Separate Legal Personality

Introduction
The case of Salomon v A. Salomon & Co. Ltd established the principle of separate legal personality as
was provided in the Companies Act of 1862 and as it is still provided in the Companies Act of 2006 under
the United Kingdom Company Law. In this case Mr Salomon a shoe manufacturer had sold his business to
a limited liability company where he and his wife and five children where the shareholders and directors of
the company (to comply with the Companies Act of 1862 which required a minimum of 7 members). Mr
Salomon owned 20,001from the 20,007 shares of the company with the remaining 6 shared equally
amongst his wife and children. The company ran into some financial difficulties and sort a loan of 5,000
from one Mr Edmund Broderip who granted the loan. Subsequently the company went into more financial
difficulties and was unable to pay its debt of which an action for liquidation was carried out against it.
When Mr Edmund's failed to realise his unsecured loans he instituted an action claiming for Mr Salomon's
personal liability. The High Court and Court of Appeal held Mr Salomon liable. Upon appeal to the House
of Lords, it overturned the decision arguing that a company had been duly created and cannot be deprived
of its separate legal personality. However as I shall be pointing out in the course of this essay certain
exceptional situations have developed over time through statutory and judicial decisions where the court
will disregard the corporate status and go after natural person(s).

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A Company acquires corporate status upon registration under section 16(2) of the Companies Act
(subsequently known as CA 2006) with the registrar of companies. Section 15(1) provides that upon
registration a company must be given a certificate as proof of incorporation. By incorporation it means a
company becomes a corporation or body corporate. What then is a corporation? A corporation is an
artificial person in law distinct from its members (Shareholders and employees) with the power to sue and
be sued, enter into legal and contractual relationships, acquire property etc. One distinct feature of a
corporation is its distinct legal personality which is different from its members. By this members are
exempted from personal liability. However in certain circumstances the law will deny the corporate status
and hold a person (director, agent) liable or accountable. See the case of Kosmopoulos v Constitution
Insurance Co where the Justice Bertha Wilson held that the best that can be said is that the separate
entities principle is not enforced when it would yield a result too flagrantly opposed to justice,
convenience...One may then wonder what are those circumstances. This work shall be trying to analyse
and discuss those rare situations.

Section 7(1), (2) and section 16(2) of the CA 2006, provides for the registration and incorporation of a
limited liability company so long as the aim legal. The Insolvency Act provides in section 74 that an
incorporation of a limited liability company restricts the liability of its members. By this natural persons
will not be held personally liable if an act is done in the name of a company. See the case of Salomon v A.
Salomon Ltd (supra). However a problem will arise where a member(s) of the company have taken
advantage of the separate legal status to act fraudulently or act in a manner which seems unjust. In such a
situation the court acts with caution and depending on the fact and surrounding circumstances the law may
go after the individual who has acted dishonestly to hold him liable. In the case of Atlas
Mayson e tal, 2009 pointed out two views; the narrower view and the wider view, which the court will
consider when denying corporate status. In the narrower view the court will deny corporate status when the
company's property, rights or liability are regarded as though they belong to another person on the basis of
statutory provisions, contractual relationship, agency relationship, authority over another's property and
fraud. The second view is that the court will disregard the corporate status when the court puts into
consideration the surrounding circumstances and fact regarding the members, directors, other companies in
the same group when deciding a case concerning a company. See the case of EBM Co Ltd v Dominion
Bank where the court stated that
Their Lordship of the privy [of the Privy Council] believe it to be of supreme importance that the
distinction should be clearly marked, observed and maintained between an incorporated company's legal
entity and its action, assets, rights and liabilities on the one hand, and the individual shareholder and their
actions, assets, rights and liabilities on the other hand.
However the courts have experienced some difficulties in deciding what term best suits the situation of
describing the act of denying corporate status. In the case of Atlas Maritime Co SA v Avalon Maritime Ltd
Staughton LJ attempted a clarification by stating
To pierce the corporate veil is an expression that I would reserve for treating the rights or liabilities or
activities of a company as the right or liabilities or activities of its shareholders. To lift the corporate veil or
look behind it, on the other hand should mean to have regard to the shareholding in a company for some
legal purpose.
In the words of Staughton LJ, the term to pierce the corporate veil' covers a broader perspective of
denying corporate status than the term to lift the corporate veil or look behind it' which only covers the
wider view however both situations create legal consequences. Note however that common law makes no
provision for a wider view when it comes to determining separate corporate status however as evidenced
from the case of Atlas Maritime Co SA v Aalon Maritime Ltd (supra) and EBM Co Ltd v Dominion Bank
(supra) the courts on some occasions take cognisance of the wider view.

