Corporate Personality

Corporate Personality

Upon incorporation, a company becomes a legal person, and so it can do many things that a natural person can.

-          Following the Joint Stock Companies Act 1844 the doctrine of corporate personality took on a new-found importance.

-          Salomon v Salomon: Salomon was not personally liable for the company’s debts. The company was a separate entity and thus it was the company that owed money to the creditors, not Salomon.

Why was Salomon so important?

-          It established that a company could be legitimately set up to shield its members from liability;

-          It acknowledged the validity of a one-man company;

-          The fact that a person owns most (if not all) of the shares in the company, does not create a relationship of trust or agency.

Statute

-          Companies are granted corporate personality by statute under section 16(2) of the Companies Act 2006. It therefore follows that statute can set aside corporate personality. Notable examples include:

o   If a public company starts trading before it has been issued a trading certificate. In this situation, the directors will be held liable (section 767 of the CA 2006).

o   Personal liability can also be imposed where directors have acted to defraud creditors, known as fraudulent trading (Insolvency Act 1986, section 213).

o   When a company goes into voluntary liquidation, the directors shall be personally liable if they continue trading, when they knew, or ought to have known, that there was no reasonable prospect of the company avoiding liquidation (IA 1986, section 214).

Common Law

-          As corporate personality is granted by statute, it follows that the courts are not willing to side-step this.

-          Adams v Cape Industries demonstrates this. In this case, the court refused to lift the veil to hold an English parent company liable for the acts of its US subsidiary. In Adams, four arguments were put forward for when the veil can be pierced. These are:

o   Fraud, cloak or sham;

o   ‘One single economic unit’;

o   Agency or trust relationship;

o   Lifting the veil was fair and just given the circumstances.  

Fraud, Sham or Cloak

Gilford Motor Co v Horne – the defendant’s wife set up a company merely to avoid a restrictive covenant. This was merely a sham and so the veil was lifted in this instance.

Antonio Gramsci Shipping Corp v Stepanovs – laid down a number of principles to be laid down in fraud cases. These are:

                The company need not be controlled…