FACULTY OF BUSINESS ECONOMICS AND ACCOUNTING

NAME : ELIZABETH MUSODZA

REG NUMBER : R211579C

PROGRAMME : BACHELOR OF COMMERCE IN BUSINESS MANAGEMENT

QUESTION 2 :BRIEFLY OUTLINE THE CONSTITUTIONAL DOCUMENTS OF

A COMPANY

COURSE CODE :CAC213 COMPANY LAW AND PRACTISE

LECTURER : MR J MUKETSI

LECTURER’S COMMENTS

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SIGNATURE………………………………………..
Question 2

(a) Constitutional documents also known as "constituent documents", the formation documents
and other internal documents of an entity that govern:
The rights and obligations of the entity’s members or stakeholders.
The entity’s management and operation.
Formatted[Muketsi]: Numbered + Level: 1 + Numbering Style:
a, b, c, ... + Start at: 1 + Alignment: Left + Aligned at: 0 mm +
Indent at: 0 mm
Formatted[Muketsi]: Bullets and Numbering

Constitutional documents generally include an entity's:

Certificate of incorporation or partnership (as applicable).

Certificate of change of name (if applicable).

Constitution or articles of association.

In some contexts, constitutional documents may also include:

A trust deed.

A shareholders' agreement.

A partnership deed.

Any document or resolution that affects the management or operation of an entity.

NO MARKS AWARDED

(b) Formatted[Muketsi]: Numbered + Level: 1 + Numbering Style:

a, b, c, ... + Start at: 1 + Alignment: Left + Aligned at: 0 mm +
Private Business Corporation Private Limited Company Indent at: 0 mm

Formatted[Muketsi]: Bullets and Numbering

Mainly meant for medium to large Formatted Table[Muketsi]

Mainly meant for small to medium businesses
businesses

Can accommodate sole traders Only accommodates 2 or more people

Has a legal persona of its own apart

Has a legal persona of its own apart from its owners
from its owners
Has perpetual succession Has perpetual succession

Can have a maximum of 20 directors Can have a maximum of 50 directors

Shareholders are owners and can be

Members are the same as shareholders or owners
different from the directors

Companies cannot be shareholders or hold a

Both companies and individuals can be
member’s interest in a PBC, only individuals can be
shareholders in a PLC
members

Comprised of members Comprised of directors and shareholders

Has a certificate, memorandum, articles,

Has an incorporation statement and bylaws
CR6 and CR14

Articles of association are not required Registered articles of association

Does not require annual return to be lodged Annual returns are compulsory

Has member’s contributions Has share capital

Has an accounting officer Has an auditor

Annual general meeting not required Annual general meeting is required

(8/10)
(c ) Introduction

Separate Legal Personality (SLP) is the basic tenet on which company law is premised.
Establishing the foundation of how a company exists and functions, it is perceived as, perhaps,
the most profound and steady rule of corporate jurisprudence. Contrastingly, the rule of “SLP”
has experienced much turbulence historically, and is one of the most litigated aspects within and
across jurisdictions. Nonetheless, this principle, established in the epic case of Salomon v
Salomon, is still much prevalent, and is conventionally celebrated as forming the core of, not
only the English company law, but of the universal commercial law regime.

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 aprior 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, was essentially an agent of Salomon, and therefore,
Salomon being the principal, was personally liable for its debt. In other words, 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.

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 accordingly, 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/controller could be held liable for its debt,
over and above the capital contribution, so as to expose such member to unlimited personal
liability.
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/controllers4 was firmly
created by the Salomon case.

Commencing with the Salomon case, the rule of SLP has been followed as an uncompromising
precedent5 in several subsequent cases like Macaura v Northern Assurance Co. Lee v Lee’s Air
Farming Limited, and the Farrar case.

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
SLP is that a company survives the death of its members.

Notably, similar to most legal principles, the overarching rule of SLP applies with exceptions,
where the courts may look through the veil to reach out to the insider members.

So, considering the gamut of statutory and judge made exceptions above, has the Salomon rule
become redundant. While the Salomon rule appears to have been eroded substantially, a reversal
in the judiciary’s approach, commencing with the Adams case, is now visible.
All in all, the Salomon ruling remains predominant and continues to underpin English company
law. While sham, façade and fraud primarily trigger the invocation of the veil piercing exception
in limited circumstances, these grounds are not exhaustive, and much is left to the discretion and
interpretation of the courts on case-to-case basis.(5/10)

You didn’t answer the next part of the question on the advantages of the principle

TOTAL: 13/20
Reference

1. Max Radin, ‘The Endless Problem of Corporate Personality’ (1932) 32 Colum. L. Rev. 643.

2. 1897 AC 22.

3. ennings v Crown Prosecution Service, 2008 UKHL 29.

4. Marc Moore, ‘A Temple Built on Faulty Foundations: Piercing the Corporate Veil and the
Legacy of Salomon v Salomon’ (2006) JBL 180.

5. Companies Act [Chapter 24:03]