Corporate personality Chapter 3 Summary
CHAPTER 3: Corporate personality
A company can sue and be sued in its own name, hold its own property and be liable for its own debts.
ϖ Important case: Salomon v Salomon & Co
The liquidator alleged that the company was but a sham and a mere ‘alias’ or agent for Mr. Salomon and that Mr. Salomon was therefore personally liable for the debts of the company.
The Court of Appeal agreed (MORALIST VIEW), finding that the shareholders had to be a bona fide association who intended to go into business and not just hold shares to comply with the Companies Acts.
The House of Lords disagreed (LEGALIST VIEW) and found that:
- The fact that some of the shareholders were only holding shares as a technicality was irrelevant; the registration procedure could be used by an individual to carry on what was in effect a one-man business
- A company formed in compliance with the regulations of the Companies Acts is a separate person and not the agent or trustee of its controller. As a result, the debts of the company were its own and not those of the members.
Other cases illustrating the Salomon principle:
ϖ Macaura v Northern Assurance
The owner of a timber estate sold all the timber to a company, which was owned almost solely by him. He was the company's largest creditor. He insured the timber against fire, but in his own name. After the timber was destroyed by fire the insurance company refused the claim. MR MACURA HAD NO INSURABLE INTEREST, AS IT’S Company's Property, DESPITE MR MACURA OWNING ALL THE SHARES IN THE COMPANY. IE THE INSURED TIMBER WAS THE COMPANY’S ASSET NOT THAT OF MR MACURA…CORPORATE PERSONALITY-COMPANY DIFFERENT FROM OWNER
ϖ Lee v lee's Air farming
Lee formed the company, Lee’s Air Farming Ltd. He owned all the shares except one. He was the company’s sole governing director. He was also employed by the company as its chief and only pilot. Lee was killed while flying for the company. His wife made a claim for workmen’s compensation under the New Zealand workmen’s compensation legislation. 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. The New Zealand Court of Appeal refused to hold that Lee was a worker, holding that a man could not in effect, employ himself. However, the Privy Council allowed Mrs. Lee’s claim. Lee may have been the controller of the company in fact but in 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 therefore entitled to an award in respect of workmen’s compensation.
ϖ Giles v Rhind 2003
The company had suffered losses after an alleged breach of confidence by a director. The applicant sought to recover his losses as a shareholder, after the company became unable or unwilling itself to pursue an action to recover the losses it had suffered. The court held that the shareholder’s action must fail. The losses he sought, including the devaluation of his shares in the company and otherwise, were all derived from the losses which the company had itself suffered. Where those losses might have been made good if the company itself had pursued the case, the shareholder was not able himself to pursue the loss, applying Johnson v Gore Wood & Co.
Hashem v Shayif 2008
Judgment in complex ancillary relief proceedings arising from a bigamous marriage where beneficial ownership of properties owned by the husband’s company and his shares in that company were disputed. This was the husband's fourth marriage but the third had not been formally dissolved. The company in question was set up in 1988 to buy and manage properties. The other shareholders were the husband's four sons from the first three marriages who were at the time of incorporation aged from 18 years to 6 months old. Share certificates showed that the husband owned 30% of the shares. Initially these proceedings were for ancillary relief but in 2006 a Chancery action by the company was started. From 2001 the wife had lived in a property owned by the company which she had entered after leaving the matrimonial home in Saudi Arabia following an argument. Counsel for the wife made several claims including: i) the company was in reality solely the husband's as he had provided all the funds and prevented sale of assets without his consent; ii) that the husband had been seeking to defeat the ancillary relief claim at all stages of the proceedings; iii) the properties owned by the company, and in particular the property she inhabited were in effect the husband's; iv) that the husband was worth significantly more than he had disclosed – a figure of £250m was claimed. Accordingly the properties and the shares were to be available for the ancillary relief claim. In this lengthy and detailed judgment Munby J reviews the history of the litigation and the relevant case law. In particular he considers the issue of whether the wife can pierce the corporate veil to make good the claim that the entire company and its assets are in reality part of the available pool of assets for financial provision. He rejected this claim partly on the grounds that the other shareholders, although submissive, were not merely ciphers for the husband and the wife could not demonstrate any impropriety that required incorporation to be ignored. He goes on to consider the wife's occupation of one of the properties and concludes that she fails on that point subject to being required to receive notice. However Munby J allowed the claim for ancillary relief and the fact of bigamy should not impact on the award. He therefore made an award totalling £7m.