Separate Legal Personality Company Law Essay Competition - Essay for you

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Separate Legal Personality Company Law Essay Competition

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Company law assignment separate legal personality

company law assignment separate legal personality

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The main issue in the question� entails a discussion relates to corporate entity or personality. As noted a key feature of the company is that is a legal person with a separate existence from the company's members� or its directors. It is an artificial person in the eye of law that exist independently and separate from any other entity associated with the company. As a consequences a company can enter into contracts with its own shareholders� and own property in its own right. Beside that, a company can sue and be sued and taxed in its own name� and it can hold its own property and is actually liable for its own debts. This idea refers to the fact that the shareholders hold limited liability, and therefore, is not liable for the debts that belong to the company.

The decision of House of Lord's in the case of Salomon V A Salomon & Co Ltd�, which now referred to as the 'Salomon' principle established this principal of separate identity of the company�.

Aron Salomon and his boot and shoe business have done for company law what Mrs. Carlill and her smoke ball done for the law of contract and what Mrs. Donoghue and her adulterated ginger beer done for the law of tort.

The case of Salomon� is a case, which puts in a good view of how corporate personality and limited liability� closely connected to each other. In the case of Salomon�, because of the formation of a new company Mr. Salomon was no longer liable for the debts of the company. Nevertheless, he became the managing director of the company. It granted himself a secured charge over all the company's assets.

Thus, if the company failed, not only would Mr. Salomon have no liability for the debts of.

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On SEPARATE LEGAL PERSONALITY DOCTRINE IN COMPANY LAW

QUESTION. The decision in Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) firmly established that if a company was validly incorporated the concepts of separate legal personality and limited liability applied notwithstanding the size of the company or the number of its members. However, the Courts have seen fit, on numerous occasions since, to “lift the veil of incorporation” and restrict these rights. Do you think Salomon is still valid law ?

The 1862 Companies Act which created the concept of ‘Separate Legal Personality’ for incorporated companies with seven or more subscribers (members) was a piece of legislation that has shaped the landscape of the English company law. What was set out in statute was later affirmed in the courts through the decision in Salomon v A Salomon & Co Ltd [1897] AC 22 (HL) ; which created a landmark principle that a company validly incorporated possesses a separate legal personality regardless of the number of its members. This principle, I will call The Salomon Doctrine has endured till this day despite all the trimming at the edges that has been done by statutes and common law. It is great tribute to their Lordships in Salomon that after over 100years; this doctrine still stands and the Salomon case is still being cited in courts today.

The courts have through various cases (before and after Salomon) affirmed the separateness of an incorporated company over the last century. In Metropolitan Saloon Omnibus Co Ltd v Hawkins (1859) ; the court held that a company can sue directly for any defamatory statement made against it as a separate legal personality. That case also affirmed that a company could even sue its own members for libel. The courts have also stated that a company’s property belongs to it as a separate legal personality and not to its members in Macaura v Northern Assurance Co Ltd [1925] AC 619.

Later on in Farrar v Farrars Ltd (1888) 40 ChD 395 ; the court held that because a company is separate from its members; it can enter into transaction with its members. This principle of separation have been further entrenched by more recent cases when the court found for instance that a company could employ any of its members as an employer; ( Lee v Lee’s Air Farming Ltd [1961] AC 12 ). And in a case in Australia, (Re Noel Tedman Holdings Pty [1967] QdR 561 ), it was held that a company can survive the death of its members. All the foregoing cases have established the Salomon doctrine of separate legal personality without a shadow of doubt, as the hallmark of our company legal framework. Thus making a company an association of its members and a person separate from its members.

However; over the years; there have been cases when the courts have lifted the corporate veil (so to speak, by ignoring the separate legal person of the company) and made directors and shareholders personally liable for corporate wrong or obligations. These exceptions that have been granted by the courts are so diverse that categorising them into any fixed logical and conclusive group will be difficult. The Piercing of the corporate veil has not just been as a result of common law precedents (through court pronouncements); but also through public policy-driven statutory instruments such as in cases of fraudulent and wrongful trading, under s 213 and 214 of the Insolvency Act 1986. Some of the instance are:

The courts have held that they are prepared to pierce the corporate veil and will not allow (where it is clearly established) for an Incorporated Company be used for the purpose of fraud or as a tool contrived to evade contractual or other legal obligations. This is to further the interest of justice. In Standard Chartered Bank v Pakistan National Shipping Corporation [2003] 1 A.C. 959; the court established that fraudulent representation was on its own enough to lift the veil. In this case, the court was at pain to make clear that liability arose from taking part in fraudulent activities and not as a result of being a director.

