Corporate Personality
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Introduction
Companies are enterprises, also the legal person, so
companies are business entity. Company as the
business entity, different with other nonbusiness legal
person in sociality, for instance: Swansea University,
Morrison Hospital, also guild, government organs, and
other social organisations, etc. Company as business
entity, the distinction with nonbusiness legal person is
business is profitable legal person, in the other hand,
nonbusiness legal person is non—profit legal person.
The reason of why that business is profitable legal
person is company as the business entity who
conduct business operations and gain profit, they are
seeking for maximise profit for survive and
development.
Main Body
According to Pettet (2005), he suggested that “the
nature of the corporation, particularly its corporate
personality, became the focus of thought.” He
identified two main theories: the fiction theory and the
real entity theory.
The fiction theory, also named natural entity theory or
organic theory, describes that the legal person has no
actual reality, no mind, no willing, the legal person
exists only in law. John Marshall who is the Chief
Justice of the United States Supreme Court from
1801 to 1835, described the corporation: it is “an
artificial being, invisible, intangible, and existing only
in contemplation of law” (Schane, 2006). Pettet
(2005) stated in Dewey’s (1926) theory, which
asserted the corporate body is the creature of
intelligent.
On the other hand, the Real entity theory universally
seems as 19th century German realists’ work. Gierke
(1900) viewed corporate personality not only as a
legal conception, but also as a social fact with a
substantial nature. Corporate personality is a living
organism, it allows one or more natural persons
associate together arises a single entity, a new
personality.
The Veil of Incorporation
A business once incorporated, it gains a separate
corporate personality from its members. As a
separate legal person, the company has the power to:
Entering contract in its own name; Sue and be sued;
Purchasing and owning property under its own name;
Incurring debts; and Perpetual succession. Thanks to
the separate legal identity of incorporated enterprises,
their members take limited liability for their entities’
debts. The limited liabilities of members is called as
“veil of incorporation.”
However, there are differences between corporate
personality and limited liability. Chigbo (2006) said
“Limited liability is the logical consequence of the
existence of a separate personality”, however, limited
liability merely as humans can have restrictions
imposed on their corporate personality (e.g. children),
so a company may have corporate personality without
limited liability. Chigbo (2006) described according to
Companies Act 1992, “two or more persons may
incorporate a company with or without limited liability
by signing a memorandum and submitting it to the
Registrar of Companies”
The famouse case of Salomon v Salomon & Co.
(1897) AC 22 is the classical judgment of limited
liability, also is the foundational decision of the House
of Lords in the area of Company Law. Basically, Aron
Salomon was a successful leather merchant in
manufacturing leather boots. In 1892, he formed
Salomon & Co. Ltd. There were at least seven
shareholders: Mr. Salomon, his wife, daughter and
four sons. Mr. Salomon owned 20,001 of totally
20,007 company shares, the remaining six shares
were shared among other six shareholders. He sold
his business to Salomon Ltd for £39,000, of which
£10,000 secured debenture loan which entitled
Solomon. When the company went into liquidation,
the liquidator claimed the debentures used by Mr.
Salomon as security for the debt were invalid, on the
ground of defraud. Mr. Salomon disputed this as the
company was in reality his agent and he as principal
was liable for debts to unsecured creditors, should be
paid off before unsecured debts (CL&Co, 2010). The
House of Lords rejected the arguments from fraud.
Described by Smith (1999), House of Lords viewed
“as Solomon Ltd been formed as an legal person
entirely separate from those who had created it – Mr.
Solomon. He would be allowed to claim the part of his
debenture loan.” The decision also confirmed that the
use of debentures instead of shares could further
protect investor (Chigbo, 2006).
In Puig’s (2000) work, he argued that Salomon’s case
and the separate legal entity is a two-edged sword. In
the one hand, the decision was good to establishing
the corporations are separate legal entities, he stated
“Salomo’s case endowed the company with all the
requisite attributes with which to become the
powerhouse of capitalism” (Puig, 2000). In the other
hand, the decision was bad as Salomon’s case has
encouraged defraud of legal obligations.
The case of Macaura v. Northern Assurance Co.
(1925) A.C. 619 made it clear that “corporate
personality facilitates limited liability by making the
debts belong to the corporation, it also means that the
company’s asset belong to company but the
shareholders” (Chigbo, 2006). Private companies’
shareholders easily tend to think that company is
belongs to themselves. They may act on this wrong
belief.
According to David (n.d.), he stated that the common
law of England does not clothe its partnerships with
corporate personality. However, Civilian systems in
Scotland, some Roman law based countries and
some states of America, seem universally to clothe
their partnerships with separate corporate
personality.
Lift the Veil of Incorporation
In some particular circumstances of abusing in
purpose of the separate legal identity of the company
and members’ limited liabilities, to protect parties
associated with the company especially the creditors,
the court may have the power to ignore the separate
corporate personality, in other word, the court may
“lift the veil of incorporation”, therefore to hold the
members personally responsible for the actions of the
company.