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The adoption of a wider view is controversial in it and must be treated with great caution to avoid
confusion however the wider view does not deny a corporate status per se but rather it seeks to recognise
such corporate status existence. Mayson e tal 2009 pointed out that the use of a wider view helps in
determining the liability and obligations of a company through the acts of human beings. They stated that
...using information about persons connected with a company to determine the character of the company's
act is when a human being is identified with the company and the human's knowledge, actions, criminal
intent or other physical or mental attributes are taken to be those of the company. Being an artificial
person a company cannot do acts which are only possible with natural persons. However a company would
be held liable nonetheless for wrongful acts done by human beings acting on behalf of the company. See
the case of Lennard's Carrying Co Ltd v Asiatic Petroleum Co Ltd where Viscount Haldene had this to say
... a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its
active and directing wil must be consequently be sought in the person of somebody who for some purposes
may be called an agent, but who is really the directing mind and will of the corporation, the very ego and
centre of the Personality of the corporation...if Mr Lennard was the directing mind of the company, phen
his action must, unless a corporation is not liable at all, have been an action which was the action of the
company itself within the meaning of s. 502...
The phrase directing mind and will' has become the most significant basis for relating the acts of a natural
person acting on behalf of a company as the act of the company. See the Lennard's Carrying Co Ltd v
Asiatic Petroleum Co Ltd(supra). More often than not attributing the act of natural person as the act of a
company is required to be done by person in actual authority for example the directors and managers of a
company. See the case of H L Bolton (Engineering) Co Ltd v T J Graham and sons Ltd where at the first
and second instance the court pointed out that ...the state of mind of these managers is the state of mind of
the company and is treated by law as such. See the case of Tesco Supermarkets Ltd v Nattrass where Lord
Reid pointed out that the intent of Lord Denning's decision in the former case was not intended to included
...all servant of a company whose work is brain work, or who exercises some managerial discretion under
the direction of a superior officer of the company.... However in some cases that have come before the
courts the court has thought it wise to attribute act or thought than have been done by individuals who do
not form part of the directing body of the company as acts forming part in order to make the company
liable. See the case of Moore v I Bresler Ltd where the court held a company liable for false publication of
taxable transactions by the company's secretary and the branch sale manager. Contrast this with the case R
v Rozeik where defendant was not held liable because he was not part of the directing mind of the
company. See also the case of Director General of Fair Trading v Pioneer Concrete (UK) Ltd and the case
of Bank of Credit and Commerce International SA where the court attributed the directing mind and will'
to individuals who were not part of the directing body in order to prevent the directing mind and will of the
company from escaping liability. See also the case of Meridian Global Fund Management Asia Ltd v
Securities Commission where Lord Hoffman guarded against the use of the phrase directing mind and
will' as a determining factor of the acts of a company by natural persons.
In rare circumstances as early pointed the court will deny corporate status and hold natural person(s) liable
for acts done fraudulently or where the act is criminal, charge them for such an act because of the
impossibility of charging the company for such an offence. See the case of Richmond v London Borough
Council v Pinn and Wheeler Ltd where the court held that where a criminal act requires corporal
punishment the court will not embark on a fruitless journey of instituting an action against a company

bearing in mind that even where the company is found guilty no substantial implementation can be made
of the punishment. It will rather institute the action against the natural offender who can be detained or
murdered for his crime. See also the case of R v IRC Haulage Ltd where the court pointed this out ...by
embarking on a trial (of a company for the offence in which, if a verdict of guilty is returned, no effective
order by way of sentence can be made'. Turner J in the case of R v P and O European Ferries (Dover) Ltd
argued that the criminal liability of a company must be weighed each crime on its own. See also the case of
R v Murray Wright Ltd where the court pointed out that it has been statutorily provided under the New
Zealand that an artificial person cannot be held liable for manslaughter. Contrast the situation in New
Zealand with the situation as it is here in the United Kingdom where there are no express parliamentary
provisions however the courts have used discretion and caution to imply a similar reasoning to cases that
involve Corporal punishment. See the case of Richmond London Borough Council v Pinn (supra) and
Wheeler Ltd (supra).

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A criminal action can however the instituted against a company. See the case of R v Birmingham and
Gloucester Railway Co and Great North of England Railway Co where the court established that criminal
proceedings can be brought against a corporate personality. However what becomes confusing is when the
court holds a company liable for an act which requires one's mental state of mind to prove criminal
liability. I guess the case of Director of Public Prosecutions v Kent and Sussex Contractors Ltd the court
used the identification theory (where a company is held liable for the act of its members acting on its
behalf) and held the company liable under the Defence (General) Regulations 1939 for the act of the
transport manager who had given false information. Where natural persons have acted in their capacity as
employees of a company it is only reasonable that liability goes to the company. It will be a different ball
game if the act had been done for their personal interest. See the case of Jones v Lipman where the court
held the first defendant liable to the plaintiff and not the company as in the word of the judge the company
was a cloak'. See the case of R v ICR Haulage Ltd (supra) and Tesco Supermarket Ltd v Nattrass (supra)
where the court further re iterated the criminal liability of a company that requires mens rea.
Common law will impose criminal liability on an individual who had acted in the course of his duty in
such a manner as to aid, abet, counsel or procure the commission of any offence. Section 432 (2) of the
Insolvency Act further provides for prosecution against a director or any such person who has directing
powers who had acted in a manner deliberately or negligently as to create criminal liability. See the case of
Jones v Hellard where the chief executive of a company was held liable for including the title fellow of the
Royal Institute of British Architects (FRIBA) after his membership expired. The court held that it was a
personal act and not that of the company. See also the case of Brown v Director of Public Prosecution
where the court held the manager director of a publishing company who was not involved in the editing

personally liable for the contravention of the provision of section 4 of the sexual Offences (Amendment)
Act 1967 by the company.
The absence of a clear parliamentary provision has made the denial of corporate status ambiguous and
difficult to implement. See the case of Dimbleby and Sons Ltd v National Union of Journalist where Lord
Diplock pointed out this difficulty. However statutory provisions like section 30(1A) and 30(2A) of the
Landlord and Tenant Act of 1954 as amended allows a Landlord occupy a land for business or residential
purposes where he has a controlling interest in the company for a period of not less than five years. See the
case of Tunstall v Steigmann .
Another statute which pierces the veil of a company is the Inheritance Tax Act of 1984 which allows a
natural person for the purpose of income tax relief in agricultural property hold the occupation of a
property by the company controlled by him as occupation held by him [see sections 116, 117, 122 and 123
of the Inheritance Act of 1984]. See also section 213 of the Insolvency Act 1986 which holds a person in a
company personally liable for any act which is calculated in the course of employment to defraud creditors
or for any other fraudulent purpose and may be so disqualified under section 10 of the Companies
Directors Disqualification Act of 1986. Section 993 of the CA 2006 restricts such liability until such a time
when the company is being wound up. Where a person deliberating participate in company trading which
are fraudulent he will be expected to contribute to the company's asset upon it being wound down.
However such a person may be prosecuted at anytime for such criminal act and if found guilty maybe
sentence to period spanning 10 years and maybe disqualified under section 2 the CDDA 1986. See the case
of R v Kemp where the court pointed out three offences which the provision of section 993 CA and section
213 of the Insolvency Act 1986 frowns at and an individual will be held liable in the course of carrying on
the business of a company. These offences are:

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1. where there is an intent to defraud the creditors of the company
2. where there is an intent to defraud creditors of any person
3. where the fraudulent act is done to a customer(s) of the company
Where there is intent to defraud a creditor of a company it will suffice that the act was done against just a
single or in the course of one transaction to attract personal liability. See the case Re Gerald Cooper
Chemicals Ltd. However a company will not be regarded as fraudulent just because a single fraudulent act
had been done by the company against a person. This was decided in the case of Morphitis v Bernasconi.
See also the case of Re Darby where two directors had fraudulently incorporated a company to pocket
money belonging to the public and the courts held them liable to pay back all the money that had been
fraudulently received.

