Business law lecture 2
Limited Liability/Legal Personality
■ Limited liability and legal personality (also referred to as ‘separate legal personality’
or ‘separate corporate personality’) are key characteristics of the corporate form.
They are separate but linked concepts.
■ Limited Liability
■ Limited liability functions to limit the liability of shareholders to the amount they
have invested in the company.
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 veil of incorporation
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
■ S ran a business as a leather merchant and wholesale boot manufacturer as a sole
trader for 30 years
■ The business was solvent
■ In 1892, S incorporated the business as Salomon Co Ltd
■ The first 7 members/shareholders: S, his wife, daughter and 4 sons subscribed for
one share each
■ S and two of his sons were appointed directors
■ Company “paid” S £39,000 for transfer of the existing business to it
■ Payment was largely by 20,000 £1 shares and £10,000 of debentures giving a charge
over the company’s assets, £9000 cash . Salomon the man got the charge- so he is a
secured creditor
■ B lent money to S and was re-issued with the debentures as security
■ Company went into insolvent liquidation ie owing to unsecured creditors
■ Issue was whether were the debentures were invalid as having been granted to
Salomon as sole shareholder and original owner- did he have to indemnify the
company for the amount of the debentures
Shares and debentures
, ■ Shares:
■ Personal property (chose in action)
■ Holders become members,
■ Remunerated by dividend,
■ Normally entitled to vote at general meeting
■ Debentures:
■ Personal property
■ Formal loan to the company
■ Normally secured by fixed and floating charges, ie the holder has priority against
unsecured creditors
■ Holders remunerated by fixed interest payments
■ No voting rights, holders not members
■ Priority to shareholders in winding up
■ Directors are NOT members of the company
■ Directors are officers of the company
■ Directors might also be employees if they have a service contract, eg managing
director, finance director, HR director, etc
■ Note the directors’ share qualification requirement in the articles
■ Directors’ may have personal liability under statute such as wrongful trading under
the Insolvency Act 1986 s 214
The first instance decision: Vaughan Williams J
■ “this business was Mr. Salomon's business and no one else's; that he chose to
employ as agent a limited company; that he is bound to indemnify that agent, the
company; …The creditors of the company could, in my opinion, have sued Mr.
Salomon.”
■ The company was an agent or nominee for S, and therefore S was liable in the same
way as if the company was a natural person
■ NOT THE LAW TODAY BECAUSE OF DECISION IN THE HOUSE OF LORDS
The Court of Appeal decision (not the law today)
■ Lindley LJ: “The incorporation of the company cannot be disputed… in such an action
as this the validity of the certificate cannot be impeached. The company must,
therefore, be regarded as a corporation, but as a corporation created for an
illegitimate purpose.” “I should rather liken the company to a trustee for him - a
trustee improperly brought into existence by him to enable him to do what the
statute prohibits.”…if any jury were asked, Whose business was it? they would say
Aron Salomon's, and they would be right, if they meant that the beneficial interest in
the business was his.”
■ Lopes LJ: It would be lamentable if a scheme like this could not be defeated. If we
were to permit it to succeed, we should be authorizing a perversion of the
Companies Acts….
■ The indemnity order against S upheld BUT on Appeal….
The House of Lords’ decision reverses the CA
■ Lord Halsbury LC: “the important question in this case is whether the respondent
company was a company at all - whether in truth that artificial creation of the
Limited Liability/Legal Personality
■ Limited liability and legal personality (also referred to as ‘separate legal personality’
or ‘separate corporate personality’) are key characteristics of the corporate form.
They are separate but linked concepts.
■ Limited Liability
■ Limited liability functions to limit the liability of shareholders to the amount they
have invested in the company.
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 veil of incorporation
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
■ S ran a business as a leather merchant and wholesale boot manufacturer as a sole
trader for 30 years
■ The business was solvent
■ In 1892, S incorporated the business as Salomon Co Ltd
■ The first 7 members/shareholders: S, his wife, daughter and 4 sons subscribed for
one share each
■ S and two of his sons were appointed directors
■ Company “paid” S £39,000 for transfer of the existing business to it
■ Payment was largely by 20,000 £1 shares and £10,000 of debentures giving a charge
over the company’s assets, £9000 cash . Salomon the man got the charge- so he is a
secured creditor
■ B lent money to S and was re-issued with the debentures as security
■ Company went into insolvent liquidation ie owing to unsecured creditors
■ Issue was whether were the debentures were invalid as having been granted to
Salomon as sole shareholder and original owner- did he have to indemnify the
company for the amount of the debentures
Shares and debentures
, ■ Shares:
■ Personal property (chose in action)
■ Holders become members,
■ Remunerated by dividend,
■ Normally entitled to vote at general meeting
■ Debentures:
■ Personal property
■ Formal loan to the company
■ Normally secured by fixed and floating charges, ie the holder has priority against
unsecured creditors
■ Holders remunerated by fixed interest payments
■ No voting rights, holders not members
■ Priority to shareholders in winding up
■ Directors are NOT members of the company
■ Directors are officers of the company
■ Directors might also be employees if they have a service contract, eg managing
director, finance director, HR director, etc
■ Note the directors’ share qualification requirement in the articles
■ Directors’ may have personal liability under statute such as wrongful trading under
the Insolvency Act 1986 s 214
The first instance decision: Vaughan Williams J
■ “this business was Mr. Salomon's business and no one else's; that he chose to
employ as agent a limited company; that he is bound to indemnify that agent, the
company; …The creditors of the company could, in my opinion, have sued Mr.
Salomon.”
■ The company was an agent or nominee for S, and therefore S was liable in the same
way as if the company was a natural person
■ NOT THE LAW TODAY BECAUSE OF DECISION IN THE HOUSE OF LORDS
The Court of Appeal decision (not the law today)
■ Lindley LJ: “The incorporation of the company cannot be disputed… in such an action
as this the validity of the certificate cannot be impeached. The company must,
therefore, be regarded as a corporation, but as a corporation created for an
illegitimate purpose.” “I should rather liken the company to a trustee for him - a
trustee improperly brought into existence by him to enable him to do what the
statute prohibits.”…if any jury were asked, Whose business was it? they would say
Aron Salomon's, and they would be right, if they meant that the beneficial interest in
the business was his.”
■ Lopes LJ: It would be lamentable if a scheme like this could not be defeated. If we
were to permit it to succeed, we should be authorizing a perversion of the
Companies Acts….
■ The indemnity order against S upheld BUT on Appeal….
The House of Lords’ decision reverses the CA
■ Lord Halsbury LC: “the important question in this case is whether the respondent
company was a company at all - whether in truth that artificial creation of the
