Corporate Personailty

The Corporate Personality

Week 5 – Text Chapter 3

A registered company is a separate person. A company can ‘at least’ enter into contracts, hold title to property etc: s124 Corporations Act.

Salomon v A Salomon & Co Ltd

A sole trader decided to incorporate. At the time legislation required 7 members to form a company, so Salomon’s family members became shareholders. Company traded, had unsecured debts, hit ‘bad times’ and was ultimately wound up when it couldn’t pay its creditors. The dispute was over entitlement to the inadequate assets. Salomon claimed priority as a secured creditor.

House of Lords said that either the company is a legal person or it is not. If it is it is liable for its own debts. It is not a trustee or agent.

As a result of this decision the one man company was born.

Benefits of Limited Liability for Shareholders

* Shareholders not required to expend time and resources monitoring the management of the companies in which they want to invest.

* Contributes to an efficient share market. All shares are of equal value.

* Shareholders are poorer bearers of the risk of company failure than creditors.

Lee v Lee’s Air Farming Ltd

A company is a separate legal person from its governing director and can therefore enter into an employment contract with them.

Exceptions to Limited Liability

Common Law

At common law there is no unifying principle, however there are three generally recognised categories:

1. The company as agent of the shareholder

Courts are reluctant to infer agency, however if they do then ultimate responsibility for liabilities the company incurs falls on the members as principals. 100% ownership of the company’s shares by one person is not of itself sufficient to create agency: Walker v Wimborne.

Smith, Stone & Knight Ltd v Birmingham Corp – Birmingham Corp acquired land owned by SSK. SSK clearly entitled to compensation for the land, dispute whether it was entitled to further compensation for...