Student number; 21404643

Title of course; Company Law

Tutor; Femi Amao and Ahmad Gouri

Date of submission; 02 /01/2017

Words;3099
The concept of separate personality is the cornerstone of
corporate law.
Critically discuss with reference to the advantages and
disadvantages of separate personality

The concept of separate personality stems from the notion of incorporation

of a company. The fictional and personification of a company standing between the
natural character of a persons which is control and manages a company and third
parties or activities stands clear in front of the court. This analogy comes form the
touchstone case of Salomon v Salomon .The metaphysical separation between man
in his individual capacity and the capacity of the company has often created
contradictions. The decision in this case is often seen as two-edged sword.
Traditionally, it is worthwhile noting that the formation a company within the
United Kingdom and compliance with the required documents has not always been
a problem. Nowadays, companies are regarded as separate legal entities and
therefore have either limited liability or unlimited liability. Limited liability comes
as a result of separate personality. The privileges derived from separation and
limited liability were originally granted to cooperation to embark upon risky
transactions with out having to be bother about personal stake in the business.
Does the inflexible nature of the separate personality in the English jurisdiction
reflect the evolution of a modern society? An answer to this essay and the question
will necessitate an understanding of the obiter and dictum of Salomon v Salomon
and other keys cases, the impact of this on recent cases and lastly analyzing the
advantages and disadvantages of the doctrine itself and could lead to alternative
solutions.

A company that has complied with the requirements of incorporation as set

in the Companies Acts 2006 is regarded as a separate legal entity from its individual
members, regardless of the numbers of shares vested in a person, except a share
each as the companies act states, or one-man shareholder company it stands.
This doctrine therefore suggests that, a company should be treated separately
because of its new legal status existing independently from any existing persona of
the company. Arnold says “one of the essential and central notions which give our
industrial feudalism logical symmetry is the personification of great industrial
enterprise.” It follows that the rights and duties of the corporation are distinct from
directors or who ever is in control of the company. The concept of separate legal
entity largely evolved from the 19th century where it used to apply mostly to Joint
Stock Company. It is important to consider the evolution of this principle from the
Salomon’s case because it set the legal basis for the application of the separate
personality to corporate groups. Prior to this, the argument put forward in the
Salomon’s case was the question of whether a ‘one-man’ company was accepted
under the Companies Acts. In the line with the decision from Salomon, separate legal
personality doctrine gives capacity to a company to sue and to be sued, own and
dispose property, enter to contracts and may others. The facts in the Salomon case
are quite simple and going to be discussed in the subsequent paragraph.

            Salomon was a shoe manufacturer and leather merchant, he was a sole trader
for 30 year since he acted on his own. Until 1892, while his activities were
expanding and decided to sell his old business to company called “ Aron Salomon
and Company limited”, a company who himself formed. Under the Companies Acts
1862 at the time he required 7 shareholders to satisfy the current law and the
company to exist. He shared this amongst his wife, his 5 children and himself. Due to
inflation at the time, his business was worth 40,000. Nevertheless, rather than
taking cash for the sale of the business to the company, he decided to be paid in
debentures and 10,000 of which was assigned another party on which a floating
charge was attached. The later gave out these debentures in advance for the sum of
5000 pounds from Broderip. However the 10,000 pounds mortgaged initially was
cancelled and new shares were re-issued. Consequently, the family business fell in
arrears towards Broderip and later in debt. A liquidation order was made and he
sought to enforce his debentures granted to him during the transaction. The
company was equally indebted to unsecured creditors, the liquidator assigned was
trying to find Salomon liable for the debt of the company , and that Salomon
debentures couldn’t be enforced because the transaction was fraud.

               The dictum in this case received a lot of criticism. At first instance Vaughn
Williams J1 said the company was merely acting as an agent and at the court of
appeal, their lordships expressed their view that company was acting merely as a
façade. However, the decision was over turned at the House of Lords and explained
that the company was duly established as the statute stated and, there was neither
trustee nor fraud for Mr. Salomon to indemnify the creditors. Lord Magnaghten 2
gave the leading judgment;

"The company is at law a different person altogether from the subscribers to the
Memorandum and, although it may be that after incorporation the business is precisely
the same as it was before, and the same persons are managers, and the same hands
receive the profits, the company is not in law the agent of the subscribers or trustee for
them.”

Their lordships supported this view and expressed the burden relied on the
companies creditors to check on the number shares held by the company and that
failure could of this could amount to a charge of fraud on the part of Mr. Salomon. Lord

1
[1985]2 CH 323
2
[1897] AC 22 at 51
Halsbury LC expressed a similar analogy and pin pointed that, there was no need to
extended the requirement of the statue as he said “ The sole guide must be the statute
itself”. Even though the statute was silent as to the degree of interest of the
shareholders like in the Salomon case, becoming shareholder was for all purposes.
The decision is this case drew the line between those in control of the company and
the formation of the later. The decision was in this case was seen as unfair because in
this case a one-man company who controlled the majority of share was seen as
separate legal persona. The law lords concluded that even a company barely complied
with the act, it was possible for traders to avoid any serious risk through limited
liability by taking debentures instead of shares. This was criticized by a number of
scholars notably professor Kahn-Freund, as he qualified this as ‘calamitous’. The
application of the Salomon principle however has stood the test of time as has been in
recent cases like Lee v Lee's Air Farming [1961].

