Corporate legal personality explained

Legal Matters

Arthur Marara

THIS week, we want to look at the legal personality, with particular focus on companies, which are juristic bodies.

A juristic person is a body or association, other than a natural person, which is endowed by law with the capacity to have rights and duties, apart from its members.

Juristic persons are not only companies but also other statutory bodies such as parastatals and “universitas”, which we will examine at a later stage.

A company has a separate legal existence from its members.

In other words, as a juristic person, a company is an entity that is separate from its members.

It has the capacity to own property, separate from its members.

Its debts and liabilities are not those of its members.

It can sue and be sued in its own name.

A company has what is referred to as “perpetual succession”, which means its existence and identity are not affected by a change in its shareholding or control.

A company is, therefore, a distinct legal person, an artificial person or simply a body corporate.

The concept has survived for well over a century.

It still subsists.

It assisted, and still assists, in the establishment, growth and expansion of corporations.

Persons with entrepreneurial skills have taken, and still continue to take, advantage of its existence to form legal entities without fear of being made personally liable for debts they incur in the name of the company they establish.

The courts do not, therefore, treat the principle of separate legal personality lightly.

A company is a person without a soul. Renowned author Ellison Kahn has described it in the following terms: “A company has neither a body that can be kicked nor a soul that can be damned.”

From these statements, we can deduce that a company is a person, legally, and not naturally created.

It is, therefore, a legal fiction; an abstraction.

The principle of separate legal personality was established in the leading case of Salomon v Salomon & Co. (1897) AC 22, the facts of which briefly were as follows:

Mr Salomon was a leather merchant, trading as a sole trader. He decided to sell his business to a limited company he had formed for that purpose. The only shareholders in the company were Mr Salomon himself, his wife, a daughter and four sons.

In part payment, Mr Salomon was issued with debentures.

The company eventually failed and was put under liquidation.

It was found that the amount realised from the assets of the company would be insufficient to pay all the creditors.

Being a secured creditor, Mr Salomon demanded payment of his debt first.

The liquidator alleged the company was a mere sham, an alias or mere agent of Mr Salomon.

The Appeal Court ruled that Mr Salomon and the company were two separate persons.

Lord Halsbury LC said: “It seems to me impossible to dispute that once a company is legally incorporated it must be treated like any other independent person with rights and liabilities appropriate to it, 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.”

Lord Macnaghten, who agreed with this view, added: “When the memorandum is duly signed and registered, though there be only seven shares taken, the subscribers are a body corporate capable of exercising all the functions of an incorporated company. Those are strong words. The company attains maturity on its birth. There is no period of minority — no interval of incapacity”.

Although most of the leading cases we have examined are English, it should be noted that since ancient Roman times, jurists and Roman law recognised some form of legal personality, which involved, inter alia, perpetual succession, a separation from the body’s members and the ability to participate in legal transactions.

The Companies and Other Business Entities Act itself recognises the juristic personality of a company.

It provides that a company shall have the capacity and powers of a natural person insofar as a body corporate is capable of exercising such power.

Once a registration certificate has been issued in terms of the Companies and Other Business Entities Act, the company acquires its own separate legal personality.

The separate legal personality of a company means:

1. Shareholders have limited liability;
2. Property and assets of a company belong to the company;
3. Profits belong to the company;
4. Debts and liabilities of the company belong to the firm;
5. Shareholders have no right to manage the business or enter into transactions on behalf of the company;
6. A company may enter into contracts with its shareholders because it is a person separate from its shareholders;
7. A company may sue or be sued in its own name; and
8. A company enjoys perpetual succession.

In future articles, we will look at instances when the corporate veil can be pierced.

LEGAL DISCLAIMER: The material contained in this article is set out in good faith for general guidance in the spirit of raising legal awareness on topical interests that affect most people on a daily basis.

They are not meant to create an attorney-client relationship or constitute solicitation. No liability can be accepted for loss or expense incurred as a result of relying in particular circumstances on statements made in the article. Laws and regulations are complex and liable to change, and readers should check the current position with the relevant authorities before making personal arrangements.

 

Arthur Marara is a corporate law attorney practising law in Harare. He is also a notary public and conveyancer. He is passionate about employment law, commercial law, family law and promoting legal awareness and access to justice. He writes in his personal capacity. You can follow him on social media (Facebook Attorney Arthur Marara), or WhatsApp him on +263780055152 or email [email protected]