CORPORATE

PERSONALITY AND
LEGAL LIABILITY
1. “Company law”, Alan Dignam and John Lowry, 11th edition, Oxford University
Press (chapter 2)

2. “Company Law”, Mayson, French & Ryan, 38th edition, Oxford University Press
(Chapter 5)
 CORPORATE PERSONALITY
BREAKDOWN OF SLIDES

1. Definition of corporate personality

2. Salomon v Salomon and the logic of limited liability

3. Other examples of separate corporate personality with relevant

cases
CORPORATE PERSONALITY - Definition
• Human beings of sound mind and over the age of 18
have full legal personality.

• A company also has legal/corporate personality. It is a

separate “person” in the eyes of the law from its
owners, having the same rights and obligations as a
human being would.
CORPORATE PERSONALITY- recognition
• The Limited Liability Act (1855) provided limited
liability to companies and made the process of
company registration simpler.

• Its enactment made it possible for all types and sizes

of business ventures to be created and not just the
large - scale ones which were common at that time.
This led to the evolution of company law.
CORPORATE PERSONALITY – judicial
confirmation
• The judicial confirmation that a Company
has a separate legal personality than its
owners became clear in the House of Lords
decision of Salomon v Salomon & Co Ltd
(1897)
Salomon v Salomon
 Salomon v Salomon
• Mr. Salomon was a leather merchant and had a shoe business where he
acted as a sole trader.

• He formed the company Salomon & Co. Ltd and he, his wife and five of his
children held one share each in the company. (The requirements of the
Companies Act back then were seven members). Mr. Salomon was also the
managing director of the company. The rest of the family members did not
intend to take an active role in the company.

• Mr. Salomon’s newly formed company bought the shoe business at an

extraordinarily high amount for the time (£39,000)
 Salomon v Salomon
• The purchase price of the shoe business was settled by £10,000 worth
of debentures*, giving a charge over all of the newly formed
company’s assets, the issuance of 20,000 shares of 1 each and £9,000
cash.

• Mr. Salomon became the majority shareholder of the new company

holding 20.001 shares and the rest of his family members holding six

• Because of the debentures, Mr. Salomon became a secured creditor

 Salomon v Salomon
• The company run into financial difficulties very soon after its
creation and went into liquidation.

• Its assets were enough to secure the debentures but nothing

was left for the unsecured creditors who brought an action
claiming that the company was Mr. Salomon’s agent and it
was all a disguised effort on the part of Mr. Salomon to avoid
debts.
 Salomon v Salomon
• The Court of Appeal, taking a moralistic stance, agreed. They used
words such as “defraud”, “pretended” and “cheating” to describe Mr.
Salomon’s activities believing he was trying to avoid the responsibility
of his debts. They made Mr. Salomon personally liable for all of the
company’s debts

• The decision of the Court of Appeal was unanimously reversed by the

House of Lords who held that the company had been properly formed
in accordance with the requirements of the Companies Act that
required seven shareholders.
 Salomon v Salomon
• The House of Lords stated that the motives of the shareholders when forming the
company were irrelevant unless there was fraud involved.

In the House of Lords, Lord Macnaghten had the following to say:

““The company is at law a different person all together from the subscribers to the
memorandum and though it may be that after incorporation the business is precisely
the same as it was before and the same persons are managers and the same hands
receive the profits, the company is not in law the agent of the subscribers or trustees
for them. Nor are the subscribers, as members liable, in any way shape or form,
except to the extent and in the manner provided by the Act”
 Salomon v Salomon
The importance of the decision of the House of Lords is immense. It
means specifically that:

1. The fact that some shareholders hold shares in a company as a

technicality and do not plan to be actively involved is irrelevant as
long as the legal requirements of the Companies Act are complied
with.
2. A company formed in compliance with the above requirements is a
separate person in the eyes of the law and not an agent or trustee
of its controller
CORPORATE PERSONALITY – what it
entails
Following the Salomon decision, it is clear that a company is a separate
person in the eyes of the law. It hence has its own legal rights and
obligations. This means that a Company has the right to the following in
its own name:

• Employ its promoters/subscribers/directors (Lee v Lee’s Air Farming

(1961)
• Hold property (Macaura v Northern Assurance (1925)
• Sue and be sued (Metropolitan Saloon Omnibus co v Hawkins (1859)
• Conduct its own business/enter into contracts (Cristina v Sear (1985)
 Lee v Lee’s Air Farming (1961)
A company can employ its promoters/subscribers/directors
 Lee v Lee’s Air Farming
• Mr. Lee formed a company, Lee’s Air Farming

• The share capital consisted of 3,000 shares of £1 each

• He held 2,999 of the shares a solicitor holding the

remaining one (NZ Company law required two
shareholders)
 Lee v Lee’s Air Farming
• As well as the majority shareholder, he was also the
sole governing director of the company.

• He was also an employee of the Company, the articles

of association providing that the rules of master and
servant were applicable as between Mr. Lee and the
company.
 Lee v Lee’s Air Farming
• Mr. Lee died when the company plane he was flying crashed leaving behind
a widow and four minor children who were solely dependent on him

• His widow tried to claim that she was entitled to compensation under an
insurance policy taken out by the company as part of its statutory
obligations. She claimed that her husband was a “worker” in accordance
with the Worker’s Compensation Act.

• Her claim was initially unsuccessful in the NZ Court of Appeal who found
that Mr. Lee was not a “worker”
 Lee v Lee’s Air Farming
• The widow appealed to the Privy Council, that held that Mr.
Lee was indeed a “worker” as the company and Mr. Lee were
two separate persons in the eyes of the law. As such the two
of them could enter into a contractual relationship for him to
act as an employee of the company.

• The widow was therefore held to be entitled to

compensation.
 CORPORATE PERSONALITY
• As seen in the case of Lee, a company can employ its
promoters/members and directors thus entering into a contract with
them.

• In the same spirit, money paid by members for their shares belongs to
the Company and when the Company has paid a dividend to its
members, that dividend no longer belongs to the Company. “The
corporation is not a mere aggregate of shareholders” (Re Exchange
Banking Co, Flitcroft Case (1882)).
 CORPORATE PERSONALITY
• Although corporate personality facilitates limited liability by
making sure that the corporation’s debts are not the
member’s debts, it can also be a double - edged sword
because the company’s assets also accordingly belong to the
company itself and not to its shareholders.

• This can have unfortunate consequences as seen in Macaura

v Northern Assurance
 Macaura v Northern Assurance Co:
A Company can hold property in its own name
 Macaura v Northern Assurance Co
• Mr. Macaura was the owner of an estate.

• In 1919 he agreed to sell all the timber on the estate to a

company named Irish Canadian Saw Mills Ltd, allowing them
to enter the estate and cut down trees.

• In return, the company’s entire issued share capital would be

held by Mr. Macaura and his nominees
 Macaura v Northern Assurance Co
• The company entered the estate and cut down
all the remaining trees and stored them on the
estate.

• The timber represented almost all of the

company’s property
 Macaura v Northern Assurance Co
• An insurance policy was taken out in the name of Mr. Macaura
insuring the timber on the estate

• The timber was destroyed by fire two weeks after the policy was
taken out.

• The insurance company refused to cover the loss, asserting that the
property (timber) belonged to the company and not Mr. Macaura
himself.
 Macaura v Northern Assurance Co
• The House of Lords agreed with the insurance company’s
contentions.

• Lord Wrenbury stated that a member of a corporation:

“Even if he holds all the shares is not the corporation and …

neither he or any creditor of the company has any property
legal or equitable in the assets of the corporation”
 Other powers of the Company
• A company can sue in its own name
A Company can sue a third person for, amongst other things,
defamation, for example (Metropolitan Saloon Omnibus co v
Hawkins (1859) and it can even sue one of its own members for
the same. Except derivative claims. Foss v Harbottle

• The company’s business is not the owner’s business

A company can conduct its own business and the business of the
Company is not the business of its owners (Cristina v Sear (1985)).
Cristina v Sear (1985)
 Other powers of the Company
• Parent company and subsidiary companies
A Company can incorporate separate companies as
subsidiaries. Each subsidiary is a separate person in the eyes
of the law

• A company can survive the death of its members

A company has a perpetual existence