What is Legal personality?

Legal personality - To have legal personality means to be capable of having legal rights and duties within a certain legal system, such as to enter into contracts, sue, and be sued. Legal personality is a prerequisite to legal capacity (the ability of any legal person to amend rights and obligations)

There are two kinds of legal persons: (1) Natural persons (individuals) (2) Judicial persons (groups of persons)

While people acquire legal personhood when they are born, judicial persons do so when they are incorporated in accordance with the law (registered) 1

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 1996Schedule – 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 2

1. Sole Proprietorship/Sole Trader Owned and run by one owner Owner and business are one and the

same

2. Partnership Association of owners in an

unincorporated company

3. Corporation a group of people authorised by law to

act as a legal personality Separate powers, duties, and liabilities 3

Limited Liability –Registered under the Companies Act 1995, as amendedFinancial responsibility is restricted to the companyPersonal assets cannot be used to pay company debtsUnlimited Liability – Not registered Indefinite extent of liability to pay the company’s debtsExtends beyond investments in company to personal assets

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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

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Types of companies with Limited Liability1.Corporations2.Limited Liability Partnership (LLP)

Limited Liability Corporation (LLC) – United States variation

Debt responsibility is limited to his/her share of investment in the businessIf the business is sued or forced to close, the personal assets are safe

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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 liable, under the respondeat superior doctrine, for negligent acts or omissions by their employees in the course of employment

3. Primary liability: the “directing mind”• Tesco Supermarkets Ltd v Nattrass [1972]

AC 153 7

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.

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Facts:

Mr. Salomon had a boot factory. He set up a company and sold the business to it for £39,000.00. The owners of the company were Mr. Salomon and members of his family.

To complete the sale of the boot factory, Mr. Salomon lent the company £10,000.00 and secured it by a charge (mortgage) on the company’s property

The company failed and Mr. Salomon ‘paid himself’

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Mr. Salomon’s family sued him arguing the company was a front for his own business activity

The court held that the company was properly created and was a separate entity. It was irrelevant that ownership and management stayed in the same hands. The money borrowed money and was legally liable to pay it back to a secured creditor as opposed to any other creditors

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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. 11

The “Veil of Incorporation” protects members from being held responsible for the company liabilities

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This is used to avoid abuse of the separate identity principle:

a)Human Characteristicsb)Fraud c)Avoidance of legal dutyd)Agencye)Single economic Entity

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The veil will be lifted if the company displays a human characteristicDirector acts or makes a decision independently from the companySigns cheque/contract/other document in his/her name and not company’s nameCan also happen if advice is negligently given by a Director, but it must meet the “Hedley Byrne” requirements.

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The corporate veil may be lifted where the company is used to perpetuate a fraud:

Re Darby; ex p Brougham [1911] 1 KB 95

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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.

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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

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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.

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The following 6 questions will determine whether a company is carrying on its own business or that 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? 19

The exception was followed in Spreag v Paeson Pty Ltd (1990) when the word “puppet” was used to describe the subsidiary.

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The Roberta (1937) 58 LI LR 159

The veil may be lifted to look at the economic reality of the situation; i.e., does the holding company control and dictate?

In this case a parent company was held liable on a bill of lading signed on behalf of its wholly owned subsidiary, the court saying that the subsidiary was a separate entity in name alone and probably for the purposes of taxation.

However, Roskill LJ in The Albazero [1977] AC 774, 807Held that each company in a group of companies is a separate legal entity with separate rights and responsibilities

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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 22

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

5. O'Neill v Ryan et al (1993)23

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

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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.

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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. 26

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.

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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.

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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.

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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

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Keith was recently left $100,000.00 in his uncle’s will and he’s undecided about how to invest it. His friend Jack has just applied for a patent for a mouse trap he created and in which he has invested heavily. He wants Keith to join in a partnership with him. He paints a very optimistic picture to Keith by telling him he has secured investment from another friend, Kamla. While Keith thinks the business can succeed, he is concerned about Jack’s inability to be economical with the truth.

1. Should Keith join a partnership with Jack. Explain the advantages and disadvantages of this move?

2. Keith just got married but still wants to invest. Suggest to Keith what other options he has if he wants to go through with the investment.

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