Legal Personality
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]
• Viscount Haldane LC “a company is an abstraction. It has no mind of its own any more than
it has a body of its own”
Limited Liability
• A company’s liability is limited
• This means the liability of shareholders to pay debts incurred by the company is limited
• It is the obligation of the company to pay its creditors
• If the company has insufficient funds, creditors cannot persue their claim agiainst shareholders
• If the company becomes insolvent, shareholders will be liable to lose the money they invested
in subscribing for shares
• Insolvency Act 1986 enshrines concept confirming that shareholder of limited companies
and not liable to a liquidator in the event of insolvency
Separate Personality
• Directors owe their duties to the company, not the shareholders.
• Shareholders have rights against the company, not the directors.
• Third parties do business with the company and negotiate with directors.
• A company continues to exist even if the shareholders and directors change.
Significance
• Limited liability makes companies useful commercial tools
• Passive investment – shareholders can invest knowing their other personal assets are safe.
• Why groups of companies have developed. Riskier business divisions can be conducted through
separate companies.
Salomon v Salomon [1897]
• Mr Salomon was a sole trader making leather boots.
• In 1892 he incorporated as a limited company called A. Salomon & Co. Ltd and sold the sole trader
to the company for almost £39,000.
• Mr S was paid £9,000 in cash, £20,000 in shares and £10,000 by way of debenture
Debenture
A loan as a secured-creditor. In the event of the company going insolvent, you’re first in line.
Interest is paid on the loan.
,• At the time Companies Act 1862 required at least 7 people to subscribe as shareholders.
• The shareholders were S, his wife, daughter, and four sons - each had a share. Family didn’t
have a role in running the business.
• Mr S was a shareholder, director and creditor.
• Decline in boot sales (strikes and government cancelled order) and company ran into
financial difficulties.
• Mr S sold his debenture to Mr Brodreip for £5,000
• The company went into insolvent liquidation. Mr B could not enforce all of the debenture against the
company due to lack of funds.
• Mr B brought a claim against Mr S claiming he was personally liable.
• Company went into liquidation - brough the litagation before the House of Lords on behalf of
creditors.
• At first instance and appeal - S was liable to B but for different reasons:
• H igh Court: Vaughan Williams, J. The agent-principal analysis.
The company was an agent of S. S was required to indemnify the company for losses sustained.
• Court of Appeal: Lindley LJ. The company as a trustee for S as beneficiary. Due to the
requirements of there being 7 active members. Company was created for illegitimate purpose.
Therefore the company did not exist.
• House of Lords: Must use a literal interpretation of the Companies Act 1862. The company was
validly incorporated and therefore a separate legal entity. S was not liable to the company not to
creditors.
May be the same business before incorporation with the same people recieving profits but
legally it is a separate entity and not an agent to the subscribers.
Consequences of a separate legal personality
The company owns its own property
• The property of the company belongs to itself and not to the shareholders.
• Macaura v Northern Assurance Co [1925]
• Macaura was the owner of the Millymoon Estate
• Sold all the timber on the estate to a company which he set up in exchange for 42,000
shares fully paid at £1 each.
• M took out at insurance policy in his own name with Northern Assurance Co,
covering the timber against fire.
• Two weeks later a fire destroyed the timber. M brought a claim on the insurance policy.
• House of Lords held that the timber belonged to the company and not M.
Therefore unable to claim on the insurance policy.
,Company enters into its own contracts
• Companies contracts are its own.
• Benefits and liabilities of the contract belong to the company, not the shareholders or directors.
• True even when the contract is between the company and its sole director/shareholder.
• Lee v Lee’s Air Farming Ltd [1961]
• Mr Lee incorporated Lee’s Air Farming.
• Nominal capital of the company was £3,000 divided into 3,000 shares (£1 each).
• L held 2,999 shares. Final share held by a solicitor.
• L was sole director and also an employee (chief pilot).
