The Legal Status of a Company under the Law

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In the background of the statement referred in the task 1(a). Discuss the legal status of a company under the law. Your answer should include a discussion on relevant cases 

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Corporate personality refers to the fact that as far as the law is concerned, a company really exists.

Consequently a corporation can easily prosecute and become sued throughout a unique label, maintain a unique property as well as crucially be responsible for a unique debts. It really is this particular strategy allowing limited responsibility for shareholders for the reason that debts participate in this authorized business from the business and not towards shareholders for the reason that company. A company is definitely an unnatural or even fictious staying as opposed to the people. Commonly, just humans usually are recognized by legislation seeing that to be able to access authorized associations, for example legal papers. 

However companies usually are the different and are also the fictional associated with English frequent legislation. However certainly not human being, the law recognizes a company being a authorized business that may are present as well as conduct themselves like a people.

A company will be recognized by legislation seeing that to be able to commitment, to accomplish organization, to own a unique property as well as money, to use staff, to open standard bank records, for you to acquire money also to prosecute and become sued like a people. Additionally, a company might be individual and distinctive coming from people that purchased it such as, the actual shareholders.

It’s also totally different from people that immediate and care for that, the actual directors as well as staff. That individual everyday living in the company coming from it is shareholders, Administrators and staff members is among the substantial concepts linked to company legislations. This companys resources, debts, and agreements likewise belong to the corporation as opposed to on the shareholders whom purchased it, not on the directors whom care for that. This everyday living in the company is usually untouched simply by alterations throughout it is shareholders and directors. 

Investors (members in the company) and directors may well change ( one of them is usually, a new shareholder may well offer off his or her shares as well as a movie director may well die or maybe decide )but the corporation continues untouched.

On that basis, it really is popularly stated a company features ongoing sequence. A company “dies” simply when it is liquidated, wound up or maybe turns into economically bothered or bankrupt .In company law, perpetual succession is the continuation of a corporation’s or other organization’s existence despite the death, personal bankruptcy, insanity, change throughout membership rights or maybe an leave from your organization of just about any proprietor or maybe fellow member, or maybe any transfer of inventory, or anything else. Perpetual succession, along with the common seal, is one of the factors explaining a corporation’s legal existence as separate from those of its owners. This principle states that:

  • any change in membership of a company does not anyway affect the status of the company,
  • death,insolvency,insanity etc. of any member of a company does not affect the continuity of the company.thus the life of the company does not depend upon the life of its members.
  • it shall continue forever irrespective of continuity of its members or directors.except in case of winding up or liquidation of a company.

Limited liability 

As I mentioned above, separate legal personality and limited liability won’t be the same thing.

Limited liability may be the logical consequence on the existence of an outside personality. The legal existence of your company (corporation) means it can be responsible for its very individual debts. The shareholders will lose their particular initial investment inside the company but they cannot be responsible for that debts of the corporation. Just as humans will truly have restrictions imposed on your legal personality (as having youngsters for example), a business can offer lawful personality without constrained liability if that’s how it is conferred with the statute. 

The History Of Corporate Personality

 Corporate legal personality arose from the activities of organizations, such as religious orders and local authorities, that had been granted legal rights with the government to keep residence, file suit and stay sued into their personal suitable instead of to get to count on the actual legal rights with the users powering the provider.

As time passes the style did start to be employed to professional efforts having a public fascination aspect, for example railroad constructing efforts as well as colonial dealing organizations. Nevertheless, modern company law merely started out inside mid- nineteenth hundred years when combination of firms serves had been handed which often helped regular men and women in order to create listed firms using confined legal responsibility. The way in which corporate personality and limited liability link together is best expressed by examining key cases. Aron Salomon looked like there was a prosperous buckskin supplier who particular throughout making buckskin shoes. For many years they went his small enterprise like a single operator.

By way of 1892, his daughters acquired turn into thinking about getting involved in the business enterprise. Salomon chose to add in his small business being a Restricted company, Salomon & Corp.

Ltd. At the time the right dependence on incorporation looked like there was in which no less than several individuals register seeing that members associated with an company my wife and i. elizabeth. seeing in which shareholders.

Mr. Salomon himself looked like there was taking care of overseer. 

Mr. Salomon owned or operated 20, 001 from the firm’s 20, 007 explains for you – the residual 6-8 was contributed automatically involving the another 6-8 shareholders (wife, princess or queen along with a number of sons). Mr. Salomon sold his small enterprise towards the fresh corporation for as much as A£39, 000, that A£10, 000 looked like there was a financial debt for your pet.

