1.3 Principles of legal personality and veil of incorporation
1.3 PRINCIPLE OF LEGAL PERSONALITY AND VEIL OF INCORPORATION
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Separate legal personality
The principle of legal personality refers to the recognition of a company as a separate legal entity distinct from its owners or shareholders. When a company is incorporated, it is granted legal personality or legal existence.
Consequences:
(a) Company is liable for its own debts
The shareholders are not liable for the debts and liabilities of the company and cannot be sued by the company’s creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company. (Salomon v A Salomon & Co Ltd)
Salomon had a business in boot manufacture. He formed a company called Salomon & Co. (with himself, his, wife daughter and 4 sons as shareholders) and transferred to it his business. As consideration for the transfer he received the major portion of the shares of the company and debentures for £ 10,000. Later on, the company went into liquidation. Salomon, as a debenture holder, claimed to be a secured creditor and demanded priority in the payment of £ 10,000, out of the assets of the company. The unsecured creditors of the company objected on the ground that the business really belonged to Salomon and he should not be allowed to claim as a secured creditor. It was held that Solomon as an individual, was quite distinct from Salomon & Co. and he could therefore be a secured creditor of the company, even though he happened to hold the majority of the shares.
(b) Limited Liability
The fact that the company is a separate person from its shareholders makes limited liability possible.
(c) Company can own Property
A company owns its own property – the shareholders have no direct right to this or any share of it.
In Macaura v Northern Assurance Co case, Mr. Macaura owned the Killymoon estate in County Tyrone, Northern Ireland. He sold the timber there to Irish Canadian Sawmills Ltd for 42,000 fully paid up £1 shares, making him the whole owner (with nominees). Mr Macaura was also an unsecured creditor for Kshs.19, 000. He got insurance policies – but in his own name, not the company’s – with Northern Assurance covering for fire. Two weeks later, there was a fire. Northern Assurance refused to pay up because the timber was owned by the company, and that because the company was a separate legal entity, it did not need to pay Mr Macaura any money.
The House of Lords held insurers were not liable on the contract, since the timber that perished in the fire did not belong to Mr. Macaura, who held the insurance policy.
(d) Contractual Capacity
A company has full contractual capacity – and only the company can enforce its contracts
(e) A company has perpetual succession
Separate personality means that the existence of a company does not depend on the existence of its members.
Veil of incorporation
The veil of incorporation is a legal concept that recognizes the separation between a company and its shareholders. It refers to the notion that the corporate entity and its shareholders are distinct from each other, and there is a metaphorical “veil” separating their legal identities. The veil serves to protect shareholders from personal liability for the company’s actions.
In Salomon V Salomon and company limited it was established that a registered company is legal entity separate from its members. Thus once a company is incorporated a veil is drawn between the company and its members. This is called veil of incorporation.
