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

  • 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

  • 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

  • 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.

  • 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

  • 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 Personality

• Some of the features different between corporations and natural persons are iterated – that of perpetual succession and its ‘artificial/soulless’ character

  • 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)

  • Also 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

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