TOPIC 2
COMPANY LAW
2. CORPORATE PERSONALITY & LIMITED LIABILITY:
1. INTRODUCTION:
WHAT IS CORPORATE PERSONALITY?
à CORPORATE PERSONALITY: an artificial construct that recognises the
company as is its own legal person, separate from its members/shareholders
and directors. This means it is capable of suing and being sued (as well as
holding property) in its own name. Its profits and losses are its own, not the
shareholders’ (procedural aspect).
WHAT IS LIMITED LIABILITY?
à LIMITED LIABILITY: limited liability is a statute-based consequence that
flows from the existence of a separate legal personality. It dictates that
shareholders’ liability is limited to the amount they invest into the company.
This means that the company itself is liable for its debts and creditors cannot
reach into the members’ assets (substantive aspect).
o Limited liability is a creature of statute, specifically the Limited Liability
Act 1855.
! However, note that limited liability does not always necessarily flow as a
consequence of the separate legal personality. Some companies may be set up with
unlimited liability.
WHEN DOES A COMPANY ASSUME ITS OWN LEGAL PERSONALITY?
When the company undergoes incorporation, it is recognised as having the
capacity of a legal person and can begin to trade.
à INCORPORATION: where the company undergoes a registration procedure.
This process of application and registration is governed by the Company Act
2006.
Incorporation endows companies with the following important, effective
features for the world of commerce:
(i) PERPETUAL EXISTENCE: the company will exist from the date of
incorporation, until it is deregistered (removed from the Companies
House record). This means the existence of the company is not
impacted by changes to shareholders, management, employees or
business activity. Thus, companies are easily able to alter their
objectives to diversify the company and enter new sectors.
(ii) SEPARATE LEGAL PERSONALITY: corporate theorists have had
difficulty in answering how the artificial legal personality of the
company compares to the human legal personality. Contractarians
argue that the company comes into being through relationships
between individuals working in the company, while ‘real entity’
theorists (e.g. Otto von Gierke) attempt to bring the corporate form as
close to the human form as possible.
,TOPIC 2
COMPANY LAW
HOW DO SHAREHOLDERS BENEFIT FROM LIMITED LIABILITY?
If the company succeeds, shareholders are able to enjoy the benefits – they
will receive increased dividends and the value of their shares will increase.
However, if the company fails, shareholders will be shielded against the losses
because those losses will belong to the company.
! However, in certain instances, the claimant may wish to look to the person behind
the company to satisfy their claim, rather than the company itself. This is known as
piercing the corporate veil.
2. FEATURES OF COMPANY FLOWING FROM CORPORATE PERSONALITY:
SUMMARY OF KEY PRINCIPLES:
Salomon: limited liability is a consequence of the corporate personality.
Further, incorporation can be highly advantageous.
Macaura + Lonrho: given the corporate personality, the company owns its
own property.
Lee: as a consequence of the corporate personality, the company enters into
its own contracts.
Gramophone: a company runs its own business (not the controllers).
Adams: the company sues and is sued on its own liabilities. This has two
aspects:
1. Procedural aspect: the company can bring its own legal claims.
2. Substantive aspect: the company carries its own liabilities and the members
cannot be sued on these liabilities.
CASES:
The following cases indicate features of a company that are a consequence of
its separate legal personality:
A. LIMITED LIABILITY:
a Salomon v Salomon & Co Ltd: though small businesses were availing themselves
of the corporate form, the Joint Stock Companies Act envisaged that only medium
to large commercial ventures could do so. However, Salomon disproved the
assumption of this Act and proved the legitimacy of small businesses assuming
the corporate form (he did so in order to take advantage of the feature of limited
liability). Further, this case indicates rationales for incorporation, namely limited
liability and first rights to the assets of the company.
FACTS:
, TOPIC 2
COMPANY LAW
Salomon was a sole trader who owned a boot-making business. Alongside this
business, he decided to form a company named ‘Salomon & Co Ltd.’ As the
formation of a company required 7 members (a requirement that no longer
exists), Salomon used his wife and 5 children to meet this and appointed them
all as shareholders, while he also assumed the role of managing director.