The third part is that it is sufficient that the act done was done in the course of the company business. It is
irrelevant whether the act was the only reason for incorporating the company. See the case of R v
Philippou where the court held the accused persons guilty for carrying on fraudulent business as a result of
concealing information about the financial status in order not to be deprived of their licence. See also the
case of Re H and others (restraint order: realisable property) where the court held the asset of a company as
asset of the owners and not the company.
The case of Salomon v Salomon (supra) established that an agency relationship cannot exist between a
company and its shareholders however in some rare situation an agency relationship may be imputed into a
relationship between a company and the shareholders as was decided in the case of Gramophone &
Typewriter Ltd v Stanley however this relationship in most cases will arise between a parent company and
its subsidiary. In the case of Smith, Stone & Knight Ltd v Birmingham Corp, Atkinson J pointed out that
the issue of an agency relationship will depend on the surrounding facts of each case. The court held in this
case that the parent company as a matter of law and fact owned the business and profit of the subsidiary
company as the subsidiary was a mere legal entity operating on its behalf. See also the case of Re FG
(Films) Ltd where the court refused to grant separate legal entity to the English film company on the basis
that the company was an agent of the American company which owned 90% of the shares. Contrast these
two cases with the case of Adams v Cape Industries plc where the court held that a certain subsidiary
company in the United States was not an agent of the parent company in the United Kingdom as both
companies did not have an agency relationship.
In most cases the court will be eager to pierce the corporate veil of a company where it finds out that the
whole incorporation is a mere hoax. How then do the courts determine when a company is a mere facade?
In the case of Gencor ACP Ltd v Dalby a director who had breached his fiduciary duty had diverted
business opportunities meant for the company he was working with to a personal company owned and
operated by him. When this was discovered the claimant company had sought to recover the money of
which the defendant denied personal liability. The court however found that the company was only a mere
facade intended for receiving cash and operated no business at all. The court held the defendant personally
liable. See also the case of Woolfson v Strathclyde Regional Council where the court ruled that the court
will only deny corporate status where the company is found to have been incorporated for the purpose of
carrying out a fake business or not for the purpose for which it makes others believe. In this case the court
refused to treat two separate entities as one for the purpose of compensation. This case established the
mere facade test See also the case of V-C in Trustor AB v Smallbone In this case the defendant had
resigned and set up a company. It was then discovered that the sum of 39m had gone missing and 20m
was traced to a company owned by the defendant where the court pierced the veil and found out that the
defendant company was a mere facade owned by the former managing director of the claimant company
who had only created the company to create the illusion of separate legal personality. He was held
personally liable. This re iterated the court's decision in the case Woolfson v Strathclyde Regional Council
(supra) and Adams v Cape Industries plc (supra) where the court argued that the corporate veil will only be
pierced where there is indication that the company is only a mere facade. See the case of Re Darby (supra).
In most situations the court will be willing to pierce the corporate veil where a fake company has been
created by the defendant to escape the limitation on his conduct by law and such rights of relief which third
party hold against him. As pointed out in the case of Adams v Cape Industries plc (supra) one essential tool
which the court will be looking out for is the intent of the defendant. Where the intents do not seem
genuine the court will not hesitate to lift the veil and go after the defendant or the person who has acted
suspiciously or fraudulently. In the first instance the court will prevent from escaping liability when the
court imposes specific performance on such a person. In the case of Gilford Motors Co Ltd v Horne a

director had been contracted to work for a company and one of the conditions was that he was not to
operate a business similar to that of the claimant company. He subsequently incorporated a company which
carried on similar business like the claimant company and in order to conceal this fact had he had made his
wife and some other persons the directors and shareholders of the company. The court granted an
injunction against the company and the director noting that the company was a mere hoax. See the case of
Jones v Lipmam (supra) where the court orders specific performance against the defendant company which
was merely a hoax.
The second instance in which the court will not hesitate to pierce the veil and go after a natural person is
where the company had been incorporated to escape liability to third parties. In the case of Re a Company
the defendant had set up companies in order to put away assets so as to conceal the fact that he was capable
of meeting his liability to the plaintiff. The court pierced the veil and permitted the plaintiff to recover
liability from the defendant. See also the case of V-C in Trustor AB v Smallbone (supra) where the court
pierced the veil to hold a director liable for the sum 20m traced to his personal company from the
claimant company where he was a former director. See also the case of Kensington International Ltd v
Republic of Congo where the veil was lifted to expose the Republic of Congo as the sellers of oil and
receiver of profit from the sale. Contrast this with case of Ord v Belhaven Pubs Ltd where the court argued
that where there is no sufficient evidence to pierce a company's veil if will refrain from doing such.
Note also that the court will not pierce the veil of incorporation so that the third party may acquire
possession in a future date. See the case of Adams v Cape Industries plc (supra) where the court pointed
out that it will refuse to ...accept as a matter of law that the court is entitled to lift the corporate veil as
against a defendant company...in respect of particular future activities of the group....

Conclusion
The law as it is under the English company law will rather impute the principle of separate legal
personality to a limited liability company as was the case in the case of Salomon v Salomon than apply the
doctrine of lifting the veil. However the law will be ready to go after a person who takes advantage of the
principle of the case in Salomon v Salomon to act in a fraudulent or unspeakable manner. It is the intent of
the law is to create justice and fairness as it evidenced in both statutory provision and judicial decisions.
However the principle of separate legal personality comes with it some vagueness especially when one
looks at the exceptions which come with the principle. It is therefore necessary that something is done to
reduce if possible eliminate such vagueness.

