For instance, in Re FG (Films) Ltd17 a British film company was held to have been an agent for an American company which had provided all the finance and facilities for the making of a film. The UK company also had no place of business, and almost all of its shares were owned by the American company. This is a very wide exception, as an agency relationship could really apply to any company where members control the company18. In the study of business organisations, we are not concerned with corporations sole; we are concerned with corporations aggregate. Corporations aggregate may (but need not) have more than one member at any given time.
Public companies limited by shares
- The company’s assets were sold by the liquidator to realise cash to pay both the secured and the unsecured creditors of the company.
- Fraud involves intentional deception that benefits individuals at the expense of creditors, shareholders, or other stakeholders.
- The liability of a shareholder to pay money into a company needs to be considered both when the company is trading, and when the company has ceased trading and is being wound up.
- In Salomon v. Salmon & Co.Ltd case, House of Lords held that once the company has been incorporated as an entirely separate legal person from Salmon himself, therefore, Salomon did not have liability to indemnify to creditors’ claims to this company.
This document summarizes key effects and concepts regarding the separate legal personality of incorporated companies. It discusses how incorporation creates a company as a legal entity distinct from its shareholders, with perpetual existence and the ability to own property, enter contracts, and sue/be sued. It outlines the Salomon v Salomon case, where the House of Lords recognized that a company formed by one individual remained a separate legal entity capable of distinct legal treatment, establishing the principle of separate legal personality. In South African corporate law, the principle of “piercing the corporate veil” remains an essential tool for ensuring accountability in business conduct.
Separate Legal Personality of the Company
In relation to a company limited by shares, whether a public or a private company, which is being wound up, s 74(2)(d) of the Insolvency Act 1986 is the statutory basis on which the liability of shareholders to contribute to the company to enable it to pay its debts and other liabilities is limited. If that amount has been paid to the company, a shareholder is under no further obligation to contribute. The power to make such calls on shareholders, to determine when and how much, is ordinarily given to the directors of the company who must exercise the power in accordance with their duties to the company. It follows inexorably from the separate identity of the company from its owners/shareholders and managers/directors that if a company incurs debts, those debts are the debts of the company, owed by the company to the lender/creditor. This means that not even the owners/shareholders of the company are liable to pay any sum owed by the company to the lender/creditor. Any legal action to recover the debt must be brought by the creditor naming the company as the defendant in the legal action.
- The case is important because it confirmed the ability of a sole trader to transfer his business into a registered company and thereby insulate himself from the liabilities of the business.
- During or prior to the incorporation process, it is also beneficial to invest in carefully considered and drafted foundational agreements such as the following; (1) the company’s constitution, (2) shareholder’s agreement, (3) joint venture agreement (if any), etc.
- The concept of separate legal personality results in several legal consequences for companies which affirm the position that the company and the directors and shareholders are distinguishable from one another.
- Once company has been incorporated or registered, it obtains a legal entity separate separate from the owners and the people running the company (i.e. directors).
- In order to deal with that problem, court established another principle called“ lifting the veil of incorporate’ where has been enunciate in Jones v. Lipman which was mentioned before in this assignment.
Common Law and Seperate Legal Personality
He disputed the validity of the debentures on the ground of fraud and on the same ground; he claimed rescission of the agreement for the transfer of the business, cancellation of the debentures and repayment of the balance of the purchase money by Mr. Salomon. In the alternative, he claimed payment of £20,000 on Mr. Salomon’s shares, alleging that nothing had been paid on them. This online application consists of a two-stage process; (1) Application for approval and reservation of a company name, (2) submission of incorporation application and documents. A total of $315 in registration fees would have to be paid (i.e. $15 – Name Approval Fee, $300 – Registration Fee). A company will survive regardless if management changes frequently or even if shareholders sell up. Provided it can comply with all regulations of the Companies Acts it will remain until such times where it is decided to wind up the business or if they face unfortunate administration.