The veil is lifted under the exceptional situation, it
includes: Statutory exceptions and judicial
exceptions.
Statutory exceptions
Under the Companies Act, in some situations of
liability for the company’s debts are imposed upon
other parties who is not normally responsible for the
company’s debt. The situations are:
Where a public limited company acts before it has
received a trading certificate, the individuals who
carry out the acts is liable for the debts. This provision
Companies Act 1985, s.117 (8) has been retained in
the 2006 Act. See CA 2006 s767 (3)
Where a person signs, issues or authorizes the
signing or issue of certain instruments on which the
company’s name does not appear properly. This
provision Companies Act 1985 Section 349(4).
Fraudulent trading and Wrongful trading: Section 213
of the Insolvency Act 1986 describes the fraudulent
trading.
etc
Judicial Exceptions
The statutory exceptions are not exhaustive, and
some judicial precedents provide the court wider
possibilities in disregarding the veil of incorporation.
The veil might be lifted in some situations:
When a company is formed as a deliberate means to
perpetrate a fraud: Guide and Re FG (Film) Ltd (1953)
Where it is used by individuals in avoidance of
contractual obligation: Gifford Motor Co Ltd (1933)
Ch935
In some exceptional situations, the veil is lifted to
allow a group of companies to be treated as a single
one, although the general rule is that each company
within a group is different: DHN Food Distributor Ltd v.
Tower Hamlets (1976) WLR 852 and Woolfson v.
Strathclyde RC (1978) SLT 159
Extinctions of corporate personality
Termination of corporations means extinctions of
corporate personality, and the end of corporate
entrepreneurship. It happens under two kind of
situation: one is company bankruptcy; another is
dissolution of a company.
Whether the company is extinction by bankrupt or
dissolution, the following issue will be liquidation.
When the company is put into liquidation, the
corporate personality will not immediately vanished.
The company, however, have limited capacity in the
process of liquidation. In other word, the company
cannot conduct business operations within the range
as approved and registered before liquidation, only
the liquidation team can represent company conduct
business operations within the range. After the
company process the nullification of registration by
the registration organ, the corporate personality is to
completely extinction.
Conclusion
The essay mainly introduced the corporate
personality, around this topic, the “Veil of
Incorporation” has been defined, there was a famous
case of Salomon v Salomon & Co. (1897) AC 22 which
recognised of the separate identity and member’s
limited liability. However, in some particular
circumstances of abusing separate legal identity of
the company and member’ limited liabilities, in this
context, the court may have the power “lift the veil of
incorporation”. Afterward, this creature been used by
Germany, Japan, and other countries. But when he
Companies Act has been used in China since 1994,
the argument about whether or not introduce “lift the
veil of incorporation”into China never stopped. The
main reason is many state-owned enterprise’ s owner
is government, if these enterprises repudiate a debt,
the foreign court might be adjudge Chinese
government take the responsibility. Indeed, the
principal of “lift the veil of incorporation” able to
ensure the transaction security, as well as make you
go bankrupt.Reference:
Dewey, J., (1926). The Historic Background of
Corporate Legal Personality. Yale Law Journal. p669
Douglas Smith, (1999). Company Law. Oxford: Reed
educational and professional publishing Ltd. p 20
Gierke, O., (1900). Political Theories of the Middle
Age, translated by F.
W. Maitland. (1987) Cambridge: Cambridge University
Press. p62
Pettet, B. G., (2005). Company Law 2nd edition.
England: Pearson Education Limited. p48
Puig, Villalta. Gonzalo., (2000) A two-edged sword:
Salomon and the separate legal entity, Corporation
Law, Volime 7, Number 3. Murdoch Anonymous. (n.d).
Roman Law: The Law of Persons. Available from:
www.law.cam.ac.uk/faculty-resources/10006531.doc
. Accessed October 23rd 2010
Schane, Sanford A., and Foreword, Shuy, R. W., (2006).
Language and Law. Great Britain: MPG Books,
Cornwall
Chigbo Clement, (2006). Corporate personality and
limited liability. Jonesbahamas. Available from:
http://www.jonesbahamas.com/?c=135&a=7866.
Accessed October 23rd 2010
Goldberg QC David. (n.d.). Entity Classification.
Available from: www.law.cam.ac.uk/faculty-
resources/10006531.doc. Accessed October 23rd
2010
Salomon v. Salomon & Co. (1896). (1897) A.C. 22
(H.L.). (2010). CL&Co Ltd Website: Legal Briefing.
Available from:
http://www.cl-co.cn/en/articledetail.asp?id=387.
Accessed October 23rd 2010
University Electronic Journal of Law. Available from:
http://www.murdoch.edu.au/elaw/issues/v7n3/puig7
3a_text.html. Accessed October 23rd 2010
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