Company Law Separate Legal Personality Notes

SEPARATE LEGAL PERSONALITY Salomon v Salomon & Co 1897 • • • • • • • • Involved a man who possessed practically all the shares in a company, which had formerly been a family business. The rest of the members of his family possessed one share each. Here, Mr.Salomon has a successful business so there should be no problem, but then the business begins to fail. A further loan is sought, and further securities are put in place. Salomon is the secured creditor, meaning he is first in line for the assets when the company goes into liquidation. The company fails and goes into liquidation. As always, in a liquidation, the company's debts exceed their assets > meaning they cannot pay their creditors. Here, my Salomon is a creditor along with others. They think it's unfair that Mr.Salomon will be repaid, and they'll be left with little or nothing. So, the liquidator challenges Mr.Salomon on behalf of the other creditors and argues that it was a fraud. The question arose as to whether a one-man company was legitimate for the purposes of company legislation in England. On first and second instances, they said he committed fraud and they radically condemned his actions. HOLoverruled court of appeal in confirming the validity of in essence, a one- man company. They noted that the legislation required that a company contained 7 shareholders - and this is what had happened. They were family members, but there was nothing in the legislation to prevent that from being legit. Not fraud because the family members were fully aware of what was happening and what he was doing.'The company is at law a different person altogether from the subscribers to the memorandum' After incorporation, the business carried on as it always did, same workers etc. > so at one level, nothing has changed, what HAS changed > is the separation of the company and the individual legally. You can't have a legit and illegitimate company existing at the same time - either it was legit and belonged not to Mr Salomon but to itself, or it never existed at all The majority of the shares after liquidation were held by one individual - 20,001 out of 27,000 > 99.99% of the shares. Nothing in the legislation to prevent this. o Virtually all the shares were held by one trader - allowed Separate legal entity an ordinary one-man trader can benefit from o Benefit of incorporation and limited liability o So, it was lawful that he himself gave a loan to the company as a secured creditor as he, himself was separate from that company Fyffes Plc v DCC Plc Affirmed Salomon'A company registered under the Companies Acts is an artificial legal entity separate and distinct from the members, whether natural or corporate persons of which it is composed." BENEFITS OF A SEPARATE LEGAL ENTITY ❖ If business generates profits and creditors being repaid, and everything is going well, not a problem ❖ Where the concept becomes fundamentally important, is in the case of failure of a company (which had happened to Salomon) ❖ It had debts ❖ But now, what has gone into liquidation, is the company > so those debts are the COMPANY'S debts, and not the debts of the individual. ❖ This, is the benefit of incorporation to the small business person. ❖ So, a chief shareholder and manager and even sole employee can avoid the disadvantages of liquidation merely by title of company ❖ You can never sue the individual, which allows small individuals to set up businesses without being deterred by the fear of personal assets being attacked. ❖ Company Law was there initially, to protect large entities but Mr.Salomon is his pursuit of appeal to the highest court, changed this. So why did so many business men lose their houses in the recession? ➢ ➢ ➢ ➢ ➢ ➢ ➢ A bank will generally demand security they can get a 'charge' which is already a security, but can add-on personal guarantee > individual personally agreeing to put a guarantee on the loan. By signing one, you're signing away the protections given to you by the Salomon case. You might have no choice though; the discretion is of the bank. All the banks in relation to the recession, all the banks were using similar policies So, when the company contracted with the banks, they went after a personal guarantee as well, so when they failed > the personal guarantees were on the line. Salomon in operation Lee v Lee's Farming 1961 • • Concerns a pilot whose business was aerial soil spraying. He forms a company for this - one-man company in essence and at a practical level • • • • • • • He was controlling shareholder and the managing director 2 years later, plane crashes and he dies Widow seeks compensation under the workmen's compensation legislation Ground? She was a widow of a 'worker' of the company as defined in such legislation Government deny this as he was not, in their eyes, a worker. He was a self-employed business man. Succeeded at first instacnes but on appeal: PRIVY COUNCIL Despite it being a one-man companyLegally Mr.Lee is a separate legal entity from the company Nothing to prevent one of those entities from employing the other the individual entities here, are Lee's farming, and Mr.Lee the individual - the same thingSatisfied that Lee was in a contractual relationship with his company as separate entities notwithstanding that they are the same. ➢ Litigation: you have two options 1. You hire a lawyer 2. You represent yourself: lay litigant ➢ A legal team: you have to be enrolled as a solicitor or a barrister. You cannot claim that anyone is a lawyer, they have to have 'a right of audience' ➢ A company is an artificial entity and obviously cannot rep. themselves Battle v Irish Art Promotion Centre Ltd 1968 • • • Majority shareholders and managing director of company decided to act as lay litigants as they had insufficient funds to pay a legal team. Would make sense as he is familiar w/ day to day running Objection to this - based on Salomon, the managing director is a separate and distinct legal entity from the company itself. Here, the entity that is being sued isn't the managing director personally, but the company itself. Therefore,The managing director could not represent the company as a lay litigant as they are separate legal entities. Salomon under pressure ➢ Salomon Is a positive protection in its legitimate use, however there is danger of people taking advantage of their creditors and leaving them with a loss

Buy the full version of these notes or essay plans and more in our Company Law I Notes.