COMPANY LAW Otim Enoch LLB KIU Uganda LLM

COMPANY LAW Otim Enoch LLB (KIU), (Uganda), LLM (Cand) (Germany), PG Dip(LDC), Advocate of the High Court of Uganda. TOPIC THREE 1

CONTENTS OF THE PRESENTATION CORPORATE PERSONALITY l Corporate Personality l Consequences of Incorporation 2

CORPORATE PERSONALITY 3 CORPORATE PERSONALITY l Corporate personality is the fact stated by the law that a company is recognized as a legal entity distinct from its members. l A company with such personality is an independent legal existence separate from its shareholders, directors, officers and creators. l This is famously known as the veil of incorporation. l As a result of corporate personality, a company has perpetual succession. It simply means the company is everlasting and will continue to do business until it is properly wound up.

CORPORATE PERSONALITY l l 4 As a separate legal person, a company will not be affected by changes such as death, transfer of shares or resignation of any members but will continue to exist despite the number of times the changes of membership occur. Even if all the members die, it will not influence the privileges, immunities, estates and possessions of a company. The principle of perpetual succession is clearly illustrated in the case of Re Noel Tedman Holdings Pty Ltd (1967) Hence it’s capable of enjoying rights and being subject to duties which are not the same as those enjoyed or borne by its members. In other words it has a legal personality and it is often described as an artificial person in contrast with a human being-a natural person.

CORPORATE PERSONALITY l l l It has no limited liability, but under the corporate entity doctrine it will have separate legal personality. In practice, most companies are limited companies and so corporate personality and limited liability tend to go hand in hand. The principle was established in the landmark case of Salomon v A Salomon & Co Ltd (1897). – – 5 – The facts of this case were that Salomon had incorporated his boot and shoe repair business, transferring it to a company. He took all the shares of the company except six, which were held by his wife, daughter and four sons. Part of the payment for the transfer of the business was made in the form of debentures (a secured loan) issued by the company to Salomon.

CORPORATE PERSONALITY – – – l 6 Salomon transferred the debentures to Broderib in exchange for a loan. Salomon defaulted on payment of interest on the loan and Broderib sought to enforce the security against the company. Unsecured creditors tried to put the company into liquidation. A dispute ensued as to whether Broderib or the unsecured creditors had priority in relation to payment of the debts. It was argued for the unsecured creditors that Salomon’s security was void as the company was a sham and was, in reality, the agent of Salomon. This was upheld at the trial and court of appeal. The House of Lords held that this was not the case and the company had been properly incorporated and that, therefore, the security was valid and could be enforced. The case is the most important case in company law since it is from this case that many of the principles of British company law flow.

CORPORATE PERSONALITY l l 1. 2. l 7 However, it has not been universally followed and there are exceptions to the Salomon principle where the corporate veil is lifted. See the following provisions: Ss 4, 50 – 53, 55 -59, 161 of Companies Act, 2012 Order 29 rr. 1 & 2 Civil Procedure Rules SI 71 -1 Before turning to the exceptions, it is worth noting some applications of this basic principle.

CORPORATE PERSONALITY 8 CONSEQUENCES OF INCORPORATION l Upon incorporation, a company is deemed to be immortal and to exist beyond its founders. l The fundamental attribute of corporate personality from which all other consequences flow is that “the corporation is a legal entity distinct from its members”. l Hence it’s capable of enjoying rights and being subject to duties which are not the same as those enjoyed or borne by its members. l In other words it has a legal personality and it is often described as an artificial person in contrast with a human being – a natural person.

CORPORATE PERSONALITY l 1. l l l 9 It is from this fundamental attribute of separate personality that most of the particular advantages of incorporation spring and these are: Liability The company being a distinct legal “persona” is liable for its debts and obligations and the members or directors cannot be held personally responsible for the company’s debts. It follows that the company’s creditors can only sue the company and not the shareholders. In Sentamu v UCB (1983) HCB 59, it was held that individual members of the company are not liable for the company’s debts.

CORPORATE PERSONALITY – – 10 The facts of the case are that the plaintiff obtained a loan of 250, 000 as the MD Bunyoro Stationers and Printers Limited. The loan was for the company and he negotiated with the Bank in his capacity as the MD. In July and August the Bank wrote threatening letters to the plaintiff to the effect that the plaintiff would be arrested by military personnel unless the loan was paid. The 2 nd defendant knew that the company was a limited liability company. The plaintiff was arrested and locked up on the orders of the servants of the 1 st defendant. He was released after the debt was paid up by a friend. He sued the defendant. The issue was whether the defendant was liable to pay the company debt as an individual. It was held that a LLC is a separate entity from its directors, shareholders and members and its individual members are not liable for the debts of the company. Even as the MD, the plaintiff could not be personally liable for the company’s debts and that the 2 nd defendant’s action in holding the plaintiff so liable was unjustifiable and unlawful.

CORPORATE PERSONALITY 2. l l 11 Property An incorporated company is able to own property separately from its members. Thus, the members cannot claim an interest or interfere with the company property for their personal gain/benefit. Thus, one of the advantages of incorporation (corporate personality) is that it enables the property of the company to be clearly, distinguished from that of the members. In Macaura v. Northern Assurance Co. Ltd & Others [1925] A. C 619: – Lord Buckmaster of the House in Lords held that no shareholder has a right to any item of the property of the company, even if he holds all the shares in the company.

