Corporation and Shareholders are separate Legal Entity

Corporations are separate entitles in the own right. Shareholder are manager owing the assests associated with corporation .The corporation usually owns those assets


The topic in itself reveals the matter that the company has a separate legal entity and in effect can be categorised as a separate person. The company in its own right can own its assets and can bring legal proceedings against other people or companies and vice versa.

The principle of the independent corporate existence of a company was explained and emphasised by the House of Lords in the case of Salomon v Salomon Co Ltd. In that case, Aron Salomon, a leather merchant and wholesale boot manufacturer, was the owner of a profitable business, and in order to obtain the advantages of limited liability, he, being perfectly solvent at the time, converted his business into a company in 1892. The nominal capital of the company was 40,000, divided into 1 share. Of that amount he, his wife and his five children had subscribed 1 share each and a further 20,000 shares were issued to Aron Salomon. No other shares were issued. Salomon received also debentures to the amount of 10,000 in part-payment by the company for the business.[1]

A year after its formation, the company fell on evil days and got in financial difficulties; the then holder of the debentures appointed a receiver and the company went into liquidation. The courts were asked to decide whether the debentures originally issued to Salomon were valid and entitled to priority over the unsecured creditors who denied them priority on the ground that the company was a one-man company and a sham, and so Vaughan Williams J. held, being of opinion that A. Salomon & Co Ltd was a mere alias or agent for Aron Salomon, and, therefore, that Salomon was bound to pay the unsecured creditors of the company out of his own pocket, notwithstanding that his shares had all been fully paid up.[2] The Court of Appeal on the somewhat different ground affirmed the decision of the learned judge that the whole scheme was a fraud on the policy of the Act , and that it was never intended by the legislature that a company should consist of one substantial person and six mere dummies devoid of any real interest.[3]

The House of Lords unanimously reversed this decision on the ground that the only mode of ascertaining the intent and meaning of the Act was to examine its provisions and find what regulations it had imposed as a condition of trading with limited liability.[4] Lord Halsbury L.C. said: “The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven, or as to the proportion of interest or influence possessed by one or the majority of the shareholders over the others”.[5] Lord Macnaghten said: “There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertaking, or that they should have a mind and will of their own, as one of the learned Lords Justices seems to think, or that there should be anything like a balance of power in the constitution of the company”.[6]

Further illustrations of the fundamental principle that the company is an independent legal person distinct from its members are found in numerous cases, old and modern. Already before Salomon’s case, in Farrar v Farrars Ltd, Lindley L.J. had said : “A sale by a person to a corporation of which he is a member is not, either in form or in substance, a sale by a person to himself. To hold that it is, would be to ignore the principle which lies at the root of the legal idea of a corporate body, and that idea is that the corporate body is distinct from the persons composing it. A sale by a member of a corporation to the corporation itself is in every sense a sale valid in equity as well as at law.”[7]

Further, in North-West Transportation Co v Beatty it was held that a sale of property of the company to one of its members, which had been sanctioned by a general meeting, could not be invalidated on the ground that it was carried by the votes of the purchaser; and a person who holds shares in or even controls a company can vote in favour of its winding up notwithstanding that such a resolution will lead to a claim for damages by him against the company for breach of a service contract. [8]

A more modern illustration of the principle under review is found in Ebbw Vale Urban DC v South Wales Traffic Area Licensing Authority, in which the facts were as follows: the shares of an omnibus company which provided passenger road services in a district in South Wales were, by virtue of a power contained in the Transport Act 1947 s.2(2)(f), acquired by the British Transport Commission which held all, save two, shares in it. The omnibus company applied to the licensing authority for permission to increase the fares but the Ebbw Vale D.D.C. objected on the ground that as the services provided by the company were, in fact, provided by the British Transport Commission the licensing authority had no jurisdiction to hear the application.[9] The Court of Appeal held that the omnibus company had retained its character as a separate legal entity and did not act as agent of the Commission; that, consequently, the services were provided by the company and not by the Commission; and that the licensing authority and not the Transport Tribunal had to consider the charges scheme.[10] Cohen LJ. observed: “it is quite plain that Parliament when it passed this Act had in mind the general rule of law to which I have referred as laid down in Salomon v Salomon & Co. and many other cases, that a subsidiary company is not the agent of the parent company, but is an entirely separate entity. Its acts are not the acts of the parent company, and the parent company is not responsible for its acts or defaults, in the absence of special provisions in some contract between the parties”.[11]

