separate legal personality Flashcards
facts of salomon and salomon
- Mr Aron Salomon was a sole trader who incorporated his business under the Companies Act 1862, under which the members of the company were him, Mrs S and 5 of their children (as 7 members were required for registration)
- He sold his business to his company by entering into a contract of asset sale of £38K with Salomon Ltd, and in consideration Salomon Ltd gave Salomon fully paid-up shares and £10,000 worth of debentures which he then assigned to the Broderip
- Salomon Ltd became insolvent, defaulted on the loan interest to Broderip, and thus could not meet the full claim of Broderip or the other unsecured creditors. Broderip commenced an action.
- The liquidator of Salomon Ltd argued that Mr Salomon was liable for the debts of the company. It was said that the whole transaction was a fraud on the company creditors which Salomon should not be allowed to benefit. The company was argued to be Salomon’s mere agent, not a company and therefore Salomon has to indemnify the company’s loss with respect to the debts.
outcome in broderip v salomon
Vaughan Williams J: ‘the company was a mere agent of Salomon’s and as a principal, Salomon was therefore liable to indemnify the agent company for its debts’
salomon v salomon - CA appeal
- salomon appealed on the basis that a shareholder is entitled to the majority, and that the Act did not require materiality of all 7 shareholders and to read materiality into the Act would cause uncertainty
- d rebutted that it was a sham
- CA held: S’s appeal was rejected Lindley LJ: (purposive approach: followed FI): there can be no doubt that this is an attempt to use the CA 1862 for a purpose for which it was never intended.
HL decision salomon v salomon
HL Held (unanimous): the decisions of the CA and the FI were wrong. The company was duly formed and registered. It was NOT an agent or trustee of Mr Salomon. There was NO sham or fraud, and the formation of the company was NOT contrary to the true intent and meaning of CA 1862. Hence, C was NOT liable to indemnify D against the creditors’ claims!
hannigan on the cosquences of salomon
- Independent person: company is an independent person with rights and liabilities appropriate to itself. It may enter into contracts
- Owning property which is not the property of its shareholders even if they own all the shares
- Perpetual existence and succession: continuity
- Legal personality: may sue and be sued in its own name
- Debts are the company’s not the shareholders whose only obligation to is contribute any unpaid on the shares held by them under s.3(2) CA 2006
- The doctrine of separate legal personality means that a company can own property. A shareholder has no legal or equitable interest in property owned by the company!
Macaura v Northern Assurance [1925] facts
shareholder was trying to receiver the benefit of an insurance policy which benefits the company. M owes a timber estate as an individual, and was a shareholder of Irish Candian Saw Mills Ltd. M let the company fell timber in his estate, in consideration for an issue of shares (27000 + 15000 for cost of felling). The company fell all the timber in M’s estate. M bought an insurance policy as an individual covering the fallen timber on his estate (which were actually the assets of the company). A fire broke out and M claimed the insurance. D argued that M did not have an insurable interest as a shareholder in the company.
Macaura v Northern Assurance [1925] decison
- HL held: M did not have an insurance interest
- Lord Buckmaster: no shareholder has any right to any item of property owned by the company, for he has no legal or equitable interest therein! He is entitled to a share in profits when the company is wound up. Neither a simple creditor nor a shareholder in a company has any insurable interest in the company assets.
Lee v Lee’s Air Farming [1961] facts
Lee was director of Lee’s Air Farming Ltd, and chief pilot of the Ltd (i.e. also employee), as well as the majority shareholder of the company. He died during the employment in a crash, and his wife sued under the NZWC Act 1922 arguing that Lee was a ‘worker’ under the Act. Could C be a ‘worker’ as well as a controlling shareholder and director? The New Zealand CA said C could not.
Lee v Lee’s Air Farming [1961] outcome
PC held: that he could be a worker - A person can act in both capacities. Lee can have a relationship with the Ltd because the latter has separate personality.
The Gramophone and Typewriter v Stanley [1908]
- HMRC sued C arguing that C was liable to pay income tax on profits made by a German company in which C held all the shares. The profits had not been distributed to C. Held: the holding of all the shares does not establish the relationship of principal and agent. Without the agency relationship, the business was the business of the German company
Foss v Harbotle (1843)
if company has a claim, then as a separate person, it can instigate proceedings and receive the benefits of them. Held: shareholders cannot sue on behalf of the company. The company is the appropriate one to sue, subject to certain exceptions. Sir James Wigram: the corporation should sue in its own name, as the injury is to the whole corporation. In law the corporation and the aggregate members of the corporation are not the same thing
Revenue and Customs Commissioners v Holland; In re Paycheck Services (2010)
the question was whether Mr Holland was personally liable for shortfalls in company tax owed by trading cos. This depended on whether he had been a ‘de facto director’ of the trading cos for the purposes of Insolvency Act 1986, s 212.
Held: he was not a de facto director merely because he was the guiding spirit behind the corporate directors of those cos. A co is separate from its directors.
