Incorporation of a Company

A company is a separate person in law from its members. Incorporation has several important aspects:

(a) Company is liable for its own debts

The shareholders are not liable for the debts and liabilities of the company and cannot be sued by the company’s creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company. This gives a sense of security to the shareholders.

(b) Limited Liability

The fact that the company is a separate person from its shareholders makes limited liability possible. A shareholder shall be liable to contribute towards the debts of the company during its life or during winding up only at the extent of shares taken by him and only to the balance of shares taken by him or up to the guarantee given by him or both. Members cannot be asked to pay more than what is unpaid on the shares of the company held by them even though the assets of the company are not sufficient to satisfy the claims of creditors in the event of winding up. The personal property of a shareholder cannot be attached for the debts of the company if he holds a fully paid-up share. (Remember: the company’s liability is always unlimited – it is the members’ liability that is limited and that liability is to the company, not to the individual creditors.)

(c) Company Property

A company owns its own property – the shareholders have no direct right to this or any share of a person who no longer wishes to be a member is only entitled to whatever price he can get for his shares. A shareholder has no legal interest in the company’s property and cannot insure it against theft, damage, etc.

(d) Contractual Capacity

A company has the full contractual capacity – and only the company can enforce its contracts. (Companies may also be liable for negligence – shareholder cannot be made liable for the negligence of the company unless he was also personally negligent).

(e) Crimes

A company can be convicted of a crime, regardless of whether its directors are also convicted.

However, there are some limitations to this rule i.e.

1. It has been held that a company cannot be convicted of a crime that requires the physical act of driving a vehicle.

2. A company cannot be convicted of any crime for which the only available sentence is imprisonment.

3. There are particular problems with crimes that require mens rea (“a guilty mind”). Most common law crimes require mens rea, while many statutory offenses involve strict criminal liability. In order to convict companies of common-law crimes, courts may regard the mens rea of those individuals who control the company to be the mens rea of the company.

(f) Perpetual Succession

Separate personality means that the existence of a company does not depend on the existence of its members. Membership may change or members may die – the company continues in existence until wound up.

(g) Borrowing

A company can borrow money and grant security for a debt. Only a company can create a floating charge. A floating charge is a kind of security for a loan. The charge “floats” because it does not attach to any particular asset, but floats over the company’s assets as they exist from time to time. Certain events cause the charge to “crystallise” and attach to whatever assets the company has at the time.