Longman 2001) [2004]13 NWLR (Pt.890)

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1 An Analysis of the Consequences of Incorporation of a Company By Sadisu Ibrahim Esq.* 1. Introduction As soon a company is registered and issued certificate of incorporation certain consequences ensue. These consequences are generally of two types. The first category consists of obligations or duties imposed on the company which it must observe regarding its existence and operation. These include holding statutory and general meetings, filing annual returns etc. 1 The other category concerns attributes or rights which the company acquires as a consequence of its incorporation like right to own property, sue and be sued all of which owe their existence to the general principle of corporate personality of the company. The latter category is the subject of this paper. The paper therefore attempts to analyze the concept of corporate personality and its own consequences in the light of the provisions of the Companies and Allied Matters Act (CAMA) cap C22 LFN Some relevant statutes and the general principles of company law as developed overtime through case law are equally reviewed. A brief comparison of the position under Islamic law and customary law (as compared to what obtains in common law on the issue) is also undertaken in the course of the presentation. Meanwhile, it should be noted at the outset that although most companies are limited companies and so corporate personality and limited liability go hand in hand, the corporate personality concept does not necessarily involve the idea that the liability of the company s members is limited. This is because it is perfectly possible to form an unlimited company under section 36(5) (c) of CAMA. Thus, notwithstanding the tendency to equate the two legal personality and limited liability are two separate concepts Corporate Legal Personality of a Company as a Consequence of incorporation As suggested in the introduction to this paper, one of the consequences of incorporation of a company is the acquisition by the company of a distinct and separate personality from that of its members/shareholders. In fact, that has been hailed as the most important consequence. It was held in the case of C.B.D.I vs. COBEC (Nig.) Ltd. 3 Thus: By virtue of section 37 of the Companies and Allied Matters Act, the single most important consequence of incorporation of a company is the separate legal personality which the company acquires. Upon incorporation, a company is registered as a separate and distinct entity from any one of its shareholders, no matter how many shares it may hold. Also each company so registered or incorporated under the Act is [equally] quite distinct and separate from each other. Meanwhile, section 37 of CAMA provides that as from the date of incorporation mentioned in the certificate of incorporation, the subscriber of the memorandum together with such other persons as may, from time to time, become members of the company, shall be a body * Lecturer in the Department of Liberal Studies, Federal Polytechnic, Kaura Namoda, Zamfara State 1 Cf. The effect of certificate of registration. In Nigeria it is a prima facie evidence of compliance with all the requirements of registration, while in England it is a conclusive evidence to that effect. 2 Farrar J.H, Farrar s Company Law ( 2 nd ed, London : Butterworths 1988) 67; Pettet B, Company Law (London Longman 2001) [2004]13 NWLR (Pt.890)

2 corporate by the name contained in the memorandum, capable forthwith of exercising all the powers and functions of an incorporated company including the power to hold land, and having perpetual succession and common seal, but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is mentioned in this Act [emphasis, mine] Section 38(1) of the CAMA goes ahead to further explain and underscore the powers conferred by the preceding section 37. It provides that excepts to the extent that the company s memorandum or any enactment otherwise provides, every company shall, for the furtherance of its authorized business or objects, have all the powers of a natural person of full capacity. The provision of section 37 of CAMA quoted above, is a near replica of the combined provisions of section 13(3) and (4) of the United Kingdom (UK) s Companies Act, the precursor of the extant Companies Act, The only difference is the elaboration provided by the phrase including the power to hold land, and having perpetual succession and common seal contained in the said section 37. Meanwhile, section 16 of the current Companies Act, 2006 applicable in the UK differs with the 1985 Act and Nigeria s CAMA only in avoiding wordiness but not in providing the effect incorporation. The history of the concept of corporate legal personality of a company is an old one. It dates back to the 17 th century. The notorious case of Salomon V. Salomon & Co. 5 commonly regarded as the foundation of the principle was only an affirmation of an already known concept. 6 According to a learned author, non-commercial corporations enjoyed corporate personality prior to the Salomon s case. 7 He argued that the House of Lords only seized the opportunity presented by the Solomon s case to extend the old concept of corporate personality to joint-stock companies. It was further argued that the privileges attaching to corporations were originally granted to enable risky adventures to be embarked upon without the additional burden of personal liability of traders. Furthermore, the concept of corporate personality gave joint-stock companies an additional advantage over partnerships by providing a means of escape from risk of loss to big or small traders. Equally, the principle of legal personality seeks to separate company s capital from the assets of its members. Through this, it ensures that the capital of the company would not be used to meet the liability of individual members to their creditors. 8 The nature of a company s legal personality has been described by Lord MacNaghten in Salomon V. Salomon & Co. (supra) as 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 hands receive the profits, the company is not in law the agent of subscribers or a 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. 4 Walmsley K, Butterworths Company Law Handbook (18 th ed, London : Lexis Nexis 2004). 5 (1897) AC Akanki, O, Relevance of Corporate Personality Principle ( ) II N L J 9 ; Pettet, op.cit Ibid. 8 Ibid 14

