THE ARTIFICIAL HUMAN WE LIVE WITH: LEGAL CONSEQUENCES OF A REGISTERED COMPANY
A.INTRODUCTION
"Once the company is legally incorporated it must be treated like any other independent person with 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." (at p 30) (per Lord Halsbury in Salomon v A Salomon & Co Ltd [1897] AC 22)
Just imagine yourself in a public bus en route to Lagos from Akure. The vehicle is being occupied and controlled by humans viz. a driver, a bus conductor and passengers. The bus on its own is an artificial entity. The creation and subsequent management of the bus are being propelled by human activities. So is a company which can be used interchangeably for a corporation. A corporation like the bus is created by humans and upon formation, it becomes an artificial human separated from its creators. Nevertheless, in law the artificial nature of a company is ignored to the extent that a company registered in accordance with the provisions of the companies legislation is, as from the date of its incorporation, a body corporate. As such, the registered company is a separate legal entity; it possesses rights and is subject to duties in much the same way as a natural person. For example, a company may sue and be sued in its own name and will be liable to pay its own form of tax, i.e. corporation tax.
B.THE BIRTH OF A COMPANY
Companies and Allied Matters Act (Cap C20, LFN 2004) (CAMA) is the current legislation guiding the formation and other matters relating to companies in Nigeria. Part II (Sections 18-62) of the Act provides for the Incorporation of Companies and Incidental Matters. Accordingly, upon compliance with the provisions of the Sections and subsequent registration of a company evidenced by a certificate of incorporation, a separate legal personality having “all the powers of a natural person of full capacity” (Section 38 (1) of CAMA) is born.
C.LEGAL CONSEQUENCES OF A REGISTERED COMPANY
Human beings are generally legal persons—that is, they are subject to the legal system in which they find themselves. While that legal system imposes obligations on the legal person it also confers rights. When dealing with humans who are legal persons we have little difficulty with the concept, generally viewing them as one and the same. Humanity is not necessarily legal personality. Children for example, while they are human beings, are commonly excluded from having full legal personality until they cease being children. In essence humanity is a state of nature and legal personality is an artificial construct which may or may not be conferred. So, if humanity is not necessary for legal personality it follows that it is possible for legal personality to be conferred on non-humans. The logical follow-on from the creation of a separate legal personality is that it is a separate legal personality capable potentially of suing and being sued in its own name, of holding property in its own name, and logically, therefore, of making profits and losses that are its own and not those of its members (shareholders).
Two key legal implications of incorporation of limited companies are the existence of a separate legal personality and the concept of limited liability. Incorporation by registration was introduced in 1844 under Joint Stock Companies Act 1844 and the doctrine of limited liability followed in 1855 under Limited Liability Act 1855. Subsequently, in 1897, in the landmark case of Salomon v A Salomon & Co Ltd [1897] AC 22, the House of Lords explored the effects of these enactments and cemented into English law the twin concepts of corporate entity and limited liability.
The facts of the Salomon case were as follows. Salomon carried on business as a leather merchant and boot manufacturer. In 1892, he formed a limited company to take over the business. The memorandum of association was signed by Salomon, his wife, his daughter, and four of his sons. Each subscribed for one share. The subscribers met and appointed Mr Salomon and his two elder sons as directors. The company paid £39,000 to Salomon for the business, and the mode of payment was to give Salomon £10,000 in debentures, secured by a floating charge on the company’s assets, and 20,000 shares of £1 each and the balance in cash. Less than one year later the company fell on hard times and a liquidator was appointed. If Salomon’s debenture was valid, he was, as a secured creditor, entitled to be paid before the unsecured trade creditors. The assets were sufficient to pay off the debentures but in that event the trade creditors would receive nothing. The company’s liquidator claimed that the company’s business was still Salomon’s, in that the company was merely a sham to limit Salomon’s liability for debts incurred in carrying it on, and the repayment of Salomon’s debenture should be postponed until the company’s other creditors were satisfied. At first instance, Vaughan Williams J agreed with the liquidator. He held that Salomon’s sole purpose in forming the company was to use it as an agent to run his business for him. As such, the principal was responsible for the debts of its agent. The basis for the agency argument was that the company was a mere alias of its founder and had not been formed in accordance with the true spirit of the 1862 Companies Act. Vaughan Williams J believed that the 1862 Act, in its requirement for ‘seven persons associated for a lawful purpose’ should be interpreted to mean seven persons with a bona fide intention of participating in a trading venture, and not, as in the present case, a company which, in reality, was akin to a one-man business.
