The concept of incorporation is a process which forms a legal body with the liability of the persons. An organisation incorporates to achieve the goal of a company and making the large profit. A company has the separate legal entity from those of its members or other companies. Members has the limited liability to the extent of their part. In a company the role of directors and members is very important for maintain the working of a company (Vagts and et. al., 2015). Board of directors taking parts in the board meeting of a company and taking decisions by way of passing resolutions.
Concept of incorporation
Two or more members are forming a company by way of legal identity which could be incorporated under the 1930 Act. A corporation forming a new business recognised under the law through various names. A company should registered through choosing his name to get the certificate of incorporation. Company must follow the guidelines by way of following rules of the company. Company should have the registered agent to follow all the legality of the documents. There should be minimum two members in a company who has the ownership under this. The directors of the company who take all the decisions of the company. Many types of companies are exist private, public and government (Wild., Wild and Han, 2014). The board of directors has the power to manage the business by ensuring the duties of the directors. There are various meetings held to decide the rights and liabilities of the members and issue resolution by the board. A company has the separate legal entity from its members. In this case Liggett vs Lee Court ruled that there could be a corporate tax and considers the business for government when they writing the tax legislation. If company becomes insolvent then members of the company has the limited liability to their company to the extent of business. Company provides rights and liabilities to the directors and members.
Separate legal personality
Under the law of company it is an important part of the principal of separate legal personality. In this case Saloman v Saloman case (1897) AC 22 there was the relationship between company and its members which is legal. The company is a different person and from the subscribers of the memorandum also (Scholes, 2015). The companies Act 2006 provides the procedure to form a legal company. Once all the formalities done by the company, Registrar of the company issue the Certificate of registration of the company. Company always in existence and works on the principle of going concern. After its incorporation it has both nature as association of members and separated from its members (Scheer, 2012). Company has the separate rights and liabilities from its members. A business has various contracts and so many debts incurred. Any person can sue against the company not to its members. It is a benefit of this rule that they are not personally liable for any debt of a company. There is the rule must be followed by the company that the members cannot owe a reasonable duty of care in any act of the business they cannot be liable in tort for any act of them. Saloman case stated that shareholders are different from the company and they are not agent of the company. All companies follows the principle of separate legal entity (Horrigan, 2010). A company which is subsidiaries of his associate company also has the separate entity like as company and its shareholders. Sometime court evaluate that if an individual person related to the facts which creates offence then the company and the person both are liable and convicted in this principle. In the case of Jones v Hellard divisional court decided that the architect offering his service by using a wrong description then liability of architect arises. Court excludes the company from the liability. The separate legal personality relates to the property of the company not with the liability of the members. A business have separate legal entity with the limited liability from the individual or owner.
Company making the contracts by giving rights and liabilities to the another party with company name. In a company a person is appointed for the term of the employment. Such person works as a shareholder, director and employee of the company. In this situation such person would work three functions with the obligations in a company (Ruggie, 2011). In the case of crystallised in Lee v Lee’s Air Farming Ltd. Widow of Mr. Lee demand for the claim for compensation of her husband death because he died while he was working. At the same time he is the only shareholder, director and employee of the company. Privacy council held that the company and Mr. Lee is a separate legal persons they created a legal contractual relationship with the company. Thus the members of the company can take the benefit of separate legal entity. A person can function in a company with two roles as employer and employee if he has majority shareholders in the company without invalidate of employment contract. UK companies following this concept despite of company having limited liability or unlimited liability. Company treated as separate legal entity with the independent existence from its members who have rights and liabilities in a company. In this case Peater v Federal explained the principle that a company is a new legal entity in the eye of law (Folsom and et. al., 2012). Company who is separate legal personality owns many assets and liabilities and liable to pay its all debts and liabilities.
