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Separate Legal Personality Notes

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Class 2 - Separate Legal Personality Limited Liability
[4.10] The nexus between corporate personality and limited liability - while distinct conceptually the two notions are functionally related.In business, corporate personality has the function of marking out a pool of assets over which creditors have prior claims. Entity status partitions this pool from personal assets of stake holders o Piercing the veil involves breaking this partition and exposing them to claims of creditor's (and sometimes to relieve the company of the legal consequences of its status as a separate entity)
? But absent such special circumstances, shareholders and directors are not liable for the debts of a corporation
? Hence it can be said that the corporate personality is a precondition for limited liability; essentially this passes the risk of company failure on to creditors

[4.15] The merits and costs of limited liability?Some arguments in favour include: it encourages investment for those without a capacity for management, it relieves shareholders from the burden of monitoring fellow shareholders, it encourages liquidity and provides an accountability mechanism for management performances, market pricing impersonalises the share and thus divorces it from the capacity of the shareholder, it encourages entrepreneurial risk taking o But these are affected by the structure of share ownership - particularly with the emergence of investment intermediaries and corporate group structures with a capacity for internal monitoring of the risk of business failure; the case for limited liability is much weaker in such circumstances Limited liability also has its critics - some argue its benefits to shareholders are matched to creditors who may not have greater monitoring/risk-bearing capacity o Hence tort claimants may be more vulnerable (as creditors) than contract creditors who can bargain for protection and rates of returns commensurate with risks undertaken. o Hence limited liability can create a moral hazard problem in tort as enterprises can 'externalize' costs Corporate personality favours such externalisation of social costs - shifting the risk to stakeholders and wider society o This arises since not all costs of corporate operation are imposed by legislation - there will be a time lag in legislation



and gaps in its coverage and effective barriers to private/
[public enforcement create opportunities to disregard obligations - especially in relation to transnationals in countries with poor government/regulatory regimes Legal structure also favours externalisation as reflected in the calculus of self-interest = it encourages the corporation to locate activities into separate corporate structures and hence insulate group assets from the risk of failure Further, the more narrow moral compass of a corporation (as distinct from an individual who may feel personal responsibility) favours such externalisation

Corporate PersonalitySome of the features different between corporations and natural persons are iterated - that of perpetual succession and its 'artificial/soulless' character o But a Corporation can commit crimes, torts, and have defamation against it (NSWALC v Jones) (but can only claim money), it can be in contempt of court but must appear through a representative (Bay Marine v Clayton Country Properties) oAlso the HCA has held that a corporation isn't entitled to invoke CLAW privilege in relation to self-incrimination in answer to a demand for production of documents under a statutory power (EPA v Caltex) unlike in the Canada and England

The HCA has also held that a reference to 'residents' does not extend to corporations (Australasian Temperance and General Life Assurance Society v Howe) and it is further unlikely that a "subject of the Queen"

[4.25] The separate personality of a corporation - This doctrine rests fundamentally on judicial doctrine - the starting point for an inquiry into it is often Salomon's Case
[4.30] Salomon v Salomon & Co Ltd [1897] AC 22

Facts: Aron Salomon traded as a boot manufacturer. In 1982 he arranged for incorporation the now respondent company - the seven subscribers being himself (holding 20,001 shares his family (1 each). The company entered into an agreement to purchase Salomon's busines
PS39,000 to be satisfied by the issue of 20,000 fully paid PS1 shares and debentures (floating charge) with a face value of PS10,000. The balance of the purchase price (PS9000) remained unsecured.

During a recession in the business, Salmon borrowed PS5,000 which he immediately advance

the company. TO obtain this PS5000 he cancelled his debentures, and reissued them to the creditor on terms that he retain the residual benefit. The company eventually went into liquidation and after the creditor took his security, PS1055 remained on the debentures which Salomon claimed, thus exhausted the funds the liquidators had to satisfy other unsecured creditors.

Claim by the liquidator: The validity of the debentures is tainted by fraud and by suggest at trial for a declaration that the liquidator was entitled to be indemnified by Salomon for unsecured debt and for a lien on the sums payable on the debentures since the company w "mere nominee and agent" for Salomon

Held at First Instance (Vaughan Williams J): Made orders that the liquidator be indemn by Salomon for the unsecured notes of the company and for a lien on all sums payable by th company on the debenture. His honour based his conclusion on the fact that the company w the "mere nominee and agent" for Salomon

Held, dismissing the Appeal (Lindley LJ): His honour was of the opinion that the legisla had not extended limited liability to sole traders. The company was like a "trustee" for Salo as a beneficiary. Salomon is liable to indemnify the company and the creditors could only re him through the company.

Lopes and Kay LJJ in the Court of Appeal made similar sentiments: They said the transaction was a 'device to obtain the prevention of [the Act] in a way and for objects not authorised by the Act...and in my judgment in a way inconsistent with an opposed to its pol and provisions...To legalise such a transaction would be a scandal

Lord Halsbury thought that the main relevant inquiry was simply "whether the responden company was a company at all" and as to answering this question the sole guide must be th statute itself:

? The fact that 7 living persons held shares means the first condition of the statute is satisfied - the statute says nothing as to the extent of interest required, "one share is enough" o Furthermore the statute says nothing about the motive of the shareholders is something the statute must recognizes - shareholders are shareholders. Even six of them were cestuis que trust the same conclusion would be reached
? The provisions of the statute makes it essential to the artificial creation that the law s recognize only that artificial existence - quite apart from the motives of the conduct o individual corporators

His lordship then went on to criticize the approach of the courts below - simply concluding t the company satisfied the preconditions of the Act it is impossible to deny the validity of the transactions which it entered into. He then dealt with the argument as to fraud:

? He noted that he was not satisfied that the price was an exorbitant one - and further that if every member knows exactly what the true state of facts is (as was the case h

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