CONSEQUENCES OF INCORPORATION OF A COMPANY IN GHANA

COMPANY LAW I

CENTRAL UNIVERSITY
MIOTSO CAMPUS

BY

VITUS GBANG, ESQ.

LL.M, QCL, LL.B, B.SC(AGRIC. ECONS)
BAR ADMISSION: GHANA, NEW YORK STATE AND MASSACHUSETTS
.
LEX VANEM & ASSOCIATES
FIRST FLOOR P-CULAR HEIGHTS
P.O. BOX LG 1233
LEGON, ACCRA
TEL: 030-255-4944/0243340771

Email: vitus.gbang@gmail.com

FEBRUARY 2021

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 CONSEQUENCES OF INCORPOSRATION OF A COMPANY

Following the incorporation of a company under the Companies Act, 2019 (Act
992), the company becomes a separate legal entity and is distinct from the
promoters of that company, the directors, the shareholders/members, the
employees, etc. The company acquires a certain bundle of rights as if it was a
natural person of full age and capacity.

Section 18(1) of the Companies Act, 2019 (Act 992) provides as follows: “Subject to
this Act and to any other enactment, a company shall have

(a) [F]ull capacity to carry on or undertake any business or activity, do any act,
or enter into any transaction; and
(b) [F]ull rights, powers and privileges for the purposes of paragraph (a)”

A company can thus enter into legal relations in its own name, it can sue and be
sued in its own name, it can acquire and dispose of properties or assets, it can
borrow money and create a charge over its assets both present and future, it can
guarantee a loan, among others.

The instant topic seeks to delve into these consequences of incorporation and the
bundle of rights and duties that are attendant to the company after incorporation.

Separate legal entity status

A company after incorporation, becomes a separate legal entity and acquires the
status of a natural person of full age and capacity. In this regard, the company is
separate and distinct from those who formed it, the directors, employees,
shareholders/members, etc.

The company is a creation of law, and is thus an artificial person. Even though the
company in law has extensive powers, rights and duties, these functions are
routinely performed by natural persons who are duly authorized. The main primary
organs of the company through whom the company acts are the board of directors,
the members in annual general meeting and the managing director of the

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company. These organs are often called the alter ego of the company. They are not
mere agents of the company, they are in fact the company and when they act in
the usual course of the company’s business, the company is bound by their acts.
These organs are considered to be the controlling mind and will of the company.

A company may also be bound by the acts or omissions of other officers of the
company who have been authorized by any of the aforementioned primary organs.
An otherwise unauthorised act of an officer of the company may still bind the
company if the company acquiesces in the said act, if the company ratifies the said
unauthorised act, or if the acts of the said officer were done in furtherance of the
objects of the company. Since the company was meant to receive the benefit of
the so called unauthorised act, it is only equitable that the company bears the
liabilities arising therefrom.

There are several judicial decisions that lends credence to this separate legal entity
status concept. The locus classicus is Salomon v Salomon1.

In Salomon v Salomon, Mr. Salomon who used to conduct his shoe making business
as a sole proprietorship, decided to take advantage of the corporate form. He thus
formed a company and at the time, in order to incorporate a company, there was
the need for the proposed company to have seven members or shareholders. Mr.
Salomon issued a share each to five of his children and his wife, while issuing onto
himself, 20,001 shares. Mr. Salomon and two of his sons became directors of the
company. His sole proprietorship business was valued albeit over valued and he
then sold the assets of the sole proprietorship business to the new company that
he had formed. Since the new company did not have the financial wherewithal to
pay for all the assets of the sole proprietorship, Mr. Salomon issued debentures 2 in
the name of the company onto himself, and used the outstanding amounts of the
value of the assets of the sole proprietorship to issue the shares hereinbefore
described. Salomon was also paid some money for the purchase of his sole
proprietorship business. Salomon & Co. also owed other creditors of the company
who were unsecured creditors. As Salomon & Co. was not doing financially well and

1
[1897] AC 22
2
A debenture is a written acknowledgement of a company’s indebtedness.