In Lee v Lee’s Air Farming Ltd the defendant company was formed for the purpose of carrying on the business of aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the company and by the articles was appointed governing director of the company and chief pilot. Lee was killed while piloting the company’s aircraft, and his widow claimed compensation for his death under the New Zealand Workers’ Compensation Act 1922. [12][13]This statute required an employer to pay compensation on the death or injury of a worker, defined by the Act as any person who has entered into or worked under a contract of service with an employer whether remunerated by wages, salary or otherwise. The company opposed the claim (on the instructions of its insurers) on the ground that Lee was not a worker within the statutory definition, as the same person could not be both employer and employee. The Judicial Committee, reversing the New Zealand Court of Appeal, held that there was a valid contract of service between Lee and the company, and Lee was therefore a worker within the meaning of the Act.[14] It was a logical consequence of the decision in Salomon’s case that one person may function in the dual capacity both as director and employee of the same company. However, it has been disputed how far this case lays down a general principle applicable to all legislation protecting employees and how far it is confined to industrial injuries legislation.[15]

In Buchan v Secretary of State for Employment, the Employment Appeal Tribunal came close to concluding that as a matter of law the principle did not apply to dismissal legislation, on the grounds that a controlling shareholder was ultimately in a position to determine whether he was dismissed or not. Later cases, however, have regarded this view as too simplistic, at least where the company is insolvent, and have reverted to the traditional view that the company and the controlling shareholder are different legal persons, that the latter may be an employee of the former, and that the latter should have the protection of the employment legislation, provided the contractual arrangement between the shareholder and the company is a genuine one and not a sham.[16]

In Multinational Gas and Petrochemical Co v Multinational Gas and Petrochemical Services Ltd three oil companies, [17]which were incorporated in the United States, France and Japan respectively, formed the plaintiff company as a joint venture for dealings in liquefied petroleum gas and liquefied natural gas. The plaintiff company was incorporated in Liberia and another company, the first defendant (Services), was incorporated in England in order to act as adviser and agent of the plaintiff. The plaintiff had no place of business in the United Kingdom, all its directors were resident abroad and all meetings took place abroad. A fall in the charter and tanker market and other events resulted in financial difficulties for the plaintiff. Since the plaintiff had assets in this country, it was wound up as an unregistered company in this country by virtue of what is now Pt V of the Insolvency Act 1986 and a liquidator was appointed. Services were likewise in compulsory winding up. The plaintiff’s liquidator wanted to sue the directors of the plaintiff for alleged negligence. He started proceedings against Services in the English courts for the predominant purpose of joining the directors as defendants. He asked the court for leave to serve concurrent writs out of the jurisdiction on the directors according to what is now RSC 1965 Ord.11, r.(1)(c) and (t).[18]

Peter Gibson J. refused the application and the Court of Appeal affirmed his judgment. The Court of Appeal, applying Salomon v Salomon and Co Ltd and the cases following it, held that the plaintiff was a different legal person from the subscribing oil company shareholders and was not their agent. Further, when the oil companies, acting together, required the plaintiff’s directors to make or approve decisions, these decisions became the plaintiff’s decisions and were binding on it. It followed that the plaintiff could not now complain about what in law were its own acts. The substance of the cause of action arose from acts committed abroad and, therefore, since the action was founded on an alleged tort (i.e. negligence) committed abroad, the court had no jurisdiction to grant leave to serve notice on the writ on the foreign defendants. The decision has been strongly criticised.[19]

The fact that a company has a separate persona is sometimes overlooked in the management of private companies. Thus, in Strathblaine Estates Ltd, Re, in the voluntary winding up of a private company, it was resolved to divide the surplus assets, freehold properties, in equal shares between the shareholders and, after the discharge of its liabilities, the company was dissolved, but the legal estate in the properties was not conveyed to the shareholders who were merely given the title deeds. In this case the consequences, which could be rectified by a vesting order under the Trustee Act 1925 s.44(2)(c) ,[20] were not serious because the failure to treat the company as a separate person affected only the members. But in some cases the consequences are that assets are withdrawn from the company to the detriment of creditors, and this may mean not only that the creditors are prejudiced but also that directors may in due course find themselves liable in misfeasance proceedings, although they may not themselves have profited by the distribution of the assets; in such a case their right of indemnity against the members will only be of value if the members were aware of all the facts and if, in fact, they have assets on which the directors can execute a judgment.[21]

