When a company is registered, the law creates a new person. That person can own property, make contracts, borrow, sue and be sued, and it goes on existing when its members change. It also stands between the members and the company’s debts. This is the single most important idea in company law, and it was settled in one famous case more than a century ago.
This topic covers the consequences of incorporation: corporate personality, limited liability, ownership of property, the power to sue and be sued, perpetual succession, borrowing, and transfer of shares, each compared with a partnership. It then covers the exceptions, the situations in which the courts and statute lift the veil of incorporation and look at the people behind the company.
In 30 seconds
On incorporation a company becomes a body corporate with the name in its memorandum, with perpetual succession and a common seal. The consequences are corporate personality, limited liability, the company owns its own property, it sues and is sued in its own name, it continues despite changes in membership, it can borrow and give a floating charge, and its shares can be transferred.
Salomon v Salomon (1897) established that the company is separate from its members even when one person owns almost all the shares. The veil is lifted where a company was formed to evade a legal obligation, where it trades with fewer than two members for over six months, where its name is misstated, for fraudulent trading, to decide its character or residence, and in some holding and subsidiary cases.
Consequences of incorporation
Under section 42 of Companies and Allied Matters Act (CAMA), from the date of incorporation stated in the certificate, the subscribers to the memorandum and the other persons who become members form a body corporate by the name in the memorandum. It can exercise all the powers of an incorporated company, including the power to hold land, and has perpetual succession and a common seal.
Members are liable to contribute to its assets on winding up only as CAMA provides. Seven consequences follow.
1. Corporate personality
A company becomes a legal entity distinct from its members. This is a device to protect creditors and people who deal with the company, since it decides in advance who is responsible for its obligations: the company. The leading authority is Salomon v Salomon & Co Ltd (1897). Mr Salomon had run a prosperous boot and leather business for years. He formed a limited company and sold the business to it.
As payment, he received 20,001 of the 20,007 shares of £1 each, and £10,000 in secured debentures, with the rest in cash. His wife and five children each held one share as his nominees. The company later failed. After paying Salomon’s debentures, it could not pay its unsecured creditors.
The court held that the company was a different person from Salomon, even though he held almost all the shares and the other members were nominal, so the company was liable for its debts and Salomon’s secured debentures were valid and ranked first.
2. Limited liability
When an obligation is incurred for an incorporated company, the company is liable directly, though it may obtain contributions from its members. Under section 21, a company’s liability is limited by shares or by guarantee, or it is unlimited.
| Kind | Members’ liability | Example |
|---|---|---|
| Limited by shares | They may be called on to pay whatever remains unpaid on their shares | A member holds 1,000 shares of ₦100 on which ₦60 has been paid. She can be called on for the unpaid ₦40 × 1,000 = ₦40,000, and no more |
| Limited by guarantee | Members pay the sum they undertook to pay if the company is wound up, or if winding up begins within a year after they cease to be members | A member guaranteed ₦10,000. That is the most she can be asked to pay |
| Unlimited | Members are personal guarantors of the company’s debts without limit | All the members’ property is at risk |
By contrast, an unincorporated association is not a legal person and cannot be liable. The officials who act for it, or the members who have actual or apparent authority, are liable, usually without limit, to the extent of their property, unless liability is expressly or impliedly restricted to the association’s assets.
Partners are in the same position: each is an agent of all the others, and acts done in the normal course of business bind them.
3. Property
An incorporated body’s property belongs to it, not to its members. The company does not hold it as trustee or agent for them, and they have no proprietary interest in it. The company’s property is therefore available to meet its obligations.
In a partnership, a change in membership may cause a division of assets. But the property of a company is unaffected by a change of members, since the departing member’s shares are transferred.
4. Suing and being sued
A company may sue in its own name to enforce its rights and be sued for breach of its duties. It is subject to liability in contract, tort and crime. It can make contracts in its own name. A partnership can sue and be sued in its name in only a limited number of cases, and it is often necessary to join the partners or their agents.
