Corporate Personality
Lecture
Today’s outline
1) Effect of incorporation
2) Perpetual existence
3) Separate legal personality
4) Limited liability
5) Explain what is meant by separate legal personality
6) Illustrate key effects of corporate legal personality in relation to liability
Separate legal personality
What is it to incorporate
7) Most companies are formed under CA by process of application and registration at CH
8) If registrar of companies (CEO OF CH) accepts an application to incorporate, a
certification of incorporation is issued which states both the fact that a coy has been
incorporated at the date of that incorporation
a) Under CA s.15, the certificate is conclusive evidence of valid incorporation
9) CA s.16(3) provides that from date of registration, if the coy is a pte coy, it becomes
“capable of exercising all the functions of an incorporated coy”
a) This ensures they coy must be recognised for legal purposes as having the
capacity to trade
Legal effect of incorporation: perpetual existence
10) Companies are perpetually existent
11) Coy exists from date of incorporation, whether solvent or insolvent, until it is deregistered
12) Although 20-30% of coys fail in its 1st year, those that are viable have the ability to
continue in perpetuity even though…
a) Shareholders, management, employees, nature of the activity undertaken
changes
Legal effect of incorporation: separate legal personality
13) The registered coy has its own legal personality
, a) Not dependent on other legal persons to survive
14) Fundamental attribute of coy law
Separate legal personality :Theory
15) Company law’s theory has struggled with the question of separate legal personality. Why
does it exist?
16) Theory 1: contractual theory
a) Concentrated on the relationships between coy, view sep legal personality as a
nexus of ctts over which sep leg personality lies
17) Theory 2: real entity theory
a) The real and social existence of a group makes it a legal person rather than the
state
18) Theory 3: organic theory
a) Supports theory 2, in that it looks at the form, rather than the contracts that make
up the coy.
19) Entity shielding as a concept.
a) Hansmann and Kraakman conceived of the coy as allowing separation of assets
into pools available to different people. The law provides a shield protecting the
entity’s assets against claims by shareholders’ creditors and non-coy creditors
Separate legal personality Salomon v Salomon
20) Salomon & Co had gone into some financial difficulty. Such that it was unable to pay
both salomon (who was himself a creditor) and other unsecured trade creditors
21) The liquidator alleged that salomon was operating a defacto 1 person coy, & that he
structured coy finances so that he was not only maj shareholder but also secured
creditor of coy (becuase he had a secured debenture against himself)
22) Question: whether the court would
a) Enforce the financing arrangements and allow Salomon to be paid BEFORE the
unsecured trade creditors OR
b) Make Salomon contribute personally to payment of debts to external parties
23) In part, the answer depended on whether the court would recognise Salomon as a
separate legal entity, and competent to deal with Mr. Salomon
a) The liquidator argued that the whole arrangement was a sham and abuse of the
privilege of incorporation
24) Case also demonstrates the importance of debt vs equity. Debt (as a debenture holder)
allowed Mr Salomon to rank highly when his coy went insolvent. Its almost like he hedge
his risk. As an equity contributor, he would likely not gotten anything back
25) Lord Macnaghten: “the company is at law a different person altogether from the
subscribers to the memorandum…”
, 26) The coy was
a) A separate legal person
b) Competent to deal with others including its controlling shareholder
c) Not to be treated as the mere agent of its controlling shareholder
d) Validly treated even if there was only 1 real shareholder
27) Salomon showed that courts are unwilling to pierce the veil
Consequences of incorporation
28)
Before incorporation After incorporation
Mr Salomon personally liable for the debts Not personally liable for debts of Salomon
of the leather business & Co
As a secured creditor, has first rights to
assets of business if coy fails before
unsecured creditors
Separate legal personality: the implications
29) Gramophone and Typewriter v Stanley
a) English coy owned all shares of a german coy
b) Was the business of german coy belonging to shareholders of english coy?
c) Insufficient to create agency relationship. German coy not agent of english coy.
So separate legal personality even in parent-subs relationship
d) Even if a person owns most of the shares, without more to prove that they are
one and the same or an agent, wont be same lgl personality
30) The law does not concern itself with who has ultimate control of the coy. The concern is
with who has immediate, lawful control (the directors) and with the acts of the company
that they arrange.
