bodies enter into legal processes via “representative actions” but the
procedure is not without problems of its own. In case of the registered company problems do
not arise as the company may be sued directly and in its own name.

(4) Perpetual Succession

An incorporated body continues in existence and may exist perpetually even in spite
of a change in its membership. Since a company is created by law it could only be put out of
existence by the law, through the process of winding up as provided by the Companies and
Allied Matters Act. Thus, the life of a company is not dependent on the life of its members.
For instance during the 2nd world war all the members of one private company were killed in
a general meeting by a bump but the company continued in existence. Usually the personal
representatives of the deceased members stepped into their shoes. In the alternatives if they
do not want to become members, they may realise the value of shares held by the deceased
members by selling the shares.

(5) Borrowing

An incorporated company may borrow money in its own name unlike an

unincorporated body whose members have to borrow money on behalf of the association.
Since the incorporated body is more able to provide collateral security for debt it is easier for
it to borrow huge sums of money. Thus more often than not a business man incorporate his
business to be able to borrow a huge sum of money and it gives the creditor a (floating)
charge on his assets.

(6) Transfer of Shares

Membership of a company may depend on ownership of shares in it. These shares are
generally freely transferable in the absence of any express provision or regulation to the
contrary (like the case of private incorporated company where members must not transfer
shares to the members of the public). Where shares are transferred the transferor is released
from further liabilities on the shares . . . . . . . . . . Does not operate to divert him of his status
and liability as a partner. It merely gives the transferee the rights to receive whatever the
firm distributes in respect of the transferring partner`s shares. The transferee could only be
admitted into the partnership in place of the transferor only if the other partners agreed and
the transferor will only be relieved of his existing and further liabilities as a partner only if
the creditors agree expressly or impliedly to release him.

Disadvantages of incorporation

(i) Double taxation

(ii) Properties of the company belong to it and not the shareholders

(iii) The business and all the affairs of the company are managed by the Board of Directors
and not the shareholders.

(iv) The company is subjected to the doctrine of ultra vires.

Lifting the Veil of Incorporation

To recap, the concept of corporate personality endows the incorporated business

association with a distinct legal personality. However, there are circumstances in which the
court would disregard and has often disregarded, the companies` personality. This in
American`s tradition is called lifting the veil of incorporation.

According to Gower`s principles of modern company law 4 th ed. Pg. 112 “In cases
where the veil is lifted the law either goes behind the corporate personality to the individual
members, or ignores the separate personality of each company in favour of the economic
entity constituted by a group of associated companies”.

The act of lifting the veil of incorporation is a realistic treatment of the concept of
corporate personality. And it may not only lead to identification of the company with the
business conducts.

Although it has been observed that there is no consistent principle as to when the veil
of incorporation will be lifted. It has been said that the veil of incorporation will be lifted
when the principle of legal personality laid down in Salomon`s case is opposed to “justice”.

The veil of incorporation will be lifted in the case of an individual company and in
hold of subsidiary relationship (in group of associated companies). In the case of an
individual or single company the veil of incorporation will be lifted based on case law
precedent and the provisions of the Companies and Allied Matters Decree. The following
instances have been identified.

(a) Where a company has been formed to evade legal obligations. Sometime a crook may
form a company and transfer his property to the company to avoid a personal legal
obligation. Following the principle of corporate personality the transferred property should
ordinarily belong to the company, but the law in the interest of justice would disregard the
personality of the company in order to subject the unscrupulous promoter to the obligation he
has tried to evade. Such was the situation in the case of Jones v. Lipman (1962) 1 WLR 832.
In that case, Lipman agreed to sell a parcel of land to Jones; subsequently he incorporated
the company and transferred a land to it in order to avoid conveying the land to the
purchaser and in order to sidetrack any possible order of specific performance which the
court might give/issue. Lipman and a clerk of a solicitor were the only shareholders and
members of the company. Nevertheless, Jones applied to court for an order of specific
performance against Lipman and the company. The court took cognisance of the reality of
the situation, ignored the original transfer and ordered a specific performance of the
agreement between Lipman and Jones on the ground that the company was nothing but a
mere cloak for Lipman to enable him achieve his clandestine end. See also Gilford Motor
Company v. Horne (1933) 1 CH 935. In that case, Horne was appointed the managing
director of Gilford Motor Company on a condition that he would not solicit or entice away
the customers of the company while in office. In the course of time Horne formed a company
to carry on a business similar to that of his employer and this company solicited the
customers of Gilford motor company. When sued for a breach of his contract of service
Horne pleaded that it was the company and not himself who solicited Gilford`s customers. It
was held that the new company was a mere cloak or sham for the purpose of enabling the Def
to breach his covenant against solicitation. Evidence as to the formation of the company and
the position of its shareholders and directors led unequivocally to that conclusion. Hence the
new company was restrained from further acts of breach.
(b) Misdescription of the Company
A major aim of incorporation is to give an adequate warning of the nature of
incorporated company. Thus S. 631 of the Companies and Allied Matters Act 1990, demands
that the name of the Company must be fully and properly published on all the documents
published by it. For instance, the word limited or Ltd. must appear in front of the name of a
private company whose liability is limited by shares. Failure to do so may, among other
things, place on the responsible officer(s) of the company the liability which the company
would have borne. Where for instance an officer of a company accepts a bill of exchange in
which the name of the Company is not properly written, the officer shall be made personally
liable to the holder of the Bill, if the Company refuses to pay.

(c) carrying on Business With Membership Less than legal Minimum

The CAMA 1990 prescribed a minimum of 2 members for a Company S.93 of that
decree places the company`s liability for its debt on the directors or officers of the company
where the business of the company is conducted with less than the minimum prescribed
membership and the business is so conducted for more than six months.

The directors and officers are however liable only if the membership was below the
prescribed minimum at the time the debt was incurred and they were aware of the fact as at
that time. Note that a person may escape liability by transferring shares to a nominee(s) to
make up a statutory minimum. Another way of escaping liability is through a petition for
winding up of the company`s activities. See S. 408 CAMA.
(d) Fraudulent Trading

S. 506 CAMA 190 provides that where in the course of winding up it is discovered
that the business of the company had been conducted in a reckless manner or with an intent
to defraud the creditors of the company, the directors of the company who so conducted the
business shall be held liable for the debt and other liabilities of the company without any
limit to their liability. It is believed that a shareholder may be held responsible and liable
under the provision, if it is proved that he participated in the making of the management
decision which intended to or likely to defraud the creditors of the company. A provision
under the English Law which is similar to ours was considered in the case of Re-William
Laitch Brothers Ltd. (1932) Ch. 71.

(e) Holding and Subsidiary Companies

A holding company has been defined by the CAMA S.338 (incorporate by reference).
The fundamental question in this area is this: “upon what legal principle should the formal
view that the holding company and the subsidiary are two separate legal persons be
abandoned and the corporate unit separating them be piersed in order to regard the
subsidiary as a mere agent of the parent company or both as one of the same entity?”

Before an attempt is made to answer this question it must be noted that, where the veil
is lifted the court subjects the holding company to the liabilities of its subsidiaries or permits
the holding company to reap some benefits that is ordinarily due to its subsidiary. As a
prelude to the principles guiding the lifting of the incorporation veil between a holding
company and subsidiary in situation where the veil has been lifted are first considered.