separate legal personality and limited liability

Question 1

separate legal personality

Answer 1

• A company is a legal person separate from its shareholders and directors
• A company has its own rights and obligations; it can own property, it can sue in its own name and be sued

Question 2

limited liability

Answer 2

The shareholder’s liability if the company is wound up is limited to the nominal value of their shares i.e., the shareholder’s personal assets will not be at risk.

Question 3

Salomon v A Salomon & Co Ltd [1897] - significance

Answer 3

• established the scope of SLP doctrine
• a one-man company was a legitimate creation provided it was validly formed and complied with all the formalities required under the law
• so long as a company is legally incorporated, even if it only has one person controlling it, it must be treated like any other independent person with rights and liabilities, and an individual using the company to manage risk and avoid liability for debts is acceptable

Question 4

consequences of separate legal personality

Answer 4

• the company can own its own property
• the company will enter into contracts in its own name
• the company can borrow money and give security over its assets
• a company is liable for its own debts
• the company can be taxed separately

Question 5

piercing the corporate veil

Answer 5

seeking to sidestep separate legal personality and impose liability on the individuals who own or run a company

will be done in limited circumstances, e.g.:
- where the structure of a company is used to evade a legal liability that the owner of the company would have otherwise incurred (“evasion principle”)
- there is no other legal method of achieving an equivalent result

Question 6

Prest v Petrodel Resources Ltd [2013]

Answer 6

Court considered whether properties owned by Mr Prest’s company, Petrodel Group, could be transferred to Mr Prest’s wife following their divorce. Mr Prest had, however, set up the companies long before his marriage had broken down so the evasion principle did not apply

Even if the evasion principle does apply and the corporate veil can be pierced, the veil will only be pierced to deprive the company or its controller of the advantage that they otherwise would not have obtained i.e., it is very limited.

Question 7

guarantee

Answer 7

personal guarantee = another method of demanding that shareholders personally guarantee contracts that the company enters into

Question 8

Adams v Cape Industries [1990] - arguments

Answer 8

It is rare for the court to sidestep separate legal personality

1. The Agency Argument
   - C argued that Cape was present in the USA on the basis that Cape’s subsidiaries were acting as Cape’s agents
   - The court rejected this argument on the basis that it found that NAAC was authorised to carry on its own business independent of Cape, and was not merely acting as Cape’s agent
2. The Single-Economic Unit Argument
   - because owners of the parent company effectively have control over the subsidiary, they are sometimes treated as if they weren’t independent entities
   - this didn’t apply in Adams: “there is no general principle that all companies in a group of companies are to be regarded as one”
3. Corporate Veil Argument
   - this was not a situation in which the corporate veil could be pierced. Each company within a corporate group is a separate legal entity with its own rights and liabilities, even if they are economically integrated.

D were entitled to structure their group so that legal liability would fall on another member of the group rather than the defendant company (consistent with Saloman v Saloman)