Introduction to the Company Flashcards
What are the two key features of a limited company?
Seperate Legal Personality and Limited Liability
What is Seperate Legal Personality?
This refers to a company existing as a seperate legal entity in its own right, distinct from it owners and managers
What is Limited Liability
The shareholder’s liability if the company is wound up is limited to the nominal value of their shares, meaning that the shareholder’s personal assets will not be at risk
What are the owners of a company called?
Shareholders in the context of a company, Members within the CA 2006
Who runs a company?
Director/Board of Directors
In which case esatblished the scope of the doctrine of seperate legal personality?
Salomon v A Salomon & Co Ltd [1897] AC 22 - estblished by the HoL
Can you provide a summary of what occured in the Salomon case?
Aron Salomon formed a company called A Salomon & Co Ltd. He loaned the company £10,000, in return he recieved a floating charge over the compants assets. This essentially gives Aron first dibs on grabbing his share covered by the floating charge from the company before others who dont have any special right. The company ended up running into financial problems and went into insolvency owing money to a third part creditor. THe liquidator claimed that the floating charge shouldn’t be honoured and that Mr Salomon should be personally liable for the company’s debts. However Mr Solamon argued that a one-man company was a separate legal entity to the shareholder so the company’s debts were not personal debts of the shareholder. The HoL held that Mr Saloman was no personally liable and the debts belonged to the company, the floating charge was valid which allowed mr Saloman to get paid ahead of the company’s unsecured creditors and the company’s acts were its ow acts and not Mr Solamons.
What was the significance of the Saloman case?
The HoL held that a one-man company was a legitimate creation as long as it was validly formed and complied with all legally required formalities.
This means that provided a company is legally incorporated, even if only one person is controlling it, its must be treated like any other independent person, and an individual using the company to manage risk and avoid liability for debts is perfectly acceptable.
What are the consequences of the principle of separate legal personality?
The company can own its own property, enter into contracts, borrow money, give security over its assets, liable for its own debts, sue and be sued in its own name, be taxed separately.
What is the phrase sued when separate legal personlity can be side stepped?
‘Piercing the corporate veil’
When can the corporate veil be pierced?
Only in limited circumstances where:
- The structure of the company is used to evade a legal liability that the owner of the company would have otherwise incurred (the ‘evasion principle’ AND
- There is no other legal method of achieving an equivalent result.
What is a guarentee?
This is another arrangement that allows for the separate legal personlity to be sidestepped.
It demands that shareholders personally guarentee contracts that the company enters into. These are often demanded by lender to a company, such as a bank. The guarentee will require, as a matter of contract, that the shareholder makes good any shortfall in the amount owed which the company cannot repay.