SHAM OR FACADE COMPANY

This is the most notable basis the courts have demonstrated they are willing to lift the corporate veil. The court’s thinking was exposed long ago in Gilford Motor Co Ltd v Horne [1933] Ch. 935 (CA) ; a case involving a man trying to escape the provisions of a restrictive covenant he signed. Case law has shown that the reason of sham or façade company formation has been a popular basis for piercing the corporate veil. Jones v Lipman[1962] 1 WLR 832 ; Albert Locke (1940) Ltd v Winsford Urban District Council (1973) 71 LGR 308 are some of the popular cases in this regard. It can however be argued that in many of these cases (like in the Gilford Motors and Lipman cases); the court made orders against BOTH the company and the individuals involved thus (in some way) recognizing the company as a distinct personality rather than denying it. I do not therefore see these judgments as a big challenge for the Salomon doctrine; due to the need to protect society and the need for national laws to be read in harmony with each other.

AGENCY AND SINGLE ECONOMIC ENTITY EXCEPTION

In Smith, Stone & Knight Ltd v Birmingham Corp [1939]; the court showed that it was willing to lift the corporate veil if it seems that a subsidiary is operating as an agent of the parent company as a pretense to avoid existing legal obligations. It seems the focus of the court in this case was the appearance a set up to avoid “existing” liabilities. The court however strengthened Salomon Doctrine again when it came to schemes by companies that will lead to reduction in “future” potential liabilities as was the case in Adams & Others v Cape Industries plc and another [1990] BCLC 479

The other element the court has relied on in cases of subsidiary companies is the Control factor. The more control a parent company has over its subsidiary; the more it seems the court is willing to make it liable for the actions of the subsidiary. In Woolfson v Strathclyde Regional Council [1978] SC (HL) 90 HL (Sc ), the court recognised that the issue of Control is a significant matter when considering if the corporate veil should be lifted.

The most far-reaching breach of the Salomon Doctrine had actually been from statutes rather than common law. Section 213 and 214 of the Insolvency Act 1986 allows for the veil to be lifted if there is a demonstrated case of fraudulent and wrongful trading. Also, disqualified directors who register a company or act in that capacity in a company will be held personally jointly liable and cannot rely on Salomon defence (The Company Directors Disqualification Act 1986). In addition; employees transferred from one company to a subsidiary within the same group have protected rights of continuous employment based on The Employment Rights Act 1986. And after the big revision to the companies act in the Companies Act 2006 ; directors operating a company without a trading certificate are jointly liable personally.

I believe the Salomon doctrine has not been fatally undermined as the backbone of English company law; despite the periodic decisions of the courts to pierce the veil. The greater danger however is through statutes and legislative actions as there are many public policy inspired breaches of the Salomon doctrine on the statutes book. Many of these are reasonable and expected in a democratic society so that one law will nor be read in breach of another for the sake of equity and fairness.

And I concur with the profoundly stated sentiment in Mayson S. French D. and Ryan C. Mayson, French & Ryan on Company Law (29th Ed.); Page 128, which noted that: “ Whenever it is claimed that a court decision ignores a company’s separate personality, the question that should be asked is: Would the decision have been the same if the company had been a human being? If the answer is yes, the company is being treated as a person and no principle of company law has been over-ridden. If the answer is no, the company is being treated in some way differently from other persons”. Based on this analogy; I conclude that the Salomon doctrine is still intact and remains the backbone of English company law.

