CORPORATE PERSONALITY Flashcards
Legal Personality
- distinct from its owners, shareholders, as well as directors, creditors and employees
- own its own property
- enters into its own contracts
- company sues and is sued on its own liabilities
Limited Liability
Shareholders not liable to pay debits
Creditors must claim against the company
If there are not sufficient funds, creditors cannot pursue their claims against the shareholder
Responsibility
Directors owe their duty to the company not shareholders
Shareholders rights against the company (not the director)
Third parties contract with the company (although they negotiate with the directors)
Perpetual existence
Saloman V Saloman [1897] AC 22
- Key Principle: This landmark case established the doctrine of separate legal personality, confirming that a company is a distinct legal entity separate from its shareholders.
- Case Background: Salomon incorporated his business as a limited company, transferring assets to the company in exchange for shares and debentures, making him the principal shareholder and creditor.
- Legal Dispute: When the company went into liquidation, unsecured creditors argued the company was merely Salomon’s agent, and he should be personally liable for its debts.
- House of Lords Decision: The court upheld that the company was a separate legal person, and Salomon was not personally liable for the company’s debts.
- Significance: The case firmly established the principle of limited liability, protecting shareholders from being held personally liable for the company’s financial obligations beyond their investment.
Insolvency
If the company becomes insolvent the shareholders are liable of losing their initial investment as subscribers
They are also liable for any shares they have unpaid
Piercing the corporate veil
Limited circumstances of going ‘behind the corporate veil’ and making the shareholders or members liable for the company’s debts
Prest V Petrodel Resources Ltd [2013] 2 Ac 415
- Asset Ownership: The husband owned and controlled companies holding properties worth over £50 million, including the matrimonial home.
- Wife’s Claim: The wife argued the properties were held by the companies on trust for the husband and sought their transfer as part of the divorce settlement.
- Legal Question: The case centered on whether the corporate veil could be pierced to treat the companies’ assets as the husband’s personal property.
- Supreme Court Decision: The court ruled that where other legal principles (e.g., trust, agency, or tortious liability) can establish liability without disregarding the company’s separate legal identity, they should be applied instead of piercing the corporate veil.
- Outcome: The Supreme Court determined the properties were held on trust for the husband and could be transferred to the wife, without breaching the principle of corporate separateness.