A limited liability partnership, being a body corporate, can sue and be sued in its own name once incorporated.
5. Perpetual succession
An incorporated body continues to exist despite changes in its members. Since the law creates a company, only the law can end it, by winding up as CAMA provides. Its life does not depend on the lives of its members. During World War II, a bomb killed all the members of one private company who were meeting together, and the company still existed.
The personal representatives of the dead members usually take their places, or the shares are sold. An limited liability partnership (LLP) shares this attribute once incorporated. In a limited partnership, the partners who put in money without managing have limited liability, while the managing partners have unlimited liability.
6. Borrowing
A company may borrow in its own name. Members of an unincorporated body must borrow in their personal capacities. An incorporated company can offer security, including a floating charge over its changing assets, so it can borrow large sums. This is one reason a trader incorporates the business.
7. Transfer of shares
Shares are generally freely transferable unless the company’s rules say otherwise, as with a private company, whose members must not offer shares to the public. A member who transfers his shares is released from further liability on them. A partner who transfers his share does not cease to be a partner, and the transferee is admitted only if the other partners agree.
The transferor is relieved of existing and future liabilities only if the creditors agree expressly or impliedly.
Lifting the veil of incorporation
Lifting, or piercing, the veil of incorporation means that the court disregards the distinction between the company and its members. It may do so to hold members liable for the company’s debts or obligations, or to let members take benefits that should go to the company. The syllabus lists these situations.
| Situation | Rule and authority |
|---|---|
| 1. A company formed to avoid a legal obligation | Jones v Lipman (1962). Jones agreed to sell land to Lipman. To avoid the contract, he formed a company, whose members were only Jones and a clerk of his solicitor, and transferred the land to it. The court disregarded the company’s separate personality, treated Jones and the company as one, and compelled the company to transfer the land to Lipman |
| 2. A company that trades with fewer than two members | Section 118 of CAMA. If a public company or a company limited by guarantee carries on business for more than six months with fewer than two members, every director or officer during that time is liable jointly and severally with the company for its debts contracted in that period |
| 3. Misstatement of the company’s name or misdescription on a document | An officer who issues, for example, a bill of exchange on which the company’s name is wrongly written is personally liable for its value if the company does not pay |
| 4. Fraudulent trading | Section 672 of CAMA. If, in a winding up, it appears that the business was carried on recklessly or with intent to defraud creditors or others, the persons responsible may be made liable |
| 5. Determining the company’s residence or character | The court may look at the nationalities of the controlling members to decide the company’s character, for example whether it is an enemy alien company |
| 6. Holding and subsidiary companies | The court may lift the veil between a holding company and its subsidiary so that one bears the other’s liability or takes its benefit, where the holding company is in de facto control beyond what the law envisages, for example where the same staff work for both |
Section 381 defines a holding company as one that controls the composition of another company’s board or holds more than half of the nominal value of its equity share capital. The other company is its subsidiary.
Personality and the veil in more detail
Why the Salomon principle matters
Salomon shows that the law looks at the legal form, not at the economic reality. A one-person company is still a different person from its owner. This lets a sole trader limit risk, but it also means that the creditors of a one-person company can look only to its assets.
The decision protects investment, because people will take risks if they know their loss is capped, but it can be abused. That is why the courts and Parliament have made exceptions.
Comparing the veil exceptions
| Source | Examples | Effect |
|---|---|---|
| Court (common law) | Formed to avoid an obligation (Jones v Lipman); determining character or residence; holding and subsidiary | The court treats the company and its owner or parent as one |
| Statute | Section 118 (fewer than two members); fraudulent trading (section 672); misdescription of the name | Directors or officers become personally liable |
The test for a sham company
Courts are slow to lift the veil. They ask whether the company is being used as a device or a cloak to hide a legal obligation or a wrong, not merely whether the company is small or controlled by one person. In Jones v Lipman, the company was a ‘mask’ used to dodge a binding contract, so the veil was lifted.
