Corporate Personality - Company Law PDF

BUSINESS LAW Company Law Business Administration Department Ashesi University Structure of Discussion Corporate Personality Company Constitutions Shareholder Agreements Corporate Personality At incorporation, a company becomes a ”legal person” that can: Sue and be sued, Own p...

BUSINESS LAW Company Law Business Administration Department Ashesi University Structure of Discussion Corporate Personality Company Constitutions Shareholder Agreements Corporate Personality At incorporation, a company becomes a ”legal person” that can: Sue and be sued, Own property/assets, Be criminally liable for an offence and be prosecuted, and most helpfully … “A company can have rights and liabilities that belong to it alone and as a general rule cannot be enforced by and against its directors, agents and members, personally” Bondzi-Simpson, P. E. (2020). Company Law in Ghana (3rd ed). Avant Associates. Corporate Personality The concept of the separate legal personality of companies is best demonstrated in the case of Salomon v. Salomon & Co. Ltd All ER Rep 33: Mr. Salomon was a successful bootmaker who ran his business as a sole proprietorship. He later formed a company to take over this business and made himself, his wife and 5 children company members (i.e. shareholders). Mr. Salomon sold parts of the original sole proprietorship to this new company, in exchange 18th Century Bootmaker’s shop for special bonds in the company. Corporate Personality Salomon v. Salomon & Co. Ltd All ER Rep 33: A year later, the company faced difficulties and closed. In paying off the company’s debts, Mr. Salomon as a company creditor was paid first. No one else was able to have the money they were owed paid. The other creditors of the company, led by the company’s liquidator sued Mr. Salomon. They argued that the company was a sham, used to protect Mr. Salomon and thus he should be personally liable. The court held that Mr. Salomon could not be held personally liable for the company debts, because the company was a separate legal entity, and the debts were taken on by the company. This solidified the concept that a company is separate from its owners and officers. Corporate Personality Salomon v. Salomon & Co. Ltd All ER Rep 33: This concept is referred to as the corporate veil, as there is a figurative veil that distinguishes the company from its officers and owners. Corporate Personality This was reinforced in the Ghanaian case of Morkor v. Kuma(East Fisheries Case) [1998-1999] SCGLR 620 at 632 Sophia Akuffo JSC stated that “Save as otherwise restricted by its Regulations, a company, after its registration has all the powers of a natural person of full capacity to pursue authorized business…. A company is, thus a legal entity with a capacity separate, independent and distinct from the persons constituting it or employed by it.” Corporate Personality An example of a case where the concept of the corporate veil/corporate personality was enforced is Appenteng and others v. Bank of West Africa Ltd. and others GLR 196: The plaintiffs were shareholders of a company. This company was given advice by the defendant bank which led to significant losses to the company. The plaintiffs sued the defendant bank in their personal capacity for these losses. The court held that as the losses were sustained by the company and not the plaintiffs personally, they did not have the capacity to sue the defendant banks. Corporate Personality- Exceptions There are however certain circumstances where the courts will “lift/pierce the veil” (as it termed) and recognize the persons/entities acting behind the scenes of the company. Here, these persons/entities may be held personally liable for acts of the company. It may lifted by: 1. By the Courts 2. Act 992 3. Other legislation; or Lifting the veil is done in exceptional circumstances, but where is the need to, company members, directors, officers may face fines, tax liability, custodial sentences, etc. Corporate Personality- Exceptions Morkor v. Kuma(East Fisheries Case) [1998-1999] SCGLR 620 Facts: The Defendant-Appellant was sued jointly with the company for which she acted as chief executive officer, majority shareholder and director. It was held that although she holds multiple positions in the company, she was still separate from the company. Corporate Personality- Exceptions Morkor v. Kuma(East Fisheries Case) [1998-1999] SCGLR 620 Akuffo JSC “The corporate barrier between a company and the persons who constitute or run it may be breached only under certain circumstances. These circumstances may be generally characterised as those situations where, in the light of the evidence, the dictates of justice, public policy or Act 179 itself so require. It is impossible to formulate an exhaustive list of the circumstances that would justify the lifting of the corporate veil. However, the authorities indicate that such circumstances include where it is shown that the company was established to further fraudulent activities or to avoid contractual liability.” Corporate Personality- Exceptions Morkor v. Kuma(East Fisheries Case) provided some instances when the veil can be lifted, however a more comprehensive list of reasons as decided by the courts: 1. Public Interest 2. Justice 3. To stop fraud (Handelmij NV v Jebeille Brothers, HC Accra digested (1960) C.C 93) The defendant owed money to the plaintiff who had sued and been given the right to attach or take certain properties to offset the debt owed. The defendant appealed and during the appeal, transferred these properties to a new company. The plaintiff argued that the new company was set up to defraud the defendant’s creditors. The court held the transfer of properties was fraudulent and the veil was lifted. Corporate Personality- Exceptions 4. Evasion of contractual duty (Gilford Motor Co. ltd v. Horne 1933] Ch 935) The plaintiff employed the defendant, and his agreement with the company, a clause stated that once he leaves the company, he could not work in a similar field. The defendant then set up a company to get around this. The court held that the company was set up to evade his original contractual