AIMS AND OBJECTIVES
After reading this chapter you should be able to:
n Understand the consequences of a company having a separate legal personality from its owners and managers
n Understand the concept of the limited liability of shareholders n Analyse and distinguish
● separate legal personality of a company
● shareholder limited liability
n Critically assess the operation and effect of separate legal personality in the context of a corporate group
n Identify three basic ways of supplementing or curtailing the operation of the separate legal personality doctrine
n Apply self-help remedies to fact situations to work around the separate legal personality doctrine
n Understand the situations in which a court will ignore the separate legal personality of a company and the basis for doing so
n Understand how a court will approach interpretation of a statute to determine whether or not it requires a court to ignore the separate legal personality of a company
n Consider fact situations and determine whether or not a claimant against a com-pany may have a remedy against any other person
3.1 The registered company as a corporation
Section 15(1) of the Companies Act 2006 makes it clear that registered companies become incorporated and separate legal persons on registration.
SECTION
‘On the registration of a company, the registrar of companies shall give a certificate that the company is incorporated.’
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WHAT IS A CORPORATION?
Section 16(2) of the Companies Act 2006 makes it clear who the members of a registered company are and that the members may vary over time.
SECTION
‘The subscribers to the memorandum, together with such other persons as may from time to time become members of the company, are a body corporate by the name stated in the certificate of incorporation.’
3.2 What is a corporation?
To understand the meaning of corporation, it is important to understand the concept of a legal person. A legal person is a being or entity with the capacity to both:
n enjoy (by virtue of its existence), or acquire, enforceable legal rights or property; and n be (by virtue of its existence), or become subject to, enforceable legal obligations and
liabilities.
Legal persons fall into two categories:
n natural persons (individuals, including you yourself); and n artificial or juristic persons.
The word ‘individual’ is used in this book to refer to a natural person. The term ‘person’
is used to cover both natural and artificial persons. All artificial or juristic persons are corporations. ‘Corporation’ and ‘to incorporate’ come from the Latin verb ‘corporare’
which means to furnish with a body or to infuse with substance. This is what the law does when it creates or recognises an artificial or juristic corporation: it furnishes an artificial construct with substance in the eyes of the law; with the ability to have legal rights and incur legal liabilities.
Corporations fall into two categories:
n Corporations sole;
n Corporations aggregate.
Corporations sole are limited by law to one member at any given time. Corporations sole are often attached as an incident of an office. Examples are the Crown and the Archbishop of Canterbury. Mayors are also generally corporations sole. The corporation
Corporation Aggregate
Chartered
& statutory companies
Corporation Sole
Industrial &
provident Societies
Building societies Limited
liability partnerships
Registered companies Legal Persons
Artificial persons Natural persons
Corporations Individuals
Figure 3.1 Types of legal persons
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CHAPTER 3 THE COMPANY AS A DISTINCT AND LEGAL PERSON
sole is distinct in law from the individual who occupies the post at any point in time. The individual office-holder changes over time, but the corporation sole continues with no need to transfer any property or rights to the new incumbent. The individual’s acts in the capacity of the corporation are separate from the individual’s personal acts.
In the study of business organisations, we are not concerned with corporations sole, we are concerned with corporations aggregate. Corporations aggregate may (but need not) have more than one member at any given time. Statutory corporations, chartered corporations, registered companies, building societies, industrial and provident societies and limited liability partnerships are all examples of corporations aggregate. Figure 3.1 illustrates the classification of legal persons.
3.3 The consequences of incorporation/separate legal personality
In general terms, a company, because it is a corporation, is a person in law separate from any and all of the individuals involved in the company whether those individuals are its owners/shareholders, its managers/directors or are involved in some other way.
In general terms a company has the capacity to both:
n enjoy (by virtue of its existence), or acquire, enforceable legal rights or property; and n be (by virtue of its existence), or become subject to, enforceable legal obligations and
liabilities.
In specific terms, a company:
n can own property
n can be a party to a contract n can act tortiously
n can be a victim of tortious behaviour n can commit a crime
n can be the victim of a crime n can sue and be sued n has a nationality n has a domicile n has human rights.