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The Concept of Separate Legal Entity

in light of Corporations
January 30, 2015 by amoolya Leave a Comment

Bhanu Srivastava
RMLNLU, Lucknow
Editors Note: The paper deals with the concept of the separate legal identity of a
Corporation; which is separate from its shareholders or its directors. The concept is
looked at form the point of view of the origin of the separate identity of a Corporation
and the need for such a distinction along with the capacity and liability of a
Corporation. The various theories of Legal Personality are also discussed in great
detail.
INTRODUCTION
The main object of Law is to regulate the relationship between individuals in the
society. The validity of the acts and omissions of persons is determined on the basis
of their reasonableness. All those acts which do not adversely affect the interest of
others are held to be lawful whereas the acts which interfere with the rights of others
are called unlawful. Therefore law enforces certain duties on individuals for the
protection of interest of mankind. Therefore rights and duties form the basis of
judging the legality of mans act. The law imposes liability for unreasonable and
unlawful acts, the enforcement of which is ensured through legal sanctions. The law
being concerned with regulating the human conduct the concept of legal sanctions.
The law being concerned with regulating the human conduct, the concept of legal
personality constitutes an important subject matter of jurisprudence because there
cannot be rights and duties without a person.
The separate legal entity concept, as it applied to large joint stock companies,
evolved throughout much of the nineteenth century, and in particular, during the
period between 1840 and 1880. This evolution was gradual and involved subtle
changes that occurred on a number of fronts. Common law developments included
the changing nature of shares and the refinement of the internal relationships within
a company which served to separate a company from its shareholders and thereby
differentiated companies from partnerships. At the same time, companies adapted
their capital structures and the ways in which they raised capital so as to make
themselves more attractive to investors. These practices also reflected the distinction
drawn by the investment sector between joint stock enterprises and partnerships.

The separate legal entity concept then, was largely developed by the late nineteenth
century insofar as it applied to joint stock companies.
This project work along with different theories of corporations also examines the
well-known case of Salomon v Salomon & Co Ltd and its effect on the evolution of
the separate legal entity concept. It is important to consider the role of Salomons
case in this evolutionary process because the legal principle derived from the case
has been the legal basis of the subsequent application of the separate legal entity
concept to corporate groups. Salomons case is usually regarded as a landmark case
which finally established the fundamental principle that a company is a separate
legal entity distinct from its members. This core principle of company law has come
to be so closely associated with the case that it is widely known as the principle in
Salomons case. According to this widely accepted narrative, Salomons case
represented a belated but inevitable advance of the law towards clarifying the
separate nature of the relationship of shareholders and their company and thereby
better serving the needs of business by establishing a more efficient company law
that recognised the commercial expectations of the business community.[1]
ORIGINS
The word person is derived from the latin word persona which meant a mask worn
by actors playing different roles in a drama. Until sixth century the word was used to
denote the part played by a man in life. Thereafter it began to be used in the sense of
a living capable of having rights and duties.
Generally there are two types of person which the law recognises namely natural and
artificial. The former refers to human beings while latter to other human beings which
law recognised as having duties and rights. One of the most recognised artificial
person is a corporation. In the opinion of many writers the word personality has
been restricted to human beings because of the sole reason that they only are
subjected to rights and obligations, but in law the scope of word personality is wide
enough to cover gods, angels, idols, corporation etc. despite of the fact that they are
not human beings.
Conversely there may be living persons such as slaves who were not treated as
person in law because they were not capable of having rights and duties. Likewise, in
Hindu ascetic who has renounced the world ceases to have any proprietary rights

and his entire estate is passed on to his heirs and successors and his legal
personality is completely lost.
Human beings are no doubt units of society and were in existence prior to evolution
of both law and society. Since laws were made by individuals and for them, jural
relations between them came to be recognised for legal purposes. Human beings as
a legal person, therefore implies a multitude of claims, duties liberties, liabilities etc.
However no sooner than later it was realised that treating only human beings as
persons in law would lead to good deal of needless perplexity, which could be
avoided by conferring legal personality on certain jural relations applicable to others
than human beings for the purposes of law.
Definition of legal person:Jurists have defined legal persons in different ways,
The German jurist Zitelmana considers will as the essence of the legal personality
to quote him personality is the legal capacity of will, the bodylines of men for their
personality a wholly irrelevant attribute
Salmond defines a person as any being to whom the law regards as capable of
rights and duties. Any being that is so capable is a person whether human being or
not and nothing that is not so capable is a person even though he be a man[2]
Gray defines person as entity to which rights and duties may be attributed any
being that is capable of holding a right or duty, whether it being a human or not is
person in law.[3]
According to Paton, legal personality is a medium through which some such units are
created in whom right can be vested.[4]
Therefore persons in juristic terms are of two kinds: natural and legal .the former are
human beings while the latter may be real or imaginary, in whom law vests rights and
imposes duties and thus attributes personality by way of fiction.
A natural person is a living human being. But all human beings need not necessarily
be recognised as persons in law. For example slavery, before abolition of slavery the

slaves were considered to be devoid of any legal personality for they could not have
any rights and duties. Also persons such as children have restricted rights for they do
not have right to vote.
Legal persons on the other hand is a person any subject matter in which the law
attributes legal personality. Legal personality being the creation of law can be
conferred on entities other than human beings. As Salmond rightly observed that
law in creating legal persons always does so by personifying some real things. He
further pointed out that all though all legal personality involves personification the
converse is not always true.[5]
Legal persons are therefore artificial beings to which law attributes personality by
way of fiction where it does not exist in fact. They are capable of rights and duties like
natural persons.
Hibbert classified legal persons into three different categories:

Certain non-living things can be conferred legal personality by personification.

The existence of such a legal person is real but its personification is fictitious.

A collection of rights and duties may be vested in some real or imaginary

beings to whom personality is attributed by law.

