The Concept of Corporate Personality - Essay Example

Introduction The concept of corporate personality refers to the recognition by the State and all its courts that certain organizations can have a separate legal personality from the members of an organization. This important concept allows that organization to be treated as a person itself in terms of being able to hold property rights, to sue and be sued in return. The organization then can exist by itself without having to rely on the inherent rights of the members who formed an organization in the first place. Historically in the United Kingdom, this concept was originally extended only to religious organizations, charitable institutions and local government units. But over time, the concept was gradually given to all sorts of organizations engaged in commercial ventures such as trading companies, consortia for roadway construction projects, groups formed to undertake public infrastructure but funded by a private group of individuals (Hoffman 18) and the so-called parastatals or government-owned corporations. The category of parastatal can mean also a state-owned enterprise (SOE) which is similar to government-owned and controlled corporations (GOCCs). Either, both are formed specifically to operate in commercial ventures but with a public-interest nature in them such as building bridges, toll ways, waterworks and sewerage systems which affect the entire community rather than just a small group of people. An SOE or GOCC is therefore the same as a private stock company in terms of issuing shares of stocks but only in this instance, the state either holds all the shares or a majority thereof. As a stock company, it has an inherent obligation to give a decent return on investment (ROI) to its investors from the tolls or tax revenues it is able to raise by virtue of being a stock company; UK laws often require golden shares retained (Mahoobi 107). Discussion Because the law now allows an organization like a commercial corporation to acquire a legal personality separate from the personalities of the members who formed a corporation, it has created a new but extremely important legal technicality. With this concept of a separate personality, the corporation separately on its own can acquire or buy assets and in same way or manner also incur debts in the course of its operations. This gave rise to another concept which is limited liability. This simply means the creditors of a corporation, in the event it goes bankrupt, can run after the assets of that bankrupt corporation in the hope of satisfying debts or credits it had extended to the corporation in the ordinary course of business. If it happens a corporation has more debts than assets to satisfy those debts, the creditors of the corporation will have no further recourse against the members or owners of that corporation. This is unlike the case of a sole proprietorship or ordinary partnership in which owners of single proprietorships or ordinary partnerships are treated, in the eyes of the law, as one and the same. Because of this non-separation of their respective personalities, creditors can still go after the assets of these individuals to the extent allowed by law to satisfy outstanding debts. In both of the above cases, it can be said that there are no legal boundaries in going after these owners in order for them to pay off their outstanding debts to creditors who had acted in good faith and put their trust in these businesses by extending to them some credit (Zerk 54). The original intent of this limited liability concept is to encourage people to pool their monies together and form a corporation that will have enough capital to undertake businesses large enough that cannot be undertaken by a single individual or partnerships alone. A pool of capital invested in the corporation serves as a springboard for economic activities that will in turn stimulate the economy in general. Business corporations are given this advantage called as corporate veil that protects its incorporators from unlimited liability. However, some courts have lifted this veil in cases of fraud, liability evasion and manipulation (Richardson 173). Any organization or a company, once incorporated by the members of that corporation becomes a separate legal entity by virtue of operation of company law. This is now a complete separate personality from the members who comprise that corporation, as if all the members of corporation had given birth to a new personality distinct and separate from them. Resulting from this new corporate personality, the logical consequence is therefore limited liability of the members of the corporation. However, this limited liability provision is not automatic. It may happen a corporation has unlimited liability members in it based on its charter. An important precedent for this concept of corporate personality and limited liability was the case of Salomon v Salomon & Co. (1897) A C 22. In this said case, Mr. Salomon got his business going as leather goods merchant. In order to comply with the corporation laws, he formed a new company called Salomon & Co. Ltd. with his wife and five children as the shareholders of the company, each holding one share each and apparently in compliance with the minimum number of shareholders required by law which is seven incorporators. They had actually only held the said shares in his behalf (as his proxies or dummies in today’s term). In order to have control over the new company, he also appointed himself as its general manager. The old leather business was then purchased by the new company supposedly by Mr. Salomon and to further secure his exposure to the new company, he allowed himself to be the recipient of debentures issued by the new company. This in effect secured his exposure to the new company because the debentures represented a capital loan with a fixed rate of interest. By changing the business structure from a sole proprietorship to a corporation, two things had happened. Mr. Salomon is no longer liable for the debts of the new company because it had acquired a new personality separate from his own personality. Additionally, as the managing director of the new company, he also now had sole control over all the assets of the company. Therefore, in case of insolvency, he can go after the company assets to settle or pay off debts the company owed to him in the form of the debentures he was holding. However, the new company did not prosper as expected but instead turned insolvent and became bankrupt. Prior to that, Mr. Salomon sold his debentures to outside people in the hope of saving his company with the new money he had raised but still to no avail. The court in the person of the liquidator and in behalf of the company’s unsecured creditors, wanted to go after Mr. Salomon’s personal assets because they view the new company as nothing but a sham and an “alias or agent” of Mr. Salomon himself. In other words, the new company is no different from Mr. Salomon