3 There are many judicial decisions in Nigeria that restates this position and upholds the provision of CAMA in relation to the legal personality of companies. In one of such cases, Tsokwa Oil & Marketing Co. Vs. U.T.C (Nig.) Plc, 9 the Supreme Court held in the exact words of Lord MacNaghten that the company is at law a different person from its members. The case of Solomon thus established one of the basic articles of faith of British Company Law, indeed of company law of all common law systems, that the company is a legal person independent and distinct from its shareholders and its managers. 10 The principle has been rigorously applied by the courts since the Salomon s case across different jurisdictions. So widespread and consistent its application has been that it was asserted that there have been only a few cases where the court has disregarded the company s corporate personality and paid attention to where the real control and beneficial ownership of the company s undertaking lay. 11 Nevertheless, the idea of a company in the English sense with a distinct legal personality is alien to Islamic law and African customary law. It has been argued that prior to Africa s contact with Europe joint-stock companies were not in existence in African societies. 12 Application of the principle of separate legal personality of a company entails many things among which are the following: 1. The company is regarded in law as a person separate and distinct from members. It makes no difference to this rule that one member owns all the shares. 13 Much of this has already been stated in Salomon V. Salomon & Co. (Supra). It needs only to be added that subsequent decisions affirmed this principle and went a step further by holding that a controlling shareholder and governing director could have a contract with his company The Company is the Beneficial Owner of its Own Property The Shareholders of a company are not the individual owners of its property. They have no power as individuals to dispose the company s property. See Phillips v. Abou-Diwan 15 Similarly, the company does not hold its own property as a trustee for its members, and they have no interest therein The debts of the Members are not debt of the Company 17 However, members of a company shall be liable in the event of winding up of the company, to contribute in settling the debt of the company depending on the nature of the company. That is, whether the company is Unlimited, Limited Liability Company or Limited by guarantee. In the case of an Unlimited Company, members will be liable to contribute without limitation in settling the creditors of the company. While in the case of a limited Liability Company, Members will only be liable to contribute to the extent of the amount they subscribe to in the memorandum of association of the company. With regard to company 9 (2002) 12 NWLR (Pt.782) 440 at Akanki, op.cit 11 Pennington R.R., Company Law (4 th ed, London : Butterworths 1979) Barnes K.D., Cases and Materials on Nigerian Company Law, (Ile-Ife: OAU Press Ltd 1992) Ibid Lee V. Lee s Air Farming Ltd (1961) AC (1976) 2 FRCR Farrar, op.cit Barnes, op.cit. 65

4 limited by guarantee, members will only be liable to the amount they pledged to contribute in the event of winding up as illustrated under sections & 37 of CAMA. 4. Consequences of Legal Personality of Company The doctrine that a company is a legal entity, existing separate and distinct from its shareholders, is a legal theory established upon an expedient fiction. 18 The fiction has been introduced for the convenience of the remains to be said that the doctrine of separate legal personality of companies runs into problems as soon as it meets those parts of the general law which apply to natural persons. This is because as a mere legal fiction, it exists only in the eyes of the law. 19 It has no brain of its own it acts through biological persons the likes of directors and shareholders whose actions are binding on it. 20 It is therefore, an artificial entity which can act only when the acts of human beings are attributed to it by law. As a result, the concept is open to abuse. Corporate personality is not an immutable principle. Where shareholders or directors of a company hide under its garb to perpetrate fraud against creditors, its strict application would work hardship and injustice. In such situations, the court looks at the intention and activities of the individuals constituting the company to see if the advantages of separate legal personality are being applied to protect unworthy interest. This ensures that businessmen do not get the best of both worlds by taking the advantages of corporate personality without its disadvantages. 21 In the same vein, there are circumstances under which the veil of incorporation may be lifted. That is, the law will disregard or look behind the corporate personality. The Act it self permits the veil to be disregarded in certain situations. For instance, where a company s membership falls below the prescribed minimum, 22 where the company has been used for fraudulent transactions, 23 a misdirection of the company, in relation to the account holding and subsidiary companies, 24 and investigation into the affairs of the Company. 25 It may also be relevant to observe at this juncture the self-inflicted limitations of the patently exaggerative provisions of section 38 (1) of CAMA. The likening of the powers of the company to that of a natural person is subject to the limits provided in section 38 (2), any other enactment or the company s memorandum. It is important to note that a company unlike a natural person is limited to its object clause. 26 This by implication means that a company cannot act outside the objects stated in its memorandum otherwise, it will be termed ultra vires. We now look at some of the attributes of the legal personality of companies. 18 Ibid Pattet, op.cit Ladejobi v. Odutola Holdings Ltd (2002) 3 NWLR (Pt. 753) 126 at Akanki, op.cit Section 93 CAMA ; Iro Vs. Park (1972) 12 S.C Section 506 and 644 CAMA. ; Re: Patrick Lyon Ltd. (1933) Ch Section 336 CAMA. ; Container Nig. Ltd. Vs. Nigerian Glass Container and Metal Manufacturing Co. Ltd. (1979) 4-6 L.H.C Section 314 CAMA. ; Norwest Holst V. Secretary of State for Trade (1978) 3 All E.R Section 39 CAMA. ; Ashbury Rly Carriage & Iron Co. Vs. Richie (1875) LRH7HL 653

