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Summary LAWS08134 Business Entities-Separate Legal Personality of a Company
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LAWS08134 Business Entities-Separate Legal Personality of a Company
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Separate Legal Personality of a Company Salomon case
o Lord McNaughton:
It does not matter whether the subscribers a related so long as the
procedure in the companies act is followed. The company is a different
legal person even if nothing in the business has changed after the
incorporation. A prime reason to form a company is bankruptcy
insurance and bigger loans. The unsecured creditors may have sympathy
but it’s their own fault. One-man-companies are just a nickname.
Although they’ve been dealing with Mr. Salmon they were actually
dealing with his company.
If the case would have gone the other way our economic life would be very different.
It sets out a lot of things in the companies act, especially the principle of separate legal
personality
Because of that it is almost treated like a statutory enactment.
Applications of Salomon:
o Maccura v Nothern Assurance Co.
Sold timber in Ireland in exchange for shares in the company CSML. He
was allowed to use the land where the timber was owed. CSML owed M
money. The timber was ensured in M’s name, but he forgot to reassign
the insurance to CSML when it was sold. A fire destroyed the timber and
the insurance company refused to pay because there was no insurable
interest, you need to owe something to insure it.
The HL agreed with the insurance because the company owned the asset
and it did not matter that M owned all the shares in the company and
that he was a creditor. Companies can own property and it is not the
shareholders property, as long as the company is solvent.
It also set out that companies can own property
o Lee v Lee Farming
Companies can enter into contracts
Lee formed a company LFL. There was an airplane that strayed chemicals
over the fields. L had a fatal accident while flying the airplane. The wife
brought an action for compensation. The question was whether L was a
worker? L owned all but 1 share and he was governing director for life.
However he also the chief pilot and entered into a contract of
employment. The plane was owned by the company. The insurance
, company said that you cannot be the employee and the governing
director of a company for life, at the same time.
The court applied the Salomon case and ruled that the company was a
separate legal entity and that it could enter into contracts of
employment, therefore L was an employee.
Shares will allow you to vote on meetings and a return can be given. But it does not
change the companies capacity to contract with you
Other consequences are that companies can own companies or shares of it.
If you have more than 50% of the shares you’re a holding company
The owned company is called subsidiary or wholly subsidiary if it does not own any
shares.
This resulted in corporate groups. One head company owning a lot of other companies
This is usually done in a pyramid structure.
You could also have a chain of companies
Sometimes different assets are put under different names to protect the company
against insolvency
Companies put together in groups still retain their own, separate, legal identity
Limited Liability
The assets of the company, rather than the shareholders assets, are used to satisfy the
debts
If there are not enough assets, then that is tough.
The liability is limited to the capital that the shareholders have put into the company
when buying the shares.
Par or nominal value of the shares:
o The valued of the shares first issue to the initial subscriber of that share. This is
constant value and does not change.
This money goes to the company as capital
That is different from the market price of the share. The value here may change. If I sell
the shares then I get the money and not the company.
The buyer takes the shares with the limited liability, he takes them as they are
Then there are partially paid shares:
o E.g. the company says: You can buy 100 shares and you only pay part of the
price, for instance 60p in the £1. Now and we can call you for the remaining
value later.
o The liability goes with the shares. The price will adjust accordingly.
o After that outstanding price has been paid that’s already the limit of the liability.
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