31) Recognised the possibility of an exception in Gramophone
a) A sole shareholder may cause such an arrangement to be entered into between
himself and the coy as will suffice to constitute the coy his agent for the purposes
of carrying on the business, and thereupon the business will become, for all
taxing purposes, his business…
i) This means that the fact that shares owned by 1 person does not mean
its one and the same
Macaura v Northern assurance
32) No shareholder has any right to the legal property of the coy
, 33) “His relation was to the coy not its goods, and after the fire he was directly prejudiced by
the paucity of the coy’s assets, not by the fire.
Lee v Lee’s air farming
34) Facts
a) Shareholders
i) Mr lee
ii) Lawyer
b) Director
i) Mr lee
c) Employees
i) Mr lee
ii) Tractor driver
35) Mrs lee was claiming to workers compensation commission, Lee’s air farming had
provided workers comp insurance to workers compensation commission
a) Per lord morris
i) There was no suggestion that the coy was a mere sham
ii) Coy had capacity to do things of legal effect including making a ctt
iii) A person may have dual roles in a coy “the mere fact that someone is a
director of a coy is no impediment to his entering into a ctt to serve the
coy”
(1) Employee and also a director. Can give himself orders. Thence,
falls under definition of employee
iv) Coy with lee as director made a decision to hire a pilot. Lee acted as
agent of the coy in engaging himself as employee pilot
v) There was a valid ctt between 1 entity (the coy) and another Lee. Lee was
an employee. Lee’s widow was thus able to get compensation
36) The entity that Lee created has perpetual succession: its directors and members might
change over time.
a) Per L Morris: The deceased might have made a firm ctt to serve the coy for a
fixed period of years. If within such period he had retired from the office of
governing director and other directors had been appointed his contract would not
have been affected
37) Indeed, many in small business will start up coy and then sell it, while remaining an
employee of the coy to provide continued guidance and inspiration
38) CA s/7 allows registration of pte coy with single shareholder who is also the single
director
39) What we see in these cases is the separate legal personality principle being fleshed out
by court. Concept of coy as separate from its members
40) Revenue and Customs Commissioners v Holland; in re Paycheck Services
Lecture
Today’s outline
1) Effect of incorporation
2) Perpetual existence
3) Separate legal personality
4) Limited liability
5) Explain what is meant by separate legal personality
6) Illustrate key effects of corporate legal personality in relation to liability
Separate legal personality
What is it to incorporate
7) Most companies are formed under CA by process of application and registration at CH
8) If registrar of companies (CEO OF CH) accepts an application to incorporate, a
certification of incorporation is issued which states both the fact that a coy has been
incorporated at the date of that incorporation
a) Under CA s.15, the certificate is conclusive evidence of valid incorporation
9) CA s.16(3) provides that from date of registration, if the coy is a pte coy, it becomes
“capable of exercising all the functions of an incorporated coy”
a) This ensures they coy must be recognised for legal purposes as having the
capacity to trade
Legal effect of incorporation: perpetual existence
10) Companies are perpetually existent
11) Coy exists from date of incorporation, whether solvent or insolvent, until it is deregistered
12) Although 20-30% of coys fail in its 1st year, those that are viable have the ability to
continue in perpetuity even though…
a) Shareholders, management, employees, nature of the activity undertaken
changes
Legal effect of incorporation: separate legal personality
13) The registered coy has its own legal personality
, a) Not dependent on other legal persons to survive
14) Fundamental attribute of coy law
Separate legal personality :Theory
15) Company law’s theory has struggled with the question of separate legal personality. Why
does it exist?
16) Theory 1: contractual theory
a) Concentrated on the relationships between coy, view sep legal personality as a
nexus of ctts over which sep leg personality lies
17) Theory 2: real entity theory
a) The real and social existence of a group makes it a legal person rather than the
state
18) Theory 3: organic theory
a) Supports theory 2, in that it looks at the form, rather than the contracts that make
up the coy.
