Company Law. Significance of corporate personality and the meaning of 'lifting the veil of incorporation'

Essay , 2012 , 11 Pages , Grade: A

Law - Miscellaneous

This is a critical assessment of the meaning and significance of the corporate personality doctrine and explains how it is applied in practice. It also contains an explanation of what is meant by "lifting the veil of incorporation" and critically assesses in which types of situation it may be applied.

(i) A company, upon incorporation, becomes a body corporate under s.16(2) of the Companies Act 2006, with which comes its own separate legal personality^[1] . Salomon v Salomon^[2] identified that a company is not only an association of its members, but also a person separate from its members which is extremely significant as it carries many consequences.

Salomon is the leading case regarding separate personality, stating that once a company is legally incorporated it becomes a legal person with its own rights and liabilities separate from those of its members. One argument against Mr Salomon was that he fraudulently “incorporated the company contrary to the true and intent meaning” of the Companies Act, hence he should be liable for all its debts. However the House of Lords rejected this, reaffirming that the policies of the Act are to enable people to incorporate companies to avoid incurring further personal liability^[3] . Lord Herschell rejected another proposed argument concerning agency, holding that a company is not an agent of its members, thus shareholders cannot be liable to indemnify the company’s debts^[4] . Lord Macnaghten also noted that even if a business is the same after incorporation, ‘the same persons are managers, and the same hands receive the profits’^[5] , the company is not an agent of the subscribers, regardless if it issued the bulk of its capital to one person^[6] .

Individuals are permitted to incorporate companies to separate their business and personal affairs^[7] , thereby avoiding further personal liability as mentioned in Salomon. This advantageous limited liability is consequential of members being separate persons from the company. Members’ liability is limited to their fully paid share amount^[8] or the fixed amount payable by guarantee^[9] . The company cannot insist on further contribution nor can the members be liable to cover debts which the company incurred as a separate person. Additionally, the debts were not incurred on behalf of the members since Salomon rendered that no agency relationship exists between them.

Salomon also distinguished that a company’s business is its own as a separate person. A company is hereby entitled to sue third parties, and even its own members as seen in Metropolitan Saloon Omnibus Co Ltd v Hawkins^[10] . Moreover, members cannot sue on behalf of the company since the legal rights belong to the company as a separate person^[11] .

The company as a person has rights and liabilities sometimes claiming human rights^[12] , but the artificial personality does not go so far as to give them human traits, for instance it cannot claim compensation for injury to feelings, since companies do not have feelings as recognised in Collins Stewart Ltd v Financial Times^[13] .

Another consequence of this doctrine is that a company’s property is its own, hence neither members nor creditors have any legal or equitable interest in the company’s assets as stated in Macaura v Northern Assurance^[14] . Regardless if members have a profitable interest in the assets, the separate personality principle applies even to their detriment, enforcing that the company’s assets do not belong to its owners. Farrar v Farrars Ltd^[15] reaffirms this principle, illustrating that a sale by a member to a company is not a sale to himself, since those assets now become company property in which the member has no legal interest.

A company can enter into contracts and transactions, even with its members, as a result of separate personality, whether it is a contract of sale (evident in Farrar) or contract of employment demonstrated in Lee v Lee’s Air Farming^[16] . Lee’s ability to function in dual capacities was consequential of the Salomon decision. Furthermore, companies have perpetual existence even after the death of all members (evident in Re Noel Tedman Holdings^[17] ) emphasising the principle of separate personality. Thus ownership change and share trading will not affect its continuous existence, unlike partnerships.

[...]

---

^[1] Mayson French and Ryan (2010) Page 127

^[2] and Co Ltd [1897] AC 22

^[3] First stated in Re Baglan Hall Colliery Co (1870) LR 5 Ch App 346 (p356) but brought up in Salomon by Lord Macnaghten (p52)

^[4] See note 2

^[5] See note 2

^[6] See note 2

^[7] Mayson, French and Ryan (2010) Page 127

^[8] Insolvency Act 1986, s 74(2)(d)

^[9] Insolvency Act 1986, s 74(3)

^[10] [1859] 4 Hurl & N 87

^[11] Mayson, French and Ryan (2010) Page 126

^[12] Mayson, French and Ryan (2010) Page 122

^[13] Ltd [2005] EWHC 262 (QB)

^[14] Co Ltd [1925] AC 619

^[15] [1888] 40 ChD 395

^[16] Ltd [1961] AC 12

^[17] Pty Ltd [1967] Qd R651

• College: University of Westminster
• Course: BSc Accounting and Business Management
• Grade: A
• Author: Louise Franklin (Author)
• Publication Year: 2012
• Pages: 11
• Catalog Number: V202061
• ISBN (eBook): 9783656295532
• ISBN (Book): 9783656296119
• Language: English
• Tags: company, significance