Lecture 2 - Consequences of Incorporation

Question 1

What are the types of companies and explain?

Answer 1

Private Limited Companies (Ltd): Shares cannot be offered to the public and are generally smaller businesses
A private company: is any registered company (limited or unlimited) that is not stated to be a public limited company

Public Limited Companies (PLC): These companies can offer shares to the public and are often larger entities with stricter regulatory requirements, including a minimum share capital of £50,000

Question 2

What is the Legal personality of companies?

Answer 2

Corporate personality is a common law principle that grants a company a separate legal entity from the members who comprise it. The company itself is liable without limit for its debts

it refers to the concept that a company, once incorporated, is considered a separate legal entity distinct from its shareholders, directors, and employees. This principle has far-reaching implications for the rights, responsibilities, and liabilities of both the company itself and the individuals involved in it

Question 3

Salomon v A Salomon & Co Ltd

Answer 3

Mr Salomon owned and operated a successful boot-making business. He decided to incorporate his business as a limited company, A Salomon & Co Ltd, selling it to the company for a substantial sum.

To satisfy the company law requirements, Salomon’s family members each held a nominal share in the business, but he retained the majority of shares and controlled the company as its main shareholder and a secured creditor.

Issue: After a downturn in business, A Salomon & Co Ltd went into liquidation, with liabilities exceeding its assets. The company’s unsecured creditors argued that the company was merely an “agent” or “alias” for Salomon and that he should be personally liable for its debts.

Held: The House of Lords ruled in favor of Mr. Salomon, holding that once a company is legally incorporated, it is an independent entity separate from its shareholders. Thus, Salomon was not personally liable for the company’s debts, as he had acted within the framework of company law

Question 4

What are the consequences of Salomon?

Answer 4

• The company itself is liable without limit for its own debts
• Limited liability is of benefit to its members
• Limited liability means creditors of a limited company cannot demand payment of the company’s debts from members of the company
• The only liability members have is to repay any amount unpaid on the nominal value of the shares that they hold
• The company may enter into agreements and contracts in its own name and sue and be sued in matters of contract law, criminal law and tort.
• Companies have perpetual existence.
• All assets transferred to the company become property of the company. Members don’t have a direct claim on the assets therefore a company may issue fixed and floating charges over its assets

Question 5

What is the corporate veil?

Answer 5

The separation between a company and its members is sometimes called the “corporate veil.” Generally, courts respect this separation; however, in certain circumstances, they may “pierce the corporate veil” to hold the individuals behind the company personally liable. This typically occurs in cases of fraud, improper conduct, or when the company is used as a mere facade to evade legal obligations.

Question 6

What is the veil of incorporation?

Answer 6

it’s a legal concept that describes the separation between a company and its shareholders, directors, and other stakeholders. This “veil” symbolizes the company’s status as a separate legal entity, meaning that the company has its own legal personality distinct from the people who own or manage it

Question 7

When can the corporate veil be pierced?

Answer 7

courts may sometimes “pierce” or “lift” the veil to hold shareholders or directors personally liable. This is generally an exception and occurs only in specific circumstances, such as:
- Fraud or Improper Conduct: If a company is used to perpetrate fraud, evade legal obligations, or carry out dishonest activities, courts may pierce the veil.
Example Case: In Jones v Lipman (1962), a man tried to avoid transferring property by selling it to a company he controlled. The court ruled that the company was a mere facade, and he could not avoid his obligations
- Avoidance of Legal Duty: courts may pierce the veil if a company is formed or used solely to circumvent a legal duty or contractual obligation