I N C O R P O R AT I O N

&
R E L AT E D
M AT T E R S
LSU
USJP
INTENDED LEARNING OUTCOMES OF THE LESSON

• On successful completion of this lesson, undergraduates will be able

to:
1. Identify the procedure of incorporating a company in Sri Lanka
under the Companies Act No 07 of 2007.
2. Explain consequences of incorporation specifically the veil of
incorporation and grounds available to lift the veil of incorporation.
3. Discuss rules relating to name of the company under Companies
Act.
OUTLINE
1. The Law Applicable for Companies
2. What is a Company
3. Types of companies permitted
4. Formation of a company
5. The purpose of Incorporation
6. Consequences of Incorporation
7. Separate Legal Personality
Veil of Incorporation
8. Company Contracts
9. Company Name
10. Restrictions On Names
11. Change of Name
12. Use of Company Name and Number
1. THE LAW APPLICABLE FOR COMPANIES
• The law applicable for companies is

Companies Act No.7 of 2007

• Other rules and regulations
o Securities Council Act
o Securities and Exchange Commission of Sri Lanka Act No.36 of 1987
o CSE Rules
o Take Over and Mergers Code
o Unit Trust Code
2. WHAT IS A COMPANY

• Sec 529-

Company means a company incorporated

under this Act or an existing company.
3. TYPES OF COMPANIES PERMITTED

• Sec 3(1) – Under the new Act, a Company

could be incorporated as a “ limited Company”
or an “unlimited Company” or as a “Company
limited by guarantee”.

• A major change in the new Act is that it permits

by Sec 4(2) “single shareholder Companies”.
 SINGLE SHAREHOLDER COMPANIES
• Historical need for a minimum of two shareholders?
• One-share-one-shareholder/ One person Company/ Incorporated
Individual
• 100% shares owned by one person
• A requirement satisfied by the tiresome practice of needing one
nominal shareholder holding a single share in trust for the true owner
of the business.
• Reduces incorporation costs.
• Reduces administration costs in those areas where shareholder consent
is required.
• Attractive to owner/operator businesses in which the business may
become 'incorporated individual', and to wholly-owned subsidiaries
where the holding company may be the sole shareholder.
 4. FORMATION OF A COMPANY
As per Sec 4 (1) any person or persons may apply to incorporate
a Company, (other than a Company limited by guarantee) by
making an application to the Registrar in the prescribed form
signed by each of the initial shareholders, together with the
following documents:

• A declaration – the name of the Company is not identical or

similar to that of an existing Company.
• The Articles of Association of the Company – signed by each of
the initial shareholders.
• Consent from each of the initial directors, to act as a director.
• Consent from the initial secretary, to act as secretary.
Minimum No. of members.
4. (2)
A company shall have not less than two shareholders,
provided that

a company may have a single shareholder

where such single shareholder is the
Secretary to the Treasury who is holding
shares on behalf of the Government of Sri Lanka or
is
an individual or a body corporate.
FORMATION OF A COMPANY CONTD…
 Sec 5(1) - On receipt of a properly completed application, the Registrar General
should,

• (a)Enter the particulars of the Company on the Register

• (b)Assign a unique number to that Company
• (c) Issue a CERTIFICATE OF INCORPORATION

Sec 5(2) - The Certificate of Incorporation should specify;

o The name and number of the company

o The date on which the company was incorporated
o Type of the Company
o Whether the Company is a private Company
o Whether the Company is an off-shore Company
• Jubilee Cotton Mills Ltd V Lewis (1924)
A company comes into existence on the date of its
certificate of incorporation.
• Bowman V Secular Society Ltd (1917)/
R V Registrar of Joint Stock Companies, ex parte
More (1931)
The registrar will not register a company set up for
an unlawful purpose.
• R V Registrar of Companies, ex parte AG (1980)
reported (1991)
A company unlawful objects already in existence
may be struck off the register of companies.
 5. THE PURPOSE OF INCORPORATION

• Upon a COI being issued a company

become a body corporate with a separate
legal personality and identity that of its
creators.in the eyes of law it is a legal
person distinct, different and separate from
its shareholders. This is a metaphysical
person created by law with legal but with
no physical existence.
6. CONSEQUENCES OF INCORPORATION

1. Separate Legal Personality

2. Perpetual succession

3. Limited liability

4. The right to transfer shares

 7. SEPARATE LEGAL PERSONALITY/
VEIL OF INCORPORATION
Legal
Persons
Natural Artificial
Persons Persons
Crated by Crated under the
law of
• Parliament Companies Act

when a company is incorporated under the

Companies Act it is treated as a separate
legal entity
= this is called “Veil of Incorporation”
 SEPARATE LEGAL PERSONALITY CONTD...

• Company is an entity separate from those who created it, those

who own it and those who manage it.

• Sec 2- A company is a body corporate-

within and outside Sri Lanka
oWhich has the capacity to carry on or undertake any
business or activity, do any act or enter in to any
transaction (subject to Sec13)
oAll the powers and privileges necessary for that
SEPARATE LEGAL PERSONALITY CONTD...

