CORPORATIONS AND LEGAL PERSONALITY THE DOCTRINE OF INCORPORATION Module 4.1
COMPANY (artificial or abstract legal person)
A company is an artificial (as opposed to a natural) person which is an entity in its own right with a legal personality separate from that and independent of its shareholders (members/owners) or directors (managers).
V E I L
SHAREHOLDERS (Members) DIRECTORS (Management) EMPLOYEES (natural legal persons)
Relevant Case Authority
MACAURA v NORTHERN LIFE ASSURANCE (1925) M sold his forest to a company in which he owned all the shares. M had previously insured the forest in his own name but omitted to change the relevant policy to state the name of the company as owner. The forest was later destroyed by fire and M sought to claim under the policy. HELD. L could not file a claim as the forest was owned by the company. As shareholder, L had no insurable interest in the forest because the company was a separate entity.
SALOMON v SALOMON & CO (1897) S sold his sole-trader business to a company of which he was the main shareholder. When the company went into liquidation, S was sued (by creditors) in his personal capacity as they claimed S was, in effect, the company. HELD. S was not liable for any moneys owed to the creditors. These were company debts and as the company had a separate legal personality, it alone was answerable to the creditors.
LEE v LEE’s AIR FARMING LTD (1960) L was a director and owned the bulk of the shares in a company engaged in aerial crop-spraying. L appointed himself as the only pilot of the company at a salary arranged by himself. Subsequently, L was killed while crop-spraying and his widow claimed workers compensation from the company as employer of her husband. Question under the relevant Act was whether the relationship of employer and employee could exist between L and the company. HELD. Yes they were separate legal persons, thus even though L owned most of the shares, he could still be an employee of the company. Thus his widow was entitled to compensation.
I N C O R P O R A T I O N
THIS VEIL may be lifted by law (courts or statute) in certain circumstances so that the human and commercial reality behind the corporate personality can be revealed.
A company's existence does not depend on the presence of human elements or resources (although these are, for practical purposes, necessary to run the company’s business activities). Thus, the company may have perpetual succession notwithstanding the retirement, bankruptcy, mental disorder or death of the shareholders/members. (perpetual = never ends or changes)
(5) CORPORATIONS AND LEGAL PERSONALITY THE CONSEQUENCES OF INCORPORATION Module 4.2 Ownership of Property
It is the company itself which owns corporate property. It is not owned by the members (or directors) so it will not be affected by any change in shareholders. (Refer MACAURA v NORTHERN LIFE ASSURANCE (1925)). In effect, this means that in small companies, (e.g. with a single shareholder) the member would be open to a charge of theft if he were to treat the corporate property as his own.
Where a company is limited by shares, the extent of a member’s liability is the amount which remains unpaid on the nominal value of the shares held. In the event that the company is limited by guarantee, the liability is that which the member has (guaranteed) agreed to pay if the company is wound up. Limited Liability
Ownership and Management
The fact that a company is a legal entity separate and distinct from its shareholders, necessitates the involvement and participation of management in the form of a board of directors. c) Tort
a) Proper Claimant
If a wrong has been committed against a company, then, as proper claimant, only the company can sue (acting through the majority shareholders). This is known as the rule in FOSS v HARBOTTLE and in effect means that...
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