Once registered, his newly incorporated company purchased his sole trading
boot-making business. In his capacity as managing director, Salomon
purchased the business for £39,000 – this was valued far too highly. The
transaction was structured as follows:
o The price was paid in £10,000 of debentures, which placed a charge
over all the company’s assets.
*Debenture: a secured debt instrument. This is a document that creates/evidences
debt and signifies that debts are secured against the company’s assets and that
secured creditors are ranked first in the line of creditors (i.e. secured creditors will be
paid first).
o £20,000 was paid in £1 shares, thus enabling Salomon to be the
shareholder of an extra 20,000 shares.
o £9,000 in cash.
Salomon was now the vast majority shareholder of 20,001 shares, with his
family holding the 6 remaining shares, and he was also a secured creditor, as
a result of the debenture.
Before the change in legal status of the boot-making business, Mr Salomon
was a sole trader with unlimited liability for all the debts of the company.
However, after incorporation and the sale of the boot-making business Mr
Salomon was a shareholder of the company with limited liability; as the
managing director, he had granted himself a secured charge over all the
company’s assets – this meant that whatever assets were left, he could claim
them in satisfaction of his debt; lastly, as a secured creditor, he would be paid
first in the line of creditors.
However, one year after trading as Salomon & Co, trade debts lead to the
company being placed in insolvent liquidation. This meant that all the
creditors had to be paid, but there were not enough assets left to pay them
off. Thus, Mr Broderip (the debenture holder) sought to challenge the validity
of the transaction to convert the business into a company, as well as to make
Mr Salomon personally liable for the company’s debts. He argued that the
company was a mere sham for Mr Salomon.
COURT OF APPEAL:
The CA upheld the validity of Broderip’s claim.
As noted by Kay LJ, the key concern was that the six family members never
intended to take part in the business and they only held those shares to fulfil
a technicality required by the Acts. Lindley LJ added to this, stating that the
remaining shareholders were used to enable Mr Salomon to carry on his
business with limited liability.
COMPANY LAW
2. CORPORATE PERSONALITY & LIMITED LIABILITY:
1. INTRODUCTION:
WHAT IS CORPORATE PERSONALITY?
à CORPORATE PERSONALITY: an artificial construct that recognises the
company as is its own legal person, separate from its members/shareholders
and directors. This means it is capable of suing and being sued (as well as
holding property) in its own name. Its profits and losses are its own, not the
shareholders’ (procedural aspect).
WHAT IS LIMITED LIABILITY?
à LIMITED LIABILITY: limited liability is a statute-based consequence that
flows from the existence of a separate legal personality. It dictates that
shareholders’ liability is limited to the amount they invest into the company.
This means that the company itself is liable for its debts and creditors cannot
reach into the members’ assets (substantive aspect).
o Limited liability is a creature of statute, specifically the Limited Liability
Act 1855.
! However, note that limited liability does not always necessarily flow as a
consequence of the separate legal personality. Some companies may be set up with
unlimited liability.
WHEN DOES A COMPANY ASSUME ITS OWN LEGAL PERSONALITY?
When the company undergoes incorporation, it is recognised as having the
capacity of a legal person and can begin to trade.
à INCORPORATION: where the company undergoes a registration procedure.
This process of application and registration is governed by the Company Act
2006.
Incorporation endows companies with the following important, effective
features for the world of commerce:
(i) PERPETUAL EXISTENCE: the company will exist from the date of
incorporation, until it is deregistered (removed from the Companies
House record). This means the existence of the company is not
impacted by changes to shareholders, management, employees or
business activity. Thus, companies are easily able to alter their
objectives to diversify the company and enter new sectors.
(ii) SEPARATE LEGAL PERSONALITY: corporate theorists have had
difficulty in answering how the artificial legal personality of the
company compares to the human legal personality. Contractarians
argue that the company comes into being through relationships
between individuals working in the company, while ‘real entity’
theorists (e.g. Otto von Gierke) attempt to bring the corporate form as
close to the human form as possible.
