LAW/2009/222

OBILADE ONAOLAPO ABISOLA

BUL 501 (LAW OF BUSINESS ADMINISTRAION)

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An examination of the mystic of corporate

personality and the role of the corporate form

of business organization as a major pillar of

flourishing national economies against the

backdrop of the Law of Business Associations as

a core subject in legal curriculum

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November, 2014

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“A company is one of the greatest inventions of man.”1

The invention of the company has been lauded over

the years for its ingenuity and absolute relevance to

the social environment in which we live. Generally

speaking, a company refers to an association or

organization of two or more people who have agreed to

come together to pursue a particular objective. Such

objective could be of different forms.

Companies, broadly speaking have been in existence

for a very long time and have contributed in varying

degrees to growth in different spheres of the world’s

economy. However, the legal concept that underlines

company law is the idea of corporate personality and

this is a form of business corporation dating back to

16th century.

1 Professor O. Fubara 2014

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Before the advent of these business corporations,

the dominant forms of business available were

partnerships and Sole proprietorships. These were

predominantly small businesses identified directly with

the owners and these formed the structure of trade in

medieval times.

Sole proprietorships have certain advantages over

other forms of business organization. They suit the

temperament of people who like to exercise initiative

and be their own bosses. They are flexible, since

owners can make decisions quickly without having to

consult others. By law, individual proprietors pay

fewer taxes than corporations. And customers often are

attracted to sole proprietorships, believing an

individual who is accountable will do a good job.

This form of business organization has some

disadvantages, however. A sole proprietorship legally 4

ends when an owner dies or becomes incapacitated,

although someone may inherit the assets and continue to

operate the business. Also, since sole proprietorships

generally are dependent on the amount of money their

owners can save or borrow, they usually lack the

resources to develop into large-scale enterprises.

The advent of corporations, one of the legacies of

the industrial revolution, however completely changed

the face of business organisations. Non-business

corporations like the Muscovy company (1555), the

Spanish company (1577) and the East India company

(1601) received history’s first recorded charters of

incorporation during the reign of England’s Queen

Elizabeth 1.

Non-business corporation is an ancient form of

business originally used for towns, guilds and colonies

in Rome and from the early middle ages, they were used 5

for universities, religious orders and other so called

benevolent organisations performing civil services and

thus subject to governmental license and oversight.

A proper definition for the concept of a

‘corporation’ was provided by Chief Justice Marshal in

1819, when he said in his rulling;

“a corporation is an artificial being, invisible, intangible, and existing

only in the contemplation of the law. Being the mere creation of law, it

possesses only three qualities which the charter of his creation confers upon

it either expressly or as incidental to its very existence. The most important

are mortality and if the expression may be allowed, individuality, properties

by which a perpetual succession of many persons are considered as the same and

may act as a single individual”2

The chief justice in the above statement touched

lightly on the consequencies of incorporation i.e what

marks out incorporated companies and seperates it from

its un-incorporated counterparts.

2 Dartmough College v Woodward; V4 WHEAT, 518, 1819

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The most important and determining characteristic

of incorporation is the concept of ‘corporate

personality’. As professor Fubara described it in a

2014 lecture;

“companies are like cousins to us, as they are also

recognized as legal individuals”

This concept gives credence and is an important

and efficient backbone to the effectiveness of the

modern concept of incorporation. Corporate personality

simply means that the company maintains a separate

cooperate personality from that of its founders and

that of its members. A lot of the other characteristics

of the incorporated company naturally flow from its

corporate personality.

Limited liability; this is a characteristic that as

earlier state flows from the corporate personality.

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This means that the members of the company are

ordinarily not liable to the debts of the incorporated

company. This particular feature forms a bedrock of the

attractiveness of the corporate company.

Unlimited Life; this means that a company can

effectively live forever! An incorporated company is

not owned nor tied to a particular individual and in

any case of bankruptcy, death or resignation, the

company continues to exist and waxes strong

irrespective of individual members. A linked feature

that makes this unlimited life very possible is the

feature of ‘Perpetual Succession’. This is the

divisibility of ownership that permits transfer of

ownership interests without disrupting the structure of

the organisation.

