Limited liability and Separate legal personality

Question 1

What is separate legal personality? (SLP)

Answer 1

[Percival v Wright]

• the company it’s own legal entity, separate from directors and shareholders.

Question 2

What are the effects of SLP?

Answer 2

• co is responsible for its own debts/liabilities
• can enter into contracts
• can sue/be sued [Foss v Harbottle]

Question 3

What is Limited Liability (LL)?

Answer 3

[Salomon v Salomon]

• SH are only liable for what they invest

Question 4

What are the advantages of SLP and LL?

Answer 4

• Double protection for themselves & shareholders
• SH wealth is protected from creditors of company shift in risk from SH to creditors
•Partitioning (company separate from SH)
- Ensures directors manage to co rather than SH
- More efficient to use directors than SH

Question 5

What case decided that one man companies were not an abuse of the system, and what what the HoL rationale?

Answer 5

Salomon v Salomon
HoL: if statute doesn’t say it is forbidden, then cannot impose restrictions.
Compiled w formalities= entitled to benefit
Creditors: knew it was ltd, choose to enter rs

Question 6

What was the case Donald, Dickens, Macklin v Costello about? [Personal v company personal, unjust enrichment]

Answer 6

Facts: wanted to make building contract w construction company
• made it clear company to company, obligation to pay builder confined to company persona
• however court made order to restitution due to unfair enrichment by being in receipt of building work
• if allowed “personal persona” would shatter contractual containment= alter consequences of insolvency, put builders in better position then uninsured creditors.

Question 7

Economic justifications for LL for SH? Critiques?

Answer 7

Limited liability

1. Decreases need to monitor
2. Reduces costs of monitoring other shareholders
3. Free transfers of shares= gives managers incentives to act efficiently (so they don’t get taken over) [checks within market other than in company]
4. Makes it possible for market prices to impound additional information about value of firms (would make who market system less efficient if need to take into acc everything)
5. More efficient diversification
6. Facilitates optimal investment decision
7. Encourages economic investments

critiques:

1. Shareholder wealth could discourage wealth investment?
2. Entrepreneur = short termism? (only SH benefit)