Corporate Personality and Limited Liability Flashcards
Which statute first allowed incorporation without state approval?
Joint Stock Companies Act 1844
Which statute created limited liability?
Limited Liabilities Act 1855
What are the benefits of limited liability?
- Encourages investment;
- Encourages risk taking on part of management;
- Facilitates a fair public share market;
- Protects business assets from personal creditors (Hansmann and Kraakman);
- Risk premiums and board representation has improved for large creditors.
What are the disadvantages of limited liability?
- Risk is moved to creditors, not all of whom can mitigate their risk eg small businesses and individuals;
- Group structures allow companies to hide assets and put them beyond creditors.
The case of Salomon v A Salomon Co Ltd first appeared in the court of first instance and Court of Appeal as Broderip v Salomon. What was the claimant’s argument?
Mr. Broderip argued that A Salmon & Co Ltd was a sham and that he should be held personally liable for the £5k debenture Mr. Broderip was owed.
What did the Court of Appeal decide in Broderip v Salomon?
The Court of Appeal decided the company was a sham and Mr. Salomon had exploited the corporate form for his own personal business, overvaluing it and thereby giving himself security by way of debenture over the company’s assets, and using his family to make up the required number of shareholders to incorporate.
Why did the House of Lords reverse the decision of the Court of Appeal in Salomon v A Salomon & Co Ltd?
The House of Lords held that Mr. Salomon had obeyed the statute, incorporated his business correctly, paid off creditors and done what he could to make the business viable. Mr. Salomon could not be held to be an agent or trustee of the business as had been put forward at the High Court and Court of Appeal because incorporation granted separate legal personality.
What would the Court of Appeal have found that would have helped their argument if they had been able to inspect Hansard under Pepper v Hart?
They would have seen that Parliament had not intended the corporate form to be available to small businesses like Mr. Salomon’s.
Do subsidiaries have separate legal personality from their parents?
Yes (Gramaphone and Typewriter Co Ltd v Stanley and Lonrho v Shell).
Why was Mr. Macaura in Macaura v Northern Assurance Co unable to exercise his insurance over timber on his land after it burned down?
He had transferred the timber to his company for 100% of the shares but had insured the timber in his own name and had not insured his shares.
How was Mrs. Lee able to claim compensation in Lee v Lee’s Air Farming using separate legal personality?
Mr. Lee had set-up Lee’s Air Farming Co and was sole shareholder, director and employee. He died during a flight. A compensation scheme operated by the New Zealand Government allowed relief to widows for employees. The question for the court was whether Mr. Lee could be held to be an employee and the court held that it was possible to contract with yourself through separate legal personality.
Is it possible to attribute a ‘directing mind and will’ to a company?
Yes. In Lennard’s Carrying Co v Asiatic Petroleum a company ship set fire at sea due to defective boilers. The House of Lords held the company liable.
Is it possible to hold the company criminally liable?
Yes, mens rea can be attributed to a company through the state of mind of the managing director (R v ICR Holdings), but this will not apply if the employee is any less than the managing director ie branch manager (Tesco v Nattrass).