Fitzgerald, the learned editor of Salmond jurisprudence writes that legal

persons being the arbitrary creations of the law, may be of several kinds the
English law however recognises only a few kinds of legal persons .(1)
corporations (2) institutions such as trade unions and societies and
associations, and (3) the estate of funds.

THE CONCEPT OF SEPARATE LEGAL ENTITY

The principal effects of the formation of a company are twofold. First, its
shareholders, and their transferees, become members of an association and are
granted rights as such. Pre-eminent among these are, usually, powers of control in
the widest sense of an entitlement to participate, by voting, in the management of the
company through the appointment and removal of its directors, the distribution of
profits and other decisions of the company in general meeting, and also by the power
to enforce the companys regulation. Secondly, and consequently, the members

relinquish all proprietary and other interests in the monetary or other consideration
which they have given for their shares and which becomes wholly vested in the
company. In effect, therefore, the members rights of ownership of their assets are
completely reconstituted and the powers conferred by membership substituted for
powers of direct this result is achieved by.
Applying to the company three basic principles or groups of principles. First, the
legal capacity of the company is restricted or limited in its extent, both by the objects
of the company and, more basically, by the common law, to activities which are both
lawful and appropriate to the general scope of its purposes. Secondly, within the
scope of its particular objects the company is accorded legal capacity for proprietary,
contractual and other purposes which is of exactly the same nature as that
possessed by natural persons of full capacity. This capacity is entirely separate from,
and not derived from or related in any way to, the individuals who ultimately comprise
the companys membership. Thirdly, the company itself is accorded full and
independent procedural capacity both vis-h-vis its members and outsiders. From the
combination of these principles flow all the well-known practical aspects of separate
legal entity. For example, due to its separate proprietary and other capacity the
company may enjoy perpetual existence, its usefulness as an entity for accounting
purposes is given a legal foundation, and the possibility is opened that its members
may limit their liability.
Like the trust, the company enables the proprietary interests of natural persons to be
associated and reconstituted in a manner which makes possible a real division of the
ownership and control of property. Unlike the trust, however, the company may, to the
extent it is empowered, itself possess full and independent capacity to exercise
contractual, proprietary and other rights.
Corporate personality:
Meaning
Corporate personality is a creation of law. Legal personality of law is recognised both
in English and Indian law. A corporation is an artificial person enjoying in law
capacity to have rights and duties and holding property. A corporation is
distinguished by reference to different kinds of things which the law selects for
personification. The individuals forming the corpus of the Corporations are of two

kinds distinguished in English law as corporations aggregate and corporations sole.

According to coke persons are of two sorts ( a)persons naturally created by god and
persons incorporate or politique by policy of man. A corporate aggregate is a group
of co-existing persons and a corporation sole is an incorporated series of successive
persons. The former is that which has several members at a time and the latter is
that which has one member at a time. Corporations are found only when the
successive holders of some public office are incorporated so as to constitute a
single, permanent, and legal persons.[6]
Evolution of the notion of corporate personality
In mature systems of law the doctrine of corporate personality is fully developed and
a clear cut distinction is made between the individual who compose a corporation
and the corporation itself. If we postulate that the company may have a distinct
persona separate from that of is shareholders or directors, it is difficult to attack the
logic of this distinction. Whatever may be said of its practical effect? Conversely the
acts of two separate departments of a company are in law the act of the same
person.[7]
If a group of miners wish to co-operate to secure cheap delivery of coal from the
colliery at which they work, they must be careful as to the legal forms they use. if
they create an incorporated company to organise the transport a carriers licence
must be secured, since the company is carrying goods for hire or reward .but if they
merely form an association then each member is regarded as the part owner of the
vehicles and the co-owners do not carry their own goods for hire or reward merely
because they contribute to the running expenses. The formation of a company
introduces a new legal persona which owns vehicles and receives money for coal
that does not belong to it[8]
In modern law therefore there is a clear cut distinction between the personality of a
company and the personality of its members. The company may engage in juristic
acts, sue, and be sued .though all the members change overnight, indeed even if
they all die the company remains the same legal persona. But this conception of
corporate personality is achieved but slowly.[9]
The first step to evolve is based on family, but no doctrine of group personality is
necessary at home the family retained a very strong organisation but no theoretical

difficulty arose as its powers were vested in human pater families. Religious and
ecclesistical grouping provides another unifying element and we also have the
manifold agencies of government such as government such as the counties,
hundreds and boroughs of English law. Economic associations such as the merchant
guilds create another organisation of the community. But it is futile to expect to find
answers to problems phrased in modern language concerning corporate personality,
for they were not asked earlier by the lawyers. We have already seen that the state in
England reached a high degree of organisation on the very inadequate theory that
the state was the king and the king the corporation sole.[10]Duffs analysis on rule of
Roman law reveals how long the road to a fully developed conception of human
personality is. Persona was not always used in the sense of legal personality, and
there are hundreds of passages where homo could be substituted for persona
without any apparent change in the sense. If we find lack of analysis where the
individual is concerned it is not surprising to say that the republican lawyers did not
get beyond the first rudiments of that very abstract and artificial conception,
corporate personality.
In the English law there were in thirteenth and fourteenth centuries numerous active
groups of whom some were dissolved into their component parts before they
became corporations others followed a gradual development to legal personality.
When Bracton wrote the notion of corporate personality .it not clearly understood and
the evolution was comparatively slow. The inimitable touch of Maitland has enlivened
the story of the corporation sole and we see there the great difficulty that exist in
securing a clear distinction between the rights of natural man and the rights of
corporation sole which it represents. The corporation sole was a useful device for
holding of title to church land, but, although logic would require us to recognise that
the artificial corporation sole can survive the death of natural person, the medieval
lawyers however thought that the artificial corporation was in abeyance if the
benefice was as vacant. A statute of limitation speaks of a corporation sole or his
predecessor.[11]
Later in the fifteenth century it was felt that the corporation could not sue one of its
members, for this was really a case of a man suing himself. By the time coke, it was
laid down that the corporation could be created either by a common law, by authority
of parliament, by royal charter or by prescription but there must be some lawful
authority of incorporation there must be. Corporation played a large part in