However, other contemporary commentators saw the effect of the

development in the Salomon’s case as not addressing properly the question of one-
man company. With growing numbers of small enterprises in mid 19th century, the
decision in Salomon was kind of ascertaining or legitimizing the one-man company
which had been left out by parliament. This is because it gave the courts the discretion
to interpret the situation in their own understanding; an important effect of this is that
it left the unsecured creditors in a more vulnerable position than creditors to the
partnership itself. The significance of the case is sanctioning one-man company
dealing with a limited liability, but if critically thought about. In a transaction whether
there are 100,000 people behind a company, or one, what matters to creditors is the
capital and not the form. The subsequent paragraphs deal with the different themes
derived as an effect of separate personality

As aforementioned limited liability comes form the separate personality, and

the most significant effect of corporate separate personality is that a company
becomes a new and independent entity from his member. Therefore means that, a
third party can only sue the company itself and not the members. However, there
exist instances after the Salomon’s case where the courts are ready to move from
this general principle and disregarding the separate personality of a company
commonly called ‘lifting the veil of incorporation’. Lifting the veil or piercing the
veil requires some pre-requisite to be triggered, which is either fraudulent, agency,
unreasonably, or dishonesty for it to be lifted. Increasingly theorist and researchers
have found the control of a company and ownership of companies in different
hands.
Under the principle of separate personality, corporations are separate from
its members, thereby protecting business owners’ assets from corporations’
liabilities, consequently preventing them from any personal lawsuit on their
conduct since the company itself is an entity. Since a company is a separate legal
entity, it is free to enter any contract with its members’ Farrar v Farrars Ltd.
However, the first problem accounted by those trying form a company for the
purpose of conducting a business in the UK is: until a company is validly registered
it cannot enter into a contract even if its creators wanted. The extent to which a
company can act is its legal capacity can be seen in two-folds either fictional or real.
Fictional because the company in its capacity may exercise contractual or
proprietary obligations, for an association which may have a corporation status
themselves, that is when a company enters a sale contract or deal it doesn’t not do it
for itself per se as natural person would, rather, in favor of the members controlling
it. The question here is not deny that a company cannot act as an agent for its
members, but sometimes the courts want to shift a away from its fictional
obligations and focus on the real contractual and proprietary obligation they
intended, rather than separate mind in control of the company as seen in Lee v Lee’s
Air Farming Ltd.
In Lee v Lee’s Air Farming, Lord Morris when on to follow the Salomon
principle by asserting that the company was a separate legal entity. This is because,
in this case his Lordship found that, the fact that a person held a majority of shares
in a company did not stop him from entering another contractual obligations from
serving the later, since the company was separate entity and not a sham. The fact
that in his own capacities as a shareholder he could control the event of the
company will not negate his contractual relationship with the company. Unlike in
Industrial Blackburn v Equity, where not wiling to consider a subsidiary company as
part of a parent company to determine the amount of profits held by the later. After
the courts have acknowledge the separate legal entity and independent nature of its
members and rights from it, the courts have tend to mitigate the rigor of this rule by
balance the rights of a company being registered with limited liability and that of
creditors. The starting point is the limited liability Act.
A main advantage of separate legal entity is that of perpetual existence. A
company may exist forever independent of the death or if a member leaves since it
is a separate legal. However, it could depend on the form of the company. If a
company is a partnership, most of the time it comes to end if a partner dies. It could
also depend on the company constitution to wind it up if necessary or the deceased
is replaced. The effect of this is to avoid the termination of a company, in case a
shareholder wants to leave. There is a possibility of transfer of shares like any other
property or the sale of it without imposing any burden on the company. In Re Noel
Tedman Holding Pty Ltd, where it was stated that even if a company losses all its
shareholders, it is still going to exist. In this case both shareholders of the company
had died, and the court gave discretion to the deceased representative to make the
will effect as to the future of the company. However deciding to end a corporation
requires some procedures to be followed. Perpetual existence also provides security
to employees for the continuity of their working contracts since the company will
continue to exist even after a change or death in memberships.
Furthermore, another important effect of the separate legal entity is the
ability for the company to own and dispose property. S. 19 CA gives power to a
company to hold land. A company property is totally different from shareholders
property. This was established in Gramophone & Typewriter Co Ltd v Stanley, where
the importance of notion of ownership of assets was highlighted, especially were
debts of the company were not paid. As a result, they have neither proprietary
rights nor interest in it however this secures shareholders investment. Once
property has been transferred to a company and a shareholder was almost the
absolute owner, it does not belong to him anymore. This analogy though is
detrimental to someone who owned company property before incorporation and
later does not pass it down to the company. As illustrated in Macaura v Northern
Assurance Co wherein Mr Macaura had insured timber under his own name and this
was then destroyed by a fire. The insurance company refused to pay out on Mr
Macaura's claim, stating that he had no insurable interest in the timber as it was
owned by the company. In the same way, a parent company does not have an
insurable interest in its subsidiary companies, even where they are wholly owned
by it.

