Incorporation marks the birth of a corporate personality in legal terms, though it does not have any physical presence. The operations and functions of a company are undertaken only by the human minds as otherwise it is not possible for a company to operate on its own. Hence the entire credit of all the profits and losses can be given to all the personnel who are responsible for managing the business. However, it is important to note that all these actions are undertaken only in their professional capacity, in the name of company. This implies that there is no direct benefit which they are deriving out for their personal self. In addition, there are other members in the form of shareholders who are considered as the true owners and make investment to run to develop the capital of company. In pursuance to the same it was held by the court that it is essential to establish a distinction between corporate personality of company and those of all the natural persons made responsible for operating the company.
Concept of Incorporation
Incorporation is an event in the life a company which makes it come into existence and also enable the corporate personality to come alive. Section 14 of the Company Act 2006 requires every entity to register with the concerned authority, in pursuance to which the certificate of incorporation as stipulated in section of the Act is awarded. This is the juncture where the company is said to have incorporated. In section 15 of the Act it has been clearly stated that certificate of incorporation presents a conclusive evidence for valid existence of a company. Once this certificate is issued by the authorities the body corporate is made entitled to exercise all its functions and operate to earn profits. All the subscribers and other members of company from this point onwards are known in the name of incorporated company as stated in the certificate of incorporation.
Distinct Corporate Personality
Once a corporate comes into existence after receiving the certificate of incorporation, it acquires a separate as well as distinct identity. In consequence to which an artificial person comes into existence who undertakes all its operations or functions. Such an artificial person also has power to sue others and be sued by others. The English law adopted the concept of distinct legal personality which ascertains and creates separate rights and obligations for a corporate. As observed in Mach Marketing International SA v. MacColl (1995), every business organization is born with its incorporation. The concept of Corporate Personality or separate legal identity was first observed in the case of Solomon v. Solomon (1896), wherein it was held by the court that all the actions and obligations of a corporate are in its own name (Cheng, 2011). However, these activities are essentially being undertaken by the natural persons attached to the company through the positions of director or other members. It is imperative to understand the fact that though a company acquires artificial personality, it cannot exist physically and hence, requires natural persons to operate all its activities. In such a situation the question arises who is liable for all these actions and the resulting consequences. In the Solomon case it was opined by the court that all the functions and operations which are undertaken in the name of company, shall be regarded as undertaken by the company itself (Hassan and et. al., 2012). Hence, the liability ought to arise in the name of company, and no personal liability of such persons shall arise in such circumstances.
The legal personality of company also empowers and facilitates to formulate contractual as well as other legal relationships to undertake all the functions in order to operate the business and otherwise (Ireland, 2010). Moreover, this legal principle also empowers a corporate to be able to possess assets and properties in its own name. The evidence of this distinct identity has also been recognized by the Insolvency Act through section 74 which provides that members of Limited Liability Company cannot be imposed with personal liabilities for payment of creditors of the entity, subject to certain exceptions. In the legal terminology there exists a corporate veil between the identity of a company and its members. Thus in accordance to this general principle a corporate is responsible or liable for its own functions. The manner in which a natural person cannot be made liable for actions of other persons, the members can also not be made responsible for actions of another artificial person. Further, in the case of Collins Stewart Ltd. Financial Time Ltd. (2005) it was opined by the court that this legal relationship delineates the connection which exists between a corporate and the respective members (Mwaura, 2012). Further, it was also stated that the event of incorporation gives rise to a dual existence of a corporate, firstly in the nature of association of all the members and secondly, as an artificial person distinct from its shareholders and directors. In the Solomon case it was also held by the court that a company can exist for an indefinite time, irrespective of the fact that its owners are changed. Therefore, in accordance to the law a company shall be treated just like an independent person which is entitled to enjoy all the rights and obligations which are applicable in the eyes of law.
Consequences of Separate Corporate Personality
The legal principle has several consequences which it has on the members and other related persons. The existence of corporate veil ensures that the company undertakes its own business, possess assets/properties, formulate contractual relations, incur debts, sue or be sued. The member does not have any personal responsibility for all these actions. Thus this derives one of the most practical benefits for the members who can never be made liable for payment of debts of the company, until and unless it is in relation to their personal investment (Murray, 2011). It can be inferred from this that the directors as well as the shareholders does not owe any form of duty of care to others in relation to the actions undertaken on behalf of the corporations. Hence, in consequence to all these principles the shareholders or directors can never be made tortuously liable for actions undertaken in the name of company.
Another concept which finds relevance in present context refers to the agency relationship. In Solomon case it was opined by the court that there is no agency relation who is shared between shareholders and the company. Neither does any relation of trust exist between the two (Davies, 2010). Hence, in consequence to this association a great level of significance can be found for group companies, wherein the parent and subsidiaries cannot be considered as agent of each other. Therefore, the principle of legal personality or corporate personality sought to have distinct consequences.
Roles and responsibilities of Directors and shareholders
- Directors must determine the vision of a company and set goals to make it achieve easily.
- They should make the company policies to promote their working by the members.
- They must make the strategy to develop the mission to facilitate the actions.
- Evaluate the present the future opportunities, threats to risk relates to the company.
- They should delegate the authority to the management and implementation of the business plans (Hammond, 2012).
- They monitor the behaviour of the shareholders with the proper information.
- They are responsible to must act in good faith with the honesty.
- Directors must give proper notice of meeting at a decide time and place.
- They empower the board to remove the chairman from the company.
- Shareholder has the power to remove from the directorship and re-elect another person.
- The rights of the shareholders must be decided in the general meeting of the company.
- They can take part in the meeting and discuss the agenda of the business.
- If they need to held a meeting, can also request for it and gives hid votes in the meeting.
- They can analyse the accounts of his company and discuss about the decisions which directors have made (Hanrahan, Ramsayand Stapledon, 2013).
- They can make voting in the ordinary resolution and special resolution on some particular topic.
Piercing of corporate veil
A company has the separate legal entity subject to the rights and liabilities. It is a situation where shareholders or members are personally liable for the corporate debts and no limited liability of a company left. Where a court considers that company's business not conducted as per the provisions of corporate policies. It may held liable the members for their business obligations if any illegal activities done by them. This is a principle applied by the courts for the company. Here is the case Saloman v Saloman where Mr. Aron Saloman was a sole owner who set up a limited liability company (Hawkins, 2012). In his company A Saloman & co. Ltd whose business is leather making process in which his family members were the only shareholders. After a point comes and he failed in his business and many creditors sought to Mr Saloman personally liable for the debts in his company. Court of appeal considered that Mr Saloman using the company as a weapon to defraud the creditors. House of Lord did not agreed that there was any fraud and held that company was a separate legal person and therefore he was not liable for the debts of th