Critically evaluate the development of Legal Personality

Critically evaluate the development of the notion of legal personality

Question

“The doctrine of separate corporate personality is the cornerstone of modern company law. It is founded on a conception of the incorporated company not simply as an entity with an independent legal existence from its shareholders but as an object which is cleansed and emptied of them.” ¹

Critically evaluate the development of the notion of legal personality.

Introduction

This paper examines the concept of separate corporate personality, which as Spall, Ireland, and Kelly assert is the central principle of modern company law.² The doctrine is examined in the context of its development, with the conventional view that the case of Salomon v Salomon and Co Ltd³ established the concept being examined in light of the assertion by Spall, Ireland and Kelly that this ignores the historical developments that made such a judgment possible.

The development of separate legal personality

Spall, Ireland and Kelly assert that the doctrine of separate corporate personality is the central principle of modern company law, meaning that the law views a company as an actual legal person, which, just as a person, enjoys the right of owning property and the ability to enter into contracts.⁴ There are a number of legal and economic benefits for company owners by having their company considered a legal person that is separate from them, such as the ability to separate personal and company finances and the benefit of limited liability, so that in cases in which litigation may arise and the company owners are sued, their personal finances and those of the shareholders will not be under threat. Greg and Spall assert that the concept of separate legal personality is based on the concept of the company as one that is not only legally independent from the shareholders that have invested in it, but that it is also “an object which is cleansed and emptied of them.”⁵ Cower has noted that this enabled the company to be “completely separated” from its owners and its members, the shareholders.⁶

Spall, Ireland and Kelly assert that this depersonalised view of the company as a separate legal entity is based on the seminal case of Salomon v Salomon and Co Ltd of 1897.⁷ Whilst Salomon v Salomon and Co Ltd is indeed the founding case for the concept of the company as enjoying separate legal personality, Gregg and Spall take a different view from the orthodox explanation of the concept. The case, which is the precedent for the doctrine, concerned the merchant Salomon who was a sole proprietor of a company that manufactured boots, and he incorporated his business into a limited company in order to accommodate his son who joined him in the business. As at that time the obligation was for a company that was incorporating into a limited company to be comprised of at least seven shareholders, Salomon appointed his family members to positions in the company, dividing the shares between them. He remained the primary shareholder, and when he sold his business, he also became its main creditor. When the company was liquidated, the receivers argued that the debentures Salomon had used were fraudulent, and the court agreed, holding that as Salomon had only created the company in order to transfer his own business to it, he was liable for debts to creditors, in addition to which, his incorporation of the business had been intended only to enable him to continue his business as previously, but with the added benefit of limited liability.⁸

It is however to be noted that the creation of the Companies Act 1862⁹ which predates the Salomon case by several decades, meant that there was no requirement that the members of a company must be independent of the member holding the majority of the shares. Therefore, the Companies Act 1862 essentially created the doctrine that limited liability companies enjoy a complete separation from their shareholders. Therefore, under the terms of the final judgment of Salomon and under the Companies Act 1862, members will not be personally liable for the duties of a company, thus restricting their entitlement and obligations only to a share of the profits in return for their investment in the company.¹⁰ It can be asserted that the judgment in Salomon v Salomon and Co Ltd ¹¹ is of primary significance in the development of the doctrine of the separate legal personality of a company, as it established the essential separateness of a company from its shareholders. This has been developed in the common law and rules have been established, such as that a company acts in its own name, and not in the name of its owners or members, as held in the case of Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners, in which it was stated that “between the investor, who participates as shareholder, and the undertaking carried on, the law interposes another person, real though artificial, the company itself….. assuming that the company is duly formed and it’s not a sham, the idea that it is mere machinery for affecting the purposes of the shareholders is a layman’s fallacy.”¹² The other important factor of the Salomon case was that it established that under English common law, shareholders are not liable for the company’s debts, aside from their original investment in the company, and that they therefore hold no interest in the property of the company.