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subsequently became bankrupt 3, there was so much pressure on the assets of the
company as each creditor of the company sought to enforce its ‘loan’. The issue of
priority and ranking of the various instruments was brought to the fore. Mr.
Salomon argued that following the incorporation of the company, the company
acquired a separate and distinct legal status and was thus different from he, Mr.
Salomon. This contention of Mr. Salomon was in the light of the fact that the other
creditors could not understand why the company’s debt it owed Mr. Salomon had
to be paid first before that of any other creditors could then be considered if there
was excess funds from liquidating the assets of the company. They argued that the
company Mr. Salomon had formed was a sham, and that the said company was no
different from Mr. Salomon and that the two should be regarded as the same. It
was essentially argued that the company became the agent of Mr. Salomon who
was the principal. As a principal, it was argued forcefully that Mr. Salomon had
indemnified the company against its liabilities. The court of first instance held for
the liquidator who had sued on behalf of the other creditors. On appeal, the Court
of Appeal affirmed the trial court’s decision but on different grounds. The first
appellate court was of the view Mr. Salomon had abused the Company’s Act, that
there was one sole proprietor and six dummies as the other members/shareholders
were not independent of Mr. Salomon. Mr. Salomon appealed against the decision
of the Court of Appeal to the House of Lords, which allowed the appeal. The House
of Lords recognized the principle of separate legal entity status of a company after
it has been duly incorporated. In the view of Lord MacNaghten, Salomon changed
the nature of his sole proprietorship business in order to enjoy the benefits of
protection guaranteed in a limited liability company. The company was at law
considered a different person altogether from the subscribers to the memoranda
and it did not matter that it was the same hands that received the profit from the
sole proprietorship business who also received the profits from the company. In
the view of Lord Halsbury, either the limited company was a legal entity or it was
not. If it was then the business belonged to it and not to Mr. Salomon. If it was not,
then there was no person and no agent at all. In the view of His Lordship, it is
impossible to say that there was a company and at the same time, say there was

3
Could not pay its just debts and liabilities as they fell due

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not. In His Lordship’s view, if the business is not a company, then we cannot have
an agency situation. Lord MacNaghten in the same case opined that the company
attains maturity on its birth.

Several decisions of the UK courts and elsewhere upheld the separate legal entity
status of a company as was enunciated in the celebrated case of Salomon v
Salomon. These include, Lee v Lee Air Farming Co 4., where the Court decided that
following the fact that a company became a separate legal entity after
incorporation, it meant that the company could enter into a contract with the
promoter and sole shareholder and sole governing director of the same company,
for the latter to serve as an employee of the company and thus be regarded as an
employee within the meaning of that word in a workmen compensation statute
pursuant to which the widow of Mr. Lee sought to claim workmen compensation
for the death of her husband. Mr. Lee was killed at a time when he acted as a pilot
of the company and was engaged in ariel topdressing and the plane crashed.

In the jurisprudence of the courts in Ghana, this concept of separate legal entity
status of a company is well etched. In the celebrated case of Morkor v. Kuma5, the
Supreme Court of Ghana through Sophia Akuffo JSC. (as she then was), followed
the principle of separate legal entity of a company enunciated in Salomon v.
Salomon. In that case, Morkor who was the Chief Executive of a company and the
majority shareholder of a company was sued in her personal capacity for a debt the
company had incurred when the company bought fish and could not pay. The
action was brought by the creditor against Morkor and the company. It was only at
the Supreme Court that the argument of a separate personality of the company
was advanced. The Supreme Court upheld the cardinal principle in Salomon v.
Salomon and held that a company after incorporation became a legal entity with
capacity separate, independent and distinct from the members of the company and
the directors of the company.

4
[1951] AC 12
5
[1998-99] SCGLR620@635

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In Owusu v. R.N. Thorne Ltd6., the principle of separate personality of a company
was again recognized by the Ghanaian courts. In that case, a couple were the
shareholders and directors of a company. The plaintiff brought an action against
the company after being injured by the company. He subsequently sued R. N.
Thorne, one of the shareholders and directors of the company. He did so because
the said R.N. Thorne and his wife were the only directors and only shareholders of
the company and R.N. Thorne had closed down the offices of the company and was
about to travel abroad and was not likely to return. The court was of the view that
the action against R. N. Thorne was not proper. The company after incorporation
became a separate legal person from the shareholders and directors of the
company.

The right to enter into legal relations

After incorporation, a company has the right to enter into legal relations in its own
name. The company can actually enter into a contract with a member/shareholder,
a director, an employee, etc. The company has the power to enforce a contract
against any party to the contract and vice versa. The case of Lee v. Lee Air Farming
discussed supra is authority for the foregoing proposition. In Salomon v Salomon,
Mr. Salomon entered into a contract with the company he formed, Salomon & Co.
pursuant to which he became a debenture holder of that company. A debenture is
a contract, no doubt.

Limited liability

Since a company after incorporation becomes a separate legal entity, it goes

without saying that the company has the capacity to incur a debt or liability and
when it does, ordinarily it is the company that is wholly responsible for paying off
such debt or liability. It is however worthy of mention that in a company limited by
shares, the personal liability of the members of such a company is limited to the
amount unpaid on shares held by the members. The liability of the members of
such a company therefore does not extend beyond the amount they owe for their

6
[1966] GLR 90

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shares, if any. In specialized situations however, members of the company,
directors, etc. may become personally liable for the debt or liability of the company.
This may occur in the case of unlimited companies, where the debt or liability of a
company extents to the members of such a company in the event that the assets
of the company are liquidated and they are not sufficient to pay off the debts and
liabilities of the company. In appropriate cases also, the veil of incorporation of a
company may be lifted or pierced and personal liability may then attach to the
members of the company, the directors of the company, etc.

