An Assignment on an incorporated

orporated company has an

artificial
cial entity distinct from its members
Date of Submission 8 August 2020

Submitted to Submitted by
Sabrina Mostafa Saniaa Md. Hasanul Momin Shawon
Lecturer, Department Of Law Reg no: LLB2018000689
Exim Bank Agricultural Batch: 13th Department Of Law
University Bangladesh Exim Bank Agricultural
University Bangladesh

Exim Bank Agricultural University, Bangladesh

House no: 69-69
69 Boro Indara Moor, Chapai Nawabganj 6300
Tel: 078153525-29
29 Email: [email protected]

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 INDEX
CONTENTS PAGE NO

Objective ..……………………………………………….. 3
Introduction………...…….………………..................... 3
Company’s Classification and Characteristics…………... 3
Separate legal personality…………………...……………. 5
Consequences of treating the company as a separate legal
entity……………………………………….…….… ……… 5
Company has a Distinct Entity from its Members……….. 6
Agent & Trustee…………………………………………… 6
Directors ………………………………………………….… 7
Analysis to the Leading Cases........................................... 8
Findings……………………………………………………. 10

Conclusion…………………………………. …………….... 11

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Objective
‘’A company is distinct from its members. Directors are neither agents nor trustees of a
company’’ The purpose of this Assignment is to analyze the legendary statement made by
Lord Mac Naughton during the Salomon vs Salomon case on corporate personality, in the
lights of some leading cases. The statement of Lord Mac Naughton was “The Company is at
law a different person altogether from its members, the company is not in law agent of the
subscribers or to the trustees of them”.1

Introduction
A company is a legal entity that is separate and distinct from its members and shareholders
and can act as a single person. When a company is formed, it is said to have become
"incorporated". However there were several controversies about the company’s entity.
Question was being raised that, ‘does it have a separate entity from its members or does it
have no entity while having same entities that its members hold?’ For this, numerous realistic
cases came to the acknowledgement of law.

In this assignment, a detail explanation about the company, characteristics of it, its different
entity are given. Also “The Company at law is distinct from its members. Directors are
neither Agents nor Trustees of the company”- this statement will be analyzed with reference
to some leading cases related to this issue. 2

Company’s Classification and Characteristics

Company is an association of a number of individuals for the purpose of carrying on some
legitimate business. Usually, company is a form of organization. Company is an association
of a number of individuals for the purpose of carrying on some legitimate business. There are
various kinds of company that can be formed in different jurisdictions, but the most common
forms of company are:

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Limited liability Company: It is a company which is statutorily authorized in certain states
that is characterized by limited liability, management by members or managers, and
limitations on ownership transfer.

Company Limited by Guarantee: This type of companies is formed for non-commercial

purposes, such as clubs or charities. The members guarantee the payment of certain amounts
if the company goes into insolvent liquidation, but otherwise they have no economic rights in
relation to the company.

Company Limited by Shares: It is the most common form of company used for business
ventures. Specifically, a limited company is a "company in which the liability of each
shareholder is limited to the amount individually invested" with corporations being "the most
common example of a limited company." This type of company is common in England.

Company limited by Guarantee with a Share Capital: A hybrid entity, usually used where the
company is formed for non-commercial purposes, but the activities of the company are partly
funded by investors who expect a return. This type of company may no longer be formed in
the UK, although provisions still exist in law for them to exist.

Unlimited Liability Company: A company where the liability of members are unlimited for
the debts of the company.

Public Limited Company: Public companies are companies whose shares can be publicly
traded, often on a regulated stock exchange. It must act in accordance with its charter and the
laws of the state in which it exists. These laws vary by state.

Private Limited Company: A type of company that offers limited liability, or legal protection
for its shareholders but that places certain restrictions on its ownership.

Company is strongly linked with the law and it has some distinctive characteristics. They are:

i) General characteristics and

ii) Lawful characteristics.3

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Separate legal personality
The law treats a company as being a separate person from its members and those who
manage its operations. This is the doctrine of separate legal personality.

The central distinguishing characteristic of a company is that it is crated as a separate legal

person from its participants. That means the company can incur and receive obligations and
hold property on its own name. for example, a company can lend or borrow money, and enter
into contracts with its participants and the outsiders such as suppliers and customers, be the
registered proprietor of land and own chattels(personal property), be a lessor or lessee,
operate a bank account and take out insurance, and act as trustee of the trust on is own right.
The company can be the plaintiff or the defendant in civil proceedings and in certain cases
may be the defendant in criminal prosecution. The right it holds and the obligations it incurs
are the company’s own, not those of its managers, the people who invested in it or its
employees.4

Consequences of treating the company as a separate legal entity:

The consequences of treating the company as a person from its participants include the
following.

