Impacts_of_Lifting_a_Corporate_Veil_in_an_Organization

Qn. “There are occations when the court will look behind the formalily of legal personality and will appear to disregard it, but it is impossible to find any consistent principle upon which they will do so” Discuss. Answer: A company is a corporation. As a corporation is a succession or collection of persons having at law an existance , rights and duties separate and distinct from those of the persons who are from time to time its members. Accoring to Smith and Keenan’s Company Law 2005, corporations can either be sole ie.having one member at a time holding perpetual office. Here, the office is personified to distinguish it from the person who is from time to theholder of it. Corporation can as well be aggregate, ie; consisting of a number of persons so associated that in law theey form a registered company. The concept of a legal personality: This is a legal decison to treat the rights or duties of a corporation as the rights or liabilties of its share holders or directors. Usually a corporation is treated as a separate legal person ich is solely responsible for tis debts it incurs and the sole beneficiary of the credit it is owed. Common law countries uphold this principle of separate person hood but in exceptional situations this may lift the corporate veil. Lifting the corporate veil can cause difficulties and in a number of cases this is done by the law so that the human and commercial reality behind the corporate personality can be taken account off. The veil may be lifted by th judiciary or by statute. It is hoever rather difficult to be precise about the circumstances in which judge will lift the corporate veil since power to do so is a tactic used by judiciary in a flexible way to counter fraud, sharp practice, oppression and illegality.Example: In Solomon VA Solomon & Co Ltd case of 1897, the law was used to effect the unanimous ruling ot firmly uphold the doctrine of corporate personality set out in Companies’ Act of 1862. From the case the judges of the house of lords found out that, “ Either the limited company was a legal entity or it was not. If it were , the business belonged to it and not to Mr Solomon. If it was not there was no person and nothing to be an argent of al all and it is impossible to say at the same time that there is a company and there is not.” “The company is at law, a different person altogether from the subscribers to the memorandum and though it may be that after incorporation of the business is precisely the same as it was before and the agent of the subscribers or trustees for them. Nor arethe subsribers or members liable in any shape or form except to the extent and in the manner provided by the act.” In Solomon’s case, there was no fraud upon the creditors or shareholders since creditors of the old business had been paid off the unsecured creditors of the case were creditors of the new company.Any profit that Mr. Solomon might have made as a promoter selling his business to the company was fully dislosed and approved by the shareholders who are his family members. This is a special circumstance that has been delianeated both by legislature and the judiciary where courts tend to legiimately disregard a company’s legal personality, such as where a crime or fraud has been committed. However, if Solomon was a sole propriator of the company he would have been held personally responsible for all the debts of the corporation since in recent years laws have been structured to make shareholders increasingly liable to their acts. Qn.2: Discuss how the memorandum of association and articles of association form the constitution of a registered company with specific reference to their respetive contents. Answer. All registered companies have their own separate constitution. The constitution of a registered company constist of two documents called the memorandum of assciation and the articles of associaton. The memorandum contains the most important provision setting out as it does the sort of articles which the company can carry on. The articles contain rules governing the internal management of the company such as the appointment of directors and the powers of the board, the rights of different classes of shareholders, and the holding of meeting of the company. The memorandum is of itnerest to outsiders who wish to deal with the company, while the articles are of interest mainly to shareholders and directors. The memorandum of association and the articles of association set the company objectives and guiding principles within which the company is liable to act within the set jurisdictions. This is a binding constitution by law in which cannot be altered so as to require a member after he become a member to take up more shares or increase his liability unless he consents in writting either before or after the alteration is made. The memorandum and articles of association contain the following clauses setting out the following information; • Mode of forming incorporated company • Requirements with respect to memorandum • Signature of memorandum • Restriction on altreration of memorandum • Statement of company’s objectives: general commercial company • Mode in which and extent to which memorandum may be altered • Articles prescribing regulations for companies • Alteration of articles • Registration of memorandum and articles just to mention a few. Summary of a few content details of the memorandum and articles of association. 