Company Law Essay by

Company Law

p Nasim Chowdhury

Most of the British company law is contained in the Companies Act of 1985 which amended by Companies Act of 1989. In March 1998. the UK Department of Trade and Industry introduced an important initiative to identifying and addressing problems. In March 2000. the steering group of the Company Law Review published and analyzed a consultative to represent proposals the possible future of British company law and potential new development. In June 2006. the Draft Model Articles of Association for Public Companies were published

to certain the conduct and culture of companies in the UK

a ) Separate legal entity

Previously it was argued that as corporation has no soul. so they can not be legal personality. However. by the twentieth century they seem to have acquired all attributes of human personality. By using fiction that a corporation has a mind. the law has recognized the corporation as an artificial person. The laws confer rights and obligation on the corporation as it were a person. The courts have been able to convict them of offences requiring mens rea. But the main significance corporate personality lies in the fact that it enables the law to separate the company from those who operate it or own it. Salomon v Salomon is a classic illustration of this point. There are two main types of corporation these are the corporate sole and corporate aggregate

Corporate Sole. the corporate sole is a corporation with only one member. Examples include the Crown. the archbishop. the public trustee The advantage of the corporate sole is the continuity of jurally relations such as the holding of property. is made possible. For example. the land held by the crown. does not have to be conveyed from one monarch to another on success but it remains the property of the corporation (Crown

Corporate Aggregate. these are companies or corporate created by charter. statute or under the Companies Act. They are treated as persons in law unless the contrary is stated. Some unincorporated associations may give some of the benefits of corporation but they are not persons Usefulness. Now we can consider how much useful is the concept of legal personality

A company has a dual personality. As an association of its members but also as a person separate from its members. When necessary formalities of incorporation are satisfied. a new entity comes into existence that is separate and separate from its directors and shareholders Fact of the landmark case SALOMON v SALOMON CO

Salomon had incorporated shoe and his boot repair business. And he transferred the business to a company own through him. Salomon had incorporated his boot and shoe repair business. He transferred the business to a company own by him. Salomon took all the shares of the company except six which were held by his wife. daughter and four sons Part of the payment for the transfer of the production was made in the form of debentures and a secured loan. which issued.

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Separate legal personality - Uni Study Guides

Separate legal personality

Redmond, Paul Corporations and Financial Markets Law 6 th ed, 2013, LBC, pp. [4-10]-[4-40].

Supplementary materials: Cheffins, B Company Law: Theory, Structure and Operation (1997) at 496-508.

Introduction

[1] The idea of a company is that it has a separate legal personality to its members or directors. Corporate personality and limited liability are closely linked.

  • Corporate personality serves the function of marking out an asset pool against which creditors of the enterprise have prior claims - the fact that the company has a separate identity partitions this asset pool from the personal assets of stakeholders
  • The recognition of corporate personality is thus closely tied to the limited liability doctrines - the recognition of the corporation as an entity whose rights and duties are distinct from those of its members and directors is a precondition to the limited liability that members of most types of registered company enjoy.
The merits and costs of limited liability

The main purpose behind limited liability was to protect investors in publicly held companies. In the context of today's climate (where most companies are small private companies where the shareholders and directors are pretty much the same people), some would argue that the benefits to shareholders are matched by risks to creditors.

  • Merits:
    • Encourages investment by those who have no interest in/capacity for management participation.
    • Relieves shareholders from the burden of monitoring fellow shareholders’ capacity to contribute proportionately to company failure under a regime of joint and several unlimited liability.
    • Encourages free liquidity of share capital, which not only reduces the cost of capital to the company, but also insinuates an accountability mechanism for management through the threat that poor performance reflected in stock price decline will stimulate the acquisition of control by a party which believes it can achieve superior returns through management replacement.
    • Encourages entrepreneurial risk taking by companies since they may safely invest in projects with prospects of positive returns but also those with significant risk exposure. If projects with higher risk profiles are conducted through a separate entity, that further insulates members from losses.
  • Risks:
    • May create a moral hazard in the area of tort law with the opportunity it offers to externalise the risks of enterprise.
    • Favours the externalisation of social costs of corporate behaviour, shifting the risk of enterprise operations away from shareholders and onto stakeholders or wider society.
    • Mainly moral dilemmas - individual moral restraint is often blurred by the demands of the corporate role and lost in the anonymity of group decisions and action.
Corporate personality

[2] A company registered under the Act is invested with the legal capacity and powers of an individual (s 124) though its incorporeal nature ensures that it enjoys perpetual succession in the sense that there is no temporal/change of membership limit upon its existence.

