Corporate Personality in Legal Practice

Corporate personality is where the state recognizes that organizations have legal personality. Conventionally, corporate personality referred to the situation where organisations including legal organisations could sue or be sued since they held property rights by themselves and did not rely on the rights of their members. However, with time the definition of corporate personality has changed over time, its meaning has mainly been conferred to commercial ventures such as trading firms and construction projects as well as statutory corporations, in which there is vested public interest. During the nineteenth century, corporations faced difficulties in obtaining of a grant of corporate status from the British parliament. This forced organisations to utilize the trust mechanism to structure what was known as “deed of settlement” companies. The later were complex legal entities which sometimes were used as tools of fraud. The UK government stepped in to remedy the situation by the passing of the Companies Acts. By the end of the nineteenth century, ordinary individuals could now create and register a company easily with limited liability. Consequently, in just a few decades, the ownership of a company transformed from being the privileged of a few individuals to being more or less of a right.

Corporate personality in legal practice

Differences between corporate personality and limited liability

In practice, just like human beings can have restrictions imposed on their legal personality (take the example of minors) so a company can also have legal personality without limited liability depending on the way it was conferred by law. People could decide to form a company today, and register it as an unlimited company i.e. without limited liability (See Companies Act 1992 Section 3(1)). This is stated in Subsection (2) that, “two or more persons may incorporate a company with or without limited liability by signing a memorandum and submitting it to the Registrar of Companies”. The ultimate test of the distinct concepts of corporate personality and limited liability was during the late 19th century in the case of Salomon vs. Salomon & Co. (1897) A C 22. In this land mark case, Mr. Salomon, a leather merchant, had formed the company, Salomon & Co. Ltd. in 1892. Since at this time the Company’s Act required a company to have a minimum of seven stockholders, Mr. Salomon held £10,000 shares, while his wife and five of his children each held one share. Mr. Salomon also served as the manager of his company. These shareholders were ideally nominees of Mr. Salomon implying that all profits belonged to him and so the liabilities as well as expenses. This newly formed company could either be viewed as a legal entity or not. Mr. Salomon owned virtually all the shares, but at the same time the company had complied with the Company’s Act.

Salmon & Co., a newly incorporated company went ahead to acquire the sole trading leather business, valued at £39,000.00 by Mr. Salomon. This value was far from fair valuation, it was a mere representation of Mr. Salomon’s confidence in the continual success of this business. A Purchase price of £20,000 was paid to Mr. Salomon, while £10,000 was paid in terms of debentures; Salomon had given the company a loan, secured by a charge over the company’s assets. The balance was used to pay off debt worth £1000 by Mr. Salomon.

However, soon after Mr. Salomon had successfully incorporated his business, there was an economic down turn. The shoe industry witnessed a number of strikes; this prompted the government, Salomon’s main customer, to divide its contracts among several companies (the Government was trying to diversify its supply base so as to minimize the risk of its few suppliers being hit by strikes). Mr. Salmon’s warehouse was full of idle inventory. Together with his wife they lent the company some money, he also cancelled the debentures. Nevertheless, the company was still in need of more money, and they resorted to borrowing £5000 from a Mr. Edmund Broderip. The debt was in the form of a debenture, with 10% interest and a floating charge acted as security. Unfortunately, the business still collapsed since it could not sustain interest payments. In October 1893, Mr. Broderip sued Salomon & Co. to claim his security. It was argued that Salomon and the company were inseparable, since Salomon could not be his own creditor, thus his debentures were not valid. The company was liquidated and Mr. Broderip was paid but other unsecured creditors did not receive their dues. The court held that, in the absence of fraud, Salomon’s debentures were valid. The company had been constituted appropriately and in the eyes of the law, was a distinct legal entity, totally distinct from Salomon.

The court’s decision on this case confirms that the debentures as compared to shares offer more protection to investors. This case served as a building block for the twin concepts of corporate personality and limited liability as entrenched in the United Kingdom’s Company Law which courts have loyally maintained. It is also important to note that among the chief motivations for forming private companies is the desire to evade the risk of liquidation and the increased capacity to access funds. Palmer in his treatise on company law, points out that, a business deal can be easily conducted with limited liability, without exposing the people interested in it in the event of collapse to the unsympathetic provisions of the bankruptcy law. On the other hand, a company can also raise money using debentures, something which a normal proprietor is unable to do. In the case of debentures, any member of the company, as long as they are acting in good faith, are entitled to take and hold the company’s debentures just like as any external creditor.

Main Consequences of Companies’ Corporate Personality

Just for the sake of argument, one can say that a company conducts business for and on behalf of its stockholders. However, legally, this ultimately does not constitute the relationship of principal and agent between them; neither does it make the shareholders liable to cover the company against the debts incurred by it. The company is by law a different person from the shareholders. In as much as it may seem that even after incorporation the business is exactly the same, with the same people in management and the same hands receiving the profits, by law it is not the agent of the subscribers or a trustee for them. Thus companies can “sue and be sued in their own name; can enjoy perpetual succession, and can hold property and members have no property interest in company property.” (Macaura v. Northern Assurance Co Ltd [1925] AC 619). In the eyes of the law, shareholders are not part owners of an entity; rather, an entity is totally distinct from the shareholding (Evershed LJ in Short v Treasury Commissioners [1948] 1 KB 116 122).

Piercing the corporate veil

Despite a company being a legal entity, in particular situations, courts are generally “pierce the corporate veil”. They directly impose liability on the individuals behind the company. These situations include; where the company is a mere façade, where the company is in effect the agent of its members, where a representative of the company bears personal responsibility for a statement or action, where the company breaks the law by engaging in fraud or other criminal activities, where a contract or a statute is naturally interpreted as a reference to the corporate group and not specifically to the individual company, in situations that are permitted by statute, for example, where a company breaches environmental laws, and finally where a company continues to operate amid inevitable bankruptcy, the directors of such a company can be forced to account personally for trading losses.

Conclusion

Corporate personality includes the capacity of a company to have its own name, to be able to sue and be sued, and to have the right to buy, sell, lease, and even mortgage property under its own name. In this case, property cannot be seized from a company without the required legal process. Many decades after the land mark case, Salomon vs. Salomon & Co., a number of exceptional situations have been clearly outlined, by both the legislature and the judiciary. According to English law, there are circumstances where courts can legitimately “disregard a company’s separate legal personality”. This include where a crime or fraud has been committed by the company. In as much as Salomon’s case is being cited in court to this very day, it has met some denigration. Thus, the concept of lifting corporate veil seems to be coming through fairly clearly. However, the corporate veil is here to stay and can or should be lifted only in the most exceptional circumstances. Theoretically, it may be relatively easy to say with almost total clarity when the veil should be lifted as stated in the statutes. However, in practice, where there are no specific legal guidelines, the courts are increasingly becoming reluctant to “pierce the corporate veil”. Therefore, there is still much debate as to whether the modern courts would make the same decision when faced with the facts in Salomon vs. Salomon Inc. case.