LEGAL ASPECTS OF BUSINESSES (COMPANY)

EFFECTS OF INCORPORATION OF A COMPANY

ACCORDING TO COMPANIES ACT 2016

1. Section 20
Once incorporated a company becomes a body corporate and

(a) Have a legal personality separate from that of its members (the doctrine of
separate legal entity / the veil of incorporation)

When the company is formed and registered the company will become separate
legal entity. The company and its members are two separate body. The effect of
this is that:

i. Members are not liable for any debts of the company. The company has to settle
its own debts.
ii. The company and its members can enter into contract with each other.

Solomon v Solomon & Co. Ltd

Solomon was a boot and shoe manufacturer. He ran his business as a sole trader.
He then formed a company called Solomon & Co. Ltd. He is the majority
shareholder. Unfortunately his business became insolvent and had to be dissolved.
Issue: Whether Solomon was liable for the company’s debts. Held: Solomon and
the company were two separate entity. Therefore, Solomon was not liable for the
company’s debts.

Lee v Lee’s Air Farming Ltd

Lee formed a company Lee’s Air Farming Ltd. He was the company’s sole
governing director. He was also its only pilot. Lee was killed while flying for the
company. His wife made a claim from workman’s compensation. The court allowed
Mrs. Lee’s claim. Lee could enter into contract with the company because he was
the employee of the company.

(b) Continue in existence until it is removed from the register of companies

Company never dies. It exists forever. Even if all the members and the directors die,
the company still exists.

Re Noel Tedman Holding Pty Ltd

The company had only two shareholders, a husband and wife. They were the only
directors of the company. Both died in a traffic accident. Only their baby survived.
The court held that although all the directors died, the company still existed. So the
shares in the company were transferred to the baby.

2. Section 21(1)

Companies have unlimited capacity to carry on or undertake any business or activity

including:

(a) To sue or be sued

A company can sue and be sued in its own name. The members may not sue on the
company’s behalf. If a director has breached his duties, it is for the company to take
action and not the members.

Foss v Harbottle

Two shareholders in the Victoria Park Company brought an action against directors
for misapplication of company’s property. The court held that the right person to sue
was the company and not the members of the company (two shareholders).

(b) To acquire, own, hold, develop or dispose of any property,

Macaura v Northern Assurance Co. Ltd

Macaura owned an estate. He sold all the timber to a company, Irish Canadian
Sawmills Ltd. Macaura insured the timber that he sold to the company in his own
name. Two weeks later the timber was destroyed in a fire. Macaura put a claim but
the insurance company refused to pay. The court held that the timber was the
property of the company. Therefore, Macaura’s claim from the insurance company
failed.

(c) To do any act which it may do or to enter into transactions

 Comparative chart between a sole proprietorship, conventional partnership,
a limited liability partnership and a registered company.
COMPANY LIMITED GENERAL SOLE
LIABILITY (CONVENTIONAL) PROPRIETORSHIP
PARTNERSHIP PARTNERSHIP
(LLP)
Capital Share capital Partners Partners Own contribution
contribution contribution contribution
Owner(s) of Company LLP (partners Partners Sole proprietor
the business (members/share have a share in
– holders own the capital and
‘shares’ in the profits of the LLP)
company that
give them
certain rights in
relation to the
Company)
Legal status Separate legal Separate legal Not a separate legal Not a separate legal
entity entity entity entity
Party that is Company LLP Partners Sole proprietor
liable for debts
of the
business
Responsibility Board of Partners Partners Sole proprietor
for Directors
management
of business
Personal No personal No personal Unlimited liability Unlimited liability
liability liability of liability of (jointly and which can extend to
individual partner, except severally liable with personal assets of sole
director or for own wrongful the partnership) proprietor
shareholder acts or omission which can extend to
or without personal assets of
Liabilities borne authority the partners
by the directors
or shareholders Liabilities borne
are to extent of by the partners
unpaid shares are jointly and
only severally with the
LLP to the extent
of contribution
No. of Minimum of 2 Minimum 2 and 2 to 20 partners Sole proprietor only
Shareholders/ and maximum no maximum limit (except for
Partners 50 in private partnerships for
company professional practice
with no maximum
limit)