Workshop 2: Separate legal personality and groups of companies
MCQ- concept of limited liability
Preparatory Task 1
In this task, you will consider the nature and effect of separate legal personality and
limited liability, and will analyse a variety of ways in which the principle of separate
legal personality has been sought to be sidestepped.
Part A
Make a brief note summarising the principles of separate legal personality and
limited liability, making sure that you are clear about the difference between them. To
which of these principles does section 74 of the Insolvency Act 1986 relate?
Answer: Part A-
Make a brief note summarising the principles of separate legal personality and
limited liability, making sure that you are clear about the difference between them. To
which of these principles does section 74 of the Insolvency Act 1986 relate?
The formation of a company has separate legal personality; and the members of a
limited company have limited liability.
Separate legal personality-
Are the same as the people who own and run them, a company is a legal
entity separate from both its owners (the members) and those people who run
it on a day-to-day basis (the directors).
The company is recognised by the law as a person – a special type of person
known as a ‘legal person’, but nonetheless one which has its own rights and
obligations separate from the ‘natural persons’ (ie the individuals) who own
and run it.
Owns the property not the people who run it.
Limited liability-
the term ‘limited liability’ refers to the members’ own liability rather than to the
company’s liability.
Members do not have to pay for the full amount of shares they have straight
away.
If the company is wound up and comes to an end (eg, because it can no
longer pay its debts), under s 74(2)(d) of the Insolvency Act 1986 (IA 1986)
any unpaid amount of the nominal value of the shares may be claimed from
the members. The share-holders will only be liable up to their shares.
Part B-
, Workshop 2: Separate legal personality and groups of companies
Consider the following cases, in each case researching the matter as directed in
order to be able to answer the questions asked. Make brief notes of your answers to
the questions.
Answer:
Salomon v A Salomon [1897] AC 22
This is the leading case on separate legal personality and set the tone for everything
that followed. Read Lord Macnaughten from the phrase “If, however, the declaration
of the Court of Appeal means that Mr. Salomon ....” until the end of his reasoning.
Liable for their own debts.
Adams v Cape Industries Plc [1990] Ch 433
In this case, the claimants had obtained judgments in a US court against, inter alia,
Cape Industries plc (“Cape”). Cape sought to resist the enforcement of those
judgments in the English courts, on the basis that the US court had had no
jurisdiction over it. Cape’s argument was that it had not conducted any relevant
business in the United States which would have made it “present” for the purposes of
giving the US court jurisdiction (a necessary condition for the enforcement of the
judgment in the English courts). One of Cape’s subsidiaries which had conducted
business in the United States, however, was North American Asbestos Corporation
(“N.A.A.C.”).
The claimants put forward three arguments alleging that the activities of N.A.A.C.
had the effect of rendering Cape itself “present” in the United States in the requisite
sense, with the objective of attributing responsibility for the acts of the N.A.A.C to
Cape. They are described in the judgment as:
1. (a) the agency argument
2. (b) the single economic unit argument
3. (c) the corporate veil argument
and they are identified in the paragraph commencing, “These three main
submissions were substantially as follows ...”. They are analysed in the subsequent
paragraphs of the judgment under the relevant headings.
Locate the case report. You are not required to read through and analyse these
three sections in full; just scan them and glean a sufficient grasp of the issues to be
able to answer the questions below.
1. In Salomon v Salomon, what was the “one-man company” argument? What
do you think it would it take to make the individual rather than the company
liable?
The House of Lords held in its judgment that the company’s acts were its own
acts, not those of Mr Salomon personally. This was the case even though Mr
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