  • It can commit both crime and tort.
  • Injury to its reputation can be sued for by a defamation claim, although it may recover only injury to its pocket and not its feelings: Lewis v Daily Telegraph [1964], Mirror Newspapers Ltd v Harrison (1983).
  • It can be held in contempt of court: R v J G Hammond & Co [1914], but it is incapable of personal appearance and must appear through a representative: Tritonia Ltd v Equity and Law Life Assurances Soc [1943]
  • Not entitled to invoke the common law privilege against self-incrimination in answer to a demand for the production of documents under statutory power: Environmental Protection Authority v Caltex Refining Co Pty Ltd (1993).
  • Reference to “person” in state and commonwealth legislation refers also to a body corporate unless contrary intention expressed: Acts Interpretation Act 1901 (Cth) s 22 and Interpretation Act 1897 (NSW) s 21(c).
  • “Residents” in s 75(iv) of the Constitution does not embrace corporations: Australasian Temperance and General Life Assurance Society Ltd v Howe (1922)
  • Protective provisions in a money lending statute have been interpreted as confined to the “protection of borrowers who are natural persons and subject to the possibility of being overreached in their indigence”: Motel Marine Pty Ltd v IAC (Finance) Pty Ltd (1964)
  • It is well established that a company may be an enemy alien, its status being determined by the nationality of those persons in control of its affairs: Daimler Co Ltd v Continental Tyre and Rubber Co Ltd [1916]
The separate personality of the corporation

The modern conception of a separate legal entity and limited liability were established in the landmark case of Salomon v Salomon & Co Ltd. [3]

  • Facts:
    • Mr Salomon had a business selling boots and at one point he made it into a company with his 6 family members making up the other shareholders (7 was a minimum in those days).
    • Those relatives were nominal shareholders and Mr Salomon held basically all shares. He also massively overvalued the company.
    • The business eventually went bankrupt and had a few creditors including two secured creditors (one of them actually being Mr Salomon himself).
    • The liquidator was trying to get money back from Mr Salomon on the basis that the company was really a fraud – it was really just an agency for Salomon to reduce his liability.
  • Judgment:
    • The Court reject the arguments of fraud and agency - there was nothing in the Act about whether the shareholders should be independent of the majority shareholder.
    • The company was duly constituted in law and it was not the function of judges to read into the statute limitations.
    • The company was thus a separate legal entity and there is a 'corporate veil' between it and its shareholders - they are limited in liability and Salomon could not be pursued personally for the debts of the companies.

Another important case was Lee v Lee’s Air Farming Ltd . [4]

  • Facts:
    • Lee had a company in which he held all of the issued capital except for one share held by his solicitor. He was also the governing director of the company and was employed at a salary as its chief pilot. Effectively, he controlled affairs of the company
    • He was killed while performing a job for the company. The company, pursuant to legislation, had taken out workers compensation cover on its employees and his widow sued for compensation as the widow of the “worker”, defined in the statute as ”a person who works under a contract of service with the employer”.
    • The NZ Court of appeal rejected the claim on the basis that since Lee fully controlled the company, he could not also be its employee. This was appealed to the Privy Council.
  • Held:
    • “The mere fact that someone is a director of a company is no impediment to his entering into a contract to serve the company. If, then, it be accepted that the respondent company was a legal entity their Lordships see no reason to challenge the validity of any contractual obligations which were created between the company and the deceased”
    • “Assuming that the company was not a sham then the capacity of the company to make a contract with the deceased could not be impugned merely because the deceased was the agent of the company in its negotiation”
    • “It is the logical consequence of the decision in Salomon’s case that one person may function in dual capacities”
    • In other words: the company is a separate legal entity and its sole director/shareholder can also be an employee who entered into a contract with it.
Gower’s Principles of Modern Company Law

Since Salomon the complete separation of company and its members has never been doubted (though the corporate veil, ie, the separateness between the company and its shareholders, can be lifted in some cases).

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Separate Legal Personality

Separate Legal Personality.

Extracts from this document.

