It will already be apparent that a corporation is in law a person in its own right. If Messrs A, B and C form a company, X Ltd, there are now four legal persons. X Ltd can sue its own members and be sued by them. It can employ its own members. Its property belongs to
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X Ltd, not to A, B or C. Its debts are its own, not those of A, B or C. Many leading cases involve companies. In Salomon v. Salomon & Co. Ltd (1897), Mr Salomon formed a company in which, initially, seven people held one share each: Mr S himself, his wife and five of his children. Mr S then transferred his footwear business to the new company, which ‘paid’ him largely by issuing 20,000 more shares to Mr S, and ‘owing’ him a further £10,000 by issuing him debentures ( loan certificates) for this amount secured on the company’s assets. (In short, he turned his existing business into a company with himself as the main shareholder and a major creditor.) Within a few months the business became insolvent, and had to be wound up owing a lot of money to other creditors. Mr S lost the value of his shares but:
● he was not personally liable for the debts which the company could not pay;
● as a secured creditor, he was entitled to be (re)paid the amount of his debentures from the
sale of the company’s assets before the trade creditors, whose credit was unsecured, got anything. Although in reality he was the company, he and the company were treated in law as quite separate persons.
Similarly, in Macaura v. Northern Assurance Co. Ltd (1925), Mr M formed a company in which he and his nominees held all of the shares. He then insured himself, in his own name, against loss of the company’s property. When the property was destroyed by fire, his claim against the insurance company failed. It is generally unlawful to insure yourself against loss of another person’s property and, in law, this is what he had tried to do.
Limited liability
It follows naturally from separate legal personality that members of the corporation will have limited liability. The debts of the company (or council or building society or university) are those of the corporation, not those of the members. As a general rule, therefore, shareholders/ directors/managers are not liable for the company’s debts even if it becomes insolvent and is unable to pay: see Salomon v. Salomon & Co. Ltd (1897) above. There are a few exceptions to this, particularly if the company has been run dishonestly: see Section 6.2.4. But the general rule normally applies.
The company’s liability, however, is unlimited and creditors may pursue their claims against the company and its assets. The use of the term ‘limited’ in the name of a company is meant to warn outsiders that the liability of its shareholders is limited, that is, limited to the nominal value of the shares they hold. In practice, shareholders of many newly incorporated private companies do not have limited liability, having given personal guarantees to secure company debts, for example, loans from banks.
This is one of the great advantages of corporate status; people are more likely to engage in large-scale or adventurous activity if they know that, so long as they are honest, they will not lose everything if the venture fails. They may lose what they have invested in this venture when (for instance) their shares become valueless; but they do not normally lose personal assets such as home and savings.
In this respect, companies differ fundamentally from partnerships, which have no sepa- rate legal personality. Each partner is potentially liable for all of the firm’s debts. This can have drastic effects in businesses which are not permitted to operate as limited companies; see ADT v. Binder Hamlyn (1995) earlier.
Perpetual succession
This is another advantage which follows naturally from separate legal personality. As we have seen, the corporation’s property belongs to the corporation, not to its members: see
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the Macaura case above. Therefore, when a member dies or transfers his share, there is no need for the corporation to transfer any part of its assets. This can be important for all types of corporate bodies. At every election, some local authority councillors will lose their seats and others will be elected instead. It would be quite impracticable to transfer ownership of the council’s huge assets from the old members to the new each time. Even more so, in a large company, where shares can be bought and sold every minute without any need for the company to alter ownership of the company’s property.
The ultra vires rule
The ultra vires rule can be something of a disadvantage of corporate status, although it only applies to companies to a very limited extent today. A corporate body, being an artificial legal person, only has those powers which the law gives it. A statutory corporation, for example, depends largely on the statute which created it. Therefore, a local authority created for one town normally has no powers over the next town and even within its own boundaries it can only spend its money for authorised purposes. Anything else would be ultra vires (‘outside of its powers’) and therefore invalid. The issues can sometimes be difficult: in London Borough of
Bromley v. Greater London Council (1982), it was held ultra vires for Greater London Council
(GLC) to subsidise public transport in the way in which it had done.
Since the Companies Act 1989 the effect of the ultra vires rule has been greatly lessened as regards companies, and this will be discussed later (Section 6.4.2).