Separate Legal Personality - Lecture Notes PDF

The doctrine of Separate Legal Personality - Lecture 2 and 3  The company - does it have a separate legal personality? □ Natural person v/s Moral person □ A company (Moral person) has a separate legal personality □ Effects of having a Corporate Personality: - A...

The doctrine of Separate Legal Personality - Lecture 2 and 3  The company - does it have a separate legal personality? □ Natural person v/s Moral person □ A company (Moral person) has a separate legal personality □ Effects of having a Corporate Personality: - A company can be a party to a contract - A company can sue or be sued in its own name - A company can have ownership rights - Limitation of liability  Salomon v. Salomon & Co. Ltd A.C. 22 (H.L.) A foundational decision of the House of Lords in the area of company law. The effect of the Lords' unanimous ruling was to firmly uphold the doctrine of corporate personality a set out in the Companies Act 1862 Facts □Aron Salomon was a successful leather merchant who specialized in manufacturing leather boots. For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in taking part in the business. Salomon decided to incorporate his business as a Limited company, Salomon & Co. Ltd. □At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. The shareholders were Mr. Salomon, his wife, daughter and four sons. Two of his sons became directors; Mr. Salomon himself was managing director. Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders. Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000 was a debt to him. He was thus simultaneously the company's principal shareholder and its principal creditor.  Decision of the Court at first instance  When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud. The judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it, the company was in reality his agent and he as principal was liable for debts to unsecured creditors. The Appeal  The Court of Appeal also ruled against Mr. Salomon, though on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on "independent bona fide shareholders, who had a mind and will of their own and were not mere puppets". The Lords Justices of Appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability. Decision of the House of Lords The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited liability companies as legal persons separate and distinct from the shareholders. Lord Halsbury stated that the statute "enacts nothing as to the extent or degree of interest which may be held by each of the seven [shareholders] or as to the proportion of interest or influence possessed by one or the majority over the others." □ The House held: "Either the limited company was a legal entity or it was not. If it were, the business belonged to it and not to Mr Salomon. If it was not, there was no person and no thing to be an agent [of] at all; and it is impossible to say at the same time that there is a company and there is not." □ The House further noted: "The company is at law a different person altogether from the [shareholders]...; 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 received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act." The corporate veil □ The Rule: Limitation of Liability □ Corporations exist in part to shield the personal assets of both shareholders and directors from personal liability for the debts or actions of a corporation. Unlike a general partnership or sole proprietorship in which the owner could be held responsible for all the debts of the corporation, a corporation traditionally limited the personal liability of the directors. Piercing or lifting the corporate veil( exceptions to the doctrine of SLP) □This doctrine is also known as "disregarding the corporate entity. □The phrase relies on a metaphor of a "veil" that represents the veneer of formalities and dignities that protect a corporation, which can be disregarded at will when the situation warrants looking beyond the "legal fiction" of a corporate person to the reality of other persons or entities who would otherwise be protected by the corporate fiction When do we lift or pierce the corporate veil? ( Exceptions to the rule) □ Absence or inaccuracy of corporate records; □ Concealment or misrepresentation of members; □ Failure to maintain arm's length relationships with related entities; □ Failure to observe corporate formalities in terms of behavior and documentation; □ Failure to pay dividends; □ Intermingling of assets of the corporation and of the shareholder; □ Manipulation of assets or liabilities to concentrate the assets or liabilities; □ Non-functioning corporate officers and/or directors; □ Other factors the court finds relevant; □ Significant undercapitalization of the business entity (capitalization requirements vary based on industry, location, and specific company circumstances); □ Siphoning of corporate funds by the dominant shareholder(s); □ Treatment by an individual of the assets of corporation as his/her own; □ Was the corporation being used as a "façade" for dominant shareholder(s) personal dealings; Alter Ego Theory  Case Law examples where the veil has been lifted ❑ Nationality ❑ The "Fraud" Exception: Jones v. Lipman , a company was used as a "façade" (per Russell J.) to defraud the creditors of the defendant Gilford Motor Co Ltd v. Horne , an injunction was granted against a trader setting up a business which was merely as a vehicle allowing him to circumvent a covenant in restraint of trade are often said to create a "fraud" exception to the separate corporate personality  Gencor v. Dalby , the tentative suggestion was made that the corporate veil was being lifted where the company was the "alter ego" of the defendant  Adams v Cape Industries plc Ch 433 □ The case is most often cited for the comprehensive review of the corporate veil under English company law □ the case also addressed long-standing issues under the English conflict of laws as to when a company would be resident in a foreign jurisdiction such that the English courts would recognise the foreign court's jurisdiction over the company  Subsequent to the decision (which has been followed), English law on this subject is accepted to be that the court may only pierce the corporate veil in the following circumstances: when the court is construing a statute, contract or other document; when the court is satisfied that the company is a "mere façade" concealing the true facts; or when it can be established that the company is an authorised agent of its controller or its members (corporate or human)  The court cannot lift the corporate veil merely because it considers that justice requires it. Nor can it have regard to the economic reality, and regard a group of companies as a single entity. ❑ Corporate manslaughter Corporate manslaughter is a crime in several jurisdictions It enables a corporation to be punished and censured for culpable conduct that leads to a person's death This extends beyond any compensation that might be awarded in civil litigation Points to reflect on ? □ Civil damages are a more appropriate means of compensation, recognition of the loss suffered and deterrence □ How to prove mens rea? □ Who will be convicted? □ The case has to be proved ‘beyond reasonable doubt’