Separate personality and limited liability have some benefits and are
inextricably linked. For this reason, it has been argued this relation gave rise to the
corporate veil or curtain which is a fiction created by law to hold accountable those
who are behind company for improper acts. However, the main aim of the corporate
veil is to separate the controllers of the company from the company itself. In this
way, shareholders of a company cannot be personally brought in front of the courts
for company obligations like debts. Even though the lifting of the veil of
incorporation js a fundamental concept of company law strict and substantial
application of this doctrine could have negative effects as already explained in
Macaura. The courts have recognized the rigidity of this doctrine and have
acknowledged certain circumstances where the veil can actually be lifted .

In Re Polly Peck international plc,3 despite the subsidiary of the a company

having negligible capital, no separate management and the most minimal role in
certain bond issues the court did not accept that it was an agent of its
parent company . The strictness of the rule in Salomon was relaxed according to
Dignam and Lawry between 1966-1989 with the expansion of grounds for lifting the
veil, allowing the veil to be lifted where justice required so, where there was a
relationship of implied agency Atkinson identified a variety of factors relevant to
determining whether or not an agency relationship exists, who was really carrying
on the business who received the profits, who was actually conducting the business ,
who appointed those persons, who was the head and brains of the venture and who
was in effective and constant control of the business. The general position of the
courts on matters of piercing the veil of incorporation remains very narrow and
only when the company concerned is used as a mere façade.

Again the veil is only pierced in circumstances where the wrongdoer hides
being the company to carry improper acts. In such situation the courts treat the
companies like the company like it has always existed in order to protect the
shareholders. The touchstone of the current position of the law in found in Jones v
Lipman ,in essence the courts adopted the idea that the corporate structure must be
misused by persons controlling the company to escape liabilities. In Lipman, an
attempt to avoid an order for specific performance by court , the defendant 4

3
[1908]
4
[1962] 1 WLR 832
transferred his shares to a ‘façade’ company he had set up, where him and his
solicitor had the sole control. The courts therefore concluded by saying that an
attempt to escape legal obligations by an individual through corporate structure by
transferring shares to another company constituted a sham.

Conversely as opposed these advantages there are number of negatives

impacts. Registering a company allows you to have as many shareholders as you
want, how however these shareholders fall apart there are a number limitations on
the shareholders for bringing an action on behalf of the company. The case of Foss v
Harbottle illustrative of this problem, the shareholders of a company brought an
actions against their directors for fraudulent and misapplication company property.
Their Lordships said that , the injury incurred by the plaintiff was not directly to
them but to the company itself.

By and large, in order properly to understand how the separate legal entity and
limited liability concepts developed, it was necessary first to trace the history of the
joint stock company and the law and practice relating to it as this revealed the early
stages of the developing nature of the relationship between the company and its
shareholders and so provided the basis of the development of the separate legal
entity and limited liability concepts in the nineteenth century. The introduction of
limited liability was not the result of a simple linear, functionalist explanation that
legal change plays an instrumentalist role in bringing about economic development.
According to such an explanation, limited liability was introduced to meet the needs
of business as it was advantageous to raise capital and for investors to find safer
avenues of investment and as a result, encouraged the growth of more efficient,
large scale enterprises

Bibliography

 Aguilera, R and Williams, C, “Law and Finance”: Inaccurate, Incomplete and

Important‘ [2009] Brigham Young University Law Review 1413.
 Anderson, G and Tollison, R, ̳Adam Smith‘s ‘Analysis of Joint Stock
Companies‘ (1982) 90 Journal of Political Economy 1237.
 Macaura V Northern Assurance Co Ltd [1925] AC 619
 Case Salomon v salomon [1897] 5 AC 231 (HL)
 Case Lee v Lee farming [1961] AC 12
 Case Jones v Lipman [1962] 1 WLR 832
th
 Davies, P, Gower’s Principles of Modern Company Law 6 edition, Sweet &
Maxwell 1997.
th
 Farrar, J and Hannigan, B, Farrar’s Company Law 4 Edition Butterworths
1998.
 Harry G Henn and John R Alexander, Laws of Corporations and other Business
Enterprises (3rd ed, West Pub. Co., St Paul (Minn.), 1983), p 145.
 Otto Kahn-Freund, "Some Reflections on Company Law Reform" (1944) 7 The
Modern Law Review 54. Accessed 02/01/17
 D Bonham and D Soberman, "The Nature of Corporate Personality", in JS
Ziegel (ed), Studies in Canadian Company Law (Butterworths, Toronto,
1967), 5.
 R Posner, Economic Analysis of Law (2nd ed, Little, Brown & Co, Boston,
1977), p 302.

 Thompson, R, ̳’Piercing the Corporate Veil: An Empirical Study‘ (1991) 76

Cornell Law Review 1036.

Statues

 Company act 2006