LA4008

Company and Partnership

Law

Separate Legal Personality

Reading
• Callanan, G. An Introduction to Irish Company Law, (3rd
edn, Dublin: Gill & MacMillan 2015), chapter 4
• Thuillier, A. Company Law in Ireland (Dublin: Clarus Press,
2013), chapter 2. pp. 21-49
• Ebooks on Sulis
Learning Outcomes
• Be able to explain the concept of separate legal
personality
• Discuss all relevant case law
Separate Legal Personality
1. What is separate legal personality?

* The company has a separate legal personality

which is distinct from its owners
* Company can sue and be sued in its own
name, enter into contracts etc.
* Consequence: The creditors have no claim
against the personal assets of the members
 Separate Legal Personality
* Separate legal personality was not born out of the
Companies Acts

* Seminal case: Salomon v Salomon and Company Ltd

(1897) AC 22
Salomon v A Salomon & Co Ltd -
Facts
• Salomon v Salomon & Co. Ltd (1897)
• Mr. Salomon transferred his business to Salomon & Co.
Ltd for £38,782, paid in the form of:
• 20001 fully paid up shares with his wife and 5 children
getting one share each
• £8,782 in cash
• The remaining £10,000 was to stand as a debt to
Salomon, secured by creating a floating charge (a
form of security) over all the company’s assets
 Salomon v A Salomon & Co Ltd
• Salomon was the principal shareholder of the company
and its principal creditor
• The company suffered trading losses and Salomon got a
mortgage over the property – however he fell in arrears
and the mortgage provider put the company into
liquidation
• Salomon claimed priority over the mortgage provider
as Salomon’s floating charge was registered first
Salomon v A Salomon & Co Ltd

• The liquidator, on behalf of the unsecured creditors, alleged

that the company was a sham and was essentially an agent of
Mr. Salomon, and therefore, Mr. Salomon would be personally
liable for the debt.
In other words, the liquidator sought to overlook the separate
personality of Salomon Ltd., so as to make Mr. Salomon
personally liable for the company's debt.
Essentially, they wanted to treat Salomon Ltd as if Mr. Salomon
had remained a sole trader.
Salomon v A Salomon & Co Ltd

Court of Appeal
• The company was a wholly unwarranted
perversion of the companies’ legislation and
‘to legalise such a transaction would be a
scandal.’ (Lopes LJ)
• Lopes LJ: ‘It was never intended that the
company to be constituted should consist of
one substantial person and six mere dummies.’
Salomon v A Salomon & Co Ltd
• A ‘mere sham.’
• Lindley LJ: Salomon’s ‘scheme’ was essentially a ‘device
to defraud creditors.’
• ‘The pretended sale to the company was an utter fiction.’
 Salomon v A Salomon & Co
Ltd
• The House of Lords unanimously held that, as the company
was duly incorporated, it is an independent person with
its own rights and liabilities and that "the motives of those who
took part in the promotion of the company are absolutely
irrelevant in discussing what those rights and liabilities are".
Salomon v A Salomon & Co Ltd

• The Salomon decision was controversial- believed that

the rule allowed dishonest people to cheat their
creditors

• Initially - “instrument for cheating honest creditors”

• However, the advantages of such a rule has since been

recognised
Separate legal personality
A company can…

• own its own property

• enter into contractual relations with either natural persons
or other companies
• commit criminal offences and be held responsible for such
criminal offences
• can take legal proceedings and be sued themselves (rather
than the individual directors or shareholders)
 Salomon and Co Ltd
• Lord MacNaghten stated:
• ‘The company is at law a different person
altogether from the subscribers to the
memorandum; 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
receive the profits, the company is not in law
the agent for the subscribers or trustees for
them. Nor are the subscribers as members
liable in any shape or form, except to the
extent and in the manner provided by the
Act.’
On the Subsequent Application
of the Salomon Principle
Lee v Lee’s Air Farming Ltd
(1961) AC 12
• Lee was the primary shareholder in the defendant
company and a director.
• He was also employed by the company as a pilot.
• When he was killed in an accident, his widow made a
claim under the Worker’s Compensation Act.
• Lee needed to be classified as an employee
• The Court of Appeal of New Zealand held that as
shareholder and director he could not also be a worker
employed by the company.
Lee v Lee’s Air Farming Ltd
(1961) AC 12
• On appeal the Privy Council overturned this decision
• Decision: Lee and the company were separate legal
persons
• The company could therefore employ Lee
Secretary of State for Trade and
Industry v Bottrill [2000] 2 BCLC 448

