- 8 Marks
Question
Adigwe and his two sons caused Adigwe and Sons Limited to be incorporated and became the first directors of the company. The company traded profitably for five years after it was incorporated, but it is about to be wound up because it owes trade creditors a huge amount of money. Adigwe holds 95% of the issued shares of the company while each of his two sons holds 2½%. The creditors of Adigwe and Sons Limited have discovered that the assets of the company are insufficient to satisfy their claims and have filed an action to recover the money from Adigwe who holds most of the shares of the company.
Required:
Explain to the creditors of Adigwe and Sons Limited their chance of succeeding in their claim against Adigwe.
Answer
The trade creditors of Adigwe and Sons Limited will not be able to recover from Adigwe the money that the company owes them. This is because of the principle of separate legal personality, which treats a company as a distinct person from its members from the date of incorporation. This principle was established in the case of Salomon v. Salomon & Co. Ltd, where the court held that shareholders are not liable for the debts of the company beyond their unpaid share capital. Adigwe, despite holding 95% of the shares, is legally distinct from the company and cannot be personally liable unless there is evidence of fraud or improper conduct that could justify lifting the corporate veil, which does not appear to be the case here.
- Tags: Company Law, Corporate Personality, Creditor Claims, Insolvency
- Level: Level 1
- Topic: Company Law
- Series: MAY 2021
- Uploader: Kwame Aikins