Lecture notes
Separate Legal Personality and Groups of Companies
- Module
- Company Law
- Institution
- University Of Law (ULaw)
Separate legal personality and groups of companies.
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Unit 2 - Separate Legal Personality and Groups of CompaniesAlthough a company is a thing which you can own, t is an artificial legal person with its own legal
personality separate from its owners. The company itself has in its own right the legal capacity to do
almost anything a human is allowed to do including running a business as owning property, being a
party to contract, being a claimant or defendant in legal proceedings and paying tax on profits.
A company needs humans to manage its affairs. The humans in charge of running a company’s
business are known as its directors and collectively they are known as its ‘board of directors’ or ‘the
board’.
The owners of a company are the individuals who own shares in the company – the
shareholders/members which in turn own the assets required to run the business. Each shareholder
individually owns a certain number of shares and between them, the shareholders own the entire
company. A person can acquire shares in a company in two ways: either the company itself issues
new shares to the person or the person acquires shares from an existing shareholder.
As a company has its own legal personality, a company itself can be a shareholder in another
company and the two companies will be separate legal persons. If company A owns the majority of
shares in company B, then company A is known as a holding company or parent company and
company is known as a subsidiary of company A.
Shareholders/Members
The CA 2006 uses the word members of the company as opposed to shareholders. Section 112
provides for two ways of becoming a member of a company.
Section 112(1) – the subscribers of the company’s memorandum automatically become members at
the moment the company is incorporated, i.e. the moment when the company comes into existence.
(1) refers to this moment as the registration of the company, reflecting the involvement of the
Registrar of Companies in the incorporation process. The subscribers of the memorandum means
that the person who signed the company’s memorandum of association, a key document required to
incorporate a company.
Section 112(2) – provides that the other members of the company will be every person who has
agreed to become a member of the company, and whose name has been entered in the company’s
register of members. The register of members is a list of the members of the company and the
number of shares they own. A person will not be entered in the register of members unless they
own at least some shares. Therefore, if you acquire shares in an existing company, you will not
become a member of that company until you have been entered into its register of members.
Limited liability
As a general rule, shareholders do not incur liability directly to third parties due to the company’s
actions due to the company’s separate legal personality. It is only the company itself which incurs
the liability due to the third party, not the shareholders. However, the third party may have required
the shareholder to enter into an independent agreement with the third party, guaranteeing that the
company will perform its obligations. Then, the shareholder would be directly liable to the third
party under that independent agreement.
Whether the shareholders incur liability if the company goes into insolvent liquidation, that is where
the company is wound up as it is unable to pay its debts, depends on whether the company is a
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