This individual looked like there was therefore in unison transmit main shareholder in fact it is main collector. They questioned the company to issue a new debenture of A£10, 000 for your pet. However, intense slow functioning happened with the company can no longer pay out hobbies and interests to Salomon. Even the spouse areas money, but the company nevertheless cannot pay out. 

Eventually, Salomon exchanges the debenture to at least one W, nevertheless this company could not pay out.

W has appeared a secured collectors’, pertaining to this company, seeing that they holds in regard of his a new stability above house from the company throughout phrase from the debenture. W needed a new radio and for that reason, sold the perfect section of the company, my lover and i. at the., the manufacturing plant to repay his obligations. Where resulted in the end in the small enterprise. This left the obligations from the normal collectors, for example, the overall suppliers to obtain insured.

This company needed to be that’s why liquidated with the possessions had gone to get sold to spend them. If the switching upward purchase looked like there was built the official radio turned liquidator unless of course along with until finally a insolvency doctor looked like there was equiped throughout their location.

To be described as a liquidator of an company, the official receiver’s normal functions was to look into almost any incorrect doing inside of company, to secured the possessions, understand them along with disperse the profits towards firm’s collectors, along with, if there is often a excess, towards the individuals permitted that (normally the contributories). If the company travelled in liquidation, the liquidator asserted that this debentures as as used by Mr. Salomon since stability to the credit card debt had been ill, because of fraudulence; Salomon wasn’t an actual incorporator

High Court

The judge, Vaughan Williams J. accepted this argument, ruling that since Mr.

Salomon had created the company solely to transfer his business to it, prima facea, the company and Salomon were one unit; the company was in reality his agent and he as principal was liable for debts to unsecured creditors.

The appeal

The Court of Appeal also ruled against Mr. Salomon, on the grounds that Mr. Salomon had abused the privileges of incorporation and limited liability, which the Legislature had intended only to confer on “independent bona fide shareholders, who had a mind and will of their own and were not mere puppets”. The lord justices of appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability.

The Lords

The house of Lords with one voice overturned this kind of decision, rejecting the arguments coming from agency in addition to fraud.

Salomon followed the required procedures towards set the corporation; shares in addition to debentures have been issued.

The House of Lords held which the company continues to be validly formed because the Act simply required 7 members holding one or more share every.

It turned out irrelevant that the bulk of shares were issued to a single shareholder. Statute did not mention that just about every share holder really should have X amount connected with shares. It stated nothing about his or her being independent, or them to should take an important interest in your undertaking, or them to should have a mind and may of their unique, or that there needs to be anything like any balance of power inside the constitution of this company. (In the Firms Act 2001, it will be possible for one shareholder to put together a company, that is a one man show where he could be himself the shareholder plus the shareholder – closed company).

There was no fraud for the reason that company was a true creature of the lenders Act as there seemed to be compliance and it was good requirements of your Registrar of Firms. The Company are at law a distinct person. 

The 1862 Behave created limited liability companies as authorized persons separate and distinct from your shareholders. They held that there seemed to be nothing in your Act about if the subscribers (i. elizabeth. the shareholders) should be in addition to the majority shareholder.

It turned out held that: “Either the restricted company was any legal entity or it turned out not. If the item were, the business belonged into it and not in order to Mr Salomon.

If it turned out not, there was no person and no thing to become an agent of by any means; and it can be impossible to say concurrently that there is usually a company and there isn’t. ” Hence the company belonged to this company and not in order to Salomon, and Salomon seemed to be its agent. The House further noted: “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.” 

Other cases illustrating the Soloman principle

The principle in soloman is best illustrated by examining some of the key cases that followed after.

The property of a company belongs to it and not in order to its members. Neither a shareholder nor a creditor of your company (unless a new secured creditor) has a insurable interest inside the assets of this company. Mr Macaura was online resources the Killymoon house in county Tyrone. In December 1919 he decided to sell to this Irish Canadian Observed Mills Ltd, all the timber, both felled in addition to standing, on the estate in substitution for the entire supplied share capital of the company, to become held by herself and his nominees. He also granted this company a license in order to enter the house, fell the remaining trees and operate the sawmill.

By August 1921, the company had trim down the remaining trees and shrubs and passed the timber through the mill.

The timber which represented almost the whole assets of this company, was then stored about the estate. On 6 February 1922 an insurance plan insuring the timber was obtained in the name of Mr Macaura. On 22 Feb. a fire ruined the timber about the estate.

Mr Macaura then sought to claim beneath policy he had obtained. The Insurance company contended that he had no insurable curiosity about the timber since the timber belonged towards company and to not Mr Macaura. The house of Lords agreeing with the Insurance company, found that this timber belonged towards company and that Mr Macaura though he owned all the shares in this company had no insurable curiosity about the property of the company. Lord Wrenbury stated that a member – “even in case he holds all the shares is not the corporation and neither he nor any creditor of the company has just about any property legal or equitable inside the assets of this corporation”.

