Incorporation and Legal Personality Notes

Legal Personality

  • Legal personality distinguishes between human beings and legal constructs.
  • A legal person has no physical existence and cannot perform human acts like marriage or guardianship.

Consequences of Incorporation

  • Upon incorporation, a company achieves separate legal personality, distinct from its members.
  • Registration by the Companies Commission (CIPC) confirms that a company is legally established.

Hallmark of a Registered Company

  • Separate Legal Personality:
    • A company can own property, sue, and be sued; it is distinct from its directors and shareholders.
    • Limited liability protects shareholders from the company’s debts; liabilities are confined to unpaid shares or guarantees.

Key Consequences of Separate Legal Personality

  1. Limited Liability

    • Shareholders are only liable for unpaid shares, not personal assets.
    • Example: Salomon v Salomon & Co Ltd – established that a company is a legal entity separate from its owner.

  2. Ownership of Company Property

    • The company, not its shareholders, owns all property and assets.
    • Example: Macaura v Northern Assurance Co Ltd (1925) – a shareholder could not claim insurance after failing to transfer coverage to the company.

  3. Contractual Capacity

    • Only the company can enforce its contracts; shareholders are not liable for company negligence unless personally negligent.

  4. Criminal Capacity

    • A company can be convicted of crimes, but limitations exist:
      • Cannot commit crimes requiring physical acts like driving.
      • Mens rea (guilty mind) may be attributed from directors to the company.
      • Example: Theft from a company counts as a crime even if shareholders are involved.

  5. Perpetual Succession

    • A company’s existence is independent of its members; it continues until dissolution regardless of member turnover.

  6. Borrowing Capacity

    • Companies can borrow, securing debts with floating charges, which crystallize under specific events.

Lifting the Veil

  • Refers to legal instances where the corporate personality of a company is disregarded:
    • Courts may attach liability to members or directors when the company is used to commit fraud or evade legal obligations.
    • Distinction between lifting the veil (individual liability) and group treatment of companies.

Exceptions to the Salomon Principle

  • Courts can lift the veil on a case-by-case basis when justice requires it:
    • Directors may face personal liability if they violate their duties to the company or creditors.
    • Example Cases: Knoop NO v Birkenstock Properties Pty Ltd and Cape Pacific Ltd v Lubner Controlling Investments Pty Ltd.
    • Fraudulent conduct can trigger personal liability for shareholders.

Current Legal Framework

  • Section 20(9) of the 2008 Companies Act:
    • Courts can declare a company’s incorporation improper if it constitutes an unconscionable abuse of its legal personality.
    • This allows for the piercing of the corporate veil in extreme situations.