1. Name of the company with “limited” as the last word if the company is a private limited company . If the company is a public company, then its name must end with a public limited company. Example:- in the Company Act 2002. No. 9 Chapter 1-(3) a A “public company” is a company limited by shared or limited by guarantee and having a share capital. Being a company, the memorandum of association states that is is to be a public company and a “private company” is a company as defined in section 27 (1) c;- “prohibits tiny invitation to the public to subscribe for any shares or debentures of the company. 2. Object clause is the second important part of the memorandum and articles of association with together form a constitution of a company. Object clause state requirements with respect memorandum section 4-(1)b wich says, “ the object of the company “, ie reasons behind its establishment. Section 7 a and b show statement of company’s objectives.“ Where the company’s memorandum states that the object of the company is to carry on business as general commercial company. a. The object of the company is to carry on any trade or business whatsoever and b. The company has power to do all such things as are incidental or conducive to the carrying on of any trade or business by it. 3. The memorandum and the articles of association prescribe regulations for companies Example. In Section 9-(1):- There may in the case of a company limited by shares and there shall in the case of company limited by guarantee or unlimited be registered with the memorandum and articles of association which shall be signed by the subscribers to the memorandum and shall contain the regulations for the company. In Section 10-(1) which speaks about the regulations required in case of unlimited company or company limited by guarantee.. “ In case of unlimited company the articles must state the number of members with which the company proposes to be registered and and if the company has a share capital the amount of the share capital with which the company proposes to be registered. 4. The memorandum and articles must have the section explaining about the sign off of the articles. In section 5-(1) of chapter one of the memorandum explains that the memorandum shall be dated and signed by each subscriber in the presence of at least one attesting witness. Such articles in the memorandum of association are completed by the association clause in which subscribers declare their intentions to be associated as a company. In a nutshell i would like to conclude by affirming that, the two documents ie the memorandum and articles of association cannot be read independenlty of each other since together they form a set of rules codified as a written document that enumerates and limits the powers and functions of a legal entity. These rules are what defines what the entity is, its duties, powers, procedures and rights within the entity’s own reach. This is therefore the constitution of a registered company. Qn. 3 (a) “The rule of equity which insist on those who by use of fiduciary position make a profit being liable to account for that profit , in no way depends on fraud....The profitier however honest and well intentioned cannnot escape the risk of being called upon to account.” Comment. A concept of fiduciary position finds its home in the concept of fiduciary duty. One bieng in a position is entitled to a duty. According to the Wikipedia encyclopedia fiduciary duty is a legal and ethical relationship of confidence or trust between two or more parties , most commonly a fiduciary and principal . Example, a corporate trust company entrust one of the directors to act in a fiduciary capacity on behalf of the company. Here the director is thus entrusted with powers to act for and on behalf of another in a particular matter in circumstances which gives rise to a relationship of trust and confidence. As one is entrusted with a fiduciary duty, one has to give a high standard of care, one is expected to be extremely loyal to the company whom he owes the duty. He must not put his peronal interest before duty and must not profit from his position as a fiduciary unless the principal concents. In the rule of equity, fiduciary is legally required to file with probable court or judge a surety bond called a fiduciary bond or probate bond to guarantee faithful performance of ones duties. Such a bond will be make a fiduciary liable to account if proven to have acquired a profit, benefit or gain from the relationship by one of three means. • In circumstances of conflict of duty and interest • In circumstance of conflict of duty to one person and duty to another person • By taking advantage of the fiduciary position. Being called to account for in situations where the duty has been breached is a constructive remedy. The idea of an account is that the fiduciary profited by virtue of the fiduciary position therefore, any profit made should be transfered to the principal. Example, director of companies owe their fiduciary duties to the companies to which they are appointed directors.Where a director breaches a duty, the company usually sufffers loss and the director may gain, hence the company may seek to recover its loss proceedings. According to Smith & Keenan’s Company law, Chapter 17 where he explains the duties of directors in detail, the authour identifies the proper purpose rule of directors in companies. The author says, “ Directors must use their powers for the proper purpose, i.e for the benefit of the company and not to further their own interests.” (Pg 357) The author ellaborates in further by saying that, as director is accorded fuduciary duty, he must account to the