These listed are the core features of the

incorporated company that sets it apart from the un-8

incorporated companies. And this features will be

examined in greater detail subsequently.

Types of Company’s

At this juncture, it is important to point out the

different types of companies that exist

Chartered Company;

This is a company formed with a view to advance a

particular discipline or field of knowledge. Examples

of chartered companies in Nigeria include

- ICAN (Institute of Chartered Accountants of

Nigeria)

- Nigerian Society of International Law

Statutory Company;3

3 Dr Fatula

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This is a company formed by the government through

an enabling statute for the purpose of carrying out

certain activities (Economic) for the benefit of the

society. The purpose of forming a statutory company is

not to make profit. The precise nature of the statutory

company varies by jurisdiction and they might be owned

by the government with or without other shareholders*.

These companies are formed mainly with an intention to

provide the public services like gas, water,

electricity, etc. The companies are also known as

statutory corporations or public corporations. Examples

of these companies include NITEL, NIPOST, Nigeria Radio

Corporation.

In the early 60’s, 70’s and 80’s, the dominant

business were carried on by statutory companies

established by the government for such purposes.

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However, since the 1990’s, statutory companies have

ceased to be the dominant form of business corporation.

Registered Company;

This type of company is established with the

primary purpose of making profit. This feature is the

main distinguishing factor with other types of

companies. It is now the most popular form of business

organization around the world and is absolutely key to

the growth of the world’s economy.

Brief History of Company Law in Nigeria

The history of Nigerian Company Law could be

briefly traced to the Joint Stock Companies Act 1855

which introduced the principle of limited liability of

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Companies and the role of Deed of Settlement was highly

practised in the United Kingdom.4

With the reception of English laws into Nigeria

due to Colonialism, the first legislative attempt was

made in 1912 to stem the practice of going to England

for the position of the law on controversial Company

issues. However, the Companies Ordinance of 1912 was

only in force in the colony of Lagos. The amalgamation

of Southern and Northern Nigeria in 1914 brought about

the extension of the Ordinance to the entire Country.5

Progressively, the Companies Decree 1922 repealed

both 1912 and 1917 Ordinances. The 1922 Ordinance was

based on the United Kingdom Companies Act 1929. In

1968, a new Companies Decree was promulgated to replace

the 1922 Companies‟ Ordinance. The Company Act 1968 was

4 O. Orojo: Company Law and Practice in Nigeria, 3rd Edition, Mbeyi & Associates (Nig) Ltd, 1992 @ page 175 AKINOLA BUKOLA; LL.B (Hons), B.L, LL.M

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mainly based on the United Kingdom Companies Act 1948

as part of the recommendations of the Jenkins

Committee.6 The 1968 Companies Act being a federal law

was listed in the Exclusive Legislative list of the

1979 constitution. To boost the innovations of the

Companies Act 1968, the Nigerian Enterprise Promotion

Act 19777 and the 1968 Act made copious provisions for

the first time on matters such as mandatory provisions

for accounts and greater accountability of Directors

and Part X made inputs towards checking the excesses of

company officers.

Defects in the 1968 Act gave birth to the Law

Reform Commission set up in 1987 headed by his Lordship

Hon Justice Dr Olakunle Orojo (Rtd) who together with

his colleagues on the Commission ushered in the present

Companies and Allied Matters Act 19908 now referred to 6 See the Preamble to the 1968 Companies Act7 Now Cap N 1 17 Laws of the Federation 20048 Cap 59 Laws of the Federation 1990

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as CAMA and other amendments such as the Investment and