On appeal, the decision of Vaughan Williams J was upheld, although in the Court of Appeal’s opinion the correct analogy between the company and Mr Salomon was that of a trust relationship: the company held its property on trust for its beneficiary, Mr Salomon. As such, the creditors of A Salomon & Co Ltd were entitled to a claim against Mr Salomon through the company. As at first instance, the Court of Appeal recognised that A Salomon & Co Ltd, in complying with the registration provisions of the 1862 Act, had been validly incorporated as a separate legal entity. However, the court would not recognise that the liability of A Salomon & Co Ltd should be divorced from that of its founder, Mr Salomon, because in common with the High Court it agreed that in relation to the requirements of incorporation, the correct interpretation of the Companies Act 1862 was that the principle of limited liability was a privilege conferred on genuinely independent shareholders and not on “one substantial person and six mere dummies”.
Notwithstanding that the business had been profitable prior to its incorporation, Lindley LJ was of the opinion that the manner in which the company had been formed indicated that it had been created for an illegitimate purpose, that it was “device to defraud creditors” (at p 339) and as such was therefore contrary to the terms of the 1862 Act because it was not associated for a lawful purpose. Indeed, in the Court of Appeal’s opinion the company’s illegitimacy stemmed from the fact that it was in reality a one-man company. Lopes LJ stated:
“If we were to permit it to succeed, we should be authorising a perversion of the Joint Stock Companies Act. We should give vitality to that which is a myth and a fiction...To legalise such a transaction would be a scandal.” (at p 341)
The House of Lords, in reversing the decision of the Court of Appeal, rigorously denied the assertion by the lower courts that a company could not be formed by one dominant character together with six other persons divorced of a substantial interest in the business venture. According to the House, the statutory language of the Companies Act 1862 (s 6) was clear. A company could be incorporated providing it had at least seven members, irrespective of whether all seven members made a substantial contribution to the company.
Although both the High Court and the Court of Appeal recognised that A Salomon & Co Ltd, having complied with the registration provisions of the 1862 Act, was a corporate entity, they had not contemplated the fact that once incorporated the company could not be considered as anything other than an independent entity, totally separate and distinct from its founder, Mr Salomon. The House of Lords’ interpretation of the separate legal identity of a company was, in respect of A Salomon & Co Ltd, absolute. Lord Macnaughten stated thus:
“It may be that a company constituted like that under consideration was not in the contemplation of the legislature at the time when the Act authorising limited liability was passed; that if what is possible under the enactments as they stand had been foreseen a minimum sum would have been fixed as the least denomination of share possible; and that it would have been made a condition that each of the seven persons should have a substantial interest in the company. But we have to interpret the law, not to make it; and it must be remembered that no one need trust a limited company unless he so please, and that before he does so he can ascertain, if he so pleases, what is the capital of the company and how it is held.” (at p 46)
His lordship then went on to state:
“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. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act.” (at p 51)
The House of Lords in considering the agency and trust arguments of the lower courts concluded that both were contradictory to the view that the company was a separate legal entity. The finding of an agency or trust relationship would have rendered as illusory the limited liability of the company’s majority shareholder, Mr Salomon. The finding of an agency or trust relationship would have meant that Mr Salomon would have been personally liable for the company’s debts. Lord Herschell said of the decisions of the lower courts:
“It is to be observed that both courts treated the company as a legal entity distinct from Salomon and the members who composed it, and therefore as a validly constituted corporation. . . Under the circumstances I am at a loss to understand what is meant by saying that A Salomon & Co Ltd is but an alias for A Salomon.” (at p 42)
Subsequently, the principle of separate identity has been constantly applied by the court, though there are occasional exceptional instances.
In Lee (Catherine) v Lee’s Air Farming Ltd[1960] 3 All ER 420, Mr Lee incorporated a company, Lee’s Air Farming Limited, in August 1954. The nominal capital of the company was £3,000 divided into three thousand shares of £1 each. Mr Lee held 2,999 shares, the final share being held by a solicitor for Mr Lee because the New Zealand Companies Act required two shareholders. Mr Lee was also the sole ‘governing director’ for life. Thus, as with Mr Salomon, he was in essence a sole trader who now operated through a corporation. Mr Lee was also specifically appointed as an employee in the company’s articles of association which stated:
“The company shall employ the said Geoffrey Woodhouse Lee as the chief pilot of the company at a salary of £1,500 per annum from the date of incorporation of the company and in respect of such employment the rules of law applicable to the relationship of master and servant shall apply as between the company and the said Geoffrey Woodhouse Lee.”