CORPORATE PERSONALITY l In Hindu Dispensary Zanzibar v. N. A Patwa & Sons: – 3. l l 12 a flat was let out to a company and the question was whether the company could be regarded as a tenant. It was held that a company can have possession of business premises by its servants or agents and that in fact that is the only way a company can have possession of its premises. Legal Proceedings As a legal person, a company can take action to enforce its legal rights or be sued for breach of its duties in the courts of law. If it is the company being sued, then it should be sued in its registered name. if a wrong or incorrect name is used, the case will be dismissed from court.

CORPORATE PERSONALITY l In Dennis Njemanze v. Shell B. P Port Harcourt (1966) All NLR 8 – l In Wani v. Uganda Timber & Joiners Ltd. HCCS No. 989 of 1972 – 13 The plaintiff sued a company called Shell B. P Port Harcourt which was a non existing company. Counsel for the defendant company objected that there was no such company and the suit should be dismissed. Counsel for the plaintiff sought courts leave to amend and put the right party but court refused to grant the leave and dismissed the case. The plaintiff applied for a warrant of arrest against a managing director of a company instead of suing the company, Chief Justice Kiwanuka held that a managing director of a company is not the company and cannot be sued personally. That if there is a case against the company then the company is the right party to be

CORPORATE PERSONALITY 4. l l 14 Perpetual Succession This means that even if a shareholder dies, or all the shareholders die or go bankrupt, in the eyes of the law, the company will remain in existence. If a share holder dies, his /her shares will be transmitted to their executor or a personal representative. Also in case a shareholder no longer wants to be a shareholder in a company, he will simply transfer his shares to someone else and the company will continue to exist. The only way a company can come to an end is by winding up, striking it off the register of companies or through amalgamation and reconstruction as provided by the Companies Act.

CORPORATE PERSONALITY l This was illustrated in the case In Re Noel Tedman Holdings Pty Ltd (1967) Qd. R 561: – 15 Noel Tedman and his wife were the only shareholders and officers of two companies. They were killed as a result of a road traffic accident. An infant child survived the deceased. Their death did not cause the dissolution of the companies’ legal existence. The personal representatives of the deceased shareholders sought the Court to make an order to enable them to appoint the new directors of the companies so as to realize the property for the benefit of the deceased estates. The court held that the personal representative of the deceased shareholders could appoint the directors so that these new directors could assent to the transfer of the shares to the beneficiary.

CORPORATE PERSONALITY l 5. l l l 16 This perpetual succession gives the certainty required in the commercial world even when ownership of shares changes there is no effect on the performance of the company and no disruption in the company business. Transfer of Shares A share constitutes an item of property, which is freely transferable, except in the case of private companies. When shares are transferred, the person who transfers ceases to be a shareholder and the person to whom they are transferred becomes the shareholder. In private companies, there is a restriction on the transfer of shares for example one may not transfer his shares except to an existing member or shareholder, and not to an outsider.

CORPORATE PERSONALITY l 6. l l l 17 This is essential and is in any event desirable if such a company is to retain its character of an incorporated private company. Borrowing A company can borrow money and provide security in the form of a floating charge. A floating charge is a security created over the assets of the company. When a company borrows money let’s say from the bank or any other creditor, it may use its assets e. g. cars, bank accounts and other assets as security, the security/ charge will then float over those assets.

CORPORATE PERSONALITY l l l 7. l 18 l In case the company defaults on payment, the charge can settle on one or all of those assets and the bank/creditor of the company can sell those assets to recover their money. It is called a floating charge because it floats like a cloud over the whole assets of the company from time to time, it only settles/crystallizes if the company defaults on payment. So before the charge settles on the assets, the company is free to deal with those assets even to dispose them off in the usual course of business. Capacity to Contract On incorporation, a company can enter into any contract with third parties. See S. 50 (1) of Companies Act.

CORPORATE PERSONALITY l In Lee v. Lee & Air Farming Co. Ltd (1961) A. C 12: – – 19 The applicant husband was the founder of the respondent company and was also the controlling shareholder and governing director. He was also employed as the company’s chief pilot and was paid wages for that purpose. In the course of his employment he was killed and the applicant, the widow sought compensation under the Workman’s Compensation Act. For this to succeed, she had to prove that her husband was a worker within the meaning of the Act. Court of Appeal of New Zealand held that the husband could not have been an employee of the company in the light of the special circumstances in this particular case. The court argued that if there was a contract of employment between Lee and the company, Lee had the duty of giving orders and obeying them at the same time. That there could be no power of control and the relationship of mater-servant could not be deemed to exist.

CORPORATE PERSONALITY The Privy Council disagreed with the Court of Appeal and observed that the mere fact that one is a director of the company cannot be an impediment to one’s capacity to enter into a contract to serve the company. – It was therefore held that the deceased and the company were separate and distinct legal entities and there was no reason to deny the existence of the contractual relationship. In Re Air Safaris (1969) EA 595: it was held that a company can enter into a valid and effective contract with one of its members even if such a member is a principle shareholder or even the MD as long as it is within the objects of the company. – l l 20

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