Securities Act 2007.9

Corporate Personality

Corporate personality refers to the fact that as

far as the law is concerned a company personality

really exists apart and different from its owners. As a

result of this, a company can sue and be sued in its

own name, hold its own property and crucially – be

liable for its own debts. It is this concept that

enables limited liability for shareholders to occur as

the debts belong to the legal entity of the company and

not to the shareholders in that company.10 It is a

universal legal concept, which postulates that an

incorporated company is, as a matter of law a separate 9 Investment and Securities Act Cap No 29 of 200710A.VIJAYCHANDRAN; Kuala Lumpur, Selangor, Malaysia. (http://vijayhighcourt1.blogspot.com/2008/09/doctrine-of-corporate-personality.html)

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legal entity distinct from the individual(s) who are

its shareholders and directors and are in control of

its operations. The business (and the debts and other

obligations) of the company is the company’s business

(and debts and obligations) and not the shareholders‟

or directors‟.11

This concept was laid down under the common law in

the celebrated case of Salomon V Salomon and Co Ltd .12

In that case Salomon a leather merchant and boot

manufacturer in 1892 formed a limited company to take

over his business. Salomon and six other members of his

family subscribed to its memorandum for one share each,

and two of his sons were appointed directors. The

Company paid about ₤39.000 to Salomon for the business,

the mode of payment being to give Salomon ₤10.000 in

debentures secured by a floating charge on the

11AKINOLA BUKOLA; LL.B (Hons), B.L, LL.M12 (1897) AC 22

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Company’s asset and ₤20,000 shares of ₤1 each, the

balance of ₤9,000 was paid to Salomon in cash. The

business did not however prosper and when it was wound

up a year later its liabilities (including debenture

debt) exceeded its asset by ₤8,000. The liquidator

representing the unsecured creditors claimed that the

Company’s business was in actual fact still Salomon’s

liability for debts incurred in carrying it on and

therefore Salomon should be ordered to indemnify the

Company against its debts and payment of the debenture

debt to him should be suspended until the Company’s

other creditors are paid. The trial judge agreed with

the reasoning of the liquidator and he further held

that all the subscribers of the memorandum(except

Salomon) held their shares as mere nominees because

Salomon’s motive in forming the Company was to use it

as an agent to manage his business for him. A similar

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position was taken at the Court of Appeal and Salomon

went further to contest the issue at the House of Lords

where Lord McNaughten stated the position as follows.

“When the memorandum is duly signed and registered, though there be only seven

shares taken, the subscribers are a body corporate “capable forthwith”, of

exercising all the functions of incorporated company”. Those are strong words;

there is no period of minority on its birth, no interval of incapacity. I

cannot understand how a body corporate such as this made capable by statute

can lose individuality by issuing the bulk of its capital to one person,

whether he be a subscriber to the memorandum or not. The Company is at law a

different person altogether from the subscriber… Nor are the members

(subscribers) liable…”13

On the above premise of the Learned Lord Justice,

it is submitted that this ratio settles the doctrine of

corporate personality, which confers the toga of

personae juris on a company. It is able for instance to

create a per sonae juris capable of enjoying legal rights

to

own property, has a perpetual succession and its 13 At p. 51

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liabilities limited. In buttressing this position, the

court in the case of Lee v Lee’s Air Farming Ltd and

DHN Food Distributors Ltd v Tower Hamlets Lbc held that

the shareholders of such Companies are separate Legal

personalities inter se . 14

In the words of Gower, the concept of Corporate

Personality was inter-alia introduced to cater for

circumstances which tends to accumulate all the debts

and liabilities upon an individual. The doctrine

therefore acts as a shield and helmet to such

individual(s) who owns all or substantial amount of

shares of a company.

The Law of Business Administration as a core in the

Legal curriculum

The advent of the concept of cooperate personality

and the corporation as a whole has inadvertently led to

14 AKINOLA BUKOLA; LL.B (Hons), B.L, LL.M

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a more than mild complication of the business

organization. The advent of the corporation and the

expansion and reach it brought to business dealings and

affairs, the increase in the sheer bulk of business

being carried out and all other related developments

has further fortified the importance of the

introduction of law to regulate business transactions

and dealings where company are concerned. It should be

noted that the concept of corporate personality itself

was brought to the fore by a dispute about the essence

and value of incorporation which culminated in the

landmark Salomon v Salomon and co Ltd case.