In Salomon, the company was a real business, so it was not.
An application: a one-person company with a debt
Tola forms Swift Ltd, owns all its shares and is its only director. Swift buys goods on credit for ₦5 million, and the supplier is not paid when the company fails. Without more, Tola is not liable, because Swift is a separate person.
The position changes if Tola formed Swift only to avoid an existing contract she had made personally, if Swift traded for over six months with only one member and was a public company or a company limited by guarantee, if she signed documents using a wrong company name, or if the business was run with intent to defraud creditors. In those cases she may be personally liable.
Advantages and disadvantages of incorporation
| Advantages | Disadvantages |
|---|---|
| Limited liability of members | Formalities and costs of registration and annual filing |
| Separate legal personality, so it can own property and make contracts | Publicity, especially for a public company |
| Perpetual succession | Loss of some control, since directors manage |
| Easier to raise capital and borrow, with a floating charge | Directors’ duties and regulation |
| Shares are easily transferred | The veil may be lifted in some cases |
Worked example: should the veil be lifted?
Scenario. Femi agrees in writing to sell his shop to Gbenga. Before completion, he forms Femi Properties Ltd with himself and his driver as the only members, transfers the shop to it, and tells Gbenga that the company, not he, owns the shop. Gbenga sues.
- Identify the principle. A company is a separate person, and ordinarily a company that owns land is not bound by its owner’s contracts.
- Look for an exception. The company was formed only to avoid Femi’s existing obligation to Gbenga.
- Apply the authority. In Jones v Lipman (1962), a company set up in these circumstances was disregarded, and the seller and company were treated as one.
- Conclude. The court is likely to lift the veil and compel Femi Properties Ltd to transfer the shop to Gbenga.
Further notes: the company as a person, and the exam approach
A company can act and be liable only through people
A company is an artificial person. It has no body, so it acts through its directors, officers and employees. Their acts in the course of the company’s business are treated as the company’s acts. This is why the company is subject to liability in contract, tort and crime, as the syllabus states, and why a company can be convicted of an offence and fined. A company cannot be imprisoned, but its officers can be.
Corporate personality and liability: the contrast in one table
| Question | Unincorporated business | Company |
|---|---|---|
| Who owes the debt? | The owners or partners personally | The company |
| Who owns the assets? | The owners or partners | The company |
| Who sues for a breach? | The owners or partners, named individually | The company in its own name |
| What if an owner dies? | The business may end | Nothing changes for the company |
| What can be given as security? | Specific assets, but no floating charge by a partnership | Fixed and floating charges |
Why Salomon matters in practice
Salomon was a secured creditor of his own company, with debentures for £10,000. When the company failed, he was paid first from its assets, ahead of the unsecured creditors. The case shows that an owner can also be a creditor of his own company and rank as a secured creditor if he takes a valid security, which is one reason a trader may incorporate.
It also shows the risk to unsecured creditors who deal with a one-person company without checking its assets.
Lifting the veil: how to organise an answer
- State the principle in Salomon: the company is separate from its members.
- Say that the veil is lifted by the courts and by statute in exceptional cases.
- Give the situations with authority: avoidance of a legal obligation (Jones v Lipman); fewer than two members (section 118); misdescription of the name; fraudulent trading (section 672(1)); character or residence; holding and subsidiary companies (section 381).
- Close with the effect: the members or officers become personally liable, or the company and its owner are treated as one.
Questions that have been asked on this topic, and how to answer them
| Question theme | What a full answer contains |
|---|---|
| Explain the consequences of incorporation for a business owner | The seven consequences, each with a sentence, and Salomon for the first |
| Explain the circumstances in which the veil of incorporation is lifted | The six situations with the cases and sections. Mention both court and statute |
| A person forms a company and transfers an asset to it to avoid a contract | Jones v Lipman: the company is treated as the owner’s alter ego and ordered to perform |
| Nature of the liability of members of different kinds of company | Shares, guarantee and unlimited, with a numerical example for shares |
| A partner dies or a partnership changes membership | Contrast with perpetual succession of a company |
Common mistakes in the exam
- Saying a company is not a separate person where one person holds nearly all the shares. Salomon holds the opposite.