Sec 2(1)- A company is a body corporate identified

by the name by which it has been registered.

Sec 87 - A shareholder should not be liable for any

act, default or an obligation of the company, by
reason only of being a shareholder.
 8. CASE LAW ON SEPARATE LEGAL
PERSONALITY/ VEIL OF INCORPORATION
• Salomon v. Salomon & Co. Ltd [1897] AC 22
From this case comes the fundamental concept that a company has
a legal personality or identity separate from its members.
A company is thus a legal ‘person’.
Facts : Mr Saloman carried on a business as leather merchant
and formed the company with him as the managing director.
Because of a debenture he was also a creditor of the company
when the company went into insolvent liquidation. Liquidator
said that Saloman was the key person and liable for the
company.
House of Lords held: the debts of the company were its own and
not of the members
• The company is at law a different person
altogether from the subscriber…. ; and though
it may be that after incorporation the business
is the precisely the same as it was before and
same persons are managers, and the same
hands receive the payments the company is in
law not the agent of the subscribers or trustees
for them. Nor are the subscribers, as members
liable in any shape or form except in the
manner provided by the Act
• Banda owns all the shares of Banda Pvt Ltd. Banda and his wife
Menika manage the company. Now Banda wants to use company
funds to buy a parcel of land to gift his daughter.

Do you agree with Banda?

Even if a person owns all the company’s shares, they do not legally own
the assets of the company.
 CONTD..

• Lee v. Lee’s Air Farming Ltd.

Mr. Lee incorporated a company, Lee’s Air Farming
Ltd. Lee owned all the shares. He was the Governing
Director for life. He was also employed as the chief
pilot of the company. In 1956 the company plane Mr
Lee was flying stalled and crashed. He was killed.
Court held that company and Mr.Lee were two
distinct entities they had entered into a contractual
relationship where Lee is employed as the chief pilot.
Therefore his widow is entitled to the compensation
for ‘workmen’ under the Law.
 CONTD..
• MaCaura v Northern Assurance Co Ltd [1925] AC 619
 This case established that a company is separate from the owner as it has
separate legal personality.
 Mr. Macaura owned an estate and some timber company. He agreed to sell
all the timber on the estate in return for the entire issue share capital of Irish
Canadian Saw Mills Ltd. The timber amounted to almost the entire assets of
the company.
 Macaura insured the timber in his own name in 1922. two weeks later a fire
destroyed.
• Mr. Macaura tried to claim under the insurance policy. The insurance
company refused to pay arguing that he had no insurable interest in the
timber since it belonged to the company.
• Court held:
The timber belonged to the company not Mr. Macaura. He had no
insurable interest in the property of the company. Corporate personality means
that co’s assets are its own not shareholders’
 CONTD..
• Sri Lanka
• Trade Exchange (Ceylon) Ltd. V. Asian Hotels
Corporation(1981)
The mere fact that 95% of shares were held by the Government
or the fact that 95% of shares were held by a Government
Corporation like Co-orporative Wholesale Establishment does
not make any difference. The company and its shareholders being
as aforesaid, distinct entities, that the fact that the Government or
a Government Corporation holds all its shares or 95% of its
shares does not make the respondent-company an agent of the
Government.
• DFCC Bank V Muditha Perera(2010) Read
9. MAIN LEGAL CATEGORIES
(LIFTING THE VEIL)
Students are expected to read the
article “From Peeping behind the
• Agency Corporate Veil, to Ignoring It
Completely”
• Fraud written by S. Ottolenghi

• Group enterprises
• Trusts
• Tort
• Enemy
• Tax
• legislations
• Gilford Motor Company V. Horne (1933)
Facts
• Mr Horne was a former managing director of Gilford Motor Home Co Ltd (Gilford).
• His employment contract prevented him from attempting to solicit Gilford’s customers
in the event that Horne left Gilford’s employ.
• Horne was fired and he subsequently set up a competing company which undercut
Gilford’s prices.
• Gilford did not have any legal restraints upon Horne’s company, only Horne himself.
• Gilford commenced proceedings against Horne individually, claiming that Horne’s
company was an attempt to evade legal obligation (not soliciting customers).
Issues
• Had Horne violated his non-compete clause by setting up his competing company?
Held
• The English Court of Appeal held that the company was set up to evade Horne’s
contractual obligations.
• The Court “pierced the corporate veil” and ordered an injunction against Horne.
• Courts can “pierce the corporate veil” if a company is simply a mere device to evade
legal obligations, though this is only in limited and discrete circumstances.
• Jhones V Lipman (1962)
Facts
• Mr Lipman contracted to sell a house with freehold title to Jones for
£5,250.00.
• Pending completion, Lipman changed his mind and instead sold and
transferred the land to a company, which he and a law clerk were the sole
directors and shareholders of, for £3,000.00.
• The company had been set up for the sole purpose of receiving this land.
• $1,554.00 of the £3,000.00 was borrowed by the company from a bank and
the rest remaining owing to Lipman.
Issues
• Was Lipman’s company an attempt to avoid a pre-existing legal obligation?
Held
• The English High Court held that the company was a sham or facade which
Lipman intended to use to evade a pre-existing obligation.
8. COMPANY CONTRACTS