The sheer numbers of business dealings bearing

great financial impact on world economies, individuals

and the number of disputes that arise has put

cooperation’s and company right within the purview of

the law and installed it as a core aspect of the legal

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profession; The Law Of Business Administration, or as

popularly called by the students, Company Law. As a

core of the legal profession, it is absolutely

imperative that’s students of the hallowed profession

are well vast and adequately prepared for the

experiences in this particular field of law.

As the name suggests, business lawyers handle a

wide range of legal issues for persons involved in

business. They may do transactional work, litigation,

administrative (regulatory) work, or some of all three.

Law students without business backgrounds are

sometimes wary of business law, assuming that it is

about finance, or math, or other things they might find

foreign and daunting. In fact, business law is

ultimately about the problems that people have when

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trying to organize their voluntary relationships in a

business setting.15

Role Of Company’s In Economic Development

Companies play a major role in the developments of

the economies of countries. In the following pages,

we’ll examine the impact of small businesses and

corporations on the growth of the world economy at

large.

Small Business

15 Curriculum Guide to Business/Corporate/Commercial Law; University of Wisconsin Law School

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In an article published on InfoUSA16, the data

revealed highlighted the importance of small businesses

to economic development while specifically narrowing on

its impact on the economy of the United states of

America.

Many visitors from abroad are surprised to learn

that even today, the U.S. economy is by no means

dominated by giant corporations. Fully 99 percent of

all independent enterprises in the country employ fewer

than 500 people. These small enterprises account for 52

percent of all U.S. workers, according to the U.S.

Small Business Administration (SBA). Some 19.6 million

Americans work for companies employing fewer than 20

workers, 18.4 million work for firms employing between

20 and 99 workers, and 14.6 million work for firms with

16 Bureau of International Information Programs (IIP), U.S. Department of State

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100 to 499 workers. By contrast, 47.7 million Americans

work for firms with 500 or more employees.

Small businesses are a continuing source of

dynamism for the American economy. They produced three-

fourths of the economy's new jobs between 1990 and

1995, an even larger contribution to employment growth

than they made in the 1980s. They also represent an

entry point into the economy for new groups. Women, for

instance, participate heavily in small businesses. The

number of female-owned businesses climbed by 89

percent, to an estimated 8.1 million, between 1987 and

1997, and women-owned sole proprietorships were

expected to reach 35 percent of all such ventures by

the year 2000. Small firms also tend to hire a greater

number of older workers and people who prefer to work

part-time.

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A particular strength of small businesses is their

ability to respond quickly to changing economic

conditions. They often know their customers personally

and are especially suited to meet local needs. Small

businesses -- computer-related ventures in California's

"Silicon Valley" and other high-tech enclaves, for

instance -- are a source of technical innovation. Many

computer-industry innovators began as "tinkerers,"

working on hand-assembled machines in their garages,

and quickly grew into large, powerful corporations.

Small companies that rapidly became major players in

the national and international economies include the

computer software company Microsoft; the package

delivery service Federal Express; sports clothing

manufacturer Nike; the computer networking firm America

OnLine; and ice cream maker Ben & Jerry's.

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Of course, many small businesses fail. But in the

United States, a business failure does not carry the

social stigma it does in some countries. Often, failure

is seen as a valuable learning experience for the

entrepreneur, who may succeed on a later try. Failures

demonstrate how market forces work to foster greater

efficiency, economists say.

The high regard that people hold for small

business translates into considerable lobbying clout

for small firms in the U.S. Congress and state

legislatures. Small companies have won exemptions from

many federal regulations, such as health and safety

rules. Congress also created the Small Business

Administration in 1953 to provide professional

expertise and financial assistance (35 percent of

federal dollars award for contracts is set aside for

small businesses) to persons wishing to form or run

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small businesses. In a typical year, the SBA guarantees

$10,000 million in loans to small businesses, usually

for working capital or the purchase of buildings,

machinery, and equipment. SBA-backed small business

investment companies invest another $2,000 million as

venture capital.

