Essay: Separate Legal Personality

Separate Legal Personality refers to the concept that shareholders and directors take no responsibility for any liabilities arising as a result of companies’ action. Additionally, it refers to how upon incorporation, companies are considered separate legal entity from its members with the legal capacity to own assets and liabilities. Equally notably, separate legal personality ensures that a company is independent of the people who form, manage, direct and invest in it, separating the duties and rights of a corporation from the rights and duties of its directors and shareholders.
Also termed the veil of incorporation, this doctrine essentially shields members from personal debts for the liabilities of their company. It was firmly established in Saloman V A Saloman & Co Ltd, which has ever since, been the foundational precedent for the doctrine of corporate personality. Lord Mcnaughten reemphasized here that “The corporation is at law a different person altogether from the subscriber to the memorandum. Thus it can sue and be sued in its own name, make contracts on its own behalf”.
I agree with the given statement assuming that directors appropriately carry out their general and specific duties expected of them as stated from section 171 to 177 in the Companies Act 2006 (CA 2006). Under this section, Directors are required to act in a way that promotes the success of the company. On top of this, they are considered to have fiduciary duties and resultantly, must not benefit from their position of trust. As Lord Cransworth held in Aberdeen Railway Co. v Blaikie Brothers. [1854]:
“The directors are a body to whom is delegated the duty of managing the general affairs of the company. A corporate body can only act by agents, and it is of course the duty of those agents to act as best to promote the interests of the corporation whose affairs they are conducting. Such agents have duties to discharge of a fiduciary nature towards their principle”.
I also agree with the statement as the doctrine incentivises investors to invest in corporations. It protects a company’s owners and it is only in some exceptional circumstance that shareholders are held liable for the acts of their company. The first exception is when shareholders have not totally paid for their shares. In this scenario, upon liquidation, shareholders would have to foot any unpaid amounts to the company. Secondly, as per the ruling in It’s a Wrap (UK) Ltd v Gula and another, if shareholders have reasonable grounds to know their company had no distributable profits, the court would hold shareholders liable to repay dividends back to the company by section 847 of the CA 2006 (Jordenpublishing,2013).
However, it is thought that the doctrine has seen abuse by both directors and shareholders to engage in fraud and evade legal obligations (Kahn-Freund, 1944). Therefore, to prevent the corporate form to be misused or abused, the law is prepared to discount and look beneath corporate personality. This approach, referred to piercing the veil of incorporation, has been expressly authorised by statute, and adopted by the courts. In circumstances in which the Court feels that the corporate form is being misused, the Salomon principal laid down by the House of Lords will be disregarded. The courts are then authorized to rip through the corporate veil to expose company employees’ true motives.
Examples of situations where the courts disregarded the Saloman principle include: when an agency relationship is identified (See Smith, Stone and Knight Ltd v Birmingham Corporation [1939]), when connections are found between shareholders and the company, when groups are found to be a single economic unit (See DHN Food Distributors Ltd v Tower Hamlets LBC [1976]), when the company is found to be a sham or mere façade, or as a result of tort. An example of the corporate veil being set aside by the statute was stated under Section 213 of Insolvency Act 1986, where it appears that in the course of winding up a business, the company had been run with intentions to defraud the creditors. This is known as fraudulent trading.
However, in the latest ruling within Prest v Petrodel Resources Ltd [2013], although the Supreme Court allowed Mrs Prest to attain her ex-husbands’ assets that had been stored within his company, it refused to view this ruling as a piercing of the veil. In contrast, this case further limited the circumstances in which veil piercing may occur, as Lord Sumption states that the veil could be disregarded only to stop the abuse of corporate legal personality, and even then, the veil will only be pierced if absolutely essential. While a clear-cut abuse of the separate legal personality will be found if it is used to evade the law or frustrate its enforcement, this positional change can be immensely limiting as causing a mere legal liability to be incurred by a company alone cannot amount to abuse.
In Lord Sumption’s view, the difficulty lay within identifying what is considered an abuse of corporate form. To him it seemed that two distinct doctrines, the concealment and evasion principle, were involved. The concealment principle does not involve piercing the corporate veil at all. However under the evasion principle, the court may discount the corporate veil if there is a legal right against the person controlling a company, which exists independently of the company’s involvement. Additionally, a company must be positioned such that its separate legal personality will frustrate the enforcement of rightful action. Although many cases fall into both doctrines, in some scenarios the points of distinction between them can be crucial. (Wilson, 2013).
In Gilford Motor Co Ltd v Home [1933], the court imposed an injunction that prevented the defendant from soliciting the claimant’s customers. Lord Hansworth found that the new company was formed as a device to disguise the carrying on of a business, and to evade a previously-agreed restrictive covenant. Lord Sumption believed that the evasion principle was applied form the judgments of Lawrence and Romer LJJ. Lawrence LJ, who gave the most elucidated consideration, based his view largely on Mr Horne’s evasive motive for company formation. This proved to him that it was “a mere channel used by the defendant Horne for the purpose of enabling him, for his own benefit, to obtain the advantage of the customers of the plaintiff company, and that therefore the defendant company ought to be restrained as well as the defendant Horne.”
In Jones v Lipman [1962], the judge, Russell J, disregard the existence of a company because it was a façade, and the company in question had been set up purposefully to avoid an agreed obligation. The judge decreed specific performance against both defendants, as per on the concealment principle. The company, said Russell J portentously, was “a device and a sham, a mask which [Mr Lipman] holds before his face in an attempt to avoid recognition by the eye of equity.”
Prest v Petrodel Resources Ltd [2013] is currently viewed as the leading case within this discussion. Therefore, modern-day assessment must now originate from it. In the judgement, Lord Sumption and Lord Neuberger clearly expressed a limiting of the doctrine of veil piercing, by reclassifying many cases conventionally regarded as examples of piercing the veil, and pronouncing that in most cases, the veil was not in fact pierced. In Chandler v Cape Plc [2012], the court held that Cape Plc assumed responsibility towards Chandler and hence owed him a duty of care, which was deemed to be breached. Cape plc was instructed to pay damages to Chandler.
In conclusion, I agree that the separate legal personality of a company means that shareholders of the company and directors of the company are not responsible for any of the liabilities that arise as a result of the actions of the company. This is because the separate legal personality is necessary for the interests of shareholders and future investors. I agree to the statement on the assumption that directors were carrying out their duties in the faith of the company. Though there has been instances where the corporate veil was thought to be lifted, causing the directors and shareholders to shoulder liabilities, it has been decisively overwritten in the recent case of Prest v Petrodel Resources Ltd [2013]. Most notably, this is due to how significant doubt was cast on the validity of cases when the veil was regarded to be pierced. I believe the doctrine of separate legal personality remains a basic tenet of company law and exceptions are only necessary where the corporate personality was utilized to perpetrate a fraud or to evade a legal obligation.