Corporate and Separate Legal Personality: What African Entrepreneurs Need to Know

Corporate and Separate Legal Personality: What African Entrepreneurs Need to Know

Common Law is applied in African countries and based on English Law but Liberia is an exception with common law system based on United States. Every African Country has a constitution that governs their business and companies and example in Nigeria, which is governed and regulated by the Companies and Allied Matters Act (CAMA).

This piece focuses on the general principle of company law, basic concept of corporate and separate legal personality. The piece makes reference to celebrated judicial authorities, stating their principles and exceptions which now serve as precedents in new and similar cases. The authorities have also laid the foundation for judgments in courts today.

The fundamental principle of company law is that a company is a separate legal person liable for its actions. A company is a juristic entity; it can sue and can be sued and it carries out its functions through human mechanisms. The company is represented by human beings because it cannot speak itself and it has two organs that is management represented by the shareholders and general meeting represented by the board of directors.

Understanding Separate Legal Personality

When a company is incorporated (registered as a company in line with the CAMA for Nigeria or recognized law governing companies of another country) it becomes a separate legal personality. Here the company’s obligations and liabilities are its own and not that of individuals, shareholders or members of the company. Shareholders are not liable to death and liabilities.

Separate personality could be a company, limited liability, partnership or any other entity recognized by law as having its own separate legal entity. Basically, an incorporated entity, that is a registered company which has become incorporated is a separate legal entity, which signifies a separate legal existence to its founders: the natural person that caused it to be formed, directors: those that control the company and the shareholders i.e. those that own shares in the company.

Why do we need to have a separate legal entity? The company insulates individual participating in business from personal liability which may arise as a result of doing business. The company generates revenue owned by the company, incurs expenses payable by the company, attracts legal liability to pay taxes to taxation authorities and typically pays tax at lower rates than individuals. Business owners and directors are protected from liabilities other than in limited circumstances.

Understanding Corporate Personality

This is when a company is recognized as a legal entity (a company with legal rights and obligations) distinct from its members, shareholders, directors and officers and it is also known as the veil of incorporation. Corporate personality has perpetual succession i.e. continuation of an organization despite the death, change of ownership, death or any other reason, proprietary interest [the ability of a company to own property, land or building].

The company is at law a different person from the subscribers to the Memorandum (shareholders). Under corporate personality, the company is the only one that has the right to sue and be sued. This implies that members in the company cannot bring an action against someone or another company unless the company does that itself.

Under corporate personality which was embodied in case of Salomon v Salomon. The principle is basically saying only company can sue and be sued and there are exceptions i.e. instances in which court has allowed members or shareholders in certain instances to sue or bring an action against a wrong doer and this exception is majorly fraud. What this means is that, where there is fraud, not only the company itself can sue but members or shareholders.

By the rule in Foss v Habottle, the company itself suing means board of directors taking legal action on behalf of the company. Where there are instances in which the directors are the ones committing the fraud, they definitely would not want to bring an action against themselves, so the court has provided that in instances where there is fraud, the corporate veil i.e. that allows only the company to sue and be sued is pierced and gives room for members to bring action against wrong doer.

The principle of separate and corporate legal personality in Salomon v Salomon has laid the foundation and serves as precedent in the courts today. The exception to the principle as in Foss v Harbottle has been followed by African Courts in similar cases like the South African case of Zeman v Quikelberge and Another where the court pierced the corporate veil i.e. disregard the dichotomy between the company and the natural person behind it and attributing the liability to that person when he has abused or misused the corporate personality. The Court exercise its discretion. Also, in Mezuy v CB, the Supreme Court restated fraud as an exception to the long-standing company law principle of corporate personality. The court also pierced the corporate veil in the Kenya case of Caneland Limited v Dolphin. The decision of house of lord in the case of Salomon v Salomon takes the beginning of judicial acceptance of company as separate legal entity.

The Failure of Understanding the Duo

It is essential to know the doctrine of corporate personality alongside with rules and exceptions to avoid being held responsible, accountable or liable for debts or any or liabilities with the believe that one is under a corporate shield. Fraud is however not the only exception to the rule, but of course the major exception.

Other exceptions include illegal or ultra vires act, doing an act which company purports is done by special resolution and then doing it by ordinary resolution and many more. It is crucial to also note that the exercise of piercing the veil is at the court’s discretion. As governments continue having different laws towards enhancement of corporate governance practice, African business owners need to seek for knowledge about the difference between corporate and separate legal personality. Knowing the disparity at the early stage of business will go in a long way of protecting shares and equities from drowning, our analyst notes.

Additional reports by Semiyat Olawuwo

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