- Saying members are never liable. A member of a company limited by shares must pay what is unpaid on the shares.
- Confusing section 118 (fewer than two members for six months) with a general rule that a company must have two members.
- Forgetting that the veil is lifted by statute as well as by the courts.
- Giving the cases without their facts or principles.
- Saying a partnership has perpetual succession.
Quick revision
- Section 42: body corporate with perpetual succession and a common seal.
- Seven consequences: personality, limited liability, property, suing and being sued, perpetual succession, borrowing, transfer of shares.
- Salomon v Salomon (1897): the company is separate even if one person holds almost all the shares.
- Lifting the veil: avoiding an obligation (Jones v Lipman), fewer than two members (section 118), misdescription, fraudulent trading (section 672), character or residence, holding and subsidiary (section 381).
Practice questions
These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.
Section A style: multiple choice
Question 1. The leading case on corporate personality is:
- Jones v Lipman
- Salomon v Salomon & Co Ltd
- Young v Bristol Aeroplane
- Ikpeazu v ACB
Show the answer
B. It was decided in 1897.
Question 2. A member holds 500 shares of ₦100 each, on which ₦70 has been paid. The most he can be called on to pay is:
- ₦15,000
- ₦50,000
- ₦35,000
- ₦70,000
Show the answer
A. 500 × ₦30 unpaid = ₦15,000.
Question 3. In which case did the court treat the seller and his company as one to compel a transfer of land?
- Salomon v Salomon
- Jones v Lipman
- Continental Bank v Erostrate
- Akinlose v African Industries
Show the answer
B. The company had been formed to avoid a contract.
Question 4. A company continues in existence despite changes in its members. This is:
- Limited liability
- Perpetual succession
- Ratification
- Transfer of shares
Show the answer
B. Only winding up ends it.
Question 5. Under section 118 of CAMA, a public company that trades for more than six months with fewer than two members makes its directors:
- Free of liability
- Jointly and severally liable for debts contracted in that period
- Liable for tax only
- Liable only to the members
Show the answer
B. This is one case of lifting the veil.
Question 6. The property of a company belongs to:
- The members
- The directors
- The company
- The Commission
Show the answer
C. The members have no proprietary interest in it.
Question 7. An officer who signs a bill of exchange on which the company name is misstated is:
- Not liable
- Personally liable if the company does not pay
- Liable only to the Commission
- A shareholder
Show the answer
B. This is a case of misdescription.
Question 8. A holding company is one that:
- Holds only land
- Controls the composition of another company’s board or holds more than half of its equity share capital
- Has no members
- Is unlimited
Show the answer
B. Section 381 defines it.
Question 9. Which of these has no perpetual succession?
- A company
- A limited liability partnership
- A general partnership
- A public company
Show the answer
C. A general partnership may be dissolved by a partner’s death.
Question 10. Fraudulent trading is dealt with by section:
- 118
- 381
- 672
- 21
Show the answer
C. Section 672 of CAMA.
Section B style: written questions
Question 11 (10 marks). Explain the consequences of incorporating a business as a private company limited by shares.
Question 12 (20 marks). (a) State the facts and decision in Salomon v Salomon & Co Ltd. (6 marks) (b) Explain six circumstances in which the court or statute will lift the veil of incorporation. (10 marks) (c) Explain what is meant by a holding company and a subsidiary. (4 marks)
Question 13 (10 marks). Explain the nature of the liability of the members of the three kinds of company.