All of the above rights and liabilities parallel the capacity of an individual but the scope and content of some of those rights and liabilities are not exactly the same as those of an individual. For example, although some human rights make sense in the context of an artificial person, others do not. Examples of human rights set out in the European Convention on Human Rights (ECHR) exercisable by companies are:
n the right to require a fair trial in the determination of its civil rights and obligations or any criminal charge against it (ECHR, Art 6) (see R (Alconbury Developments Ltd) v Secretary of State for the Environment, Transport and Regions [2003] 2 AC 295);
n freedom of expression (ECHR, Art 10) (see R (Northern Cyprus Tourist Centre Limited) v Transport for London [2005] UKHRR 1231);
n prohibition of discrimination (ECHR Article 14);
n the right to protection of company property (ECHR, Art 1 of Protocol 1).
The ECHR cases brought to protect the rights of companies are tracked on the Human Rights of Companies website referenced at the end of this chapter.
In relation to criminal liability, a number of criminal offences are specifically aimed at companies, particularly under the Companies Act 2006, and do not apply to individuals.
Others have been drafted with companies as one class of accused in mind, for example, offences under the Health and Safety at Work Act 1974. In relation to crime generally, many crimes were established with individuals in mind and the courts have wrestled to establish principles governing when an artificial entity will be considered to have the incorporation
the process by which a legal entity, separate from its owners and managers, is formed
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SALOMON V A SALOMON & CO LTD
requisite mens rea and/or acted out the requisite actus reus, ie for our purposes, when an offence will be imputed to a company. The leading principle, derived from Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC 705 (HL) and developed by the courts is referred to as the ‘directing mind and will test’, the ‘identification theory’ or the ‘alter ego principle’. It was applied in the leading case of Tesco Supermarkets Ltd v Nattrass [1972]
AC 153 (HL), which involved Tesco advertising goods for sale at a price less than that at which it was actually offering them for sale, an offence under the Trade Descriptions Act 1968 at the time (since repealed and replaced by a different offence under the Consumer Protection Act 1987). The theory requires an individual to be ‘identified’ with the company for criminal liability to attach to the company. This arises where the individual is considered to be the ‘directing mind and will’ of the company. This attribution theory has resulted in difficult case law and the test has been called ‘dysfunctional’ (see Sullivan (1996)).
The narrowness of the identification theory inhibited successful prosecution of companies following such national tragedies as the capsizing of the Herald of Free Enterprise (which caused 192 deaths), the Piper Alpha North Sea oil platform explosion (which caused 167 deaths) and the Paddington rail crash (which caused 31 deaths). Public outcry at the failure of the courts to deliver ‘justice’ resulted in the passage of the Corporate Manslaughter and Corporate Homicide Act 2007 which took effect in April 2008 and reflects a systems-based principle of organisational behaviour rather than the individualistic principle developed by the courts. An overview of the Act can be found on the Ministry of Justice website, referenced at the end of this chapter. Under the Act, convicted companies face unlimited fines, remedial orders and publicity orders.
The first successful prosecution under the 2007 Act occurred in February 2011.
Following the death of a geologist employee when a trial pit he was working in collapsed, Cotswold Geotechnical (Holdings) Ltd was convicted of corporate manslaughter. The company was found guilty of failing to ensure the safety of the employee and was fined
£385,000, to be paid over ten years. The fine was upheld on appeal and the company was put into creditors’ voluntary liquidation. The trial in a second prosecution under the Act is expected to take place in June 2012 when a storage product manufacturing company, Lion Steel Equipment Ltd, will be prosecuted for corporate manslaughter after an employee of the company died when he fell through a roof at one of its factories.
Difficulties implicit in imputing wrongful acts to a company are not confined to criminal law. The question of attribution arises in other areas of law, including tort and contract. In those areas, what would otherwise be attribution issues are largely dealt with by applying the principle of vicarious liability and agency law.
A company differs from a natural person in that it:
n has perpetual existence until dissolved n has owners.
3.4 Salomon v A Salomon & Co Ltd
The most famous case illustrating the operation of the concept of the separate legal personality of a company is Salomon v A Salomon & Co Ltd [1897] AC 22 (HL). The case was hard fought, all the way to the House of Lords, by the liquidator on behalf of the unsecured creditors of a company that had become insolvent very soon after being registered under the Companies Act 1862. The case is important because it confirmed the ability of a sole trader to transfer his business into a registered company and thereby insulate himself from the liabilities of the business.
Before this case, the full significance of the ability to incorporate a limited liability company by registration was not appreciated. As the judgments at first instance and in the Court of Appeal indicate, as the nineteenth century was drawing to a close, it was not widely understood that sole trader owners of small businesses could use the Act to secure limited liability and insulate their personal property from business risks.
tutor tip
“Take a moment to check how
‘Salomon’ is spelt and impress your tutor by being in the minority of students who spell it correctly”
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