More modern degrees of the Soloman principle and the Macaura problem is seen in cases like Barings plc (in liquidation) versus Coopers & Lybrand (no 4). In that case a loss suffered with a parent company caused by a loss from its subsidiary ( a business in which it held all the shares ) has not been actionable by this parent – this subsidiary was the right plaintiff.

In essence we cant own it both ways- restricted liability has huge advantages of shareholders almost all means that this company is a individual legal entity featuring a own property., protection under the law and obligations.

Another good illustration is Lee v. Lee’s Air Farming Ltd.

The appellant’s husband formed the respondent company for the purpose of carrying on the business of aerial top dressing. The nominal capital of the company was $ 3000 divided into 3000 shares of $ 1 each. Mr Lee held 2999 shares, the final share being held by a solicitor. Mr Lee was the sole ‘governing director” for life.

He was the vast majority shareholder, he was the sole governing director for life and he was an employee of the company pursuant at a salary arranged by him. Article 33 also provided that in respect of such employment the relationship of master and servant should exist between him and the company. The husband was killed while piloting the company’s aircraft in the course of aerial top dressing. His widow, the appellant, claimed compensation under the New Zealand Workmen’s Compensation Act, 1922. 

On a case stated for its opinion on a question of law, the New Zealand Court of Appeal held that since the deceased was the governing director in whom was vested the full government and control of the company, he could not also be a servant of the company. The widow appealed.

It was held: The substantial question which arises is, as their Lordships think, whether the deceased was a “worker” within the meaning of the Workers’ Compensation Act, 1922, and its amendments. Was he a person who had entered into or worked under a contract of service with an employer? The company and Mr. Lee were distinct legal entities and therefore capable of entering into legal relations with one another. As such they had entered into a contractual relationship for him to be employed as the chief pilot of the company.

They found that he could in his role of governing director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of ‘worker’ under the Act. 

The circumstance that in his capacity as a shareholder he could control the course of events would not in itself affect the validity of his contractual relationship with the company. Just as the company and the deceased were separate legal entities so as to permit of contractual relations being established between them, so also were they separate legal entities so as to enable the company to give an order to the decease. In their Lordships’ view it is a logical consequence of the decision in Salomon’s case that one person may function in dual capacities. The appeal was allowed and the widow was therefore entitled to compensation.

Saloman vs Saloman was also accepted as good law and applied by the Sri Lankan court in Trade exchange (Ceylon) Ltd vs Asian Hotels Corporation (1981) 1 SLR 67. In that case ,95% of the shares of a hotel company (The Asian hotel corporation ) were held by a government corporation. 

The supreme court of Sri Lanka held that the company and its share holders were distinct legal entities and that the company did not become an agent of the government even though almost all the shares (95%) were held by a government corporation.

In the Australian case of George Hudson Ltd vs Bank of New South Wales (1978) 3 ALR 366, a shareholder of a company sued major bank saying that because of the negligence of the bank in paying certain cheques which it should not have paid , the value of his shares in the company had depreciated. He claimed the amount of that depreciation as damages from the bank. The court held that if the company assets ( share value ) had depreciated or had been damaged by the banks wrongful act, the proper party entitled to sue the bank for damages was not individual shareholders but the company itself. Accordingly, the shareholders private claim against the bank was dismissed. 

Another striking illustration of a companys separate legal existence lies in the fact that persons in control of a company in the belief that no action can be taken against them by the company because they are part of its management.

The correct position, however , is that a company can sue its own employees and it s directors if they have caused any loss to the company by their actions. For example, in Regal (Hastings) Ltd v Gulliver [1942] UKHL 1, the directors of R Co Ltd bought shares in a subsidiary company knowing that when such a subsidiary company was sold they (the directors) would make a substantial profit. The company sued the directors and the court held that the directors must return such profits as they had made use of their position as directors to make a private profit for themselves (today the actions of the directors would be caught up by principle relating to insider trading). 


A company is an artificial or fictious being – as opposed to a human being. There is really one central principle we can draw and one minor one. The central principle is that the company is a separate legal personality from its members and therefore legally liable for its debts.

This brings us to the minor principle. That is once the technical lities of the companies act are complied with, a one person company can have the benefits of corporate legal personality and limited liability. The above cases show how important, it is for the public or those engaged in business to understand and appreciate the basic principle of company law that a company is separate from its shareholders and staff.

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The Legal Status of a Company Under the Law. (2017, Jun 26). Retrieved January 28, 2023 , from

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