Corporate or legal personality Flashcards
What is separate legal personality?
SLP is the ability of a juristic person to have legal rights and duties just as if they were an entirely separate natural person of their own. It is an overarching body that is legally distinct and separate from the individual legal persons that comprise it.
What are the five elements of separate legal personality?
a) limited liability
b) perpetual succession
c) property, assets, profit, debts and liabilities of the company belong to the company
d) can sue or be sued in its own name
e) may contract with its shareholders
Provide a case summary of Salomon v Salomon
Salomon transferred his business of boot making, initially run as a sole proprietorship, to a company (Salomon Ltd.), incorporated with members comprising of himself and his family. Later, when the company’s business failed and it went into liquidation, Salomon’s right of recovery against the debentures stood aprior to the claims of unsecured creditors, who would, thus, have recovered nothing from the liquidation proceeds.
To avoid such alleged unjust exclusion, the liquidator, on behalf of the unsecured creditors, alleged that the company was sham, was essentially an agent of Salomon, and therefore, Salomon being the principal, was personally liable for its debt.
The House of Lords unanimously held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”.
Elaborate more on a) limited liability
Creditors cannot claim satisfaction of their debts from shareholders of the company. This means that they enjoy limited liability. The company, on the other hand, is fully liable for its debts. Such a practice allows companies to take greater economic risks, which might help them generate substantial wealth and employment.
Elaborate more on b) perpetual succession
Notwithstanding the changes to a company’s membership, through a transfer of shares, by death or any other cause, the company retains its legal identity and continues to survive.
Elaborate more on c) property, assets, profits, debts and liabilities of the company belong to the company
They do not belong to the shareholders [Macaura]. Only once the company is liquidated do the shareholders have a right to share in a division of the company’s assets. However, shareholders have an interest in the dividends paid by the company after its debts have been settled and therefore, they have an interest in the financial wellbeing of the company. Shareholders cannot be held liable for the debts of a company.
Elaborate more on d) can sue or be sued in its own name
A shareholder does not have a direct right of action for a loss. The company itself must institute the action.
Elaborate more on e) may contract with its shareholders
A company may employ one of its shareholders as an employee under a contract of service [Lee v Lee’s Air Farming].
