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Case Study on Separate Legal Entity of a Company

Case Study on Company as Separate Legal Entity

A corporation is a separate legal entity from its owners. In other words, if a corporation, in the course of doing business, is involved in any legal action, then the corporation, for legal purposes, is its own person. The corporation is liable for its taxes - not the owner. This is how corporations may sue and be sued, and their assets are tracked separately. If a corporation is sued, then the owners will not have their personal belongings at risk unless those belongings were purchased with illegal returns from the corporation.

In a sole proprietorship or partnership, the owners personally liable. For all intents and purposes, all acts taken by these two company types are taken by the owners themselves. The company becomes a legal person in its own right, distinct from the

Shareholders and management:

This was seen in the famous case of Salomon v Salomon & Co Ltd (1897). Separate personality means that the artificial legal person, the company, can do almost everything a human person can do; it can make contracts, employ people, borrow and pay money, sue and be sued, among other things.

The ‘veil of incorporation’ is the rather poetic term given to this separation of the company from its shareholders or members. This separation of a company from its members was established in the House of Lords in the famous case.

Salomon v Salomon & Co Ltd (1897)

Mr. Salomon had a boot manufacturing business which he decided to incorporate into a private limited company. He sold his business to the newly formed company, A Salomon & Co Ltd, and took his payment by shares and a debenture or debt of £10,000. Mr Salomon owned 20,000 £1 shares, and his wife and five children owned one share each. Some years later the company went into liquidation, and Mr Salomon claimed to be entitled to be paid first as a secured debenture holder. The liquidator and the other creditors objected to this, claiming that it was unfair for the person who formed and ran the company to get paid first. However, the House of Lords held that the company was a different legal person from the shareholders, and thus Mr Salomon, as a shareholder and creditor, was totally separate in law from the company A Salomon & Co Ltd. The result was that Mr Salomon was entitled to be repaid the debt as the first secured creditor.

In this case, Mr Salomon was the major shareholder, a director, an employee and a creditor of the company he created. It is quite common in Ireland for one person to have such a variety of roles and still be a different legal entity from the company.

Lee v Lee’s Air Farming Ltd (1961)

In this case, Mr. Lee formed his crop spraying business into a limited company in which he was director, shareholder and employee. When he was killed in a flying accident, his widow sought social welfare compensation from the State, arguing that Mr. Lee was a ‘worker’ under the law. The State argued that Mr. Lee was self-employed and thus not covered by the legislation. The court held that Mr. Lee and the company he had formed were separate entities, and it was possible for Mr. Lee to be employed by Lee’s Air Farming.

The following case is similar to Salomon and Lee, but the principle of separate personality worked to the disadvantage of the plaintiff.

Battle v Irish Art Promotion Centre Ltd (1968)

The defendant company was involved in legal proceedings but did not have enough money for legal representation. The plaintiff, who was the major shareholder and managing director of the company, sought to conduct the company’s defence. The court held that while a human person can represent him or herself in court, a legal person such as a company can only be represented by a solicitor or barrister.

The principle in Salomon’s Case that a company is a legally different person from those who control it represents the current law in Ireland. For example, if I form a company called ‘Murphy & Co Ltd’ in which I own one hundred per cent of the shares and am a director and employee, legally speaking the company and myself are two distinct people. The ‘corporate veil’ surrounds the company of Murphy & Co Ltd and prevents outsiders challenging the operation of the company. However, although the principle of separation is central to company law, there are a number of situations when the company and its members can be identified together and treated as the same. These are the exceptions to the rule in Salomon’s Case, when the corporate veil is lifted and the reality of the situation is examined.

State Trading Corporation of India Ltd. AIR (1963) SC 1811

It was held that As soon as citizens form a company, the rights guaranteed to them by article 19(1)c has been exercised and no restraint has been placed on the right and no infringement of that right is made. Once a company or corporation is formed, the business which is carried on by the such company or corporation is the business of that company or corporation and is not the business of the citizens who get the company or corporation incorporated and the rights of the incorporated body must be judges on that footing and cannot be judged on the assumption that they are the rights attributed to the business of individual citizens.

In C.I.T. v. Meenakshi Mills Ltd. (AIR 1967 SC 819)

The court held that the income-tax authorities were entitled to pierce the veil of corporate entity and to look at the reality of the transaction to examine whether the corporate entity was being used for tax evasion. In this case, a separate corporate entity was brought into existence outside the taxable territory with the ulterior motive of evading the tax obligation by the assessee mills.

The Supreme Court observed: "It is true that from the juristic point of view, the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members.

But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation."

Macaura v Northern Assurance Co Ltd (1925) AC 619

Appear before the House of Lords concerning the principle of lifting the corporate veil

Macaura own land on which stood timber. He sold the land and timber to a company he formed and received as consideration all the fully paid shares. The company carried the business of felling and milling timber. A fire destroyed all timber which had been felled. Macaura had earlier insured the timber against loss of by fire in his own name. He had not transferred the insurance policy to the company.

Macaura owned a tree plantation. The plantation was covered by an insurance policy. He subsequently sold the plantation to a company of which he was the only shareholder, through the purchase money remained owing to him. After the sale, Macaura continued to insure the plantation in his own name. A fire broke out and destroyed the plantation. When Macaura attempted to claim on the policy, the company refused to pay. The issue was whether Macaura had an insurable interest at the time of the loss.

Macaura's case is depending upon the fact that Company whether private or public is distinct from his owner if he took the policy from insurance company at the name of company then he could claim for damages.

The court held that insurers were not liable. Only Macaura’s company, as owner of the timber, which had the requisite insurable interest in it. Only the company, and not Macaura, could insure its property against loss or damage. Shareholders have no legal or equitable interest in their company’s property. Such property belongs to the company which had a legal personality. This was despite the fact that he was the sole shareholder and was also a creditor of the company to a large extent.

Constitutional Perspective

This entity cannot aspire top hold a Public office or to membership of Parliament or the Legislature or to Franchise or to entry into educational institutions. This is because it is to a citizen in true sense of the term and because it’s ‘nationality’ though of consequence in Public or Private International Law, in treaties, in conventions and in protocols, is of no consequence in Municipal Law except to the extent that the Municipal Law says so.

The General Causes Act is applicable to interpret the Constitution and that Act , defines ‘person’ as including corporations.The following article of the Constitution employ the word ‘person’ which applies equally to individuals as to corporations etc. 

Art. 14: Equality before Law.

Art. 20: Protection in respect of Convictions.

Art. 27: Freedom as to payment of taxes for promotion of any particular Religion.

Comments
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cecilia September 25, 2012
good breakdown
cecilia September 25, 2012
good breakdown
blessed October 20, 2012
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mq.zaman October 24, 2012
company is a separate legal entity from its shareholders discuss with suitable cases
sudip December 19, 2012
provided a good understanding regareding the issue of seperate legal entity. Thankx a lot.
mayi July 2, 2013
thank you ..
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