Exceptions in General Law
He wished to run his business through a limited company which he achieved by registering a company and selling his business to that company. “I would not at this juncture accept that in every case where one has a group of companies one is entitled to pierce the veil, but in this case the two subsidiaries were both wholly owned; further, they had no separate business operations whatsoever”. So to succeed in a claim for damages against a director on the basis that the director breached a duty that caused the shareholder a loss, a shareholder must prove the shareholder had a special factual relationship with the director in terms of which this duty was owed to the shareholder. This is a type of equitable security which can only be granted by companies and others who are empowered under specific legislation. The essence of a floating charge is that it floats over the undertaking or class of assets until an event occurs which causes it to crystallise, whereupon it becomes a fixed equitable charge.
But in more recent times and as we have identified above, there are now grounds in which a third party can challenge this. Nevertheless, anyone wishing to enter into a specific contract with a company is strongly recommended to read, digest and understand that company’s Memorandum of Association so they don’t fall foul of the ultra vires rule. Implied agency arguments have been particularly relevant in cases related to holding companies and their subsidiaries. However, as seen in Hook v Day,33for example, courts are reluctant still to ‘pierce the corporate veil’ in holding that a subsidiary company was acting impliedly as an agent for the holding company.
The liquidator counter- claimed that the company was entitled to be reimbursed by Salomon 6 . Company was merely an agent of Salomon and as principal; he was liable for its debts 7 . Although the Act allows the remedy whenever it is justified, the courts must maintain the drastic extent of the remedy and the importance of upholding separate legal personality except in instances where policy considerations demand a piercing of the veil. The corporation sole is distinct in law from the individual who occupies the post at any point in time. The individual office-holder changes over time, but the corporation sole continues with no need to transfer any property or rights to the new incumbent. The individual’s acts in the capacity of the corporation are separate from the individual’s personal acts.
Critical Theories – Communitarian Theory, Feminist Critique and Islamic jurisprudence
Courts may lift the corporate veil where the corporate form is used to commit fraud. For instance, in Jones v Lipman20 the defendant contracted to sell land and later tried to get out of this by conveying the land to a company he had formed for this express purpose. The court held that his company was ‘cloak’ or ‘sham’ and lifted the corporate veil, ordering specific performance of the contract. For instance, s.213 Insolvency Act 1986 states that a court may ignore the corporate veil if, during winding up a company it appears that the company’s business has been carried on with intent to defraud its creditors, a court can force anyone who is knowingly a party to this business to contribute to the company’s debts. In Trustor AB v Smallbone and others (No3) 59 the managing director of Trustor had transferred money to Introcom, a company which he controlled, and one of the issues which arose was whether the corporate veil of Introcom could be pierced so as to treat receipt by Introcom as receipt by him.
This article provides an overview of the five points which should be considered when equipping remote employees.
Section 22 of the Companies Act prohibits companies from engaging in reckless trading or carrying on business with an intent to defraud creditors. For instance, if a company knowingly enters transactions that exceed its financial capabilities, the court may find that its directors acted recklessly, thereby justifying the piercing of the corporate veil. More recently, in Trustor AB v Smallbone (No 2)21 it was held that courts cannot lift the corporate veil merely because the company is involved in some wrongdoing. The corporate form itself must be used as a façade to conceal the true facts and the liability of responsible individuals22. The companies must also be set up to avoid an existing contractual obligation23.
Salomon v Salomon Precedent Summary
Following Salomon, creditors must seek recourse from the corporate entity, not its shareholders. This separation heightens commercial risk for creditors, prompting scrutiny of corporate governance practices. Consequently, Adams v Cape has narrowed the ways in which the veil may be lifted regarding groups of companies.
(c) Liability of shareholders for debts of company; a company’s liabilities are its own, not those of its shareholders. The biggest advantage of incorporating a company is this concept of “limited liability”. We have established how the effects of an ultra vires contract can render it unenforceable and companies should make certain they act within the object of their memorandum. In old law, it was assumed everyone would know the contents of the memorandum of association under constructive notice.
Recognising the limited liability framework is essential, especially in cities like New York, where businesses often consult a corporate lawyer to ensure compliance with corporate regulations and safeguard shareholder interests. Mr Saloman loaned the company £10,000 in return for which he received a floating charge over the company’s assets. The business ran consequences of incorporation separate legal personality into difficulties and ultimately went into insolvence owing money to third party creditors.