Lecture 3&4: Corporate personality, limited liability and lifting the veil
The doctrine of separate legal personality/limited liability:
Limited liability and legal personality are key characteristics of the cooperate form
Limited liability functions to limit the liability of shareholders to the amount each has
invested in the company when they acquired their shares- in practice today this will be paid
in full up front so no liability on liquidation. In other words, if a company goes bust, e.g. they
cannot afford to pay its debt- in the principle the shareholders are not liable.
Separate legal personality: The corporate veil
By virtue of a company’s separate legal personality, it is in law an entity
separate from its members, enjoying rights such as ownership of property,
the capacity to enter into contracts in its own name, and continuous
existence (also referred to as ‘perpetual existence’ or ‘perpetual
succession’).
It is also subject to legal and contractual liabilities. The
principle of legal personality (sometimes referred to as a veil of
incorporation separating the company from its shareholders) has been
developed through various cases, commencing with the House of Lords
decision in Salomon v A. Salomon & Co Ltd [1897] A.C. 22, which has
been influential in various common law jurisdictions.
In the Salomon case, it was held that a company was a separate entity from its shareholders
even where the company was effectively owned and controlled by a single shareholder.
Salomon v Salomon & Co Ltd [1897] AC 22 (HL), and Broderip v Salomon [1895] 2 Ch 323
(Chancery Division and Court of Appeal).
Macaura v Northern Assurance Co Ltd [1925] AC 619
Lee v Lee's Air Farming Ltd [1961] AC 12
A further consequence of limited liability/separate personality is that a wrong done to the
company can generally speaking not be pursued by the shareholders of the company no
matter how much they may have been harmed indirectly by the wrong. This is known as the
rule in Foss v Harbottle which we will come back to in a later lecture.
2. Lifting or piercing the veil
What does this doctrine mean?
When can it be applied?
What is its effect?
The doctrine of separate legal personality/limited liability:
Limited liability and legal personality are key characteristics of the cooperate form
Limited liability functions to limit the liability of shareholders to the amount each has
invested in the company when they acquired their shares- in practice today this will be paid
in full up front so no liability on liquidation. In other words, if a company goes bust, e.g. they
cannot afford to pay its debt- in the principle the shareholders are not liable.
Separate legal personality: The corporate veil
By virtue of a company’s separate legal personality, it is in law an entity
separate from its members, enjoying rights such as ownership of property,
the capacity to enter into contracts in its own name, and continuous
existence (also referred to as ‘perpetual existence’ or ‘perpetual
succession’).
It is also subject to legal and contractual liabilities. The
principle of legal personality (sometimes referred to as a veil of
incorporation separating the company from its shareholders) has been
developed through various cases, commencing with the House of Lords
decision in Salomon v A. Salomon & Co Ltd [1897] A.C. 22, which has
been influential in various common law jurisdictions.
In the Salomon case, it was held that a company was a separate entity from its shareholders
even where the company was effectively owned and controlled by a single shareholder.
Salomon v Salomon & Co Ltd [1897] AC 22 (HL), and Broderip v Salomon [1895] 2 Ch 323
(Chancery Division and Court of Appeal).
Macaura v Northern Assurance Co Ltd [1925] AC 619
Lee v Lee's Air Farming Ltd [1961] AC 12
A further consequence of limited liability/separate personality is that a wrong done to the
company can generally speaking not be pursued by the shareholders of the company no
matter how much they may have been harmed indirectly by the wrong. This is known as the
rule in Foss v Harbottle which we will come back to in a later lecture.
2. Lifting or piercing the veil
What does this doctrine mean?
When can it be applied?
What is its effect?