development of British empire .as a result of which there were 65000 registered
companies in England, but within forty years the number increased to 3, 31,000.
In 1897 Salomon v Salomon & Co Ltd[12], a case concerning the legitimacy of
limited liability of a single beneficially owned company according to the companies
legislation, created the concept of the separate legal personality of a company. This
idea, often described as a fundamental principle of
Company Law by our judges, exists both as a powerful metaphor and a judicial
reality The interaction of these two aspects has in a sense caused the concept to
assume a life of its own as a persuasive metaphor which has dictated the course of
law focussed around its fulfilment rather than the specific regulative aims of the law
in each discrete area. The principles application in so many different situations each
with utterly different consequences, indicate a sense in which the courts have often
merely mapped out the logical consequences of separate legal personality with
inadequate examinations as to its specific ramifications.
The concept of the corporation as a separate legal personality is, as Farrar describes
essentially a metaphorical use of language, clothing the formal group with a single
separate legal entity by analogy with a natural person] while obviously a fiction, the
choice of metaphor or analogy is not entirely arbitrary, and must respond to
organisational realities of the corporation as well as conforming with and making
intelligible the treatment of organisations as legal actors[13] In this sense the
conception of a corporation is both analytical and ideological, descriptive and
prescriptive, It is not enough to dismiss the debate over the nature of corporate
personality as Dewey did in 1920 by emphasising that corporate rights and Liabilities
were the product of the law and that the legal implications or meanings of the
corporation was whatever the law makes it mean.[14]
The laws conception that the company is at law a different person[15] in some
ways seems proper and satisfying, as Dan-Cohen writes, it at once provides a
unifying familiar image of The organisation and expresses those features in virtue of
which treating the organisation as a legal actor makes sense .[16]The corporation as
a complex organisation requiring regulation in many different situations presents a
special problem as Dan Cohen writes:

The cognitive need for epistemic access thorough a Unifying metaphor is felt most
urgently with respect to organisations because of their ontological elusiveness:
hovering between the abstract and the concrete, they evade our grasp by constantly
invoking the opposing fears of reductionism and Rectification.
The metaphor of personality is useful in conceptually facilitating and describing many
of the corporations traditional and modem corporate attributes. The metaphor was
used in Salomon to express the fact that Salomons incorporation was legitimate
according to legislation and therefore he should be a11owed to benefit from limited
liability. The creation of the separate legal person analogy/metaphor was useful in
particular to assert this point against the first instance judge mad court of appeal who
held respectively that the company was Salomons agent and that Salomon was
trustee for the company.[17] The language used however, does not add anything to
our understanding of the real issues involved and in particular, the analogy with, or
metaphor of, person creates some problems which exhibit the typical dangers of
metaphorical thinking as Dan-Cohen write:
By inducing misplaced analogies between individuals and organisations, the
metaphor of person easily leads to anthropomorphism: the attribution to
organisations of traits and the adoption toward them of attitudes that properly pertain
to individuals only. The conception of the company as a person in particular has
contributed towards two tendencies: firstly the tendency to treat the normative status
of Corporations with similar considerations that ground and determine the legal fights
of individual human beings, and secondly, the diversion of judicial attention from the
distinctive features of organisations (many of which obviously do not correspond to
the idea of person) and from the normative implications of these features[18].
The courts treatment of separate legal personality
The doctrine of piercing the veil has been the primary method through which the
courts have mitigated the strenuous demands of the logical fulfilment of the separate
legal personality concept. The problems with finding some thread of principle through
all the decisions basically stem from the false unity of the cases which, while
involving vastly different underlying issues, are still linked under the metaphor of the
veil As Blumberg writes ~the conceptual standards of entity law are frequently
regarded as universal principles and applied indiscriminately across the entire range

of the law o In that way while it is possible, as some writers have done, to analytically
organise the cases in this area in various ways, what is needed is a more diagnostic
approach which examines why rather than how the area is a problem o The point is
not to simply rationalise the disparate cases under some principle, but to point to
their essential dissimilarity and criticise the framework around which they are
organised. The function of much of the courts work in this area is to delineate the
legitimate uses of the corporate form It is obvious that the existing framework,
organised as it is around reluctant departure from the demands of a metaphor, is
inadequate for the proper articulation of such varied and complex questions.
The primary weakness of most attempt to rational the cases in the area is their tacit
acceptance and reliance on the veil metaphor. A more obvious example of this can
be seen in an article by Otto lenghi whose self-appointed task is to propose
suggestions for some inroads into this jungle of judgments.
Ottolenghi commences his analysis the the popular warning of Cardozo J that
metaphors in law are to be narrowly watched, for starting as devices to liberate
thought they end often by enslaving. . However, his analysis is divided and organised
around four categories: peeping behind the veil, penetrating the veil, extending the
veil, and ignoring the veil of each of these categories he argues has its own
appropriate set of considerations and justifications.
Such an approach is flawed in its reliance for a legal principled analysis on the
concept of the veil. While obviously compromised by the fact that it is result-driven
its assertion that there are considerations appropriate to categories referable to the
veil allies itself to perpetuating the very source of confusion in this area. Any
framework that would align Lee v Lees Air Farming Ltd[19] (a case about whether
the director of a single member family business could legally be allowed to employ
myself for the purposes of workers compensation) and Walker v Wimborne[20] (a
case on directors duties within corporate groups) on the basis of their similar
treatment of the corporate veil can only blur any understanding of the area.
The categories analysis adopted by most writers identifying particular legal
categories which have been used to justify piercing the corporate veil has similarly
been criticised for being result oriented and rarely assisting as a guide to predicting
when and under what conditions another court will be prepared to lift the veil.

