Separate Legal Personality

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The incorporation of a company is an artificial person which exists as a separate legal personality. This separate personality means that the company is separate and distinct from its participants. The company needs to be treated like “any other independent person” with rights and liabilities, even if it is owned and managed by one man. It is capable of holding its own property and may sue or being sued in its own name. The company has perpetual succession which implies that it is able to carry on living regardless of death, insolvency or disagreement of a shareholder.

The case of Salomon v Salomon &Co Ltd [1897] had significant impact in Company law, as it firmly established the principle of “Separate legal personality”. In this case the Court of Appeal initially considered the company was simply an agent of Salomon, in order to allow him continue like before but with limited liability. This was contrary to the meaning of the Companies Act 1862, and so he should be liable for its debts. However, the House of Lords later overturned this decision. They held that the company was fully registered and constituted. Lord MacNaghten stated that “Though after incorporation the business may be 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 trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the act.” Thus Mr. Salomon was completely separate from the company and as a result was entitled to be paid before other creditors as he held debentures. By compared to other debt, his secured debt had higher priority. Hence Mr. Salomon got to paid first.

At its most general level, the decision of the Salomon case seems to be a good one as it is benefit to both economic and society. The Salomon principle protects shareholder’s personal assets and reduces the exposure to personal...
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