5 1. Right to own property The right to own property is one of the most important attributes of the legal personality concept. So important it is that the provision of section 37 of CAMA does not stop at stating that the company has all the powers and functions of an incorporated company, but went ahead to state that that power includes the power to hold land It is instructive to note that virtually all laws relating to land in Nigeria have, directly or indirectly, indicate that a company can own landed property. See for instance, the provisions of section 5 & 6 (1) of Land Use Act cap L5 LFN, 2004 and section 1(2) of the Lands (Title Vesting, Etc.) Act cap L7 LFN, On the other hand, Section 43 of the Constitution of the Federal Republic of Nigeria, 1999 vests the right to ownership of immovable property on citizens only. Meanwhile it was held in Alumaco Manufacturing Co. (Nig.) Ltd Vs. Oshodi Lisolo Local Government 27 that a company cannot be a citizen of Nigeria. Similarly, in the case of Merchant Bank Ltd Vs. Federal Minister of Finance (1961) All NLR 594 (SC) it was stated that a company is not, with respect a citizen of Nigeria However, it needs to be pointed out here that even if the above cited cases represents the correct position of the law, the word right used in section 43 of the Constitution is restrictive. It denotes fundamental right in the sense of a legal claim, not ability. There is a general consensus that a company can own property, movable or immovable, tangible or intangible. This position was further illustrated in the case of Macaura Vs. Northern Assurance Co. Ltd 28 where the Court maintained that the Company has the capacity to own property. In other words, all the properties of the company belong to the company as a legal entity and not to its members. This extends to properties acquired on behalf of the company by promoters prior to its incorporation which the company may ratify under section 72 of CAMA. 2. Right to sue and be sued In the common law tradition, only a natural person could sue or be sued. This was not a problem in the era before the Industrial Revolution, when the typical business venture was either a sole proprietorship or partnership in which case the owners were liable for the debts of the business. A feature of the corporation, however, is that the owners/shareholder enjoyed limited liability. They were generally not liable for the debts of the company. Thus, there was no remedy against a corporation that breached a contract or broke the law because it was not a legal person. To resolve the issue legal personality was established and the right of the company to sue and be sued was provided as one of the necessary corollaries. It may be observed that CAMA does not specifically provide for this right in section 37 thereof. However, by providing in section 38(1) that the company shall have all the powers of a natural person of full capacity, it goes without saying that the Act vests companies with the right to sue and sued. The right to sue and be sued granted to natural persons is principally provided for in sections 6(6)(b) and 36(1) of the Unreported Lagos High Court suit no. M/10/83 28 (1925) A.C. P. 619

6 Constitution. Meanwhile section 18(1) of Interpretation Act, cap 123 LFN 2004 defines person to include anybody of persons corporate and incorporate. A community reading of the provisions therefore affirms this right. As a restatement, the Supreme Court held in Bank of Baroda V. Iyalabani Co. Ltd 29 that companies and other corporations aggregate whether incorporated by charter, by prescription, by Act of Parliament or by statutory registration, sue and are sued by their corporate names. It was held in the case of Okumu Palm & Co. Ltd Vs. Iserhien 30 that it is the company that is sued in its registered name. 3. Perpetual Succession Perpetual succession means that the company exists in perpetuity. Unlike natural persons, the company does not have a life expectancy nor does it die a natural death. Until dissolved it continues to exist and survive the death of its directors and shareholders Liability As mentioned previously in this paper, the liability of the company is not the liability of its members except in the event of winding up where the members will be called upon to contribute in settling the creditors of the company as contained under section 37 of CAMA. 3. Conclusion Incorporation gives a company legal personality that separates it from its members with the result that it can do most of what a natural person could do including owning property, suing and being sued in its own corporate name. That distinct personality also enables it to outlive its members. The separate existence of the company has been identified as one of the attractions of the corporate form of businessmen. However, there is no denying the fact that just as the concept has been logically applied by the courts to serve its important purposes; it has also been used by some unscrupulous businessmen as a device to defeat some important values in the law. Consequently, both the law and the courts have come up with mechanisms that check its misapplication but do not deny its validity. 29 (2002) 13 NWLR (pt. 785) (2001) 6 NWLR Farrar, op. cit. 66