A company’s obligation and liabilities are its own, and not those of its participants. Where
a company incurs a contractual obligation or a liability in tort, that obligation or liability is
the company’s and not an obligation or liability of its members or officers. Because
companies are separate entities, creditors of a company are generally unable to look to the
participants in the company to pay company’s debts. But there are exceptions to this general
rule.

A company can sue and be sued in its own name. That means it is not necessary for the
members of the company or its officers to be named as parties to the legal proceedings where
the proceeding only involve the company.

A company has perpetual succession. This means that a company is a continuing entity in
law with its own identity regardless of changes in its membership. It continues its existence

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unchanged, even if its original members die, sell their share to others or otherwise cease to
participate as shareholders.

A company’s property is not the property of its participants. Unlike the beneficiaries of a
trust, the participants in the company have no proprietary (legal or equitable) interest in the
company’s property. They therefore have no ownership right in respect of it

A company can contract with its controlling participants. Because they are separate legal
entities, a company and its participants can enter into contracts with each other. For example
we have seen from solomon’s case that a company can lend money to or borrow money from
its controlling shareholders.5

Company has a Distinct Entity from its Members

In the Eye of Court, Company is an independent identity. It is an artificial person. There is no

body, soul or brain but it works like an human being. It can buy and sell on its own name. No
members have right on company except their invested share capital. So, no shareholder sells
or buy the company's property. They can only sell their bought share at its current market
value. It is not just association of persons like partnership. It has full independent legal entity.
Death or birth of new shareholder will not affect the existence of a company. Shareholders
are not also the agent of company.6

Agent & Trustee

An “agent” is a person employed to do any act for another or to represent another in dealings
with third persons. Agency law deals with the relationship between- Agents and Principals,
Agents and the Third Parties with whom they deal on their Principals' behalf; and Principals
and the Third Parties when the Agents deal on their behalf.

On the other hand, Trustee is a legal term that refers to a holder of property on behalf of a
beneficiary. They have certain duties; these include the duty to carry out the express terms of
the trust instrument, the duty to defend the trust, the duty of loyalty, the duty not to delegate,
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the duty not to be in a conflict of interest position. The term trustee is also applied to
someone held to a fiduciary duty similar in some respects to that of a trustee proper.

Directors

The human agencies that mainly run the company’s business are called directors. According
to Companies Act—1994, “Director includes any person occupying the position of director
by whatever name called”

Directors as agent: It is a well establish principle that directors are the agents of the
company. Where the director’s contact in the name of the company and on behalf of the
company, it is the company which is liable on it, not the director’s personality

Directors as Trustees: Directors are always considered to be trustees of the property or

assets of the company, which comes to their hand and which is actually under their control.
They are to make good use of moneys which they have misapplied as if they were trustees.
Again in the case of exercising their powers, they are bound to act like a trustee for the
benefit of the company only.

Shareholders are the actual owner of the company. But when a company is formed and
registered in the stock exchange under the company Act—1994 it becomes a separate legal
entity or personality. Then everything (ownership and liabilities) goes under the name of the
company.

On the other hand directors are in the duty of managing the corporation. These directors may
be form the shareholders or they can be employed as well. We can say the directors as
employee of the corporation. They cannot be treated as agent or trustee of the company.

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Analysis to the Leading Cases

Following cases can be mentioned as reference cases regarding the issue discussed:

Salomon v. Salomon & Co.

Salomon was a successful leather merchant and wholesale boot manufacturer. Salomon
decided to incorporate his business as a limited company named ‘Salomon and Co’ on July
20 1892. The other shareholders were his wife, daughter and four sons. He gave himself
20000 shares (1 pound each), 1 share to each child (total 5 shares for 5 children) and 1 share
to his wife. Two of his sons became directors; Mr. Salomon himself was managing director.
Mr. Salomon sold his business to the new corporation for almost £39,000, of which £10,000
was a debt to him. At this stage, Salomon was, therefore, the majority shareholder in the
company the managing director and a debenture holder against the company. After 1 year, the
company went into liquidation and the creditors needed to be paid. Salomon aimed to
enforce his debenture and have the company assets sold to repay his £10,000 loan but its
remaining assets were worth less than £10,000 which was insufficient to pay the creditors
The liquidator, acting on behalf of the other creditors, claimed the other creditors should have
priority of payment arguing that Salomon and the company was the same person and
Salomon should be personally liable for the debts of the company.