engagement and they granted an injunction against the defendant’s new company, after lifting the veil. Corporate Personality- Exceptions 5. To avoid trading with a national of a hostile/enemy country (Daimler Co. Ltd. v. Continental Tyre and Rubber Co (Great Britain) Ltd 2 AC 307 (HL)) Although Continental Tyre and Rubber Co (Britain) Ltd was incorporated in England, all its directors and most of company shares were held by persons with German nationality, living in Germany. Germany and England were at war at the time. The courts lifted the veil to take note of the nationalities of the directors and shareholders, and the company was held to have an enemy character. Corporate Personality- Exceptions 6. To treat a group of associated companies as a single economic unit: (Adams v Cape Industries plc [1990 Ch. 433] Cape Industries , a UK company, had subsidiaries in different countries including South Africa and USA. The South African subsidiary shipped asbestos to the USA subsidiary. Employees of the USA subsidiary sued the UK parent company and its subsidiaries in the USA after they became ill from the asbestos. When judgment was given in their favour, they sought to enforce the judgment in the UK, arguing they were a single economic unit…. Corporate Personality- Exceptions 6. To treat a group of associated companies as a single economic unit: (Adams v Cape Industries plc [1990 Ch. 433] … and the separation of the companies was a mere façade, and an agency relationship existed. The court disagreed and did not lift the veil. Corporate Personality- Exceptions Lifting the Veil under Statute: Different statute codify circumstances under which the corporate veil will be lifted. There are many instances statute including: Act 992: S41, Act 992 – Where the company ceases to have a member and carries on business, all directors at the time, will be liable for all debts and liabilities of the company during the period. S171, Act 992 – Where there are less than 2 directors acting for a company, and the company transacts business for more than 4 weeks, the members, director and company will be liable for a fine of GHS300 per day Corporate Personality- Exceptions Lifting the Veil under Statute: There are many instances statute including: Act 992- S8, S125, Act 992 Other Legislation: Article 181(5), 1992 Constitution: Parliamentary approval is requires for international business transactions or agreements where the government is a party. The definition of “international business transactions” has come to mean where “the subject matter of the transaction has a significant foreign element or the parties have a foreign nationality or reside in different coutries.. Or their central management or control is outside Ghana” Attorney General v. Balkan Energy Ghana Ltd; Balkan Energy LLC & Phillip Elgar (the Balkan case) unreported SC, Ghana J6/1/2012 Corporate Personality- Exceptions Lifting the Veil under Statute: Other Legislation: S117, Corporate Insolvency & Restructuring Act, 2020 ( Act 1015): Where a company is in official liquidation (ie. being brought to an end), the liquidator, member or company creditor may apply to Court to lift the veil to hold liable anyone who carried out business in the name of the company with intent to defraud creditors. Corporate Personality- Exceptions Lifting the Veil under Statute: Other Legislation: Income Tax Act, 2015 (Act 896) gives Ghana Revenue Authority the powers to show relationship with associated companies that are used to avoid taxes. This list is far from exhaustive! Constitution of a Company This is the foundational document of the company, and guides the operation of the company. In other countries, its referred to as “memorandum of association, company regulations, company articles”, etc. It acts as a contract between the company and its members and officers, as well amongst the officers and members themselves. (s29(1), Act 992) Adehyeman Gardens Ltd. v. Assibey [2003-2004] 2 SCGLR 1016) “It is the registration of the Regulations that bring the company into existence as a body corporate..” Adehyeman Gardens Ltd. v. Assibey [2003-2004] 2 SCGLR 1016) Constitution of a Company What is included in the constitution of the company is up to the promoters. The company may opt to have either a: Registered Constitution (S24-30, Act 992): This is a constitution, custom-made for the company, that is submitted to RGD at incorporation. Note: Provisions in the Second, Third, and Fourth Schedule, Act 992 will still apply unless expressly revoked. Requirements under S26(1)-(4), Act 992 must form part of the Cconstitution. Constitution of a Company Default Constitution(Second, Third and Fourth Schedule, Act 992): Where the promoters of the company opt to not create a custom constitution, then the constitutions outlined in the Second, Third or Fourth Schedule, Act 992 will apply, depending on the business entity type. Constitution of a Company Some issues that a constitution may typically set out are as follows: The specified purpose of the company (if any) Limits on powers of company Duties, rights, liabilities of members, directors and officers of the company Shareholders Agreement Members of a company may opt to enter an agreement that governs only the members, where there are matters they wish to bind them alone. This may include matters which they would rather keep from public view ( as a company’s constitution is available for public inspection), or additional protections for minority members.  Additional Concepts to Note Ultra-Vires Under Ghana’s old Companies Act, 1963, Act 179, the concept of ultra vires was an important one. Companies formed under this Act, were required to confine their operations to the company’s “authorized business”, which would be outlined in the company’s regulations. This was/is also called the company’s “objects”. With the present Act 992, specifying the authorized business of the company is not necessary. The subscribers (i.e. first company members/shareholders) may however choose to. (S19, Act 992). Though, Act 992 does not require an authorized business, some industry- specific restrictions may be applied by regulators of that industry. Questions?