4 In the context of company law explain:
(a) the doctrine of separate personality and its consequences; (6 marks)
(b) the circumstances under which separate personality will be ignored. (4 marks)
(10 marks)

4 This question asks candidates to consider the doctrine of separate personality, one of the key concepts of company law. It also
requires some consideration of the occasions when the doctrine will be ignored, and the veil of incorporation pulled aside. This
latter part will demand consideration of both statute and common law provisions.
(a) Separate personality
Whereas English law treats a partnership as simply a group of individuals trading collectively, the effect of incorporation is
that a company once formed has its own distinct legal personality, completely separate from its members.
The doctrine of separate or corporate personality is an ancient one, but the case usually cited in relation to separate personality
is: Salomon v Salomon & Co (1897). Salomon had been in the boot and leather business for some time. Together with other
members of his family he formed a limited company and sold his previous business to it. Payment was in the form of cash,
shares and debentures. When the company was eventually wound up it was argued that Salomon and the company were
the same, and, as he could not be his own creditor, his debentures should have no effect. Although earlier courts had decided
against Salomon, the House of Lords held that under the circumstances, in the absence of fraud, his debentures were valid.
The company had been properly constituted and consequently it was, in law, a distinct legal person, completely separate from

Salomon. Prior to the Companies Act 2006 (CA 2006) true single person limited companies, with only one member, could
be formed but these were exceptional and in the event of the membership of an ordinary company falling below one, the
remaining member assumed liability for the debts of the company. Now under s.123 CA 2006, if the number of members
of a limited company falls to one, all that is required is that the fact be entered in the company’s register of members, with
the name and address of the sole member.
A number of consequences flow from the fact that corporations are treated as having legal personality in their own right.
(i) Limited liability
No one is responsible for anyone else’s debts unless they agree to accept such responsibility. Similarly, at common law,
members of a corporation are not responsible for its debts without agreement. However, registered companies, i.e. those
formed under the Companies Acts, are not permitted unless the shareholders agree to accept liability for their company’s
debts. In return for this agreement the extent of their liability is set at a fixed amount. In the case of a company limited
by shares the level of liability is the amount remaining unpaid on the nominal value of the shares held. In the case of
a company limited by guarantee it is the amount that shareholders have agreed to pay in the event of the company being
wound up.
(ii) Perpetual existence
As the corporation exists in its own right changes in its membership have no effect on its status or existence. Members
may die, be declared bankrupt or insane, or transfer their shares without any effect on the company. As an abstract legal
person the company cannot die, although its existence can be brought to an end through the winding up procedure.
(iii) Business property is owned by the company
Any business assets are owned by the company itself and not the shareholders. This is normally a major advantage in
that the company’s assets are not subject to claims based on the ownership rights of its members. It can, however, cause
unforeseen problems as may be seen in Macaura v Northern Assurance (1925). The plaintiff had owned a timber estate
and later formed a one-man company and transferred the estate to it. He continued to insure the estate in his own name.
When the timber was lost in a fire it was held that Macaura could not claim on the insurance as he had no personal
interest in the timber, which belonged to the company.
(iv) Legal capacity
The company has contractual capacity in its own right and can sue and be sued in its own name. The extent of the
company’s liability, as opposed to the members, is unlimited and all its assets may be used to pay off debts. The
company may also be liable in tort for any injuries sustained as a consequence of the negligence of its agents or
employees.
(iv) The rule in Foss v Harbottle
This states that where a company suffers an injury, it is for the company, acting through the majority of the members,
to take the appropriate remedial action. Perhaps of more importance is the corollary of the rule which is that an
individual cannot raise an action in response to a wrong suffered by the company.
(b) Lifting the veil of incorporation
There are a number of occasions, both statutory and at common law, when the doctrine of separate personality will not be
followed. On these occasions it is said that the veil of incorporation, which separates the company from its members, is
pierced, lifted or drawn aside. Such situations arise as follows:
(i) Under the companies legislation
Section 399 of the Companies Act 2006 requires accounts to be prepared by a group of related companies, thus
recognising the common link between them as separate corporate entities. Section 213 of the Insolvency Act 1986
provides for personal liability in relation to fraudulent trading and s.214 does the same in relation to wrongful trading.
(ii) At common law
As in most areas of law that are based on the application of policy decisions it is difficult to predict when the courts will
ignore separate personality. What is certain is that the courts will not permit the corporate form to be used for a clearly
fraudulent purpose or to evade a legal duty. Thus in Gilford Motor Co Ltd v Horne (1933) an employee had covenanted
not to solicit his former employer’s customers. After he left their employment he formed a company to solicit those
customers and it was held that the company was a sham and the court would not permit it to be used to avoid the
contract.
As would be expected the courts are prepared to ignore separate personality in times of war to defeat the activity of
shareholders who might be enemy aliens. See Daimler Co Ltd v Continental Tyre and Rubber Co (GB) Ltd (1917).
Where groups of companies have been set up for particular business ends the courts will usually not ignore the separate
existence of the various companies unless they are being used for fraud. There is authority for treating separate
companies as a single group as in DHN Food Distributors Ltd v Borough of Tower Hamlets (1976) but later authorities
have cast extreme doubt on this decision. See Woolfson v Strathclyde RC (1978) and National Dock Labour Board v
Pinn & Wheeler (1989). The later cases would appear to suggest that the courts are becoming more reluctant to ignore
separate personality where the company has been properly established (Adams v Cape Industries plc (1990) and Ord
v Belhaven Pubs Ltd (1998)).

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