The SBA seeks to support programs for minorities,

especially African, Asian, and Hispanic Americans. It

runs an aggressive program to identify markets and

joint-venture opportunities for small businesses that

have export potential. In addition, the agency sponsors

a program in which retired entrepreneurs offer

management assistance for new or faltering businesses.

Working with individual state agencies and

universities, the SBA also operates about 900 Small

Business Development Centers that provide technical and

management assistance.

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In addition, the SBA has made over $26,000 million

in low-interest loans to homeowners, renters, and

businesses of all sizes suffering losses from floods,

hurricanes, tornadoes, and other disasters.

In highlighting the importance of small businesses

to the Japanese economy, it was stated that

“Japan's streets are lined with small shops, grocery stores, restaurants, and

coffeehouses. Although supermarkets and large discount department stores are

more common than in the 1980s, the political muscle of small business

associations was reflected in the success with which they blocked the

nationalization of the country's distribution system. The Large-Scale Retail

Store Law of 1973, amended in 1978, made it very difficult in the late 1980s

for either Japanese or foreign retailers to establish large, economically

efficient outlets in local communities.”17

The impact of small businesses on the growth of the

economy is always grossly under-valued by individuals

despite the obvious importance as succinctly put above.

17 Government-business relations in Japan (Wikipedia)

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Corporations

Although there are many small and medium-sized

companies, big business units play a dominant role in

economies around the world. There are several reasons

for this; Large companies can supply goods and services

to a greater number of people, and they frequently

operate more efficiently than small ones. In addition,

they often can sell their products at lower prices

because of the large volume and small costs per unit

sold. They have an advantage in the marketplace because

many consumers are attracted to well-known brand names,

which they believe guarantee a certain level of

quality.

Large businesses are important to the overall

economy because they tend to have more financial

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resources than small firms to conduct research and

develop new goods. And they generally offer more varied

job opportunities and greater job stability, higher

wages, and better health and retirement benefits.

Corporations contribute a lot to the developments

of a country both in the country’s economy and the

institution of the citizenry. Most countries around the

world have over the years put in place stringent

measures to ensure the derivation of maximum benefit

from the presence of large corporations on their

shores. A few examples of these measures include a

minimum percentage of citizen/local employees,

registration as national companies/presence on the

Nigerian stock exchange.

The impact of these corporations on world

economies cannot be overstated as they play a major

role in improving the general economy of each control 29

and strengthening the GDP of such country. These

corporations essentially drive an economy and the

provision of conducive environments for companies to

thrive is always paramount on the agenda of country

leaders around the world. This will encourage the

influx of foreign investors including portfolio

investors to add to the local corporations that exist.

Conclusion

Companies are a major pillar/backbone of

flourishing national economies and central to the

attractiveness of these corporations and their growth

is the concept of corporate personality. The

introduction and grounding of the concept has led to

massive economic drive and industrial revolution which

has created many such corporations and flooded the

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market with them. These corporations have grown so

powerful over the years that they now drive entire

economies and contribute to the growth or on the flip

side, lack of growth of various world economies.

Economies like China which in a few years would assume

the mantle of the strongest world economy has

benefitted from a vast number of small, medium and

large scale companies which have completely transformed

their economy from that of a struggling third world

country to a world superpower. The reach of these

companies mean that Chinese products are found all over

the world, which means a large scale of export traffic

from the country which would translate to a lot of

money coming into the Chinese economy. The present

world economic super power, the United States of

America has also benefitted from a lot of corporation

within the country and it should be noted that the

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number of corporations greatly produce more jobs and

help to improve the wellbeing of members of the

country.

This paper started with a quote setting apart a

country as one of the greatest inventions of man and

extolling its impact and importance in the world as a

whole and upon further reflection of the complications

and impact of corporations on the world at large, it

can be said that corporations have become the dominant

factor in the modern private and public economic

sectors in nearly all developed and developing

countries.

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