INTRODUCTION
After registration, a company becomes
“incorporated” and gains “legal personality”
 Legal personality - allows one or more natural
persons to act as a single entity for legal
purposes

Commonwealth Development Corporation
(Privileges And Immunities) Act 1996
Schedule – Part I
1 (a) to contract;
 (b) to acquire and dispose of real and personal
property; and
 (c) to be a party to legal proceedings
TYPES OF LEGAL ENTITIES
1.
Sole Proprietorship/Sole Trader


2.
Partnership

3.
Owned and run by one owner
Owner and business are one and the same
Association of owners in an unincorporated
company
Corporation
a
group of people authorised by law to act as a
legal personality
 Separate powers, duties, and liabilities
TYPES OF LIABILITIES
Limited Liability –
Registered under the Companies Act 1995, as
amended
Financial responsibility is restricted to the
company
Personal assets cannot be used to pay company
debts
Unlimited Liability –
Not registered
Indefinite extent of liability to pay the company’s
debts
Extends beyond investments in company to
personal assets
UNLIMITED LIABILITY

Sole Trader
 Total

personal liability for business debts
Partnerships
 Unlimited
liability for debts unless registered as a
Limited Liability Partnership (LLP)
 All will be liable even if one partner’s actions
caused the business to be sued
LIMITED LIABILITY
Types of companies with Limited Liability
1.Corporations
2.Limited Liability Partnership (LLP)
 Limited Liability Corporation (LLC) – United
States variation
Debt
responsibility is limited to his/her
share of investment in the business
If the business is sued or forced to close,
the personal assets are safe
CORPORATE LIABILITY
1.
Strict liability - Legally responsible for damages or
loss caused by act or omission, despite fault. Just
need to prove causal link
2.
Vicarious liability – Employers are vicariously
(clearly/openly) liable, under the respondeat
superior doctrine, for negligent acts or omissions
by their employees in the course of employment
3.
Primary liability: the organic theory
• Tesco Supermarkets Ltd v Nattrass [1972] AC
153
SALOMON PRINCIPLE

House of Lords judgement in Salomon v. A.
Salomon & Co. Ltd. (1897) AC 22

One of the fundamental principles of company
law is that a company has a personality that is
distinct from that of its shareholders.
SALOMON PRINCIPLE

Advantages:
 One contract, instead of multiple contracts
for all shareholders
 Personal property is protected after failure of
the business

Disadvantages:
 Lack
of ethics by shareholders. If the company
fails, they aren’t personally affected
 Outside investors are the real losers.
THE CORPORATE VEIL

The “Veil of Incorporation” protects members
from being held responsible for the company
liabilities
PIERCING/LIFTING THE CORPORATE VEIL
This is used to avoid abuse of the separate
identity principle:
a)
b)
c)
d)
e)
Human Characteristics
Fraud
Avoidance of legal duty
Agency
Single economic Entity
HUMAN CHARACTERISTIC
The veil will be lifted if the company displays a
human characteristic
Director acts or makes a decision
independently from the company
Signs cheque/contract/other document in
his/her name and not company’s name
Can also happen if advice is negligently given
by a Director, but it must meet the “Hedley
Byrne” requirements.
FRAUD
The corporate veil may be lifted where the
company is used to perpetuate a fraud:
Re Darby; ex p Broughton [1911] 1 KB 95
AVOIDANCE OF LEGAL DUTY (1)
Gilford Motor Co. Ltd. v Horne [1933] Ch 935
Mr.
Horne’s contract stated that if he left Gilford
Motor, he was not allowed to solicit customers.
He set up a company offering a cheaper price,
but after legal consultation, he was told that it
was still illegal.
AVOIDANCE OF LEGAL DUTY (2)

He then started a new company in the
names of his wife and friend thinking that
“technically” he wasn’t breaching the clause
in the previous employment contract
because (1) this was a company and (2) it
was not in his name.