Mr Lee therefore wore three hats as far as the company was concerned. He was the vast majority shareholder, he was the sole governing director for life and he was an employee of the company. In March 1956, while Mr Lee was working, the company plane he was flying, stalled and crashed. Mr Lee was killed in the crash leaving a widow and four infant children who were totally dependent on him.
The company as part of its statutory obligations had been paying an insurance policy to cover claims brought under the Workers’ Compensation Act 1922. The widow claimed she was entitled to compensation under the Act as the widow of a ‘worker’. The issue went first to the New Zealand Court of Appeal who found that he was not a ‘worker’ within the meaning of the Act and so no compensation was payable. The case was appealed to the Privy Council in London. They emphasised that the company and Mr Lee were distinct legal entities and therefore capable of entering into legal relations with one another. As such they had entered into a contractual relationship for him to be employed as the chief pilot of the company.
They found that he could in his role of governing director give himself orders as chief pilot. It was therefore a master and servant relationship and so he fitted the definition of ‘worker’ under the Act. The widow was therefore entitled to compensation.
Also in Macaura v Northern Assurance Co Ltd [1925] AC 619, Mr Macaura was the owner of the Killymoon estate in County Tyrone. In December 1919 he agreed to sell to the Irish Canadian Saw Mills Ltd all the timber, both felled and standing, on the estate in return for the entire issued share capital of the company, to be held by himself and his nominees. He also granted the company a licence to enter the estate, fell the remaining trees and use the sawmill. By August 1921, the company had cut down the remaining trees and passed the timber through the mill.
The timber, which represented almost the entire assets of the company, was then stored on the estate. On 6 February 1922 a policy insuring the timber was taken out in the name of Mr Macaura. On 22 February a fire destroyed the timber on the estate. Mr Macaura then sought to claim under the policy he had taken out. The insurance company contended that he had no insurable interest in the timber as the timber belonged to the company and not Mr Macaura. The case passed through the Northern Ireland court system, during which time allegations of fraud were made against Mr Macaura but never proven. Eventually in 1925 the issue arrived before the House of Lords who, agreeing with the insurance company, found that the timber belonged to the company and that Mr Macaura even though he owned all the shares in the company had no insurable interest in the property of the company. Lord Wrenbury, agreeing with the insurance company’s contention, stated that a member:
“Even if he holds all the shares is not the corporation and . . . neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.”
Just as corporate personality facilitates limited liability by having the debts belong to the corporation and not the members it also means that the company’s assets belong to it and not the shareholders. Thus corporate personality can be a double-edged sword.
Equally, the consequences and effects of incorporation of a company is set out in Section 37 of CAMA and it provides as follows:
“As from the date 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 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 a 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.”
The Nigerian courts had at various times upheld the doctrine of corporate personality as it applies to corporate administration governance and control. The principle was famously celebrated in the case of Marina Nominees Ltd v Federal Board of Inland Revenue (1986) 2 NWLR [Pt. 20] at 61 where Aniagolu JSC (as he then was) stated as follows:
“. . . the truth however is that it is a company registered under the Companies Act having its full legal status on the principles enunciated in Salomon v Salomon and Co Ltd and must be subject to all incidents of incorporation.”
What transpired in this case was that Peat Marwick Casselton and Co. a firm of accountants acted as secretary to a number of its client companies. In March, 1964 the firm incorporated the Marina Nominees Ltd, the appellant to perform secretarial duties. The company had other objects. It had no staff of its own. All the staff who carried out the secretarial duties were employees of the holding company. A dispute arose between the company; Marina Nominees Ltd and the Federal Board of Inland Revenue as to whether the company should be liable to pay tax on income it earned and the Supreme Court held inter-alia that an incorporated company must be regarded as a separate entity from anyone of its shareholders and subject to all incidents under the Companies Act of a company so registered.
Jurisprudentially, within the Nigerian context the underlying foundation upon which the above position was premised was handed down in the recent case of Iyke Medical Merchandise v. Pfizer Inc (2001) FWLR [Pt. 53] 62 where the doctrine of juristic personality was generally appraised and the phraseology “juristic person” was recognized to include:
i.Natural persons, that is to say, human beings;
ii.Companies incorporated under the Companies Act;
iii.Corporations aggregate and Corporations sole with perpetual succession;
iv.Certain unincorporated associations granted the status of legal personae by law such as:
a)Registered Trade Union;
b)Partnership and
c)Friendly societies or sole proprietorships.