Spall, Ireland and Kelly noted that “traditionally”, this separation of the company from its members is based on the ruling in Salomon v. Salomon and Co. Ltd, and this means that the “legal act of incorporation” means that incorporated companies are clearly delineated from companies that have not been concerned with incorporation, and which can be described as “organisations which are merely collection(s) or aggregation(s) of individuals, in which the members are the company.¹³ Interestingly, Spall, Ireland and Kelly vehemently assert that the statement that the Salomon case ushered in the concept of a company’s separate legal personality is incorrect, and that in actual fact, there were other significant economic factors that impacted on the development of the concept.¹⁴ They assert that the “conventional” view, which holds the judgment of Salomon principally responsible for the development of the doctrine, ignores significant developments, such as the fact that the whilst incorporation of a company in the eighteenth and nineteenth centuries could create a company that was legally separate from its members; there was however “no suggestion that this entity was completely separate from its members,” and that up until the middle of the nineteenth century, joint stock companies were “consistently identified with their component members.”¹⁵ Indeed, the decision in Ex parte the Lancaster Canal Co. in 1828¹⁶ demonstrates that prior to Salomon in 1897, companies were viewed as associations.¹⁷ The orthodox view of the development of separate legal personality also holds that the Companies Act 2006¹⁸ simply developed the principle of separate legal personality as established in the Companies Act 1862, so that under Section 16(2) of the Companies Act 2006, a company will attain corporate status upon registration. Additionally, Section 74 of the Insolvency Act¹⁹ limits the liability of the members of a company upon its dissolution, so that they will not be considered personally liable.

However, Spall, Ireland and Kelly argue that it was not the judgment in Salomon and the legal act of incorporating a company, which heralded the change in the perception of companies as enjoying a separate legal personality from members, but rather the “changing economic and legal nature of the joint stock company share.”²⁰ Indeed, they argue that the standard, conventional view of the doctrine of separate legal personality and the separation of members from a company completely ignores the historical developments of the nineteenth century, and that the development of the share and other financial instruments at this time as “legally recognised, autonomous forms of property” is intrinsic to understanding the concept of separate legal personality.²¹ Notably, in the eighteenth and nineteenth centuries, “share” was a term that was used to refer to the ownership of an “appreciable part of a whole undertaking.”²² However, during this period, the view of the share was changing, as it began to be considered an equitable interest, and as separate from the assets of a company. This was decisively demonstrated in the 1837 case of Bligh v. Brent, ²³ which concerned the issue of whether the shares of a company were included in their property. The court asserted that the shareholders could have interests only in the profits of a company, and not in their assets. This was a seminal judgment, as it essentially limited the liability of a company.

In the 1854 case of Watson v Spratley²⁴, also predating Salomon in 1897 concerned the shares of an unincorporated mining company. Here, the court held that the interests of the members in the shares were relevant only to the profits of the company, establishing the rule that shareholders could not lay any claim to the assets of the companies in which they had invested, even in companies that were not incorporated. This also meant that shares were given a value as separate forms of property, which, Spall, Ireland and Kelly assert, led to the emergence of a “legal space between joint stock companies and their shareholders.”²⁵ This meant that whilst companies held assets, both legally and in equity, shareholders could only lay claim to shares, a new, “intangible type of property in the form of a right to revenue.”²⁶ This development is key to the understanding of the development of separate legal personality, as it explains the social and economic developments that laid the ground for the decision in Salomon.

Furthermore, Spall, Ireland and Kelly note, it is important to bear in mind the Marxist analysis of these forms of “fictitious capital”, which in the eighteenth century were denoted “choses in action”, and which included such instruments as bills and notes, as well as company shares.²⁷ The significance of the emergence and the use of these instruments was that they were an intangible means of holding money in a company, and holding other parties such as company owners to certain obligations.²⁸ In this way they came to be what Spall, Ireland and Kelly term “autonomous forms of property.”²⁹ From the mid 1820s a market in shares emerged, and this, note Spall, Ireland and Kelly, was due to the expansion of the railway system, which necessitated huge investments, for which the flexible and transferable share was the favoured form of capital, as they were “now marketable commodities, liquid assets, easily converted by their holders into money.”³⁰ As Holdsworth has stated, “some of the choses in action….. changed their original character and became very much less like personal rights of action and very much more like rights of property.”³¹ This development of the share provided a means by which ownership of what is essentially an intangible piece of property contributed to the way in which capitalism itself developed as an economic system, thus laying the ground for the judgment in Salomon, which recognised for the first time in the common law that a company possesses a separate legal personality.