• A director holds the only share in a company-

can he be an employee?
• There is no rule of law, to suggest that a sole
director and owner of majority of
shareholding, could not be an employee of
that company, and be entitled to a redundancy
payment on the liquidation of the company.
Roundabout Ltd v Beirne and others [1959] IR
423

• Use of SLP to end picketing of a pub:

• In Roundabout v Beirne, a company, Marian Park Inns Ltd
operated a pub. Most of the staff of the pub joined a
trade union at the same time. The controllers of the
company were unwilling to employ unionised staff and
so dismissed them all.
• In response, the union picketed the pub. The controllers
of the company then set up a new company,
Roundabout Ltd, and leased the pub from the Marian
Park Inns Limited to it. Three non-union barmen were
appointed directors of the new company.
• No employees= no union issues.
• Roundabout then sought an injunction restraining the
strikers from picketing the premises.
Roundabout Ltd v Beirne and
others [1959] IR 423
• The new company is in law a distinct entity, as is the old
company. Each company is what is known as a legal
person. I have to regard the two companies as distinct in
the same way as I would regard two distinct individuals. I
must, therefore, proceed on the basis that a new and
different person is now in occupation of the premises
and carrying on a business there. It was stated that
though this was a legal subterfuge, it was an effective
one.
Tunstall v Steigman [1962] 2 QB 593
• Mrs Steigmann, the landlord, wanted to
acquire possession of property which she had
leased out to a tenant Mrs Tunstall, so that she
could run her own butchery business there.
• The Landlord and Tenant Act 1954 section
30(1)(g) prevented landlords who wished to
terminate tenancies from opposing a tenant's
application for a new tenancy, unless there
were exceptional circumstances.
Tunstall v Steigman [1962] 2 QB 593

• An exceptional circumstance under the Act included

the landlord wishing to occupy the premises
themselves to carry on a new business.
• Mrs Steigmann had given Mrs Tunstall notice. But
then, Mrs Steigmann decided to incorporate her
business.
• Mrs Tunstall claimed that the company was now
carrying on the business, rather than Mrs Steigmann
as the landlord. Because the company was a separate
legal person, Mrs Tunstall argued that Mrs Steigmann
did not have the right to repossession under the
statute
Tunstall v Steigman [1962] 2 QB 593
• Ormerod LJ held that the incorporated business of the
landlord was entitled to repossess the property. He asked
if there was ‘anything to merit a departure from the
main principle of Salomon v A Salomon & Co Ltd and
continued:
• “[A departure from Salomon required...] ‘that a company
and the individual or individuals forming a company were
separate legal entities, however complete the control
might be by one or more of those individuals over the
company.... any departure... has been made to deal with
special circumstances when a limited company might
well be a facade concealing the true facts.”
MacCaura v Northern Assurance Company
[1925] AC 619

• A shareholder does not have an insurable

interest in the assets or business of the
company
• Damage to a company’s property was not
recoverable under an insurance policy because
the policy was in the name of the company’s
controller and not that of the company. The
company owned the property.
Battle v Irish Art Promotion Centre Ltd
[1968] IR 252
• Chief Justice O Dalaigh stated:
• "in the absence of statutory exception, a limited
company cannot be represented in court proceedings by
its managing director or other officer or servant. This is
an infirmity of the company which derives from its very
own nature… In seeking incorporation [the subscribers]
thereby lose the right of audience which they would
have as individuals; but the choice has been their own…
[the appellant] cannot as major shareholder and
managing director substitute his persona for that of the
company."
Examples of SLP in Practice
• The continuing vitality of the Salomon principle was demonstrated
in England in Maclaine Watson & Company Ltd v Department of
Trade and Industry [1989] 3 All ER 1056, the House of Lords making
clear that the decision in Salomon ‘is as much the law today as it
was in 1896.’