Authored By: Blessing Banda
Cavendish University Zambia
Have you ever wondered how a company can be sued while its owners remain financially protected, or how a business can continue long after its founders are gone? These are not just fascinating questions; they lead us to one of the most fundamental principles in business law: separate legal personality.
Let’s begin with a story. There was a man named Mr. Salomon who had a thriving leather boot business. As a sole trader, he and his business were one and the same in the eyes of the law. But Mr. Salomon had a clever idea: he decided to turn his business into a limited company, “A. Salomon & Co. Ltd.” He, along with his family, owned almost all the shares, and he even loaned the company money.
Later, when the business ran into trouble, its creditors argued that since it was essentially still Mr. Salomon’s business, he should be held personally responsible for its debts. However, the courts made a groundbreaking ruling. They decided that once a company is properly incorporated, it becomes a distinct legal entity, separate from its owners.[1]
This principle grants a company a unique status, similar to that of an individual person. It can own assets, enter into contracts, incur debts, and sue or be sued—all in its own name. This separation is crucial, as it provides owners with limited liability. In essence, their personal assets are protected from the company’s debts; their financial risk is generally limited to their investment in the business.
Another key feature of this legal status is perpetual succession. A company does not cease to exist if its owners pass away. As outlined in Section 22 of the Companies Act No. 10 of 2017, [2]the company continues to operate, ensuring the business can endure for generations.
In Zambia, a company’s separate legal status is established upon its registration and persists until it is officially removed from the register, as per Section 16 of the Companies Act No. 10 of 2017. This robust protection is a primary reason why many entrepreneurs choose to incorporate their businesses.
This brings us to a compelling question,If companies are legal persons, why do they still need us?
While a company is a “legal person,” it is not a physical human being. As noted in the Zambian case of Associated Chemicals Ltd v Hill and Delamain Zambia Ltd and Anor, [3]a company is a “metaphysical entity” that can only act through people—the individuals who manage its affairs. Therefore, although a company is legally separate from its owners, it is dependent on us to operate and function.
It is important to note that this powerful principle is not an absolute shield. In certain circumstances, courts may “lift or pierce the corporate veil.” This occurs when the court looks beyond the company’s separate legal status to hold the individuals behind it personally responsible. This is typically done to prevent the misuse of limited liability, such as in cases of fraud or tax evasion. For instance, Section 360 of the Companies Act No. 10 of 2017, [4] allows for the veil to be lifted if a company is used for fraudulent purposes. This mechanism ensures that while separate legal personality is a vital tool for legitimate business, it cannot be used to escape accountability for unlawful conduct.
Understanding these aspects of company law is essential for anyone involved in business, as it shapes our perspective on corporate responsibility and fairness.
Reference(S):
[1] Salomon v. Salomon & Co Ltd [1897] AC 22
[2] Companies Act no.10 of 2017, S 22
[3] Associated Chemicals Limited v Hill and Delamain Zambia Limited & Another (as a Law Firm) (S.C.Z. Judgment 2 of 1998) [1998] ZMSC 2 (2 March 1998)
[4] Companies Act No. 10 of 2017 ,S 360
