legal person

When a business becomes a ‘person’

Recently, an acquaintance heard me refer to a company as a person. Her dramatic response to my reference resulted into a mini-class of sorts, since she does not know a lot of legal jargon.
As we discussed, we delved into business and the importance of forming companies until she prompted me to elaborate on the ‘personality’ of a company. I obliged.

Among the issues we discussed, I concluded that one of the advantages of consulting legal practitioners on the legal processes of forming and carrying out a business venture is the availability of options that enable a prospective businessman decide which venture to take on.

Incorporating a company

This literally means forming a company as per the legal requirements that govern the business in a particular economy.
Incorporating a company is an avenue of expanding a business. It has its advantages and disadvantages like any practice. However, being in an economic environment, trading cannot survive without proper channels through which businesses can be certified for purposes of accountability.

A company will have directors and a secretary to run its operations; and shareholders who hold shares of the company (paid up or unpaid or partially paid up). These form the membership of and share interests in the company which is an entity of its own.
That is why it is proper to consider the implications and basic understanding of incorporating a company and why a company is considered a ‘person’ at law.

The following succinct explanation examines what it means when a company is considered a legal person.

Legality:

A company is a legal entity. It can make decisions, execute contracts, etc through its directors, who are its representatives. Any change in its directorship does not necessary cease its operations. A company survives if it observes the legal expectations for its existence.
The famous English case of * Salomon v. Salomon [1897] A.C. 22. HL, created a precedent understanding of a company as a ‘person’ as opposed to a natural person.
In that case, Salomon operated a sole business as a leather merchant for a long time. In 1892, he converted the business into a limited company, ‘Salomon & Co. Ltd’.

His wife and five of his children were members while he managed it as the Managing Director. In due course, the Company bought the business wherein Salomon held 20,001 of 20,007 shares; whilst his other family members held one share each. The company suffered losses and went into liquidation shortly thereafter.

Vaughan William J., a judge in the Court of Appeal held that Salomon feigned the entity when he remained the sole proprietor of the business turned company and therefore had to secure the company creditors.

The House of Lords, the highest court of record, saw this differently. It reversed the earlier court decision reasoning that Salomon had validly and wholly formed a company separate from himself because each member held at least a share. The House of Lords’ decision that the company owned the business and not Salomon stamped the concept that a company is a separate legal entity capable of carrying on business like an individual, although through its representatives.
Lord McNaughton famously put it;
The company is at law a different person altogether from the subscribers…; 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. Nor are the subscribers, as members liable in any shape or form, except, to the extent and in the manner provided by the Act.’

The above case, to date, influences how courts look at companies and the formalities involved therein. If all formalities are complied with, the company is a legal entity and courts will reconsider when establishing whether shareholders can be personally held liable for the company debts.

The existence of an incorporated company means that it is a person, separate from its members.

Liability:

This concept follows the above principle of a company being a separate legal entity from its members. A company can be limited or unlimited. Since a company is a legal person, it has legal obligations as well as rights. It therefore can sue or be sued.

The liability of a company is dependent on whether the acts of its representatives reflect its intention. Members who are directly involved in the company operations may not be wholly protected from liability in case a company is sued for breach of its duties. Members like directors have a heavier burden of separating their roles as directors from individual responsibilities/business.

When the directors act in favour of the company, the company is responsible and must redeem them. On the other hand, a company cannot ratify acts of directors who act outside their roles unless it can be verified that such acts benefitted the company.
Other important issues to note about an incorporated company include;
• Its ability to own property distinct from its members. Members can only claim a share in the company property if their subscription in the company remains valid. When they sell their shares, they forfeit the interest in the company property.
• A company continues operating despite death or illness or mental/physical incapacity of its directors or members. A change in its ownership does not necessarily cease the company from operating. It enjoys perpetual succession in law.
• On transfer of shares, a company may opt to limit how one can possess or purchase its shares. The articles of association will dictate how the transfer ought to be done and in case it deviates without proper authority, its members can object. This limits the operation shareholding in the company in as much as it enables the company to limit the control of its shareholding.
• It can borrow against its assets like a natural person does.
• It enjoys the liberty to choose its directors and managerial criteria through its representatives.

Conclusion

An entity that enjoys the privileges of a natural person in law will ordinarily have some form of human qualities. Incorporation is the birth, a certificate of incorporation is the birth certificate; and other documents are the identification and qualifications of a company. These similarities to a natural person give an artificial institution like a company the ‘personification’ in legal terms.

‘Does this mean that a company dies?’ My acquaintance finally asked.
‘Yes, it does. When it is dissolved,’ I replied, ‘but that is a topic for another day.’

BY ATUHAIRWE AGRACE

This article appears in our digital law newsletter, The Deuteronomy Vol 8, Issue 2 of August 11th, 2017
To receive The Deuteronomy in real time, click HERE

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