“Separate legal personality”;
Separate personality means that a corporation is an artificial legal person, created by law, can perform almost everything a natural person can perform. It can sign agreements and contracts, hire employee, pay and borrow money, hold property, carry on a business, sue and be sued, just to name a few.
The separate legal principle is administer globally as a basic principle of Company Law. An corporation is regarded as a different legal entity with a separate being from its owner, management team and members. For this reason, the company's asset are treated separately. For example, a company is responsible for its taxes rather than the owner. Besides, a company is capable of suing and being sued. For instance, if a company is sued, as a result of separate legal personality, the owners' personal belongings will not fall into a risk.
However, in a partnership or a sole proprietorship situation, the owners are individually responsible to the company. Hence, all acts liable by both of the company types are also liable by the owners themselves. (Lawteacher.net, n.d.)
Separate legal was firstly showed in the case of R v Arnaud (1846). A registering authority, given the reason that the ship's owner involving foreigners, reject to register the ship. In fact, the ship was hold by a British chartered corporation that involve foreign members in the corporation. The court held that the registering authority had to record the ship on the principle that the corporation the owner of the ship, not the members of the corporation. However, the concurrent decision in the case Salomon v Salomon & Co Ltd is considered as a milestone in Company law which verified that a corporation is a separate legal entity with separate legal personality (Mwakibinga, 2012).
In the case of Salomon v Salomon & Co Ltd, Aron Salomon was a trader who manufacturing leather boots. At the beginning, he acted as a sole proprietor to ran his business. After that, his son was interested to join his business. Then, Salomon had decided to make his business incorporate as Salomon & Co Ltd, a Limited company.
The valid condition for business to be incorporated at that time was a minimum of seven persons subscribe as the company's member. Hence, Mr Salomon, his wife and their five children become the members of the company. The company paid £ 39,000 to buy the business and each share was £ 1. The company had 20,007 shares, that Mr. Salomon hold 20,001 shares while the remaining six shares were distributed to his wife and five children. Nevertheless, the company had not paid £10,000 to Mr. Salomon but issued debentures to him. Therefore, Mr. Salomon acted as a managing director, principal shareholder and principal creditor of the company. (Lawteacher.net, n.d.)
However, Mr Salomon and his wife had lent more money to the company as it did not perform well. Besides, Mr Salomon cancelled and reissued his debentures to Broderip. Broderip did not receive his interest when it due. He then acted as a receiver to check the liquidation of the company. The bad liquidation lead to the forced sales of the company's assets. Nonetheless, the amount from that sale was only enough to pay Broderip, excluding the compensate for the debenture in full and the unsecured creditor such as employees and utility bills. The liquidator wanted Mr. Salomon to liable for the debts by the argument that the company was Mr. Saloman's agent, thus there was a fraud on the creditors and Mr. Salomon was not granted to the benefit.
The House of Lords held that Mr. Salomon was not liable for the debt of the company and the creditors as the company was not Mr. Salomon's agent (Rachagan, Pascoe & Joshi, 2005).
In relation to the judgment of the House in the case of Salomon v Salomon & Co Ltd, there are four points to show that an incorporated company has separate legal personality. (Lawteacher.net, n.d.)
Firstly, firm's property is firm's property. In the case of Macaura v Northern Assurance Co Ltd, Macaura converted his business into a limited company and had the majority of shares in the limited company which trading timber. However, he continued the insurance of timber in his own name rather than the company's name. Unexpectedly, the property of the company was spoiled by fire. Macaura claimed his losses from the insurance company but his claim was rejected. Even though the property had been insured, it was under Macaura's name. As the property had been transferred to the company and Macaura was not the owner of the property to which claim related, the insurance company was not liable to pay the claim. Hence, if the insurance of the property had transferred from Macaura to the name of company at the moment Macaura converted his businness into a limited company, the insurance company should be liable for the claim (Swarb.co.uk, 2015).
Secondly, firm's debt is firm's debt. This point had already been stated clearly in the case Salomon v Salomon & Co Ltd.
Thirdly, firms can contract with their directors, members and even outsiders. In the case Lee v Lee's Air Farming Ltd, Lee was a pilot. He formed a company to manage an aerial top-dressing business and he held 2999 shares while his wife held 1 share. He acted as a governing director and chief pilot. Out of the blue, Lee was killed in the aeroplane crash when flying for the company. His wife sued for compensation under the Workers Compensation Act 1922. However, it was initially rejected with the reason that Lee was the governing director who had full power to control the company. Hence, it said that Lee was not acted as a worker within the definition of act. After that, the Privy Council held that the company was a separate legal entity, which was definitely different from Lee, even though Lee was the founder of the company. Hence, the company could contract with Lee who acted as an employee. As Lee was also the company's employees, his wife could recover the compensation (Rachagan, Pascoe & Joshi, 2005).
Fourthly, companies can perform crimes and torts. In the case Lee v Lee's Air Farming Ltd showed that firms are liable to crimes and torts because firms are separate legal entity and can contract with others.