Separate Legal Personality.

Authors Avatar


            A corporate legal person is very different from the natural or human legal person. It has neither body, mind nor soul. In the Case of Sutton’s Hospital, it was said that it invisible, immortal and rests only in the intendment and consideration of the law. A company in itself is an artificial legal person and its member’s liability are limited. Limited liability invariably means that if the company is insolvent, the shareholders and others engaged in the management of the company can restrict their liability for the debts of the company. An artificial legal person in the form of an incorporated company is in law an entirely distinct and separate legal personality from its members. This principle is called the veil of incorporation and was belatedly established in the Salamon v Salamon in which Lord Mcnaughten stated “the company is at law a different person altogether from the subscribers to the memorandum. Thus it can sue and be sued in its own name, make contracts on its own behalf. This principle also extends to holding and subsidiary companies. A holding and subsidiary company relationship exists under s 736 of the Companies Act 1985 where one company controls the composition of the board other’s board of directors by being able to appoint or direct the appointment of a majority of the maximum numbers of directors who may be appointed, or the appointment of directors who may together exercise a   the voting rights exercisable at board meetings of the other company. The other company is known as the subsidiary of the holding company.

              The existence of the veil of incorporation shields the holding company from the attention of creditors of the subsidiary as enunciated in Salamon v Salamon. The strict adherence to the separation of subsidiary company and its shareholders causes loss to creditors but as yet this position has not been ameliorated by the courts. It is clear that each company is to be considered as a separate legal personality and this has been upheld in the case of The Abazero. However in DHN v Tower Hamlets London Borough Council the group of companies was treated as the economic entity and so all the subsidiaries were treated as one company, but the case of Woolfson v Strathclyde Regional Council considered that the DHN case was clearly distinguishable on it facts from the Woolfson case and that it was appropriate to pierce the corporate veil only where special circumstances existed indicating that it was a mere façade concealing the true facts

    In Re Southard & Co Ltd it was held that a holding company is not responsible for the debts of the subsidiary. Also in YukoyLine Ltd v Rendsburg investment Corporation it was held that where the claimants right of action is against a company in the first place the veil cannot be lifted so as to enable the claimant to bring proceedings against a person who controlled the company but who is not otherwise liable to the claimants. The modern trend of the courts is therefore to refuse to lift the veil between parents companies and their subsidiaries.

    Advice to DEF Ltd

Taking the first issue, is XYZ liable for the debts of TAR? By virtue of s736 TAR Ltd is a wholly owned subsidiary of XYZ Ltd, but as a registered company, it is a separate legal entity from XYZ Ltd  it is therefore unlikely that DEF Ltd will be able to persuade the courts to lift the veil of incorporation to seek compensation from XYZ Ltd  and on the basis of the decision in ReSouthard  & Co Ltd XYZ it will not responsible for the debts of TAR

What right of action does DEF Ltd have?

An alternative approach to seeking relief would be to use s214 Insolvency Act 1986

s214 of the Insolvency Act 1986 deals with issues on wrongful applies where a company has gone into liquidation and it appears that a person who was director or shadow director of the company at some time before the commencement of the winding up, knew or ought to have concluded that a company had no reasonable prospect of not going into insolvent liquidation and did not take every step that they should have take to minimise potential loss to the company’s creditors

Join now!

        A shadow director is any person in accordance with whose directions or instructions the directors of a company are accustomed to act., The court may under this provision make an order for a contribution on the company’s assets by a director or shadow director in circumstances where it cannot be proved that he knowingly and fraudulently carried on the company’s business with intent to defraud the company’s and that he was therefore guilty of fraudulent trading.

DEF Ltd should be advised that since there seems to be no evidence of fraud by XYZ Ltd and TAR ...

This is a preview of the whole essay