Company as a Separate Legal Entity
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COMPANY AS A SEPARATE LEGAL ENTITY The company as a separate entity was frmly established in the landmark decision in Salomon v. Salomon & Co. Ltd.6 On appeal, the Hose o! Lords held that Salomon & Co. Ltd. was not a sham" that the debts o! the corporation were not the debts o! #r. Salomon becase they were two separate le$al entities" and that once the artifcial person has been created, %it mst be treated like any other independent person with its ri$hts and liabilities appropriate to itsel!.% Salomon, a sole trader, sold his man!actrin$ bsiness to Salomon & Co. Ltd. a company he incorporated' in consideration !or all bt si( shares in the company, and received debentres worth )* thosand ponds. The other sbscribers to the memorandm were his wi!e and fve children who each took p one share. The bsiness sbse+ently collapsed, and Salomon made a claim, on the basis o! the debentres held, as a secred creditor. The li+idator ar$ed that Salomon cold not rank ahead o! other creditors becase, in !act, the company and #r. Salomon were one and the same or alternatively, that the company carried on bsiness on Salomon-s behal!. s Lord #acna$hten observed/0 1The company is at law a di2erent person alto$ether !rom the sbscribers to the memorandm, and, tho$h it may be that a!ter incorporation the bsiness is precisely the same as it was be!ore, and the same persons are mana$ers, and the same hands receive the profts, the company is not in law the a$ent o! t sbscribers or trstee !or them.3 Likewise, in #acara v. 4orthern ssrance Co. Ltd.5 the Hose o! Lords decided that insrers were not liable nder a contract o! insrance on property that was insred by the plainti2 bt owned by a company in which the plainti2 held all the !lly paid shares. The Hose o! Lords held that only the company as the separate le$al owner o! the property, and not the plainti2, had the re+ired insr interest. The plainti2, bein$ a shareholder, did not have any le$al or benefcial interest in that property merely becase o! his shareholdin$. Spport !or doctrine has been e(hibited more recently in Lee v. Lee-s ir armin$.7
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Transcript of Company as a Separate Legal Entity
COMPANY AS A SEPARATE LEGAL ENTITYThe company as a separate entity was firmly established in the landmark decision in Salomon v. Salomon & Co. Ltd.6On appeal, the House of Lords held that Salomon & Co. Ltd. was not a sham; that the debts of the corporation were not the debts of Mr. Salomon because they were two separate legal entities; and that once the artificial person has been created, "it must be treated like any other independent person with its rights and liabilities appropriate to itself." Salomon, a sole trader, sold his manufacturing business to Salomon & Co. Ltd. (a company he incorporated) in consideration for all but six shares in the company, and received debentures worth 10 thousand pounds. The other subscribers to the memorandum were his wife and five children who each took up one share. The business subsequently collapsed, and Salomon made a claim, on the basis of the debentures held, as a secured creditor. The liquidator argued that Salomon could not rank ahead of other creditors because, in fact, the company and Mr. Salomon were one and the same--or alternatively, that the company carried on business on Salomon's behalf.
As Lord Macnaghten observed:7The company is at law a different person altogether from the subscribers to the memorandum, and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers or trustee for them.Likewise, in Macaura v. Northern Assurance Co. Ltd.8 the House of Lords decided that insurers were not liable under a contract of insurance on property that was insured by the plaintiff but owned by a company in which the plaintiff held all the fully-paid shares. The House of Lords held that only the company as the separate legal owner of the property, and not the plaintiff, had the required insurable interest. The plaintiff, being a shareholder, did not have any legal or beneficial interest in that property merely because of his shareholding. Support for the doctrine has been exhibited more recently in Lee v. Lee's Air Farming.9