Salomon appealed to the highest court "HOUSE OF LORDS". House of Lords rejected all the
judgments made by the trial judge Vaughan Williams and the court of appeal. House of Lords
said that there is neither fraud in the manner which Mr. Salomon formed the company, nor
Mr. Salomon formed the company for fraudulent purpose. So, Mr. Salomon did not have to
pay to the company’s creditors since Mr. Salomon and the Company is two separate legal
entities. The company is separate from its members. 7

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Lee and Lee’s Air Farm’s Ltd
Mr Lee formed a corporation named Lee's Air Farming Ltd. Its main business was aerial
spraying. He was the director and owned most of the shares and also he hired himself as an
employee of the corporation. In an accident the corporation's plane crashed while Mr Lee
died. His widow made a claim for payment under the Workers’ Compensation Act 1922 and
attempted to collect what was rightfully due to a widow of a man killed on the job.

Her entitlement to such compensation depended on whether or not Lee was a worker ie. a
person who has entered into a contract of service with an employer. Her claim was initially
rejected on the ground that as Lee had full control of his company he could not be a "worker"
within the meaning of the Act. On the other hand the Privy Council allowed Mrs Lee’s claim.
Lee may have been the controller of the company in fact but in the law, they were distinct
persons. He could therefore enter into a contract with the company and could be considered
to be an employee. The widow was entitled to an award in respect for workmen’s
compensation. 8

DHN v Tower Hamlets London Borough Council

DHN was a holding company in a group of three companies. There were two subsidiaries
which were owned by DHN. One of the companies owned the land of DHN and the other one
owned vehicles used by DHN. The land was subject to compulsory purchase, and DHN
sought compensation for disturbance of its business. In the Court of Appeal, Lord Denning
said,
‘These subsidiaries are bound hand and foot to the parent company and must do just what the
parent company says’. This group is virtually the same as a partnership in which all the three
companies are partners. It was therefore held that DHN was entitled to claim. The separate
corporate personality policy was overridden. However, this is likely only to be followed
where the subsidiaries are totally owned and serve no purpose other than to own the parent
company's assets. 9

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Lubbe v Cape Plc [2000]

Facts

Mr Lubbe was injured at work while manufacturing asbestos for a South African subsidiary
company of the UK parent company, Cape plc. The South African subsidiary had no money
left and Cape Plc had no assets in South Africa. His case was one of 3000 claims. He alleged
that the parent, Cape Plc, owed a direct duty of care in tort to him as a worker in the company
group. Cape Plc was applying to stay the actions on the basis of forum non conveniens,
submitting that they were an abuse of process on grounds that intention to launch a multi
party action was not disclosed to the court. Mr Lubbe argued that the claims should not be
stayed since, in South Africa, the legal aid necessary to continue the claim had been
withdrawn, no contingency fee arrangement was available and no other source of funding
would be available. The Court of Appeal refused Mr Lubbe's arguments and continued the
stay, and Mr Lubbe appealed to the House of Lords.

Judgment

The House of Lords held unanimously that although South Africa was the more appropriate
forum for hearing the claim, it was highly likely that legal representation for the claimants
would be unavailable. The expert evidence suggested a denial of justice would result,
exacerbated by the lack of procedures in South Africa to accommodate multi-party actions.
This meant that lifting the stay was appropriate and the action continued in the English
courts.10

Findings
The mentioned cases demonstrate different aspects of corporate personality. From the
analysis of those famous cases, some of the notions of ‘corporate personality’ can be
summarized here.

Company is not an agent of the shareholders. It is a legal person. That means, law
considers it in such a way that, as if it is a person. (Salomon vs. Salomon)

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Company as a legal person, has its own debt (Salomon vs. Salomon) and its own assets
(Macaura vs. northern assurance co). The shareholders have limited liability for
company’s debt and their personal insurance will not cover company’s assets.

Company is legal person, so it can engage in contractual relationship, even with the
owners. The shareholders can become manger or creditor of the company (Salomon vs.
Salomon). The company can even employ its owner/shareholder (Lee vs. Lee). 11

Conclusion

After all of these discussions and demonstration of the cases we can conclude by agreeing
and proving the statement true that is a company is distinct from its members and directors
are neither an agent nor trustees to the company. All the aspects have been analyzed and
researched in respect of the topic.

Infact the effects of corporate separate personality are extensive. A company has contractual
capacity in its own right and can sue and be sued in its own name – members, as such, are not
able to bind the company. It is capable of owning property, making contracts, employing
people and raise capital through the issuance of shares. Moreover, shareholders and directors
cannot be considered as the agents or trustees of a company. Also, a basic feature of
corporate separate personality is that of perpetual succession, which results in a continuation
of the company's existence regardless of its members. Therefore, a company at law is distinct
from its members. Directors or shareholders are neither agents nor trustees of the company. 12

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