,TOPIC 2
COMPANY LAW
HOW DO SHAREHOLDERS BENEFIT FROM LIMITED LIABILITY?
If the company succeeds, shareholders are able to enjoy the benefits – they
will receive increased dividends and the value of their shares will increase.
However, if the company fails, shareholders will be shielded against the losses
because those losses will belong to the company.
! However, in certain instances, the claimant may wish to look to the person behind
the company to satisfy their claim, rather than the company itself. This is known as
piercing the corporate veil.
2. FEATURES OF COMPANY FLOWING FROM CORPORATE PERSONALITY:
SUMMARY OF KEY PRINCIPLES:
Salomon: limited liability is a consequence of the corporate personality.
Further, incorporation can be highly advantageous.
Macaura + Lonrho: given the corporate personality, the company owns its
own property.
Lee: as a consequence of the corporate personality, the company enters into
its own contracts.
Gramophone: a company runs its own business (not the controllers).
Adams: the company sues and is sued on its own liabilities. This has two
aspects:
1. Procedural aspect: the company can bring its own legal claims.
2. Substantive aspect: the company carries its own liabilities and the members
cannot be sued on these liabilities.
CASES:
The following cases indicate features of a company that are a consequence of
its separate legal personality:
A. LIMITED LIABILITY:
a Salomon v Salomon & Co Ltd: though small businesses were availing themselves
of the corporate form, the Joint Stock Companies Act envisaged that only medium
to large commercial ventures could do so. However, Salomon disproved the
assumption of this Act and proved the legitimacy of small businesses assuming
the corporate form (he did so in order to take advantage of the feature of limited
liability). Further, this case indicates rationales for incorporation, namely limited
liability and first rights to the assets of the company.
FACTS:
, TOPIC 2
COMPANY LAW
Salomon was a sole trader who owned a boot-making business. Alongside this
business, he decided to form a company named ‘Salomon & Co Ltd.’ As the
formation of a company required 7 members (a requirement that no longer
exists), Salomon used his wife and 5 children to meet this and appointed them
all as shareholders, while he also assumed the role of managing director.
Once registered, his newly incorporated company purchased his sole trading
boot-making business. In his capacity as managing director, Salomon
purchased the business for £39,000 – this was valued far too highly. The
transaction was structured as follows:
o The price was paid in £10,000 of debentures, which placed a charge
over all the company’s assets.
*Debenture: a secured debt instrument. This is a document that creates/evidences
debt and signifies that debts are secured against the company’s assets and that
secured creditors are ranked first in the line of creditors (i.e. secured creditors will be
paid first).
o £20,000 was paid in £1 shares, thus enabling Salomon to be the
shareholder of an extra 20,000 shares.
o £9,000 in cash.
Salomon was now the vast majority shareholder of 20,001 shares, with his
family holding the 6 remaining shares, and he was also a secured creditor, as
a result of the debenture.
Before the change in legal status of the boot-making business, Mr Salomon
was a sole trader with unlimited liability for all the debts of the company.
However, after incorporation and the sale of the boot-making business Mr
Salomon was a shareholder of the company with limited liability; as the
managing director, he had granted himself a secured charge over all the
company’s assets – this meant that whatever assets were left, he could claim
them in satisfaction of his debt; lastly, as a secured creditor, he would be paid
first in the line of creditors.
However, one year after trading as Salomon & Co, trade debts lead to the
company being placed in insolvent liquidation. This meant that all the
creditors had to be paid, but there were not enough assets left to pay them
off. Thus, Mr Broderip (the debenture holder) sought to challenge the validity
of the transaction to convert the business into a company, as well as to make
Mr Salomon personally liable for the company’s debts. He argued that the
company was a mere sham for Mr Salomon.
COURT OF APPEAL:
The CA upheld the validity of Broderip’s claim.
As noted by Kay LJ, the key concern was that the six family members never
intended to take part in the business and they only held those shares to fulfil
a technicality required by the Acts. Lindley LJ added to this, stating that the
remaining shareholders were used to enable Mr Salomon to carry on his
business with limited liability.
