The word company ordinarily means an association of a number of individuals formed for some common purpose. When such an association is registered under companies Act, it becomes an artificial person with perpetual succession and a common seal.
According to Lord Justice Lindley, a company is an association of many persons who contribute money or money’s worth to a common stock and employed for a common purpose. The common stock so contributed is denoted in money and is capital of the company. The persons who contribute it are members. The proportion of capital to which each member is entitled is his share. Shares are always transferable although the right to transfer them is often more or less restricted.
Characteristics of a company
On being incorporated, a company enjoys certain advantages over other associations. Such advantages are termed as characteristics of a company and are as follows:-
(1) Separate Legal Entity
A company formed and registered under the companies Act is a distinct legal entity. It is regarded by law as a person, just as a human being is a person. It is a creation of law also called artificial person being invisible and intangible without physical existence. Though devoid of natural existence, it can own land and other property, enter into contracts, sue and be sued, have a bank account in its own name, owe money to others and be a creditor to other people and employ people to work for it.
The company is at law a different person altogether from the subscribers to the memorandum of association. The company’s money and property belong to the company and not to the members or shareholders, similarly, the company’s debts are the debts of the company and the shareholders cannot be compelled to pay them. A company may contract with its members. This principle of legal separate entity is clearly illustrated in the leading case of Saloman v. Saloman & Co. Ltd.
Case Law: Saloman vs. Saloman & Co. Ltd.
Saloman had a boot business. He sold the business to a company named Saloman & Co. Ltd which he formed. There were seven members –his wife, daughter and four sons who took £1 share each and Saloman himself took 20,000 shares. The price paid by the company to Saloman was £30,000, but instead of paying him cash, the company gave him 20,000 fully paid shares of £1 each and £10,000 debentures. Owing to strike to the boot business the company could not service the interest on loans and an action was instituted to enforce his security against the assets of the company. Thereafter, at the instance of unsecured creditors of the company, a liquidation order was made and a liquidator appointed. The assets of the company amounted to £6,000 only. Debts amounted to £10,000 due to Saloman and secured by debentures and a further £7,000 due to unsecured creditors. The unsecured creditors claimed that as Saloman & Co. Ltd was really the same person as Saloman, he could not owe money to himself and that they should be paid their £7,000 first.
It was held by the House of Lords that Saloman was entitled to £6,000 as the company was an entirely separate person from Saloman. The unsecured creditors got nothing.
Lord Macnaghten observed in this case that;
“When the memorandum is duly signed and registered, the subscribers are a body corporate. The company is at law a different person altogether from the subscribers to the memorandum 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 trustee for them”.
Saloman’s case established beyond doubt, that in law a registered company is an entity distinct from its members, even if one person holds all the shares in the company. There is no difference in principle between a company consisting of only two shareholders and a company consisting of two hundred members. In each case, a company is a separate legal entity.
Case Law: Lee vs. Lee’s Air Farming Co. Ltd (1960)
Of the 3000 shares in a company, L held 2,999. He voted himself as the managing director. L was killed in an air crash while working for the company. His widow claimed compensation for personal injuries to her husband while in the course of this employment. It was argued that no compensation was due because L and Lee’s Air Farming Ltd were the same person.
The Privy Council applied Saloman’s case and said that L was a separate person from the company he formed and compensation was payable.
Case Law: People’s Pleasure Park vs. Rohleder 6 Southeast
The articles contained prohibition that title to land should never pass to a colored person. The land was sold to a corporation all the members of which were Negroes. It was held that the corporation was distinct from its members and that the transfer was valid.
Case Law: A.L Underwood Ltd vs. Bank of Liverpool
Mr. Underwood had carried on business as an engineering and machinery merchant. He converted the business into a limited company and allotted one share to his wife.
Underwood as the sole director received 45 cheques of the aggregated value of £8,502 drawn in favor of the company. He endorsed them “ALU Ltd. ALU sole director” and paid them into his personal account with the bank of Liverpool instead of paying them into the company’s account with another bank. The Bank of Liverpool, the defendants, without inquiring whether the company had a separate banking account collected the cheques and credited Underwood with the proceeds and honoured cheques drawn by him against them to pay his private debts.
The court was of the opinion that when doing what they had done, the Bank of Liverpool had treated Mr. Underwood as being identical with the company by virtue of his peculiar position as the beneficial owner of all the company’s shares and its sole director.