• 1956 L was killed in a plane crash leaving a widow and 4 children.
• L’s wife brought a claim under the Worker’s Compensation Act 1922.
• Privy Council found the company and L were distinct legal entities and therefore L (under his
employment contract) was a worker.
• The widow was therefore entitled to compensation. Irrelevant that L was also the
majority shareholder.
Company sues and is sued on its own liabilities
• Adams v Cape Industries [1990]
• Cape was parent company of a group of wholly owned subsidiaries (some mined asbestos
in South Africa and some marketed it to other countries).
• Employees of the Texas subsidiary company NAAC became ill and sued Cape and NAAC.
• Issue was whether the judgment could be enforced against the much wealthier parent company.
• Claimants argued that Cape and its subsidiaries should be treated as a single economic unit.
That the subsidiaries were used as a façade concealing the true facts.
An agency relationship existed between Cape and NAAC.
• Court of Appeal rejected all arguments - judgment could not be enforced against Cape.
As things stand...
• Section 16 CA 2006 – Company becomes a body corporate (legal person) from the date of
incorporation. From then it has its own existence and personality.
• A private limited company can be formed with 1 director and 1 shareholder.
• Company will continue to exist if the directors and shareholders change.
• Shareholders – Pay for their shares and are entitled to profits. They have no entitlement to the
companies property. They own the company but are not involved in the day-to-day running.
• Directors – Have day-to-day control of the company. Company is inanimate so must act
through human beings.
, Limited Liability – Justifaction and Issues
Justifications Issues
Encourages investment and businesses to take Creditors risk being unable to receive monies
risks. This generates money and benefits the due to them. They can’t go behind the
wider community. corporate structure.
Creditors will be aware. Private Limited Accounts are only filed once a year so might not
Companies must use LTD and Public must be up to date.
use PLC.
Creditors therefore have the opportunity to Small private companies’ accounts do not give
assess the financial viability of the company. much information.
They can check the publically filed documents.
Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]
• Viscount Haldane LC “a company is an abstraction. It has no mind of its own any more than
it has a body of its own”
Limited Liability
• A company’s liability is limited
• This means the liability of shareholders to pay debts incurred by the company is limited
• It is the obligation of the company to pay its creditors
• If the company has insufficient funds, creditors cannot persue their claim agiainst shareholders
• If the company becomes insolvent, shareholders will be liable to lose the money they invested
in subscribing for shares
• Insolvency Act 1986 enshrines concept confirming that shareholder of limited companies
and not liable to a liquidator in the event of insolvency
Separate Personality
• Directors owe their duties to the company, not the shareholders.
• Shareholders have rights against the company, not the directors.
• Third parties do business with the company and negotiate with directors.
• A company continues to exist even if the shareholders and directors change.
Significance
• Limited liability makes companies useful commercial tools
• Passive investment – shareholders can invest knowing their other personal assets are safe.
• Why groups of companies have developed. Riskier business divisions can be conducted through
separate companies.
Salomon v Salomon [1897]
• Mr Salomon was a sole trader making leather boots.
• In 1892 he incorporated as a limited company called A. Salomon & Co. Ltd and sold the sole trader
to the company for almost £39,000.
• Mr S was paid £9,000 in cash, £20,000 in shares and £10,000 by way of debenture
Debenture
A loan as a secured-creditor. In the event of the company going insolvent, you’re first in line.
Interest is paid on the loan.
,• At the time Companies Act 1862 required at least 7 people to subscribe as shareholders.
• The shareholders were S, his wife, daughter, and four sons - each had a share. Family didn’t
have a role in running the business.
• Mr S was a shareholder, director and creditor.
• Decline in boot sales (strikes and government cancelled order) and company ran into
financial difficulties.
• Mr S sold his debenture to Mr Brodreip for £5,000
• The company went into insolvent liquidation. Mr B could not enforce all of the debenture against the
company due to lack of funds.
