The corporate world has no shortage of terminology that can be complex. For those entering the corporate world for the first time – often after transferring to a limited company from a sole trader or partnership – it’s important to learn what these terms mean to you and your business. With that being said, it’s also equally important for individuals with more experience in the field of company ownership to continue broadening their understanding of said terms.
‘Corporate personality’ is certainly one of those terms that can confound people – predominantly because it can be interpreted in so many ways. For example, it can refer to: a concept found in the Old Testament; the different personalities of people found in the corporate world; or part of a company’s corporate identity. For the purposes of this article, our company solicitors are going to discuss the legal definition of ‘corporate personality’ and the implications of such a concept in layman’s terms.
Defining corporate personality
At Foys, we work with directors and members of limited companies to assist them in understanding the legal implications of the day-to-day running of their business. One such implication is that limited companies are juridical persons. But before we get ‘lost in the weeds’, let’s work our way back from this term and define how this relates to corporate personality.
Law recognises legal entities as human (natural persons) and non-human (juridical persons). While humans become natural persons after birth, juridical persons are created when, for example, companies are incorporated. The latter can refer to entities such as firms, businesses, clubs, non-profits, and local governments. In this article, we’re going to focus on limited companies as juridical persons in the UK.
While not the first historical example of corporate personality, the history of companies as legal entities in the UK can be traced back to a legal case from the late 19th century – Salomon v A. Salomon and Company (1897).
The case surrounded the issue of personal liability – namely, that of Mr Salomon’s personal liability for the debts of a company of which he was the majority shareholder. After Mr Salomon lost in the High Court and the Court of Appeal, the House of Lords would overturn the decision. Presiding over the case, Lord Halsbury stated that a company that had been legally incorporated ‘must be treated like any other independent person with its rights and liabilities appropriate to itself’ thereby ruling that Mr Salomon was not liable for the company’s debts.
Thus, the concept of ‘corporate personality’ was defined – a term used to separate a company from its directors, members, and shareholders.
Implications of companies having a corporate personality
When a limited company is registered with Companies House, it becomes a legal entity. This means that limited companies have certain rights, responsibilities, obligations and privileges – including the right to sue, the right to be sued, the right to own property, and the right to enter into a contract – similar to those of a human.
How, then, does ‘corporate personality’ impact directors, shareholders, and other members? Well, it’s important to understand that this legally defines directors, shareholders, and other members as legal entities separate to the entity that is the limited company. Therefore, a company’s finances, assets, and liabilities are its own – not those of its owners. The company is accountable for itself – that is to say, rather than the directors or shareholders owning the company property, for example, the company owns this in its own right.
In essence, this means that unless directors or shareholders act wrongly in their duties and are found guilty of misconduct, they cannot be held personally liable for any debts or liabilities incurred by the company. This is to, in spirit, encourage entrepreneurship.
Why corporate personality is disregarded
Despite the enshrinement of companies as separate legal entities, there are examples of when this distinction, and the rights it affords, has been disregarded – commonly referred to as ‘piercing the corporate veil’ or ‘lifting the corporate veil’. While rare within the UK context, this often happens as a means of, essentially, treating the rights or liabilities of a company as that of its shareholders.
Simply put: as sentient beings, humans are cognisant of their rights and responsibilities; non-human legal entities (such as companies) are not. Companies rely on the integrity of their respective directors to make decisions that are in the best interests of the company’s health – as set out in the Companies Act 2006.
So if, for example, a director is trying to conceal the reality of a situation within a company or evade an action that affects the company, the Act stipulates that the company is not consenting to this behaviour. Again, this comes down to misconduct, in which case it is determined that the individuals behind the company (i.e. directors, shareholders, and other members) should take on the rights and liabilities of the company.
Often lifting the veil of incorporation is required in order to gain insight into a company’s ‘intent’. Though it may technically infringe upon the rights of a company as a non-human legal entity, in such situations this is construed as merely a way of establishing the truthfulness surrounding a legal case in order to properly direct the issue of culpability.
Examples of lifting the veil
There may be a piercing of the veil if a case involves statutory provisions. An example of these provisions can be found within the Insolvency Act 1986. Sections 213 and 214 of the Act relate to an offence whereby directors and other members have been charged with the offence of ‘fraudulent trading’. The existence of such trading would take the liability of the company’s debts away from the company and place it with the directors and other members – due to, as previously mentioned, said directors and members acting wrongfully in their duties.
Other examples and considerations include contracting of members around limited liability, a company acting as an agent to a member, the ‘concealment principle’ and ‘evasion principle’, reverse piercing, interposing a company, or the rights of a group of companies as a single entity.
What does this mean for you?
Assuming you’re involved in a limited company as a director or shareholder, ‘corporate personality’ essentially protects your rights should the company become liable to pay off a debt. This is reliant on there being no evidence of misconduct or misbehaviour from yourself or another director or shareholder acting in the company’s interests.
If you are considering incorporating a sole trader or partnership business as a limited company, Foys solicitors can provide further explanation of the notion of corporate personality, as well as giving bespoke, insightful advice about your rights and responsibilities and those of the potential company.
Foys: expert company law and corporate law solicitors
With over 100 years of legal cases involving the issue of corporate personality in relation to UK companies, it’s important to retain the services of legal counsel with extensive experience and knowledge in company law.
Foys’ company and commercial law team provide the necessary legal support and advice to help companies, directors, shareholders, and other members with issues relating to corporate personality, lifting the veil, or other company law matters.
We are committed to giving you a more thorough understanding of the laws that affect you and your business, while also providing legal advice on everyday company matters.
To find out more on how we can provide your business with company and commercial legal expertise, simply fill out our Online Form, or call your local Foys Solicitors office:
Relevant articles pertaining to company law are:
This post is not legal advice and should not replace professional advice tailored to your specific circumstances. It is intended to provide information of general interest about current legal issues.
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