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ASSIGNMENT- LAW-200

(March 30, 2010)


Submitted to:
Faculty MemberBarrister Shaheen Ahmed (ShD)
LAW-200
Section: 05

Submitted by: M Ruhul Quddus


ID # 0920441110
North South Magipara

Introduction:
A company is at law a distinct person. A company is neither the agent nor the trustee of
the shareholders. This is a statement made by Lord MacNaughten during the Salomon vs.
Salomon case. The purpose of this Assignment is to analyze this legendary statement on
corporate personality, in the lights of some leading cases.

Company and its Meaning:


In general sense, a company means a group of people associated to achieve some specific goals.
We can define a company as a voluntary organization for profit with capital dissociable into
movable shares with limited liability, having a corporate body and common varnish. The
company is an artificial legal person created by law and empowered with certain exponents. It
exists in the eyes or contemplation of law as thought it were a natural person, separate and
distinct from the persons who are its members. The features of the company are precisely
described below.

Separate Legal Entity:


It is the feature of the company that is not just association of persons but it has separate legal
entity. By law it is an artificial person. Its asset is not the assets of the shareholders. It can
contract with the members. This feature was firstly accepted in Salomon vs. Salomon and
Company Ltd.

Salomon v Salomon & Co Ltd. (1897):


Mr. Salomon was a dealer and manufacturer of leather boot and shoe. In 1892, he sold his
business to Salomon and Company Ltd. which he made himself. He as well as his wife, his
daughter and his four sons were the shareholders of that company. The newly incorporated
company purchased the sole trading leather business. Mr. Salomon valued the leather business at
39,000. This was not an attempt at a fair valuation; rather it represented Mr. Salomons

confidence in the continued success of the business. The price was paid in 10,000 worth of
debentures giving a charge over all the companys assets. That means the debt is secured over the
companys assets and Mr. Salomon could, if he is not repaid his debt, take the companys assets
and sell them to get his money back. The company also issued 20,007 shares of 1 each. Mr.
Salomon issued 20,001 shares of his name, and 6 shares for his family members, thus the
company held 20,007 shares. The rest of the 9,000 was paid in cash.
After a year, things were not going well for the company and Salomon had to sell his 10,000
debentures. But it was not enough to save the company. The external creditors demanded money
because Salomon and Salomon Company were both one person and this business was of
Salomon and it was being operated by him. It was a fraud.

The House of Lords said:

Either the limited company was a legal entity or it was not. If it were, the business
belonged to it and not to Mr. Salomon. If it was not, there was no person and no thing to
be an agent (of) at all; and it is impossible to say at the same time that there is a company
and there is not.

The company is at law a different person altogether from the shareholders; and,
though it may be that after incorporation the business is precisely the same as it was
before, and the same persons are managers, and the same hands received the profits, the
company is not in law the agent of the shareholders or trustee for them. Nor are the
shareholders, as members, liable in any shape or form, except to the extent and in the
manner provided for by the Act.

In the end the court decided that Salomon and Company Ltd. is different from Salomon, and
Salomon is a secured creditor. So his given loan should be returned first.

Separate Property:
It is also feature of the company that property of company is different from its members. It can
purchase or sell property without the permission of shareholders. In other words, assets of the
company are not the assets of members like partnerships.

Limited Liability:
Limited liability is also another important feature of company. It is the reason that large number
of investors invest in limited liability companies. It is the liability of company to repay not the
liability of its members. Members liability is only limited up to the purchased value of shares.
They have to pay balance amount of their shares.

Perpetual Succession:
The life of company is very stable that human beings life. There is no effect of changing, death,
insolvency of respected member on company. Its existence is not affected by the members
existence. Shares can be easily transfer from one member to another member, so liquidation of
company is only possible by law.

Common Seal:
Company can not sign on any contract because it is artificial person and it works with common
seal. Every document of contract with company is only valid, if there is common seal of
company on it.

Right to Sue:
Company can sue on other parties like natural person for protecting its assets and properties.
Other persons can also charge on the company.
Some other leading cases will help us to analyze the statement, A company is at law a distinct
person. A company is neither the agent nor the trustee of the shareholders.

Macaura v Northern Assurance Co Ltd. (1925):


Mr. Macaura owned an estate and some timber. He agreed to sell all the timber on the estate in
return for the entire issued share capital of Irish Canadian Saw Mills Ltd. The timber, which
amounted to almost the entire assets of the company, was then stored on the estate. On 6
February 1922, Mr. Macaura insured the timber in his own name. Two weeks later a fire
destroyed all the timber on the estate. Mr. Macaura tried to claim under the insurance policy. The
insurance company refused to pay out arguing that he had no insurable interest in the timber as
the timber belonged to the company. Allegations of fraud were also made against Mr. Macaura
but never proven. Eventually in 1925, the issue arrived before the House of Lords.