• Mr B brought a claim against Mr S claiming he was personally liable.
• Company went into liquidation - brough the litagation before the House of Lords on behalf of
creditors.
• At first instance and appeal - S was liable to B but for different reasons:
• H igh Court: Vaughan Williams, J. The agent-principal analysis.
The company was an agent of S. S was required to indemnify the company for losses sustained.
• Court of Appeal: Lindley LJ. The company as a trustee for S as beneficiary. Due to the
requirements of there being 7 active members. Company was created for illegitimate purpose.
Therefore the company did not exist.
• House of Lords: Must use a literal interpretation of the Companies Act 1862. The company was
validly incorporated and therefore a separate legal entity. S was not liable to the company not to
creditors.
May be the same business before incorporation with the same people recieving profits but
legally it is a separate entity and not an agent to the subscribers.
Consequences of a separate legal personality
The company owns its own property
• The property of the company belongs to itself and not to the shareholders.
• Macaura v Northern Assurance Co [1925]
• Macaura was the owner of the Millymoon Estate
• Sold all the timber on the estate to a company which he set up in exchange for 42,000
shares fully paid at £1 each.
• M took out at insurance policy in his own name with Northern Assurance Co,
covering the timber against fire.
• Two weeks later a fire destroyed the timber. M brought a claim on the insurance policy.
• House of Lords held that the timber belonged to the company and not M.
Therefore unable to claim on the insurance policy.
,Company enters into its own contracts
• Companies contracts are its own.
• Benefits and liabilities of the contract belong to the company, not the shareholders or directors.
• True even when the contract is between the company and its sole director/shareholder.
• Lee v Lee’s Air Farming Ltd [1961]
• Mr Lee incorporated Lee’s Air Farming.
• Nominal capital of the company was £3,000 divided into 3,000 shares (£1 each).
• L held 2,999 shares. Final share held by a solicitor.
• L was sole director and also an employee (chief pilot).
• 1956 L was killed in a plane crash leaving a widow and 4 children.
• L’s wife brought a claim under the Worker’s Compensation Act 1922.
• Privy Council found the company and L were distinct legal entities and therefore L (under his
employment contract) was a worker.
• The widow was therefore entitled to compensation. Irrelevant that L was also the
majority shareholder.
Company sues and is sued on its own liabilities
• Adams v Cape Industries [1990]
• Cape was parent company of a group of wholly owned subsidiaries (some mined asbestos
in South Africa and some marketed it to other countries).
• Employees of the Texas subsidiary company NAAC became ill and sued Cape and NAAC.
• Issue was whether the judgment could be enforced against the much wealthier parent company.
• Claimants argued that Cape and its subsidiaries should be treated as a single economic unit.
That the subsidiaries were used as a façade concealing the true facts.
An agency relationship existed between Cape and NAAC.
• Court of Appeal rejected all arguments - judgment could not be enforced against Cape.
As things stand...
• Section 16 CA 2006 – Company becomes a body corporate (legal person) from the date of
incorporation. From then it has its own existence and personality.
• A private limited company can be formed with 1 director and 1 shareholder.
• Company will continue to exist if the directors and shareholders change.
• Shareholders – Pay for their shares and are entitled to profits. They have no entitlement to the
companies property. They own the company but are not involved in the day-to-day running.
• Directors – Have day-to-day control of the company. Company is inanimate so must act
through human beings.
, Limited Liability – Justifaction and Issues
Justifications Issues
Encourages investment and businesses to take Creditors risk being unable to receive monies
risks. This generates money and benefits the due to them. They can’t go behind the
wider community. corporate structure.
Creditors will be aware. Private Limited Accounts are only filed once a year so might not
Companies must use LTD and Public must be up to date.
use PLC.
Creditors therefore have the opportunity to Small private companies’ accounts do not give
assess the financial viability of the company. much information.
They can check the publically filed documents.