Model answers
Show the model answer to Question 11
The consequences of incorporation, as Katako should be advised, are these. Corporate personality: on incorporation the company becomes a legal entity distinct from its members, as Salomon v Salomon decided, so it is liable for its own debts. Limited liability: if it is limited by shares, Katako’s liability is limited to the amount unpaid on his shares. Property: the company owns its property, not its members.
Suing and being sued: it sues and is sued in its own name and can contract in its own name. Perpetual succession: it continues despite changes in its members, and is ended only by winding up. Borrowing: it can borrow in its own name and give security, including a floating charge.
Transfer of shares: shares are generally transferable, subject to restrictions in a private company, and a member who transfers his shares is released from further liability on them. He should also be told of the costs and formalities of registration and annual filing.
Show the model answer to Question 12
(a) Salomon v Salomon & Co Ltd (1897). Salomon, a prosperous boot and leather trader, formed a limited company, sold his business to it, and received 20,001 of its 20,007 shares of £1, plus £10,000 in secured debentures and the balance in cash. Six shares were held by his wife and children as his nominees. When the company failed, it could not pay its unsecured creditors after paying Salomon’s debentures.
The court held that the company was a different person from Salomon, even though he held almost all the shares, and that the company, not he, was liable for its debts. The decision established that a registered company is separate from its members.
(b) Circumstances in which the veil is lifted. (i) Where a company has been formed to avoid a legal obligation: in Jones v Lipman (1962), Jones agreed to sell land to Lipman, formed a company with a clerk of his solicitor as the only other member, and transferred the land to it. The court disregarded the company and compelled the transfer.
(ii) Where a public company or a company limited by guarantee carries on business for more than six months with fewer than two members: section 118 makes the directors and officers jointly and severally liable for debts contracted in that period. (iii) Misstatement of the company’s name on a document, for example a bill of exchange: the officer is personally liable if the company does not pay.
(iv) Fraudulent trading, under section 672(1), where the business was carried on recklessly or with intent to defraud creditors. (v) To determine the company’s character or residence from its controlling members. (vi) In some holding and subsidiary cases.
(c) Holding and subsidiary. Section 381 defines a holding company as one that controls the composition of another company’s board or holds more than half of its nominal equity share capital, and the other is its subsidiary.
The court may lift the veil between them so that one bears the other’s liability or takes its benefits, but only where the holding company has control beyond that envisaged by law, for example where the staff of the holding company are also the staff of the subsidiary.
Show the model answer to Question 13
The limited liability of members depends on the kind of company. In a company limited by shares, a member is liable only for any amount unpaid on the shares he holds. For example, a member with 1,000 shares of ₦100 on which ₦60 has been paid can be called on for ₦40,000 and no more.
In a company limited by guarantee, the members are liable to pay the amount they undertook to contribute if the company is wound up, or if winding up begins within a year after they cease to be members. In an unlimited company, the members are personal guarantors of the company’s debts without limit. In each case the company itself is liable for its own obligations.
The protection of limited liability lets members know in advance the most they can lose, which is why it is called a hedge against business risk.
Pathfinder on corporate personality and lifting the veil
These are the ICAN Pathfinder questions that test this topic. ICAN owns the questions and the suggested solutions, so we point you to them and do not copy them. Open your Pathfinder, attempt each question under exam conditions, then check your answer against the notes above.
From the Business Law paper set under the previous syllabus. Includes a part on the veil of incorporation. Revise the table of situations and the two leading cases.
Revise first: Lifting the veil of incorporation
From the Business Law paper set under the previous syllabus. Includes parts on companies and their separate legal personality. Revise the consequences of incorporation.
Revise first: Consequences of incorporation
Multiple-choice questions can test Salomon v Salomon, the effect of limited liability and the grounds for lifting the veil. Check Section A of every diet you practise for items on these points.
Revise first: Lifting the veil of incorporation
Source: ICAN Pathfinder, Corporate and Business Law. Diets covered: May Diet, 2022 to May Diet, 2024. Earlier diets are mapped where they fit.
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