SEPARATE LEGAL PERSONALITY A corporate legal person is very different from the natural or human legal person. It has neither body, mind nor soul. In the Case of Sutton's Hospital1, it was said that it invisible, immortal and rests only in the intendment and consideration of the law. A company in itself is an artificial legal person and its member's liability are limited. Limited liability invariably means that if the company is insolvent, the shareholders and others engaged in the management of the company can restrict their liability for the debts of the company. An artificial legal person in the form of an incorporated company is in law an entirely distinct and separate legal personality from its members. This principle is called the veil of incorporation and was belatedly established in the Salamon v Salamon2 in which Lord Mcnaughten stated "the company is at law a different person altogether from the subscribers to the memorandum. Thus it can sue and be sued in its own name, make contracts on its own behalf. This principle also extends to holding and subsidiary companies. A holding and subsidiary company relationship exists under s 736 of the Companies Act 1985 where one company controls the composition of the board other's board of directors by being able to appoint or direct the appointment of a majority of the maximum numbers of directors who may be appointed, or the appointment of directors who may together exercise a the voting rights exercisable at board meetings of the other company. The other company is known as the subsidiary of the holding company. The existence of the veil of incorporation shields the holding company from the attention of creditors of the subsidiary as enunciated in Salamon v Salamon. The strict adherence to the separation of subsidiary company and its shareholders causes loss to creditors but as yet this position has not been ameliorated by the courts. . read more.

However it was held in Evans v Brunner, Mond and Co Ltd17, it was held that " When an act of the company is challenged on the ground that it is beyond the powers of the company the challenge is not disposed of by proving that the act is beneficial to the company, it must be established that it is an act the doing of which is authorised by the company's constitution. If the purchase of the computer discs is found to be ultra vires it would seem that s35 CA 1985 will probably protect the third parties (i.e DEF Ltd). XYZ Ltd would be bound unless Clare has exceeded any limitations put onto her authority by the board. If she has then she will become personally liable to restore the company's funds except if the shareholders ratify his act by a special resolution. Nevertheless s35A will protect DEF Ltd and the section states that in favour of a person dealing with a company in good faith, the power of the board of directors to bind the company, or authorise others to do so, is to be deemed to be free of any limitation under the company's constitution. This s35B CA provides that third parties to a transaction do not have to make enquiries about any limitations that have been put on a director's powers. This provision also extends to the Agency rule applied in the case of Freeman & Lockyer v Buckhurst Park Properties18 which states that when those authorized to run a company hold a person out as having authority to undertake particular tasks, then a third person who relies upon that representation is entitled to assume that the person held out as ostensible authority to act. The result is that XYZ Ltd probably has no option but to honour the contract in any case, causing it liable to pay the debt. . read more.

However the courts have generally refused to enforce non-membership rights. In Eley v The Positive Government Security Life Assurance company ltd (1876) 1 Ex D 88 it was held that s14 could not be used to enforce the right, contained in the articles to be a company solicitor. It was held that a third party cannot enforce a provision in the articles to obtain a benefit in them intended for him accordingly john may not be able to seek any action. 1 (1612) 10 Co Rep 23a 2 <1987>, Macaura v Northen Assurance Co Ltd(1925); Lee v Lee's Air Farming Ltd (1961) 3 [1977] AC 774 4 [1976] 3 All ER 462 5 [1978 SLT 159,National Dock Labour Board v Pinn & Wheeler Ltd (1989) COA 6 (1979) 1 All ER 582 7 No 2 1997 8 s741 Companies Act 1985 9 Salamon v Salamon(1987) 10 s213 Insolvency Act 1986 11 Re Produce Marketing Consortium ltd ( no 2) ( 1989) 12 Ashbury Railway Carriage and Iron Co Ltd v Riche(1875) LR 7 HL 653 13 [1986] ch 246 per slade LJ at p. 295 14 Stephens v Mysore Reefs (Kangundy) ( Mining Co ltd [1902] 1 ch 15 [1918] AC 514 16 Co(1880) 5 App CA 17 [1921] 1 Ch 359(Hutton v West Cork Railway Co(1883) 23 cH D 654 18 [1964] 2 QB 480 19 [1894] 1 Ch 616) 20 (1889)42 Ch D 636 21 Russell v Northern Bank development Corporation Ltd[1992] 1 WLR 588 22 Imperial Hydropathic Hotel Co, Blackpool v Hampson(1882) 23 ChD 1. 23 Lee v Chou Wen Hsien[1985] BCLC 45 24 [1970] AC 1099 25 s303(4) 26 Wood v Odessa Waterworks Co(1889) 42 CH d 636 27 Eley v Positive Government Security Life Assurance Co (1876) 1 Ex D 88 28 [1909] AC 442 29 Bushell v Faith[1970] AC 1099 30 Bushell v Faith[1970] AC 1099 31 Re JE Cade Ltd (1991) 32 [1986] Ch 211 33 [1973] AC 360 34 [1915] 1 ch 881 . read more.

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