Consequently, the bank had overlooked the materiality of the cheques being drawn in the company’s favor and not Underwood’s favor.
In an action for conversion brought by the company on behalf of a creditor to whom debentures had been issued by the company it was held that the Bank of Liverpool was liable and that it was precluded upon the following grounds from arguing that Underwood, when paying the cheques into his own account, was acting within the scope of his apparent authority as agent of the company:
(i) The act of an agent paying his principal’s cheque in his own account was so unusual as to put them on inquiry and they ought to have inquired whether the company had a separate bank account and if it had why the cheques were not paid into that account. The banks failure to make an inquiry amounted to negligence.
(ii) Underwood when paying the cheques did not purport to act as the company’s agent but as being himself the company and the bank so treated him.
In the course of his judgment, Atkins L. J said:-
“The directors, whether collectively or singly, do not have actual authority to steal the company’s goods. Although he acted in capacity of a director he is a different person from the company.”
Case Law: Macaura vs. Northern Assurance Co.
Macaura, who owned an estate, sold the whole of the timber on the estate to a company in consideration of the allotment to him of 42,000 fully paid £1 shares. All the company’s shares were held by him and his nominees, and he was also unsecured creditor of the company for an amount of £19,000. Subsequent to the sale, he effected insurance policies in his own name with the Northern Assurance company covering timber against fire. Two weeks after, the policies were effected, almost all the timer was destroyed in a fire. A claim brought by him on the policies was dismissed by the House of Lords on the ground that he had no insurable interest in the timber.
In the course of his judgment Lord Summer said;-
“It is clear that the appellant had no insurable interest in the timber described. It was not his rather it belonged to the company. He owned almost all the shares in the company and the company owed him a good deal of money, but neither as a creditor nor as shareholder could he insure the company’s assets. The debt was not exposed to fire, nor was the shares. His relation was to the company, not to its goods”.
In this case, it is clear that the company is very different from the subscribers and its assets cannot be vested to the members. A member does not have interest in the property of the company and should not be regarded as an agent or as a trustee.
Macaura owned almost all the shares of the company, but the property of the company was not his and could not insure it in his name.
(2) Perpetual Succession
According to concise Oxford Dictionary, ‘perpetual’ means inter alia, “applicable, valid for ever or for indefinite time” while ‘succession’ means a following in order.
Unlike a natural person, a company never dies. Its existence is not affected by death, lunacy and insolvency of its members. A company is an immortal person. Members may come and go, but the company continues in its operation unless it is wound up. The existence of the company is not affected by the death of all the shareholders. Thus where all the members of a company were killed say by a bomb the company was deemed to survive.
The perpetual succession occurs because a company and its members are separate persons and so the company’s legal life is not terminated by a member’s death.
(3) Limited liability
The fact that a registered company is a different person altogether from the subscribers to its memorandum means that the company’s debts are not the debts of its members. If a 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 it debts the creditors may petition the High court for an order to wind it up. During the winding up the members will be called upon to pay the amount, if any, which is unpaid on the shares they hold incase of a company limited by shares or the amount prescribed by the memorandum incase of a company limited by guarantee.
A point to note is that a company’s creditor cannot institute legal proceedings against the company’s member inorder to recover from him what he owes the company. This is because the member does not, legally, become his debtor merely because the company is his debtor.
(4) Common Seal
As an artificial person it cannot sign its name on the contract. So it functions with the help of a seal. Common seal is used as a substitute for its signature. Every company must have a seal with its name engraved on it. Anything done under an agreement between the company and the third party requires recognition of the company in the form of an official seal.
(5) Capacity to sue and be sued
Because a company is at law a different person altogether from its members it follows that a wrong to, or by, the company does not legally constitute a wrong to, or by, the company’s members. Consequently;-
(a) A member cannot institute legal proceedings to redress a wrong to the company. The company as the injured party is generally speaking, the proper plaintiff.
(b) A member cannot be sued to redress a wrong by the company. This is illustrated by Saloman v Saloman Co. Ltd in which it was held that Saloman was not liable for the company’s failure to repay the loans as agreed with its creditors and should not therefore have been sued to recover them.
(6) Transferability of shares
The shares of a company are freely transferable and can be sold or purchased in the share market. The shares or other interest of any member shall be movable property transferable in the manner provided for in the articles of the company.