Corporations: Legal Capacity

To the extent that a company is properly authorised to act, what is the nature of the
legal capacity which it may exercise? Is it real, or fictitious? The terms fictitious
and artificial, as sometimes used to describe companies can only be understood by
taking account of the twofold nature of the corporation. It consists both of an
association of members, which may themselves be corporate bodies; and of an
entity possessing independently of its membership the legal capacity to exercise
proprietary, contractual and other powers. Clearly, as an association of members it
has as real an existence as any other formally constituted society, and the above
terms must therefore refer primarily to the nature of its legal rights and obligations. It
may be thought, for example, that when a company owns or deals in property, or
enters into service, sale or other contracts, it does so not in its own right, as a natural
person may do, but merely for or on behalf of its members and for their benefit. This
being so, the company in reality exists simply as the agent of its members, or as a
trustee for them, of property and contractual rights and obligations which in a true
sense, taking into account (the realities of the situation, belong to those members.
It follows that on appropriate occasions the courts may or ought to disregard the
fiction and deal instead with the company in its true nature as the agent or trustee of
its members. To deny this proposition is not to assert that a company can never be
the agent or trustee of its members or directors. It can, of course, act as an agent or
as a trustee for any other person or persons, including its own members and
directors. Whether or not it is acting in such capacity does not depend on the
existence of an independent mind to control the company, as was shown in Lee v.
Lees Air Farming Ltd., but on whether the proprietary, contractual or other rights in
question are, as a question of fact, being exercised on behalf of its members.
While this is undoubted, it does not affect the wider proposition that, irrespective of
true legal agency, a company may always be held to be the agent or trustee of its
members in appropriate circumstances. In oth3er words, in reality, or in substance,
all the pro- proprietary, contractual or other rights which may be in the apparent or
(fictitious ownership or possession of a company are in fact held or exercised by it
on behalf of its shareholders. This proposition, if it represents the law, must be of
fundamental importance and there is, it seems, considerable authority in its support.

Dicta in certain cases suggest that a company may be the agent of its members
where one shareholder beneficially owns the entire share capital 7e including, for
example, in Pegler v. Craven and Devlin J.s somewhat guarded comments that
. . . the proposition might in loose talk pass muster in the case of the 100 per cent
Shareholder.
But it is a proposition which does not appear ever to have been applied to decide a
case, and which is contrary to the decision in Salomon v. Salomon 4 Co. Ltd., where
the six minority shareholders were all, to all intents and purposes, the mere
nominees of Salomon, the majority shareholder. The House of Lords nevertheless
specifically rejected the suggestion that the company was the agent of the latter.
Further, the dicta to this effect in Pegler v. Craven were subsequently discussed and
rejected by a unanimous Court of Appeal in Tunstall v. Steigmann. Subsidiary
companies constitute a special case within the preceding category, for by definition
they must always be controlled by another company. Again, however, the existence
of complete control does not, of itself, establish that the subsidiary is the agent of its
holding company. This is confirmed by William Cory Son Ltd. v. Dorman Long 4 Co..,
Ebbw Vale U.D.C. v. South Wales Traffic Area Licensing Authority 84 and
merchandise transport limited v British transport commission
THEORIES OF CORPORATE PERSONALITY
1. Fiction theory:- this theory is mainly propounded by Savigny, Salmond,
Kelson and Holland . According to this theory a corporation is clothed with a
legal personality. The personality of a corporation is different from its
members. Savigny regarded corporations as an exclusive creation of law
having no existence apart from its individual members who form the corporate
group and whose acts by fiction are attributed to the corporate entity .as a
result of this change in the membership does not affect the existence of the
corporation or its unity . savigny further pointed out that there is double fiction
in case of a corporation. By one fiction the corporation is given a legal entity,
by another it is clothed with the will of an individual. Thus, fictitious personality
of a corporation has also a will of its own which is different from that of its
members.

Kelson also regards legal personality a fiction. To quote his words it is convenient
peg upon which to hang legal rights and duties. Thus a group of persons or a
successive series of person is a legal person because it has an imaginary
personality by fiction of law.
Salmond also supports the view that a corporation has a fictitious existence. It is
distinct from its members and capable of surviving even after all the members have
ceased to exist. Gray justifies fiction theory on the ground that the main object of
incorporation is to protect the interest of persons having common objectives. Like
fictitious personality, the will of the corporation is also an imaginary creation of law.
[21]
The fiction theory thus believes that incorporation is a fictitious extension of
personality resorted to for the purpose of facilitating dealings with property owned by
a large body of natural persons. The fiction theory, however, answer satisfactorily the
civil and criminal liability of corporations. If it is assumed that the will of the
corporation is attributed to it by the fiction of law then it leads to infer that it must
always be lawful as the will conferred by law can never be for unlawful and illegal
ends.
However this theory has been criticised by Sir Fredrick Pollock on the grounds that
under English law neither collective liabilities nor collective power can be enjoyed by
the body of individuals unless they are duly incorporated under the existing laws.
Therefore unincorporated bodies are not treated as legal person.
2. Realist theory: also known as organic theory, was propounded by Glerke, a
german jurist . He believed that every collective group has a real mind, a real
will, and a real power of action. A corporation therefore has a real existence
irrespective of the fact whether it is recognised by the state or not. The
corporate will of the corporation finds expression through the acts and
directions of its directors, employees or agents.

The existence of the

corporation is based on reality and not fiction. It is a psychological reality and

not physical reality. Gray, however denies the existence of collective will. He
calls it a figment this theory has also been supported by some other jurists like
Bluntschli, Beseler Miraglia, Pollock, Maitland and Dr. Jethrow Brown. Dicey
also contends that the personality of a group is the reflection of its

