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 separates
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
■ 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 separates
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
