Corporate Personality

Question 1

Corporate Personality

Answer 1

Upon incorporation, the company becomes a person in its own right and can do many things that a natural person can do. Corporate personality was available to unregistered companies, but with the passing of the Joint Stock Companies Act 1844 and the ability to incorporate a company by registration, corporate personality took on a new found importance. However, despite this, it was over 50 years later, in the following landmark case, that the courts finally appreciated the true significance of corporate personality.

Question 2

Salomon v A Salomon & Co Ltd [1897] AC 22 (HL)

Answer 2

FACTS: Salomon was a sole trader engaged in the business of bootmaking. He created a new company and sold the bootmaking business to this new company, in return for which Salomon received shares and £10,000 worth of debentures, secured by a floating charge. Salomon held 20,001 shares and six members of his family held one share each (the Companies Act 1862 required companies to have a minimum of seven members), although they took no part in the business. The business soon failed and the company entered liquidation. Salomon used the floating charge to recover the £10,000 owed to him, but this meant that there were no remaining assets to pay the company’s other creditors. The liquidator argued that Salomon should be personally liable for the company’s debts, as the company was his agent or trustee.
HELD: Salomon was not personally liable for the company’s debts. The company was not an agent or trustee for Salomon - it was a separate entity, with which the creditors had contracted. Accordingly, its debts were not Salomon’s debts and, as his debts outranked the debts of the other creditors, he was entitled to the money owed to him.

Question 3

Extra info - Salomon

Answer 3

Many incorrectly believe that Salomon created the concept of corporate personality, but this is not the case. Salomon is regarded by many as the most important case in company law for three reasons:

1. it recognised that a company could legitimately be set up to shield its members and directors from liability.
2. it implicitly recognised the validity of the ‘one-man company’ (i.e. a company run by one person, with a number of dormant nominee members) nearly a century before single person companies could not formally be created, and
3. the fact that a person holds shares (even, all the shares) is not enough to create a relationship of agency or trusteeship.

Question 4

Salomon contd.

Answer 4

There is no doubt that Salomon is the cornerstone upon which UK company law is based. However, the ability to set up a company to shield oneself from liability is clearly open to abuse. Accordingly, both parliament and the courts have the ability to ignore a company’s corporate personality and impose liability upon those behind the company’s corporate personality. This is known as ‘piercing’ or ‘lifting’ the ‘veil’ - referring to the ‘corporate veil’ that hides the company’s members and directors from liability,

Question 5

Corporate personality

REVISION TIP!

Answer 5

Corporate personality and piercing the veil are popular exam topics. Essay questions typically focus on Salomon or the validity and clarity of those instances when the courts will pierce the corporate veil (an area which has undergone substantial change recently). Problem questions tend to require students to determine if a company’s corporate personality will be upheld or ignored.