Concept of Separate Legal Entity and Consequences of Corporate Personality on a Company

Topics: Corporation, Types of business entity, Corporations law Pages: 8 (2734 words) Published: November 6, 2011
ACW 204
YEAR 2010/2011

Lecturer : Dr. Hazril Izwar Ibrahim
Name : Kok Cheng Hon
Matric No. : 105000

Discuss the concept of separate legal entity and consequences of corporate personality on a company; as part of the discussion present your opinion whether the judiciary can ignore the rule of separate corporate personality and how the said rule will affect group of companies.

Under the concept of separate legal entity, a company will becomes a body corporate that exists separately with its owner and distinct from its individual members and directors. In others word, the corporation is an entity just like human being created using legal and official purpose.

A company once created by the law can only be destroyed by the process of law. The company exist in its own capacity and does business, generate revenues, incur losses, hire employees and pay for its own tax. It is better to recognize the company as a separate entity because the owners can enjoy the limited liability and risk based on their investment in stock. However, under this concept, the company is treated in its own capacity. It is not human, not a machine, and it cannot operate by itself. Therefore, it must need a group of people of different capacity to manage it ethically and represent it in theirs vested authorities.

The separate legal entity has its roots in the landmark case of the English House of Lord in Salomon v. A Salomon & Co Ltd. Aron Salomon is a leather merchant and wholesale boot manufacturer trading on his sole account. In year 1892, he decided to change his business to a limited company. The company purchase the business for £39,000 and £20,000 was being transferred into the business as fully paid shares. £10,000 was paid in debentures and £1,000 was received by Aron Salomon to discharge the debts and liabilities during the purchase.

A year after its incorporation, the company become insolvent and went into liquidation. The company was set out by the way of counterclaim, inter alia, so that the company was entitled to be indemnified by Aron Salomon against all debt of the company. The court held that Aron Salomon is not personally liable to pay to the creditors. The company is a independent person in law and not a trustee or agent. Therefore it is liable for the liability itself.

There are a few consequences incurred based on the independent legal entity theory. A company is a body corporate and is capable of exercising all the functions of an incorporated company. A company is also capable of suing and being sued. As a company is incorporates under the Act, it will automatically has the perpectual succession, its own common seal and the power to hold land.

Corporate personality allow one corporate to act as a single entity for legal purpose. The corporate personality allow the company to sue and being sued, enter into contracts, incur debt and own a property. The corporate personality is not absolute and it can be treated as the rights or responsibilities of the directors or the shareholders by “piercing the corporate veil”.

The effect of the theory of independent legal entity is the property of the company which is a going concern belongs to it and not to its individual members, directors or the shareholders. The principal of law can be related to an English case of Macaura v. Northern Assurance Company Ltd & Ors. The appellant sold the whole timber estate to a company called Irish Canadian Sawmills Ltd. And received pay of 42,000 fully paid shares of £1 each in the company. After the sale, the appellant bought an insurance policy in his own name in covering against the fire on the timber of the estate. After that, the greater part of the estate caught fire but the respondent refuse to pay the appellant by argued that he had no insurable interest towards the estate....
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