Whether a company is a limited liability company, a company limited by guarantee

or an unlimited company is a decision that has to be made by the promoters of the
company who were responsible for undertaking the necessary processes to have
the company incorporated.

The right to own property

Another consequence of incorporation of a company is that, the company can now

own assets in its own name, and these assets are the assets of the company, they
are not the assets of the individual members of the company. This is true even in
situations where a member of the company uses his or her asset as a consideration
in kind for the issuance of shares to him or her.

In Short v. Treasury Commission7, it was held that shareholders are not in the eyes
of the law part owners of the undertaking of a company. The undertaking of a
company is its assets both present and future.

The importance of the distinction between the ownership interests of a company

and its associated persons was seen in the case of Macaura v. Northern Assurance
Co. Ltd8.

Macaura who used to operate his timber business as a sole proprietorship later
incorporated a company and became the majority shareholder thereof. After the

7
[1948] 1 KB 116@122
8
[1925] AC 619

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sale, he took up an insurance cover for the business but in his own private name. A
peril occurred and the timber was lost to fire. Macaura then sought to make an
insurance claim for the loss. It was held that he did not have an insurable interest
in the business and thus could not lawfully take up an insurance cover for the
business. In effect, the timber did not belong to Macaura and thus he could not
claim under his insurance policy.

The right to sue and be sued

After incorporation, a company can sue and be sued in its own name. Members of
the company, directors, employees, etc. can sue the company and the company
can in turn sue any of these persons to enforce a right of the company or to seek
the performance of an obligation by any of these persons.

A principle was enunciated in Foss v. Harbottle9 and Appenteng v. Bank for West
Africa10 that when a wrong is done to the company, it is the company that must
sue to seek a redress. There are common law and statutory exceptions to this
principle.

Perpetual existence and succession

One essential attribute of a company following incorporation is that a company has

the potential of existing forever if it is well managed. A company may however not
achieve this desired end and may thus be liquidated and wound up at some point
for various reasons.

The death of a member or a director, etc. does not automatically lead to the death
of the company. Even where a company ceases to have a member, the law
recognizes the right of the company to continue to exist and operate for up to six

9
(1843) 67 ER 189
10
[1972] 1 GLR 153

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months without any member. If the company however continues to operate after
the said six months without a member, there would be consequences.

Through the relative free transferability of shares, membership of the company

may change from time to time, and from one generation to another.

The right to raise capital through borrowing

A company after it is incorporated, acquires the right to raise capital through equity
contribution, through borrowing and other means. The power of the company to
borrow includes the power to use assets of the company to guarantee the payment
of the loans. Through the device of debentures, the company can raise loans. A
debenture is a written acknowledgement of the indebtedness of a company.
Debentures can only be issued by companies.

Disadvantages of incorporation

1. Sometimes incorporation may work against the interests of the person who
wanted to benefit from incorporation.

Tunstall v. Steigmann11

Mrs. Steigmannn had two adjoining shops, she run her own business from one of
the shops. At some point in time she required the shop next door for her own
business. And under rent and tenant law, she was entitled to it if she needed it for
her own use. She served notice to the tenant. However in anticipation of the
premises she turned her own business into a company. The court held that she was
not entitled to the premises because it was the company which needed the
premises and not the woman.

2. Sometimes the application of the Salomon v Salomon principle will cause a

difficulty especially where the principle in Salomon is used to perpetrate a wrong.
The law is mindful of ensuring that the concept of separate legal entity is not

11
2 QB 593

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abused. It would do this by denying any advantage or abuse which was intended by
the operation of the company. It does this by lifting the veil of incorporation.

3. Too many formalities

There are so many forms to be filled in the process of incorporation. There
are several returns to be filed with the Registrar of Companies.
Companies make decisions through resolutions duly passed and
depending on the type of decision to be made, there may be the need for
a supermajority of votes of shareholders/members or directors in order
to make a decision.

4. Incorporation particularly the idea of limited liability may create an

unfavourable regime for creditors. Creditors cannot touch shareholders
and sometimes directors and therefore they may lose out when the
company is badly managed.

5. Incorporation may impose some costs to the company. Example if a

company increases its working capital, it is required to pay some
percentage to the taxman.

6. Another disadvantage of incorporation is that you lose control of the

management of the company. The shareholders of a company may not
be in the management of the company. By ceding this power to board of
directors of the company, shareholders do not take part in the direct
management of the company.

7. There may be loss of privacy because of several disclosure requirements.

Shareholders including a shareholder who has only a share has the right
to know about certain things in the company. The filing of returns by the
company discloses so much about the company to third parties.

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 8. Double taxation.
The company pays corporate tax which is currently 25% of the net profit
of the company. The shareholders also pay tax on the dividends they
receive if the company makes profit and dividend is declared and
distributed to the shareholders. Employees also pay income tax on their
salaries (remuneration).

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