INTRODUCTION
The
word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or
together" and ‘Pains’ meaning, "bread". Originally, it referred
to a group of persons who took their meals together. Section 2 of the Companies Act,
2002 (Cap 212) defines Company as “…a company formed and registered
under this Act or an existing company”.
A company is nothing but a group of persons
who have come together or who have contributed money for some common purpose
and who have incorporated themselves into a distinct legal entity in the form
of a company for that purpose.
Lindley L.J defines a
company as “an association of many persons who contribute money or money’s worth to
a common stock, and to employ it in some common trade or business, and who
share the profit or loss arising therefrom”[1]
Lord Justice Marshall
defines a corporation as “an artificial being, invisible, intangible,
existing only in contemplation of the law. Being a mere creation of law, it
possesses only properties which the charter of its creation confers upon it
either expressly or as incidental to its very existence”
Under Halsbury’s Laws of England, the term
"company" has been defined as a collection of many individuals united
into one body under special domination, having perpetual succession under an
artificial form and vested by law with the capacity of acting in several
respect as an individual, particularly for taking and granting of property, for
contracting obligation and for suing and being sued, for enjoying privileges
and immunities in common and exercising a variety of political rights, more or
less extensive, according to the design of its institution or the powers upon it,
either at the time of its creation or at any subsequent period of its
existence. Normally, in the world of commerce the word “company” is used to
denote an association of people so associated for an economic purpose e.g.
business. Please note that companies can be formed for other purposes as well –
for example – for charity.
A
company is also define to mean a
group of persons associated together for the attainment of a common end, social
or economic or a voluntary association of persons or individuals formed for
some common purpose (Smith v Anderson 1880 Ch. D. 247). A company as an entity
has several distinct features which together make it a unique organization.
The following are the defining
characteristics of a company:
Separate Legal Entity:
On incorporation under the law, a company
becomes a separate legal entity as compared to its members. The company is
different and distinct from its members in law. It has its own name and its own
seal, its assets and liabilities are separate and distinct from those of its
members. It is capable of owning property, incurring debt and borrowing money,
having a bank account, employing people, entering into contracts and suing and
being sued separately. The legal personality or separate entity was recognized
in Oakes v Turquant (1867) L.R. 2 H.L.
325, but the importance was firmly established in Salomon v Salomon (1897) A.C 22. In this case, Salomon sold his
boots business to a newly formed company for ₤ 30000. His wife, one daughter
and four sons took up one share of ₤ 1 each. Salomon took 23000 shares of ₤ 1
each and ₤ 10,000 debentures in the company. The debentures gave Salomon a
charge over the assets of the company as the consideration of the transfer of
business. Subsequently, when the company was wound up, its assets were found to
be worth ₤ 6,000 and its liabilities amounted to ₤ 17,000 of which ₤ 10000 was
due to Salomon (secured by debentures) and ₤ 7000 due to unsecured creditors.
The unsecured creditors claimed that Salomon and the company were one and the
same person and that the company was merely agent for Salomon and hence they
should be paid in priority to Salomon. It was held that the company was, in the
eyes of law, a separate person independent from Salomon and was not his agent
though initially the holder of all shares of the company was also a secured
creditor, and was entitled to repayment in priority to unsecured creditors.
Lord Macnaghten observed:
“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 of them. Nor are subscribers liable, in any shape or
form except to the extent and in a manner provided by the Act”
Limited Liability:
The
liability of the members of the company is limited to contribution to the
assets of the company up to the face value of shares held by them. A member is
liable to pay only the uncalled money due on shares held by him when called
upon to pay and nothing more, even if liabilities of the company far exceeds
its assets. The personal property of a shareholder cannot be attached for the
debts of the company if he/she holds fully paid up share. A company may be
limited by shares or by guarantee (s. 3(2) of the Companies Act, 2002). In a
company limited by shares the liability of members is limited to the unpaid
value of shares. In a company limited by guarantee, the liability of a member
is limited to such amount, as the members may undertake to contribute to the
assets of a company, in the events of its being wound up. The importance of
limited liability was expressed in Senkin v Pharmaceutical Society of GB (1921)
1 Ch. 392. Limited liability is the offspring of a proved necessity
that, men should be entitled to engage in commercial pursuit without involving
the whole of their fortune in that particular pursuit in which they are
engaged.
Perpetual Succession:
A
company is a Juristic person with perpetual succession. A company does not die
or cease to exist unless it is specifically wound up or the task for which it
was formed has been completed. Membership of a company may keep on changing
from time to time but that does not affect life of the company. Death or
insolvency of members does not affect the existence of the company. It is
created by the process of the law and can only be put to an end by the process
of law. Separate Property: A company is a distinct legal entity. The company’s
property is its own. A member cannot claim to be owner of the company's
property during the existence of the company. A shareholder doesn’t even have
insurable interest in the property of the Company. Macaura v Northern Ins. Co.
(1925) AC 619 M was holder of nearly all shares of a timber company. He
was also a substantial creditor of the company. He insured the Company’s timber
in his own name. The timber was destroyed by fire. It was held that the
insurance company was not liable.
Transferability of Shares:
S. 74 of the Companies Act states that “the
shares or any other interests of any member in a company shall be transferable
in a manner provided by the articles of the company.” Shares in a public
company are freely transferable, subject to certain conditions, such that no
shareholder is permanently or necessarily wedded to a company. When a member
transfers his shares to another person, the transferee steps into the shoes of
the transferor and acquires all the rights of the transferor in respect of
those shares. Section 27 of the Companies Act restricts the right of the
members of a private company to transfer shares.
Capacity to sue and being sued:
A company can sue or be sued in its own name
as distinct from its members. It may also inflict or suffer wrongs. It can in
fact do or have done to it most of the things which may be done by or to a human
being. The company is only able to sue or be sued in its own name when it has
been registered. If the company has not acquired legal personality (not fully
registered) it cannot institute a suit[2].
In the case of Fort Hall Bakery Supply co. v. Federic Muigai Wangoe (1959) E.A. 474
a suit was instituted by an unregistered firm of over twenty members whose
existence as body was not recognized in law. The high Court of Kenya stated at
page 475.
“It is not registered as a company under
Companies Ordinance or formed in pursuance of some other Ordinances or Act of
parliament or letters of patent. It cannot therefore be recognized as having
any legal existence.
In
the words of Bankes, L.J. in Banque Internationale de Commerce de Petrograd vs.
Goankassaow (1923) 2. K.B. 682 at 688 “ The party seeking to maintain
the action is in the eye of law no party at all but a mere name only, with no
legal existence…A non- existence person cannot sue, and once the court is made
aware that the plaintiff is non- existence, and therefore incapable of
maintaining the action, it cannot allow the action to proceed
Separate
Management:
A company is administered and managed by its
managerial personnel i.e. the Board of Directors. The shareholders are simply
the holders of the shares in the company and need not be necessarily the
managers of the company.
[1] Taken
from Saleemi N.A & Opiyo, A.G, Company Law Simplified (1997) at p.1
[2] The
proper procedure for seeking legal remedy in a court by a body of persons who
have no corporate existence, is by way of a representative suit as provided
under Order 1 rule 8 of the Civil Procedure Code