19) Entity shielding as a concept.
a) Hansmann and Kraakman conceived of the coy as allowing separation of assets
into pools available to different people. The law provides a shield protecting the
entity’s assets against claims by shareholders’ creditors and non-coy creditors
Separate legal personality Salomon v Salomon
20) Salomon & Co had gone into some financial difficulty. Such that it was unable to pay
both salomon (who was himself a creditor) and other unsecured trade creditors
21) The liquidator alleged that salomon was operating a defacto 1 person coy, & that he
structured coy finances so that he was not only maj shareholder but also secured
creditor of coy (becuase he had a secured debenture against himself)
22) Question: whether the court would
a) Enforce the financing arrangements and allow Salomon to be paid BEFORE the
unsecured trade creditors OR
b) Make Salomon contribute personally to payment of debts to external parties
23) In part, the answer depended on whether the court would recognise Salomon as a
separate legal entity, and competent to deal with Mr. Salomon
a) The liquidator argued that the whole arrangement was a sham and abuse of the
privilege of incorporation
24) Case also demonstrates the importance of debt vs equity. Debt (as a debenture holder)
allowed Mr Salomon to rank highly when his coy went insolvent. Its almost like he hedge
his risk. As an equity contributor, he would likely not gotten anything back
25) Lord Macnaghten: “the company is at law a different person altogether from the
subscribers to the memorandum…”
, 26) The coy was
a) A separate legal person
b) Competent to deal with others including its controlling shareholder
c) Not to be treated as the mere agent of its controlling shareholder
d) Validly treated even if there was only 1 real shareholder
27) Salomon showed that courts are unwilling to pierce the veil
Consequences of incorporation
28)
Before incorporation After incorporation
Mr Salomon personally liable for the debts Not personally liable for debts of Salomon
of the leather business & Co
As a secured creditor, has first rights to
assets of business if coy fails before
unsecured creditors
Separate legal personality: the implications
29) Gramophone and Typewriter v Stanley
a) English coy owned all shares of a german coy
b) Was the business of german coy belonging to shareholders of english coy?
c) Insufficient to create agency relationship. German coy not agent of english coy.
So separate legal personality even in parent-subs relationship
d) Even if a person owns most of the shares, without more to prove that they are
one and the same or an agent, wont be same lgl personality
30) The law does not concern itself with who has ultimate control of the coy. The concern is
with who has immediate, lawful control (the directors) and with the acts of the company
that they arrange.
31) Recognised the possibility of an exception in Gramophone
a) A sole shareholder may cause such an arrangement to be entered into between
himself and the coy as will suffice to constitute the coy his agent for the purposes
of carrying on the business, and thereupon the business will become, for all
taxing purposes, his business…
i) This means that the fact that shares owned by 1 person does not mean
its one and the same
Macaura v Northern assurance
32) No shareholder has any right to the legal property of the coy
, 33) “His relation was to the coy not its goods, and after the fire he was directly prejudiced by
the paucity of the coy’s assets, not by the fire.
Lee v Lee’s air farming
34) Facts
a) Shareholders
i) Mr lee
ii) Lawyer
b) Director
i) Mr lee
c) Employees
i) Mr lee
ii) Tractor driver
35) Mrs lee was claiming to workers compensation commission, Lee’s air farming had
provided workers comp insurance to workers compensation commission
a) Per lord morris
i) There was no suggestion that the coy was a mere sham
ii) Coy had capacity to do things of legal effect including making a ctt
iii) A person may have dual roles in a coy “the mere fact that someone is a
director of a coy is no impediment to his entering into a ctt to serve the
coy”
(1) Employee and also a director. Can give himself orders. Thence,
falls under definition of employee
iv) Coy with lee as director made a decision to hire a pilot. Lee acted as
agent of the coy in engaging himself as employee pilot
v) There was a valid ctt between 1 entity (the coy) and another Lee. Lee was
an employee. Lee’s widow was thus able to get compensation
36) The entity that Lee created has perpetual succession: its directors and members might
change over time.
a) Per L Morris: The deceased might have made a firm ctt to serve the coy for a
fixed period of years. If within such period he had retired from the office of
governing director and other directors had been appointed his contract would not
have been affected
37) Indeed, many in small business will start up coy and then sell it, while remaining an
employee of the coy to provide continued guidance and inspiration
38) CA s/7 allows registration of pte coy with single shareholder who is also the single
director
39) What we see in these cases is the separate legal personality principle being fleshed out
by court. Concept of coy as separate from its members
40) Revenue and Customs Commissioners v Holland; in re Paycheck Services
