CORPORATE PERSONALITY
Corporate personality is the creation of law. And as per the law, a corporation is an
artificial person created by the personification of a group of individuals. The theory of
corporate personality mainly states that a company has a legal identity different from
its member. Both English and Indian laws follow the concept of corporate
personality.
The creditors of the company can recover their money only from the company and
they cannot sue individual members. In the same way, the company is not in any
way liable for the individual debts of its shareholders/members and the property of
the company is only used for the benefit of the company.
It enjoys certain rights and duties such as the right to hold property, right to enter into
contracts, to sue and be sued in the name of the company. The rights and liabilities
of the members are different from the company.
In short, corporate/legal personality, which the company acquires on incorporation,
confers legal personality and independent status to the company.
There are two types of corporations:
For the first time, this concept was recognized in the year 1867 in the case of Oakes
v. Turquand and Harding. But it was approved and firmly established in the leading
case of Salomon vs. Salomon in which it was held that a company has its own
personality which is different from the personalities of the individuals.
CASE STUDY: Salomon v A Salomon & Co Ltd [1897] AC 22
FACTS:
1. Mr. Aron Salomon was a businessman who specialized in manufacturing
leather boots. After a few years, he incorporated a limited company known as
Salomon and Co. Ltd.
2. In order to meet the requirement to incorporate a company, he needed at
least seven members/ shareholders so he decided to make his family
members his business partners by giving one share to each of them.
3. He sold his business to the limited company for $39000 out of which $10000
was a debt to him. He was then the company’s principal shareholder and
principal creditor.
4. After one year, the company went into liquidation. The assets realized were
$6000 while the liability was debentures held by Salomon $10000 and
unsecured creditor $7000.
5. An unsecured creditor challenged the right of Salomon to have preference as
debenture holder over unsecured creditors.
ISSUE:
Was the formation of Salomon’s company a fraud intended to defraud the creditors?
HELD:
The court said that on incorporation, the company became an independent legal
person and not an agent of Salomon. Salomon, as a debenture holder of the
company was ought to get priority in payment over the unsecured creditor.
IMPORTANCE OF THIS JUDGEMENT:
The decision in this case established the concept of separate legal personality of a
company which allowed shareholders to carry on trading with minimal exposure to
the risk of personal insolvency in the event of a collapse. There are 2 principles laid
down in the Salomon’s case:
1. Artificial Person: Company is an artificial person created by law. Artificial in
the sense, it has no body/soul like a natural person. Created by law means
formation of a company requires fulfilment of so many legal formalities.
2. Limited Liability: The liability of the members is limited to the extent of the
face value of the shares, where the company is limited by shares. Then, the
shareholder is liable to the extent of the unpaid capital on his shares and his
personal assets will not be affected in the event of winding up of the company.
CASE STUDY: Lee v. Lee’s Air Farming Ltd. (1961) AC 12
FACTS:
1. This case is concerning about the veil of incorporation and separate legal
personality. In this case out of the 3000 shares in Lee’s Air Farming Ltd., L
held 2999 shares. He made himself the Managing Director and was also the
chief pilot on a salary.
2. While working for the company he was killed in an air crash. Since his death
was in the course of employment, his widow claimed for compensation. She
claimed £2,430 compensation for herself and her four infant children and she
also claimed a sum for funeral expenses.
3. The respondent company denied that deceased was a “worker” of the
company and alleged that at the time of the accident the deceased was the
controlling shareholder and governing director of the respondent company.
ISSUE:
Was there a separate legal entity? Whether Mrs. Lee can claim compensation?
HELD:
The Lee Air Farming case confirmed the Salomon principal. The Privy Council
allowed Mrs Lee’s claim and said that Lee might have been the controller of the
company in fact but in law, they were separate distinct persons and the concept of
separate legal entity was explained. Mr. Lee could therefore enter into a contract
with the company, and could be considered to be an employee. His wife was
therefore entitled to an award in respect of workmen’s compensation.
Judicial Committee of the Privy Council also said that a company is a separate legal
entity, so that a director could still be under a contract of employment with the
company he solely owned.
