CONSEQUENCES(Effects) OF

SEPARATE LEGAL PERSONALITY

Definitions of legal personality
To be capable of having legal rights and duties within
a certain legal system eg entering into contracts, sue or
to be sued.
It is a pre-requisite to legal capacity- i.e the ability of
any legal person to amend a right and obligation
Legal persons are of two types, namely:
1) Natural persons—people
2) Judicial persons– groups of people such as
corporations which are treated by law as if they were
people.
While people acquire legal personhood as soon as
they are born, judicial persons on the other hand do so
when they are incorporated in accordance with the law.
Consequences/effects of separate legal
personality
The case of Salomon v Salomon & Co Ltd clearly
demonstrates the separate legal personality of companies and
is of great
The company gets transformed into a body corporate with
power to exercise all the functions of an incorporated
company( Main )
Members of the company are not personally liable for the
company’s debts as long as it is a going concern.
Directors of the company are not ordinarily liable for the
deeds or acts of the company.
The company’s property (assets) belongs to it and not to its
members or creditors.
Shareholders cannot validly pay money belonging to
the company into their personal accounts or draw
money from its accounts for their personal use. This
also corresponds with the accounting principle of
separate legal entity.
A company is immortal: it does not come to an end
because of the death of one or all its shareholders. It
enjoys perpetual succession.
Under the Taxation Act, a company is charged tax on its own
income and not an agent for its shareholders.
A person may perform multiple functions in a company, e g a
director , shareholder and an employee of the same company.

LIFTING THE CORPORATE VEIL

This is based on the case of Salomon vs Salomon & CoLtd
in which it was clearly stated that a company duly
incorporated is a separate legal entity with its own rights and
obligations distinct from those of its share holders.
Lifting the corporate veil
 This points at the fact that when a company is incorporated , it is
indeed separate from its shareholders legally.
 That is, even if its shareholders are well known to the public,
they cannot sue or be sued for the wrong doing of the company.
 However , there are instances that the law will depart from this
rule. The law in that case goes behind the corporate
veil/façade/curtain, to expose the real actors. It is such
exceptions that are referred to as lifting the veil of incorporation
or piercing the veil of incorporation
 So lifting the veil refers to the fact that it is sometimes
necessary by law to look at who the owners of a company are.
The separate legal personality can be ignored to:
a) Identify the company with its members and/ or directors
b) Treat a group of companies as a single commercial entity
(if a company is owned by another company)

Three ways in which the veil of incorporation may be

lifted.
c) By Act of Parliament/by statute to enforce the law
d) By Common law/case law/by the courts to prevent evasion
of obligations
e) In group situations
Lifting the veil by statute to enforce the law.
Lifting of the veil is permitted under a number of statutes
to enforce law
1) Liability for trading without trading certificate –
this occurs where one member carries on the business
of a company for say six months, he is liable jointly
and severally with the company.( Sections 4 and 42).
Note failure to register for trading purposes leads to
personal liability of a director for any loss.
2) Fraudulent and wrongful trading
 That is, if upon winding up, evidence is found that an
officer of the company contracted a debt knowing that the
company would be unable to pay it, he will be personally
liable (sec 337) Note that Fraudulent trading is also a
criminal offense under s993 of Companies Act2006.
 Similarly , where one is conducting company business
with the intent to defraud creditors or anybody, he will be
personally liable. The case in point is that of NBM,
Continental Traders Limited and Mary Nyandovi-
Kerr(2001-2007)
3) Disqualified directors
 Directors who participate in the management of a company in
contravention of an order under the Directors Disqualification Act
1996, will be jointly or severally liable along with the company for the
company’s debts
4)Abuse of Company names
 In the past , there were a number of instances where directors of
companies which went into insolvent liquidation formed another
company with identical or similar name. the new company bought the
original company’s business and assets from its liquidator. Under
Insolvency Act 1986( s217), this was a criminal offence and the
directors were personally liable where for example the directors were
involved the operation of a company with identical name to the
liquidated one.
2) Lifting the veil to prevent evasion of obligations
A company may be identified with those who control
it, e g to determine its residence for tax purposes. In
that case the courts may ignore the distinction between
a company and its members and managers if the latter
use that distinction to evade their existing legal
obligations
This is inline with section 119 of the Taxation Act
which provides that where a company is liable to a
penalty, every person who at the time of the offence
was an officer of the company, shall also be liable to
the same penalty.
Public interest
 The veil may be lifted also due to public interest e g
In time of war, a company is not permitted to trade with
enemy aliens. The courts may draw aside the veil if despite a
company being registered in UK, it is suspected that it is
controlled by aliens
• Evasion of liabilities
 The veil may also be lifted where directors ignore the separate
legal personality of two companies and transfer of assets
from one to the other in disregard of their duties in order to
avoid an existing liability.
Evasion of taxation
 The courts may lift the veil of incorporation where it is
used to conceal the nationality of the company.

• Lifting the veil in group situations

 In a group situation, the court may lift the veil by
refusing to recognise that a holding company and its
subsidiaries are separate legal entities and holding
them to be a single economic unit
SUMMARY OF THE LEGAL
CONSEQUENCES OF A LIMITED FIRM
 It acquires a legal personality
 Members are not liable for its debts
 Any property belongs to it does not belong to members
 Shareholders cannot pay money belonging to the
company to their personal accounts
 The company is an independent personality and
therefore cannot come to an end when a member dies
 It is charged tax on its income and not as agent of the
shareholders.
THE END