It is a new business structure that can be used in UK limited liability company. This concept gives an idea that shareholders or directors are not directly liable for the liabilities of a company. There are many debts incur by the company and no one is liable to pay the debt only company can pay this. Company is separate legal person from its directors, members and shareholders. Where company is limited by shares then obligation of the shareholder to pay the amount of shares and no further obligation left (Hynes and Loewenstein, 2011). A company is limited by guarantee are bound by its memorandum of association to pay up to a fixed sum £1. Directors has no personal liability to pay any amount in the company. Sometime people misuse this liability and uses as a weapon in the company and exploit the business and ran away. In those circumstances where people engaged in fraudulent activity then court imposes the liability on the person. If a company becomes insolvent because liabilities of the company are greater than the assets so there is the statutory liability of the director to control the activities and ensure the creditors for their repayment of loans. The board of director of the company manages the working system.
Roles of directors and shareholders
- Director should act in accordance with laws and exercise his powers in a company.
- He must act with the knowledge and reasonable care in a company.
- Directors are accountable to the shareholders and provide the report on the performance of the company.
- They should consider the interest of the employees of the company (Amsden, 2010).
- They should deal with the issues of the corporate responsibility ans ethics.
- They held meeting timely by giving responsibility to maintain the position of the company.
- They are responsible for managing the conditions and supervising the management.
- All the directors must attend the meeting and take an active part in the company to express their view by taking decisions
- They are determining the rights and strategy of a business to make possible to achieve their targets.
- Shareholders can change the name of the company by the majority of consent of them.
- Shareholders rights defined in the companies Act 2006 to perform their rights and duties.
- They can remove a director from the office if they works beyond the powers (Eid and El-Gohary, 2013).
- They takes a active part in the general meeting of the company to take any decision they have made.
- They should attend the general meeting and the agenda to ensure the directors with their powers.
- They can vote in the meeting at least 5% of the paid up share capital or if there is no paid up capital then 5% of voting rights.
- Shareholders give their consent bypassing the resolution on a particular activity in the company.
- Shareholders making investment in the business and elect the directors by their voting rights according to their shareholding (Ruggie, 2013).
Piercing the corporate veil
The legal personality of a company is different from its directors and shareholders. House of Lords held in the case of Saloman v A Saloman that company has a separate legal personality which is independent of its shareholders even if the owner of the company is sole trader. The court of appeal stated the fact that Mr Saloman had been benefited of his business without any risk which had the effect of defrauding the creditors. The house of Lord stated that if company became insolvent then it would be unable to recover the debts of the company because members of the company whose liabilities limited (Muchlinski, 2012).
This principle applies when a person is under an obligation to his liability which he intentionally interrupt the act of a company by taking his control. This is a situation where court makes personally liable to the shareholder or directors and set aside the limited liability of a company. If there is any serious misconduct act by the members then court may have against piercing the corporate veil. It is term described by the court where any person is doing wrongful act then he is liable for the debts and liabilities of a business. In general circumstances if company sued by any person or group then individuals are not liable for any lawsuit.
There are two cases where members or shareholders are personally liable for the in a sue:
- In case of any fraudulent activities held by them for the purpose of going to mislead any activities.
- In case of any activity which by the members or investor that makes the profit above the public good (Ruggie, 2014).
It is the concept of limited liability which separated the individual from the business and not responsible for the company's actions. But if members act in a way to dissolve the activity then corporate veil between the company and individuals has been pierced.
There are the most common actions which pierce the corporate veil:
- Misuse of the company funds with their person amount.
- Fails to keep the business record that must be statutory.
- The members or individuals are not functioning in their capacities.
- Diverting the loan amount for personal use by infringing the data of a company.
In some circumstances where court feels that they misuse the corporate form they are liable to pay the liability (Lin., Liu and Zhang, 2016). Court will not allow the Saloman principal to be used as the weapon against any fraud. In this case Gilford Motor Company Ltd v. Horne he is the ex employee of the Gilford Motor Company and they made an employment contract which could not solicit the customers of the company. He defeated his order and formed a limited company in his wife's name and solicited the customer's of the company. The main reason to form the company was to made a fraud. Court of appeal stated it as mere sham to cloak his misconduct.
It has been observed from the above report that company is a separate legal entity and its members have the limited liability in a business. In a company many directors and shareholders are working to take the decisions by passing the resolution. Directors are accountable to held the meetings in a company where they can approve many transactions of a business. A company has the separate legal personality but if any member usurp his position then principle of corporate veil applies.
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