The legal fiction that the company is, as Cave J. put it, a legal persona just as much as an individual is subject to obvious natural limitations which were pointed out poignantly by counsel in the days of James II when asking: Can you hang its common seal? In the following pages, the application of the principle that the company is a separate legal entity to some legal relations will be considered. It will be seen that though the principle is still firmly established in English and Scots law as, in the words of Lindley LJ., lying at the root of the legal idea of a corporate body, modern practice, in deference to the reality of economic facts, has frequently admitted exceptions to it in which the veil of corporations is lifted.[22]

The contractual capacity of a company incorporated under the Companies Act or one of its predecessors is the same as that of a natural person, if the company is not acting ultra vires. Where a question of knowledge or intention arises, as, e.g. in connection with misrepresentation, the company’s knowledge or ignorance must be found in the minds of its agents.[23]

A company may be a subscriber to the memorandum of, or shareholder in, another company, subject to certain statutory restrictions applying to the holding of shares by a subsidiary in its holding company. Further, a company may be a director, a secretary, a manager or a trustee for debenture holders of another company an insolvency practitioner (Insolvency Act 1986 s.390(1) ). A company may be a partner in a partnership, indeed all the partners in a partnership may be companies. These companies like all partners (except limited partners of a limited partnership), are liable for the debts of the partnership without limitation; that the liability of the incorporators, i.e. the members of those partners, is limited is irrelevant.[24]

It is well established in modern common law that a company (which as a persona fleta , can only act through its agents or servants) is vicariously liable for torts committed by those agents or servants in the course of their employment or business on behalf of the company in the same manner in which any other principal or employer would be vicariously liable. It has been pointed out earlier that, on this basis, a company is fully responsible for torts committed by its agents and servants. This applies, in particular, to torts requiring an element of intention or some other subjective test for its commission, such as malicious prosecution, malicious libel, fraudulent misrepresentation or negligence.[25]


A company, like any other entity recognised by the law, can as a general rule be prosecuted for its criminal acts which from the very necessity of the case must be performed by human agency and which in given circumstances become the acts of the company, and for this purpose there is no distinction between an intention or other function of the mind and any other activity. In addition, a company has the same capacity to hold land as a natural person, provided that this is not inconsistent with its objects.[26]


1.      A. Dignam & J. Lowry, Company Law

2.      Gower and Davies: Principles of Modern Company Law

3.      Sealy L.S. Sealy Case and materials In Company Law

4.      Hunnigan J.M. Company Law.

5.      Modern Law Review (MLR)

6.      Oxford Journal of Legal Studies.

7.      Cambridge Law Journal.

8.      Palmers Company law manual.

9.      Companies Act 1994 of Bangladesh.

[1]A. Dignam & J. Lowry, Company Law

[2] Sealy L.S. Sealy Case and materials In Company Law

[3] A. Dignam & J. Lowry, Company Law.

[4] Palmer’s company Law manual.

[5] Gower and Davies: Principles of Modern Company Law.

[6] Gower and Davies: Principles of Modern Company Law

[7] A. Dignam & J. Lowry, Company Law

[8] A. Dignam & J. Lowry, Company Law

[9] Sealy L.S. Sealy Case and materials In Company Law

[10] Sealy L.S. Sealy Case and materials In Company Law

[11] Hunnigan J.M. Company Law.

[12] Palmer’s company Law manual.

[13] Sealy L.S. Sealy Case and materials In Company Law

[14] Gower and Davies: Principles of Modern Company Law.

[15] Sealy L.S. Sealy Case and materials In Company Law

[16] Sealy L.S. Sealy Case and materials In Company Law

[17] Palmer’s company Law manual.

[18] Sealy L.S. Sealy Case and materials In Company Law

[19] Hunnigan J.M. Company Law

[20] Palmer’s company Law.

[21] A. Dignam & J. Lowry, Company Law

[22] Gower and Davies: Principles of Modern Company Law

[23] A. Dignam & J. Lowry, Company Law

[24] Gower and Davies: Principles of Modern Company Law

[25] A. Dignam & J. Lowry, Company Law

[26] A. Dignam & J. Lowry, Company Law


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