consciousness and will. Thus group personality is as real as the personality of

an individual.
However this theory has been criticised by J.C. Gray as he contended that collective
will have no reality, it is nothing more than mere fiction. Salmond also says that even
it is assumed that that the group will is reality, the reality of the unitary notional entity
which may in law survive the last of its members cannot be conceded to .moreover
he further contends that the realist theory cannot be applied in case of a corporation
sole because it is simply a series of natural persons whose rights are different from
those natural persons in general and in case of corporation aggregate personality is
nothing more than a metaphor and a fiction.[22]
3. Bracket theory:- Ihering propounded this theory of corporate personality
.according to this theory juristic personality is only a symbol to facilitate the
working of corporate bodies. Only the members of corporations are persons
in real sense and a bracket is put around them to indicate that they are to be
treated as one single unit when they form themselves into a a corporation .this
theory has been advocated by American jurist Hohfeld in a different form, in
his view corporate personality is creation of arbitrary legal rules designed to
facilitate proceedings by and against an incorporated body in the court of law.
His theory has been criticised on the grounds that as it does not specifies as
to when the bracket are to be removed and when the corporate mask be lifted
for taking note of persons constituting the corporation.
3. Concession theory:- this theory presupposes that corporation as legal
person has has great importance because it is recognised by the state or the
law. According to this theory, juristic personality is a concession granted by
the state to a corporation. It is entirely at the discretion of the state to
recognise or not to recognise a juristic person the theory closely resembles
the fiction theory as it also believes that there is no juristic personality apart
from the creation of law. It is for this reason that the fiction theory is being
accepted by the followers of this theory[23]. This theory deviates from the
fiction theory in as much as it emphasis on the discretionary power of the
state in matter of recognising the corporate personality of the corporation.
Some critics consider the theory dangerous because of its over emphasis on
the discretionary power of the state in regard to recognition of a corporation or

not. In this view it may lead to dictatorship and arbitrary restrictions on

corporate bodies, particularly the political entities.[24]
3. Purpose Theory:-This theory was propounded by Brinz, on the view that
corporations are treated as persons for certain specific purposes. The
assumption that only living persons can be the subject matter of rights and
duties would have derived imposition of rights and duties on corporations
which are non living entities .it therefore became necessary to attribute
personality to corporations for the purposes of being capable of having rights
and duties.
These different theories were analysed by Dr. Friedmann who concluded that almost
all of the theories had a political significance and their role in attending the legal
problems has been secondary.
Advantages and disadvantages of separate legal entity concept[25]
Legal protection
Forming a corporation offers legal protection because the business owner becomes
a separate entity from the incorporated company, Inc. notes. This distinction protects
business owners from personal lawsuits and corporate liabilities and secures their
personal assets. A C corporation can be sued since it serves as its own entity. That
means the company and all of its assets and equity are exposed to risks, while the
owners remains safe.
Liability and Taxation
Since a corporation is a separate and distinct legal entity, owners of a corporation
are only indebted to the extent of their interest in the corporation, according to
Business Accent. This means that shareholders are not personally liable for any
company debt and creditors cannot go after their personal assets for business debts.
Similarly, shareholders only pay taxes on any profits paid to them as salaries,
bonuses or dividends and the corporation itself pays corporate rate taxes on any
additional profits at the lower corporate rate.
Perpetual Existence

The main advantage of a corporation is its perpetual existence. Since the corporation
is a separate legal entity from any of its owners, it does not dissolve when one owner
leaves. If a shareholder dies, the company may transfer her shares in the same way
as any other property, and the corporation is not negatively affected. This also allows
a shareholder to disconnect from the corporation by selling all of her shares without
ending the corporation. Keep in mind that when deciding to dissolve a company there
are procedures and paperwork required.
Disadvantages
While a corporation offers many advantages, those same qualities can also make life
more difficult. It costs money to incorporate your business, as start up, operating
and tax costs are not required of most other structures, reports Business.gov.
Corporations have rules to follow and you must adhere to the formalities of
organizing and running the company. Increased business regulations lead to a large
amount of paperwork required to both incorporate and keep accurate tax, business
and monetary records as required by la
Liability of corporations[26]
Corporations are legal persons .it means that they have rights and liabilities .so far as
rights are concerned there is no difficulty in their enforcement .But the liabilities of
corporations present very complicated problems. How are the liabilities of an entity
which is treated as person only by a fiction of law to be enforced against it? This
problem shall be discussed under three headings:1. Liability of a corporation in contract: For entering into a contract two things are
important i.e. the form of the contract and the capacity of the parties, a
corporation has no material existence therefore it always through its agents. It
signifies its assent through seal. Therefore the presence of the seal is
considered as evidence of the assent of the body corporate. The power of the
corporation to enter into contract is limited by the statute .and anything beyond
the words of the statute is rendered as ultra vires. Therefore the corporation
formed under a statute is liable only for the acts done within the ambit of the
statute.

2. Liability of corporations of torts: as observed earlier a corporation always acts

through its agents therefore the liability of the corporation for the torts is based
on the principle of vicarious liability. A corporation is liable for the acts of its
servants done in the course of employment but this rule applies only to those
acts which are intra vires the corporation. Two things are taken into
consideration while imposing the liability upon the corporation i.e. whether the
act was done by the authority of the corporation or the act was done without
the authority of corporation for the acts done with authority the corporation is
liable but for the acts done without the authority the corporation could not be
made liable.
3. Liability for criminal acts:- the earlier view was that the corporation cannot be
made liable for criminal offences for the theoretical difficulties like how to
attribute mens rea to the corporations and how can a corporation be
punished. The procedural difficulties have been now been removed partly by
legislations and partly by judicial decisions and in the recent years the
corporations have been made liable for the criminal acts .for instance:- in the
case of D.P.P. v Kent and Sussex contractors[27] where the manager of the
company has sent in false returns for the purpose of obtaining petrol coupons
the court held the company liable and said that though the act was done
through the manager the company was liable for the acts. In another case of
Moor v Bresler Ltd. The court held the company liable for the criminal acts of
the secretary. Moreover a suit can be filed against the company in the
capacity of juristic person.
CONCLUSION
Therefore from the analysis of the studies of different theories on corporate
personality undertaken as a part of this project it can be concluded that the concept
of separate legal entity is of great importance as it imposes rights and duties on non
living persons by attributing legal personality to them. Clothed with the legal
personality these corporations can own, use and dispose of property in their own
name. Moreover in case of any dispute such conferment of title of legal personality
enables the entity to sue or be sued in its own name. Therefore in the light of above
statements the concept of separate legal entity cannot be regarded as a sham
concept, though not real but not fully fictitious as well.