The key issue in Salomon was the separation of the company from the individual, a situation termed “piercing the corporate veil.”³² The case of Prest v Petrodel Resources Ltd in 2013 concerned the financial assets of a divorced couple. As the former husband owned companies, the court was concerned with whether he was entitled to maintain his ownership of them or whether they could be transferred to his former wife under the Matrimonial Causes Act 1973³³. It is of great significance that the judges of the Supreme Court unanimously held that the corporate veil could not be pierced in this way, and that the husband’s company held his assets on trust for him.³⁴ The importance of a company’s separate legal personality and the reluctance of the courts to pierce the corporate veil was demonstrated in the case. There are however occasions in which the corporate veil may be pierced, such as in cases of fraud and concealment of assets, which provide the exceptions to the principle established in Salomon,³⁵. Whilst the judges in Prest v Petrodel Resources Ltd acknowledged that family law does not exist in isolation from the company law principle of separate legal personality.³⁶

Conclusion

Therefore, although the orthodox view of the development of the separate legal personality of companies holds that the case of Salomon v Salomon and Co Ltd ³⁷ established the concept, it was in fact the culmination of a host of economic developments that enabled the judgment to be made. These developments enabled the emergence of the share as an autonomous form of property that was easily transferable, which enabled the courts to determine that members of companies should have claims only on them, and not on the assets of a company. In this way, the judgment in Salomon was in fact the visible result of a historical development that now forms the basis of modern company law.

Footnotes

¹ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 98

² Ibid.

³ Saloman v Saloman and Co Ltd ¹⁸⁹⁷ AC 22

⁴ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G. and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 98

⁵ Ibid.

⁶ Cower, L.C.B. Principles of Modem Company Law (London:Stevens1979, 4th edn) 100

⁷ Saloman v Saloman and Co Ltd ¹⁸⁹⁷ AC 22

⁸ Saloman v Saloman and Co Ltd ¹⁸⁹⁷ AC 22

⁹ Companies Act 1862

¹⁰ Cheon, A. P. Corporate Liability, A Study in Principles of Attribution (Kluwer Law International, 2001) 41

¹¹ Saloman v Saloman and Co Ltd ¹⁸⁹⁷ AC 22

¹² Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 at 740

¹³ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G .and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 101

¹⁴ Ibid.

¹⁵ Ibid.

¹⁶ Ex parte the Lancaster Canal Co. (Mont & Bligh 94 ¹⁸²⁸

¹⁷ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G .and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 101

¹⁸ Companies Act 2006

¹⁹ Insolvency Act 1986 Section 74

²⁰ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G .and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 101

²¹ Ibid.

²² Scott, W.M. The Constitution and Finance of English and Irish Joint Stock Companies to 1720 (Cambridge: Cambridge University Press, 1912, 1951) 45

²³ Bligh v. Brent 1837 (2 Y & C Ex. 268)

²⁴ Watson v. Spratley 1854 10Ex. 222),

²⁵ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G. and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 101

²⁶ Ibid.

²⁷ Spall, I. G.; Ireland, P. and Kelly, D. “Company Law” in Spall, I. G .and Ireland, P. The Critical Lawyer’s Handbook (Pluto Press, 1992) 102

²⁸ Ibid.

²⁹ Ibid.

³⁰ Ibid.

³¹ Holdsworth, W. A History of English Law (London: Methuen, Volume VII, 1937) 75

³² French, D.; Mayson, S.; Ryan, C. Mayson, French and Ryan on Company Law 133

³³ Matrimonial Causes Act 1973

³⁴ Prest v Petrodel Resources Ltd²⁰¹³ UKSC 34

³⁵ Hannigan, B. Company Law (Oxford: Oxford University Press, 2015) 57

³⁶ Talbot, L. Critical Company Law(Routledge, 2015) 50

³⁷ Saloman v Saloman and Co Ltd ¹⁸⁹⁷ AC 22