• Sec 19- A company can enter in to a contract or other

enforceable obligation in the following manner
(a) an obligation which, if entered into by a natural person is
required by law to be in writing signed by that person and be
notarially attested, may be entered into on behalf of the
company in writing signed under the name of the company
by
(i) two directors of the company;
(ii) if there be only one director, by that director ;
(iii) if the articles of the company so provide, by any
other person or class of persons; or
(iv) one or more attorneys appointed by the company,
and be notarially executed
(b) an obligation which, if entered into by a natural person is
required by law to be in writing and signed by that person,
may be entered into on behalf of the company in writing
signed by a person acting under the company’s express or
implied authority

(c) an obligation which if entered into by a natural person is

not required by law to be in writing, may be entered into on
behalf of the company in writing or orally, by a person
acting under the company’s express or implied authority.
FACEBOOK TO META
TO FACE THE COMPETITION

Now
 9. COMPANY NAME

The general rule is a company can select a combination

of any set of words it pleases, as its name. However
there are some limitations to this rule

These rules are set out mainly from sec.6 to sec12.

• Sec 6-
• Limited companies other than listed companies -
• Private company-
• Limited companies which is a listed companies-
 10. RESTRICTIONS ON NAMES

RESTRICTIONS

Absolute Conditionally
Restrictions Restricted

Sec 7(1)
A name -
(a) Identical with the name of any other co.
(b) Misleading in the opinion of the Registrar
• Sec 7(1)(b) - “Chamber of Commerce”
registered under a licence granted under section 34

• Sec 7(2) –
“President”, “Presidential”,
“Municipal”, “Incorporated”,
“Co-operative”, “Society”,
“National”, “State”, “
“Sri Lanka”
Except with the consent of the Minister given
having regard to the national interest.
• Sec 7(3)- Disregarding Words

Following words shall be disregarded in determining whether one name is identical with
another, :—
(a) the word “the”, where it is the first word of the name ;
(b) the following words and expressions, where they appear at the end of the name :
(i) “company”
(ii) “and company”
(iii) “company limited”
(iv) “and company limited”
(v) “limited”
(vi) “unlimited”
(vii) “(Private) limited”
(viii) “Public Limited Company”
(c) abbreviations referred to in section 6, where they appear at the end of the name ;
(d) type and case of letters, accents, spaces between letters and punctuation marks ; and
(e) “and” or “&”.
11. CHANGE OF NAME
• Voluntary change-
• the members of a company can change its name by passing a
special resolution
• Sec 8
• Sec 8(4)
• Sec 9
• It is necessary to inform the change of the name to the Reg. of
Co and make a public notice of the change
• Compulsory change-
• the co. registrar may direct a co. to change its name under
sec.10
• According to the sec 11 upon the change of status of a company
co. name has to be change.
12. USE OF CO. NAME AND NO.

• Sec 12- A company shall ensure that its name and its company number are
clearly stated in-
• (a) all business letters of the company ;
• (b) all notices and other official publications of the company ;
• (c) all bills of exchange, promissory notes, endorsements, cheques and orders
for money or goods signed on behalf of the company ;
• (d) all invoices, receipts and letters of credit of the company ;
• (e) all other documents issued or signed by the company which creates or is
evidence of a legal obligation of the company ; and
• (f) the company seal, if any.

• (2) Every company shall ensure that its name and its company number are
clearly displayed at its registered office.
• Re Association of certified Public Accountants of Britain
(1998)
A company name must not be illegal, offensive or
misleading.
• Ewing V Buttercup Margarine Company Ltd (1917)
The tort of passing off may provide a remedy if a name is
deceptively to similar to that of another company.
• Exxon Corporation V Exxon Insurance Consultants
International Ltd (1982)
An injunction may be sought requiring the controllers of a
company already registered to stop using a name that is too
similar to that of another company.
WEB INCORPORATION
SERVICE
• Web Incorporation is the safe and reliable
way to file online, enabling you to quickly
and easily incorporate your company.
• Electronic Registration of Companies in Sri
Lanka introduced on 2nd April 2018.
• Visit EROC :
• http://43.224.124.134/frontend/eroc/dashbo
ard/home
5 MAIN REASONS TO CHANGE TO THE E-
ROC

1. The web based single window for business registration facilities.

2. Reduce unnecessary time consuming paperwork and help more
startups registration as well as to speed up the process.
3. The online system cuts down the business register process from six
to one day.
4. View your name approval and company registration status online.
5. Foreigners can register their companies in Sri Lanka from their
countries, by paying through the nominated credit cards.
FEBRUARY, 2019
• Department of Registrar of Companies offers eROC the new company
registration system with a new look and much advanced features.
1. Register company secretaries,
2. Register company auditors.
3. Request Certified copies ( Only for the users who registered there
company through eROC system).
4. Public Tender publishers can submit their tenders and tender
applicant also can apply for those Tenders using the same system.
HTTP://43.224.124.134/FRONTEND/EROC/DASHBOARD/
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