company for any personal profit he may take in the course of his dealing with the company’s property in different situations. (1) If a director buys shares in the company at par when the issue price is greater he must account to the company for the difference; whre he has sold at profit, he must account for the profit. Again, if the director receives gifts of money or shares from promoters of the company or from persons selling he must account for these sums to the company. The reason for this is that, there has been a conflict of interest. The director is supposed to negitiate for the company’s benefit he can harly have done so if he were taking gifts from the other party. He must also account for commisions received from persons who supply goods to the company. In addition, a direcotr who is in the course of his employment obtains a contract for himself is liable to account to the company for the profit he makes, even if it can be shown that the company would not necessarilyhave obtained the contract. The accountabilty arises from the mere fact that a profit is made by the director , it is not a question of loss to the company. (Pg 354). (b) Give an account of the extent to which the common law fiduciary duties of company directors have been added to by statutory provisions. A director is a person employed as an officer of a company and has a duty to perfom the duties of management of the business of the company. Director’s duties founded in the depths of common law derive from three potential sources:- • Those imposed by statute, primarily the corporations law. • Those developed by courts, particulary those duties arising from a director’s fiduciary position • Those that may be expanded upon or shaped by the particular circumstances of a company primarily by a company’s constitution or replaceable rules and other contracts such as shareholders’ agreements. There are five (5) types of statuory duties given by statuory provisons which have given rise to common law fiduciary duties. These are; 1. Section 180(1)- Care and Diligence “ A director or other officer of a corporation must exercise their powers and discharge their duties with a degree of care and diligence that a reasonable person would exericse if they; • Were a director or officer of a corporation in the corporation’s circumstances; and • Occupied the office held by, and had the same responsibilities within the corporation, as the director or officer” 2. Section 181(1)- Duty to Act in Good Faith “ A director or other officer of a corporation must exercise their powers and discharge thier duties ; • In good faith and best interest of the corporation and • For a proper purpose” 3. Section 182(1)- Use of Position “A director, secretary or other officer or employee of a corporation must not improperly use their position to;- • Gain and advantage for themselves or someone else; or • Cause a ditriment to the corporation” 4. Section 191(1) – Disclosure of interest “ A director who has a material personal interest in a matter that relates to the affairs of the company must give notice of interest” However, this rule has various exceptions. 5. Section 183(1) – Use of Information. “A person who obtains information because they are, or have been, a director or other officer or employee of a corporation must not improperly use the information to:- • Gain an advantage for themselves or someone else; or • Cause detriment to the corporation” The above mentioned statuory provisions have added / gave birth to common law fiduciary duties as follows: a) Duty to act in good faith:- The duty of good faith is owed by each director and is owed to the company itself, as a whole. Directors are required to act in what they honestly believe to be the interest of the company. In considering what is in the interest of the company, a dicector must have regard to the interest of the shareholders of the company as commercial entity. The courts have also considered the interest of the company’s creditors. b) Duty to avoid conflict of interest:- A director has a duty to avoid conflicting his or her own interests with the itnerests of the company. A director is liable to account to the company for any profit derived or to endemnify the company from any loss arising from the director’s action. Additionally, the company can choose to void any contract that the director entered into as a result of the conflict. c) Duty to exercise power for a proper purpose:- A director must exercise his or her powers conferred on them under the company’s constitution or the Act for a proper purpose. Powers must not be exercised for an ulterior purpose or for manipulating voting power. d) Duty to retain discretion:- Generally, a director cannot contract as to how they will vote at a future board meeting. A director can howeve, having entered into a contract on behalf of the company in the bona fide exercise of his or her duties , agree to take certain action at a board meeting that is necessary to carry out the contract. e) Insolvent trading:- Directors are now under a positive duty to ensure that the company does not incur a debt while insolvent. In a nutshell, i would like to conclude by saying that, common law fuduciary duties of directors have greatly been contributed by statuory law provitions as stipulated above. REFERENCE BOOKS: 1. Denis Keenan; Smith & Keenan’s Company Law; Thirteenth Edition (2005) , Persons Education Limited, London. 2. “http:/en.wikipedia.org/wiki/Fiduciary” 3. “http:/en.wikipedia.org/wiki/Salomon_ v_ Salomon & Co 4. “http:/en.wikipedia.org/wiki/ piercing _the_ corporate_veil