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Except in cases of fraud or specific tax statutes, the directors do not have personal liability for the company’s debts. The courts will only lift or pierce the veil where an inequitable situation may be occurring behind the corporate façade based on the facts of each case. The corporate veil is vital for the legitimate use of the corporate structure and the protection of shareholders and directors and thus, by its very existence, promotes the playing field for taking commercial risks. In court cases regarding religious entities, the deity is also a «legal person» who can engage in legal cases through «trustees» or «managing board in charge of the temple».


Macaura was a landowner who sold timber from his estate to a company of which he was the sole owner. He insured the timber that lay on his land in his own name as the person insured under the policies issued by the insurance company. Northern Assurance claimed that the timber belonged to the company and as a consequence it was not properly insured. Therefore, he concluded that this group of three CONSEQUENCES OF INCORPORATION Separate Legal Personality companies for the purpose object of the judgment, which was the right of compensation for disturbance, had to be considered as one, and in the same manner the parent company has to be regarded as that one. On different manner, the Court identified the group of companies as one company. Avoiding the details of the case, what is important to highlight is the concept that the Court accepted.

Criminal Liability

Limited liability and separate legal personality are the special privileges, which were the originated from the Salomon case, for the business entity after the incorporation under the UK Company Act 2006. The purpose of both principles is to facilitate the trade and business at large level without investing the huge money and taking risk.

Historically most corporations sole were ecclesiastical in nature , but a number of other public offices are now formed as corporations sole. Though a company is a legal person, it is not a citizen under the constitutional law of India or the Citizenship Act, 1955. The reason as to why a company cannot be treated as a citizen is that citizenship is available to individuals or natural persons only and not to juristic persons. The question whether a corporation is a citizen was decided by the Supreme Court in State Trading Corporation of India v. Commercial Tax Officer. Since a company is not treated as a citizen, it cannot claim protection of such fundamental rights as are expressly guaranteed to citizens, but it can certainly claim the protection of such fundamental rights as are guaranteed to all persons whether citizens or not. In Tata Engineering Company v. State of Bihar it was held that since the legal personality of a company is altogether different from that of its members and share­holders, it cannot claim protection of fundamental rights although all its members are Indian citizens.

Functions of Separate Legal Existence

It is presumed that a company is a different legitimate individual, Separate from its individuals and a firm after its appropriate fuse through corporate law secures a juridical status. A company can maintain its business through its delegate and specialists and all the exchange made by any individual from the company will be viewed as the exchange of the company, whenever done by the individual who is approved to do it. The company can sell a property possessed by such enterprise and furthermore can purchase any sort of property.

Even if during a war all the members of one private company while in a meeting were killed by a bomb or where the only two members were killed in a road accident, the company continues to exist! Therefore, Mr Salomon’s personal liability for the debt of the business had changed completely from unlimited liability to limited liability. Not only was Mr Salomon no longer liable personally for the debt of the company, but he had also as managing director of the company granted himself a secured charge over all the company’s assets. Thus, if the company failed, not only would Mr Salomon have no personal liability for the debts of the company, but whatsoever assets were left, would be claimed by him to pay off the company’s debt to him.

What Are the Advantages & Disadvantages of Forming a Corporation?

In certain cases, the corpus of the legal person shall be some fund or estate which reserved certain special uses. For instance, a trust – estate or the estate of an insolvent, a charitable fund etc..; are included within the term ‘legal personality’. The case of Salomon established the Doctrine of Separate Legal Entity in the corporate world. This Doctrine has been protecting the members, directors, and shareholders of the company.


Thus, the members of the company are not liable for the company debts. For instance, when a company turn into a contract, the company itself will personally liable for the contract rather than the shareholders and the directors. A corporation is an artificial legal person that exists independently of the individuals who at any given time are the members of the corporate body. This principle was established by the House of Lords in Salomon v Salomon & Co Ltd. “Since a corporation is a separate and distinct legal entity, owners of a corporation are only indebted to the extent of their interest in the corporation,” according to Business Accent. This means that shareholders are not personally liable for any company debt and creditors cannot go after their personal assets for business debts. Similarly, shareholders only pay taxes on any profits paid to them as salaries, bonuses or dividends and the corporation itself pays corporate rate taxes on any additional profits at the lower corporate rate.

Ownership of Property

Its worldwide marketing subsidiary was another English company, named Capasco. It also had a US marketing subsidiary incorporated in Illinois, named NAAC. In 1974, some 462 people sued Cape, Capasco, NAAC and others in Texas, for personal injuries arising from the installation of asbestos in a factory.

Shares dilution and its effects on shareholders’ rights – Myjoyonline

Shares dilution and its effects on shareholders’ rights.

Posted: Mon, 22 Aug 2022 09:59:49 GMT [source]

While a corporation offers many advantages, those same qualities can also make life more difficult. It costs money to incorporate your business, as “startup, operating and tax costs are not required of most other structures,” reports Corporations have rules to follow and you must adhere to the formalities of organizing and running the company.

In the event of a company being wound up, a shareholder, without more, is required to contribute to the assets of a company sufficient to enable the company to pay its creditors and meet its other liabilities. At last, lifting the corporate veil can also assist in the prevention of fraud.


He then claimed he no longer owned the land and could not comply with the contract. The judge found the company was but a façade or front for Mr Lipman and granted an order for specific performance. By the 1960s the increasingly sophisticated use of group structures was beginning to cause the courts some difficulty with the strict application of the Salomon principle. These two doctrines are recognized as the twin pillars on which modern company law rests, and the courts have largely been keen to maintain and sustain it despite an overwhelming number of attacks on it. Salomon followed the required procedures to set the company; shares and debentures were issued. The House of Lords held that the company has been validly formed since the Act merely required 7 members holding at least one share each.

Where shares are obtained from a company on a partly paid or nil-paid basis the shareholder, at the time of allotment, does not pay to the company a part, or any , of the price payable for the shares. In such a case the company is entitled to call upon the shareholder to pay to the company any part, or the whole, of the amount of the share price as yet unpaid, at any time. Difficulties implicit in imputing wrongful acts to a company are not confined to criminal law. The question of attribution arises in other areas of law, including tort and contract. In those areas, although the identification theory plays a part, attribution issues are largely dealt with by applying the principle of vicarious liability and agency law. Abdul Aziz Bin Atan & 87 ORS vs Ladang Rengo Malay Estate SDN BHD 2 MLJ 165 is another case where all the shareholders of the company sold and transferred their entire share holdings to a certain buyer. Therefore, the court had to determine whether a change of employer took place.

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