This doctrine was concretized in (iii) above with all the attendant incidents of incorporation and within the Nigerian context. The case of A.C.B v Emostrade Ltd (2002) FWLR [pt. 104] 540 recently decided by the Supreme Court; per UWAIFO JSC also held that:
“What was needed to be proved as to the juristic personality of the plaintiff was whether there was evidence that it was duly incorporated.”
The answer to this judicial poser is that upon production of the certificate of incorporation the company wears the elegant corporate personality cloak. To buttress this, the court in Habib Nig. Bank Ltd v Ochete (2001) FWLR [pt. 54] 384 stated that as from the moment of incorporation, it legally assumed a separate and distinct personality from the plaintiff and his wife as well as others behind it. It is thus submitted that from that moment it puts on a corporate veil beyond which no one can penetrate except it is lifted in a manner authorized by law. It could own property and accept transfer of assets and liabilities in its corporate name.
The doctrine further postulates that only a company can bring an action for any wrong done against it since it has its own name by virtue of its incorporation. The legal implication also appears to be that a company not registered in Nigeria is a legal person and may sue in a Nigerian court. This postulation was given judicial approval in the case of Kitchen Equip W.A. Ltd v Staines Catering Equip Int Ltd (UNREPORTED FCAL/17/82)
In the light of the above, it has been held in the Nigerian case of Philips v Abou Diwan (1976) 2 FRCR 24 that the shareholders are not the individual owners of the company’s property and have no powers as individuals to dispose of the Company’s property. This in essence implies that the liability of individual shareholders is limited to the number of shares subscribed to and does not cover the unsubscribed assets of the shareholders since they are distinct from the company’s assets.
Accordingly, the legal personality of a company affects its structure, existence, capacity, power, rights and liabilities. Although a company is a legal entity and has an independent legal personality, it is, of course, an artificial person or entity. Therefore, all the operations and activities of the company have to be carried on by its officers and agents who act as its alter ego (a corporation used by an individual in conducting personal business). In Bolton (Engineering) Co. Ltd. v Graham and Sons (1934) 1 K.B 57, Denning LJ characterised the position as follows:
“A Company may in many ways be likened to a human body. It has a brain and nerve center, which controls what it does. It also has hands, which holds the tools and act in accordance with direction from the center. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the Company and Control what it does…..”
D.CONCLUSION
In general terms, a company upon incorporation is a person in law separate from any and all of the individuals involved in the company whether those individuals are its owners/shareholders, its managers/directors or are involved in some other way.
In general terms a company has the capacity to both:
1.enjoy (by virtue of its existence), or acquire, enforceable legal rights or property; and
2.be (by virtue of its existence), or become subject to, enforceable legal obligations and liabilities.
In specific terms, a company:
a.can own property
b.can be a party to a contract
c.can act tortuously
d.can be a victim of tortious behaviour
e.can commit a crime
f.can be the victim of a crime
g.can sue and be sued
h.has a nationality
i.has a domicile
j.has human rights.
So readers! Next time you see an incorporated company, doff your hat, nod and smile in the euphoria of knowledge of the fact that under the law, a registered company is as human as you are.
REFERENCES:
1.Company Law by Alan Dignam and John Lowry, 7th Edition, Oxford University Press
2.Company Law Fundamental Principles by Stephen Griffin, Michael Hirst and Peter Walton, 4th Edition, Pearson Education Limited.
3.Bourne on Company Law by Nicholas Bourne, 6th Edition, Routledge.
4.Unlocking Company Law by Susan McLaughlin, 2nd Edition, Routledge.
5.Company Law by Ben Pettet, 2nd Edition, Longman Law Series
6.Company Law: Key Facts Key Cases by Ann Ridley and Chris Shepherd, Routledge.
7.Essential Company Law by Nicholas Bourne, 3rd Edition, Cavendish Publishing Limited.
8.Smith and Keenan’s Company Law by Charles Wild and Stuart Weinstein, 5th Edition, Pearson Education Limited.
9.Company Law and Practice in Nigeria by Hon. Dr. J Olakunle Orojo, 5th Edition, LexisNexis.
10.“A Critical Appraisal Of The Doctrine Of Corporate Personality Under The Nigerian Company Law” by Akinola Bukola, Lecturer Nigerian Law School, Augustine Nnamani Campus, Enugu.
OLABODE, OLADAPO SAMUEL
[THE SMILING MAN]
500 level
Public Relations Officer
Law Students’ Society
Faculty of Law
Obafemi Awolowo University
Ile-Ife, Nigeria
+2348176561958
[email protected]