The Court of Appeal held that the business
was a sham to circumvent the covenant in
his previous employment contract
AGENCY (1)
Smith, Stone & Knight Ltd v. Birmingham
Corporation [1939] 4 All ER 116
The parent company had full and exclusive access to
the subsidiary’s books; the subsidiary had no
employees other than a manager; it occupied the
parent’s premises for no consideration, and the only
evidence of its purportedly independent existence
was its name on the stationery.
AGENCY (2)
The following 6 questions will determine whether a company is
carrying on its own business or at of the parent company:
(i) Were the profits of the subsidiary those of the parent company?
(ii) Were the persons conducting the business of the subsidiary
appointed by the parent company?
(iii) Was the parent company the “head and brains” of the
venture?
(iv) Did the parent company govern the venture?
(v) Were the profits made by the subsidiary company made by the
skill and direction of the parent company?
(vi) Was the parent company in effective and constant control of
the subsidiary?
AGENCY (3)
The exception was followed in Spreag v Paeson
Pty Ltd (1990) 94 ALR 67 when the word
“puppet” was used to describe the subsidiary.
SINGLE ECONOMIC ENTITY (1)
Roskill LJ in The Albazero [1977] AC 774, 807
Each company in a group of companies is a
separate legal entity with separate rights and
responsibilities
The Roberta (1937) 58 LI LR 159
However, the veil may be lifted to look at the
economic reality of the situation; i.e., does the
holding company control and dictate?

SINGLE ECONOMIC ENTITY (2)
But… Robert Goff LJ in Bank of Tokyo Ltd. v
Karoon [1987] AC 45n:
“… we are concerned not with economics, but
with law. The distinction between the two is,
in law, fundamental and cannot here be
abridged.”

Then… Adams v Cape Industries plc [1990] Ch
433 - The holding company is separate from
its subsidiaries
CONSEQUENCES OF LEGAL PERSONALITY
1.
The ability of the firm to sue and be sued: Lee v
Lee's Air Farming)
2.
Transfer of property: Farrar v Farrar's Ltd)
3.
Insurable interests: Macaura v Northern Trust
Assurance Co Ltd
4.
Compensation: Shareholders cannot get
compensation for company failure
O'Neill v Ryan et al (1993) I.L.R.M. 557
5.
OTHER CONSEQUENCES

Limited liability

Perpetual succession

Liability in tort and crime

The rule in Foss v Harbottle (1843)– individual
shareholders can’t sue; the company must sue
SOLE TRADER - ADVANTAGES

No legal filing requirements or fees and no
professional advice is needed to set it up.

You just literally go into business on your own.

Simplicity – one person does not need a
complex organisational structure.
SOLE TRADER - DISADVANTAGES
Not a particularly useful business form for raising
capital (money).
 For most sole traders the capital will be provided
by personal savings or a bank loan.
 Unlimited liability – the most important point to
note in terms of comparing this form to the
company in that there is no difference between
the sole trading business and the sole trader
himself.
 The profits of the business belong to the sole
trader but so do the losses.
 As a result he has personal liability for all the
debts of the business.

PARTNERSHIP - ADVANTAGES
No formal legal filing requirement involved in
becoming a partnership beyond the minimum
requirement that there be two members of the
partnership.
 Easier to obtain capital as there can be up to
20 members of the partnership, all of whom
could pool their investment within the
partnership.

COMPANY - ADVANTAGES
Companies are designed to make it easy to
raise capital.
 Companies have the ability to subdivide their
capital into small amounts, allowing them to
draw in huge numbers of investors who also
benefit from the sub-division by being able to
sell on small parts of their investment.
 Limited liability also minimises the risk for
investors and is said to encourage investment.

COMPANY – ADVANTAGES (CONT.)

It is also said to allow managers to take greater
risk in the knowledge that the shareholders will
not lose everything.

The constitution of the company provides a
clear organisational structure which is essential
in a business venture where you have large
numbers of participants.
COMPANY - DISADVANTAGES
Forming a company and complying with
company law is expensive and time
consuming.
 It also appears to be a very complex
organisational form for small businesses,
where the Board of Directors and the
shareholders are often the same people