The House of Lords noticed:

The timber didnt belong to Mr. Macaura, it belonged to the Company.

Mr. Macaura, even though he owned all the shares in the company, had no insurable
interest in the property of the company.

Just as corporate personality facilitates limited liability by having the debts belong to the
corporation and not the members, it also means that the companys assets belong to it and
not to the shareholders.

Adams v Cape Industries plc (1990):


Facts:
To summarize the relatively complicated case, the company was an American registered
company whose business was mining asbestos in South Africa. The company had become the
subject of a class action lawsuit in the United States, and the company tried to avoid fighting the
case in the American courts on jurisdictional grounds. The Plaintiffs obtained a judgment against
the English company in the American courts, but as Cape had no assets left in the U.S., they then
sought to enforce the judgment against the principal company in the group in the English courts.
Judgment:
The court accepted that the purpose of the corporate group structure set up by Cape Industries
had been used specifically to ensure that the legal liability of a particular group would fall upon
the particular group and not the defendant company in England.
The court held that:

"Whether or not this is desirable, the right to use a corporate structure in this manner is
inherent in our corporate law. In our judgment Cape was in law entitled to organize the
group's affairs in that manner."

Subsequent to the decision (which has been followed), English law on this subject is accepted to
be that the court may only pierce the corporate veil in the following circumstances:

When the court is construing a statute, contract or other document;

When the court is satisfied that the company is a "mere facade" concealing the true facts;
or

When it can be established that the company is an authorized agent of its controller or its
members (corporate or human).

The court cannot lift the corporate veil merely because it considers that justice requires it. Nor
can it have regard to the economic reality, and regard a group of companies as a single entity.
The court separately had to consider whether Cape had established a presence within the United
States such that the English court should recognize the jurisdiction of the United States over
Cape, and enforce a U.S. judgment against it .
The Court of Appeal held that in order for a company to have a presence in the foreign
jurisdiction, it must be established that:

The company had its own fixed place of business (a branch office) in the jurisdiction
from which it has carried on its own business for more than a minimal time; and

The company's business is transacted from that fixed place of business.

On the facts the Court of Appeal held that Cape had no fixed place of business in the United
States such that recognition should not be given to the U.S. judgment awarded against it.

Lee (Catherine) v Lees Air Farming Ltd. (1961):


Mr. Lee integrated a company, Lees Air Farming Limited, in August 1954 in which he owned all
the shares. Mr. Lee was also the sole Governing Director for life. Mr. Lee was also employed as
chief pilot of the company. In March 1956, while Mr. Lee was working, the company plane he
was flying procrastinated and went down. Mr. Lee was killed in the crash leaving a widow and
four infant children.
The company as part of its legal obligations had been paying an insurance policy to cover claims
brought under the Workers Compensation Act. The widow claimed she was entitled to
compensation under the Act as the widow of a worker.
The issue went first to the New Zealand Court of Appeal who found that he was not a worker
within the meaning of the Act and so no compensation was payable. The case was appealed to
the Privy Council in London.

The Privy Council found:

The company and Mr. Lee were distinct legal entities and therefore capable of entering
into legal relations with one another

Mr. Lee and the company had entered into a contractual relationship for him to be
employed as the chief pilot of the company.

Conclusion:
Lord MacNaughten stated, The Company is at law a different person altogether from its
members, the company is not in law agent of the subscribers or to the trustees of them.
Company is a separate legal entity from its owners or shareholders. A company is regarded by
law as a single person. It has a legal personality. Corporate personality refers to the fact that as
far as the law is concerned a company really exists on its own. As a result of this, a company can
sue and be sued in its own name, hold its own property and crucially be liable for its own
debts. It is this concept that enables limited liability for shareholders.
Limited liability of the shareholders is an implication of the Corporate Personality feature.
According to it, the creditors of a company are not creditors of individual shareholders and a
decree obtained against a company cannot be executed against any shareholders. It can only be
executed against the assets of the company.
Therefore, the statement given by Lord MacNaughten expresses the concept of corporate
personality.

Reference:

Smith & Keenans Company Law, 14th edition, Pearson-Longman

http://www.lawtel.com

http://www.jstor.com