and therefore he was still liable for the new company’s debts. On appeal, the Court of Appeals further sided with the complainants, stating that the new company’s shareholders must be bona fide persons who intended to go into business and not mere family members who hold shares just to comply with the Companies Acts. However, the House of Lords thought otherwise. The fact that family members themselves held shares in the new company was irrelevant to the case at bar. The machinery, spirit and intent of the said Companies Acts could be used legitimately by any person to carry on what is in reality his own business. But the most important finding and conclusion of fact the House of Lords made was that a company formed in compliance of the Companies Act had indeed become a new corporate personality separate and distinct from its owners. The final decision in this peculiar case became a precedent in terms of setting the new concepts of corporate personality and limited liability. These two principles became pillars of the Company Law in the United Kingdom ever since. This case also recognised why people form private companies to avoid the risks of personal bankruptcy due to unlimited liability. Desire to avoid the harsh provisions of bankruptcy laws encouraged people to choose this business organizational structure by which they can still carry out a trade but with a limited liability. Any person can hold debentures of a company irrespective of being an outsider or not as long as he did it in good faith. This principle in Salomon’s case had been extended to public corporations and even multinationals (Grantham & Rickett 175). The debentures held by Mr. Salomon further secured his rights to the assets of the now bankrupt company because debentures are fixed liabilities in the nature of a loan and superior to shares in a company which merely represents fractional ownership. The debentures proved the company has a payable due to Mr. Salomon and that he was entitled to repayment. Those creditors of the new company who were unsecured (not holding debentures like Mr. Salomon) took a normal business risk and they were given ample notice that they were already dealing with a new entity and no longer just in the person of Mr. Salomon alone and they lost. Another important case further illustrated the separation of the corporate personality from the owners of the company and indirectly, the concept of limited liability. This case was Macaura v Northern Assurance Co. (1925) A C 619 where the facts of the case showed the complainant sold all his timber holdings in return for the entire issued shares of the Irish- Canadian Saw Mills, Ltd. A few weeks after the consummation of such a sale, the timber was insured by Macaura in his own name. However, the timber owned by Macaura burned down after he had procured the insurance policy. He then tried to secure reimbursement from the fire policy by filing a claim with the insurance company. However, the insurance company refused to honour the said policy and did not pay the claim filed by Mr. Macaura against it. The case again reached the House of Lords which also illustrated the very concept of a separate corporate personality. The argument used was that in this case, it was the company which owned the timber and not Mr. Macaura himself despite the fact the insurance policy was in his name. Although he owned the company, he was not in any way the direct owner of the burned timber but the company itself. He therefore had no insurable interest in the timber. The correct procedure would have been to procure a policy for the timber but in the name of the company and not in the name of Mr. Macaura. This case was illustrative of the concept of assets belonging to a corporation. In the same manner, liabilities attach to a corporation and not to shareholders of that corporation which is entirely separate. A third case also illustrated the same concepts of corporate personality as separate and distinct from the persons or shareholders comprising the corporation. The case in point was all about Mr. Lee who died in a plane crash and his widow sued the very own company he had put up. The particulars of this case showed Mr. Lee owned 2,999 of the total 3,000 shares in the company; he also appointed himself as its sole governing director and then hired himself as its chief pilot in the business of spraying chemicals from the air. As its director, Mr. Lee had entered into a valid contract to hire himself and so he was therefore a legal employee of the same company and covered under the Workers Compensation Act of 1922. As such, the court ruled he was entitled to all the benefits due him under the said Act and his widow was able to collect the said benefits in his behalf as his beneficiary. The House of Lords ruled in his widow’s favour because Mr. Lee was both owner and employee at the same time because the deceased and the company he owned are two separate entities. This case filed under the Lee v Lee Air Farming (1961) A C 12. Conclusion It is clear from the above cases that a corporation acquires a new personality separate and distinct from the personalities of the incorporators and shareholders. This principle is now well established even in the jurisprudence of supranational courts and has been adopted as the global standard (Milman 61). The idea is to allow separation for limited liability to take hold and encourage people to take business risks without the fear or risks of the harshness of the bankruptcy laws being applied to them in case the venture will not prosper. Without these two critical provisions, business progress would be extremely slow as people will not pool their capital to launch a bigger business venture. In the same way a corporation is separate from the owners, it can also hold assets on its own and incur debts in the furtherance of its business objectives. People should be aware of these very important distinctions so they will not have a false idea or impression when they extend credit to a business company or corporation. Work Cited Grantham, Ross and C. E. F. Rickett. Corporate Personality in the 20th Century. Oxford, UK: Hart Publishing, 1998. Print. Hoffman, Scott L. The Law and Business of International Project Finance. Cambridge, UK: Cambridge University Press, 2008. Print. Mahoobi, Ladan. Privatising State-owned Enterprises: An Overview of Policies and Practices in OECD Countries. Paris, France: OECD Publishing, 2003. Print. Milman, David. National Corporate Law in a Globalised Market: The UK Experience in Perspective. Cheltenham, UK: Edward Elgar Publishing, Limited, 2009. Print. Richardson, Benjamin J. Environmental Regulation through Financial Organisations: Comparative Perspectives on the Industrialised Nations. The Hague, Netherlands: Kluwer Law International, 2002. Print. Zerk, Jennifer A. Multinationals and Corporate Social Responsibility: Limitations and Opportunities in International Law. Cambridge, UK: Cambridge University Press, 2006. Print. Read More