“In spite of the obvious economic connection between companies within the same group, English company law has steadfastly maintained its policy of treating such companies as distinct legal entities.”
Explain this statement. Consider the need for reform.
Salomon v Salomon
Lifting the veil of incorporation
Façade or a sham
Groups of Companies
Adams & Others v Cape Industries plc
Is there a need for reform?
In order to explain the statement this essay will explore the background to treating companies as distinct legal entities; review certain cases trying to pierce limited liability; discuss the application of these rules to groups of companies; and then consider whether there is a need for reform.
Over a century ago the English Courts established the basic principle of separate corporate personality: “the corporation has a separate existence from the shareholder” per Vaughan Williams J in Salomon v Salomon1. A distinct legal personality can “own and deal with property, sue and be sued in its own name and contract on its own behalf.2”
A company has a dual nature as both an association of its members and a person separate from its members. The company’s property is owned by the company as a separate person, not by the members; the company’s business is conducted by the company as a separate person, not by the members; and it is the company as a separate person that enters into contracts in relation to the company’s business and property3. “The members are not personally entitled to the benefits or liable for the burdens arising, so their rights are restricted to receiving from the company their share of profits and their liabilities to paying the amounts due from them to the company4.”
The acts of the company are not the acts of the shareholder, and so the company’s liabilities do not become the liabilities of the shareholders. This is perhaps the greatest privilege of incorporation: in a company the members have no individual liability to its creditors for debts owing by the company. This gives limited liability to shareholders whereby they are only liable up to the extent of their committed investment in the company.
Salomon v Salomon
The separate personality of a company as distinct from its shareholders was established by the House of Lords in Salomon v Salomon & Co . This led to the veil of incorporation; that a registered company is a legal person separate from its members5. “The company is at law a different person altogether from subscribers to the memorandum” per Lord Mcnaughten.6 It established the position in English law of the concept of separate legal personality for companies. It is the leading case on the fundamental importance of the separate personality of a company.
Mr Salomon was a boot and shoe manufacturer. At First Instance, it was held that the company had conducted the business as agent for Mr Salomon, so he was responsible for all debts incurred. The House of Lords rejected this approach “a company may be said to carry on a business for and on behalf of its shareholders but this does not in point of law constitute the relation of principal and agent between them or render the shareholders liable to indemnify the company against the debts which it incurs7.” It was held that however large the quantity of shares and debentures owned by one man even if the other shares were held in trust for him the company’s acts were not his acts, nor were its liabilities his liabilities; nor is it otherwise if he has sole control of its affairs as governing director8. There was strong evidence of good faith and confidence in the company and the House of Lords found no evidence of fraud or deliberate abuse of the corporate form.
It is impossible...
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