Separate Corporate Personality
Explain the meaning of and the rationale for the principle of separate corporation personality.
Personality in this case does not have anything to do with an actual person, but that personhood is given to something. Also, this does not mean that the corporation in question has the traits or quirks given to it by the people who work there. The concept of identity in the corporate realm is something else entirely. The concept of separate corporate personality can be equated to the fact that an individual has and individual personality, and that no one else is responsible for what that individual does or says. The fault or benefit is that persons alone. A separate corporate personality means that the corporation is an entity that is separate and that the component parts that make up the organization are not responsible, legally, for any action taken against the company.
It is simplest to examine the concept in light of personhood for an actual person. Some amount of the personality of an individual is made up of innate qualities that are inborn and cannot be altered. Much like a persons eye color or how tall the individual is going to be, these traits are determined genetically. The rest of the personality is developed early in a childs life, and it is the result of the environment that child grows up in. how the child interprets and adds items to his or her personality is determined primarily by the innate qualities they are provided at birth. A company has both sets of determinants also. When an organization is first founded it is given certain characteristics because of the type of business it is, and due to what the founders wanted the company to be originally (Reza, 2009). However, a company has to grow just like a person, and it is affected by its environment and the traits it acquires. The people who work at the business, the industry it grows in, and other factors influence the identity of the company. However, few of these actually have to do with the legal standing of the company. Thus the two can be separated into the innate characteristics which are legally termed the corporate personality and make the business a separate entity from the people who make up the organization, and the corporate identity or how the company conducts business and treats employees based on the style of management (Balmer & Wilson, 1998). This paper is concerned with the former, or how a company is viewed by legal entities as separate from the people within the organization.
The personhood of the organization is determined by what type of business it is for the most part. This is a large part of the innate quality of the company. Most countries have some sort of arrangement whereby a company becomes a separate legal entity when it first born and registered. In Australia,
“The Corporations-Act-2001-confirms that a company comes into existence as a body corporate on the day it is registered by the Australian Securities and Investments Commission (ASIC). In doing so, a company becomes a legal entity with the legal capacity and powers of an individual” (Shub, 2005).
On the day that the company is registered with the ASIC it becomes an entity that is separate and has its own personhood. In the United States the process is much the same. Podnar and Melewar (2010) said that;
“This notion can be traced back to the principles of law dating back to 1819 in the case of the Trustees of Dartmouth College vs. Woodward, when the Supreme Court in the U.S.A. recognized the corporation as a person. In the case of Santa Clara County vs. Southern Pacific Railroad in 1886 the Supreme Court held that, under the Constitution, a private corporation was a “natural person,” entitled to all the rights and privileges of a human being.”
These are two landmark cases which defined the bounds of a corporate entity and ensured that the sovereignty of the company would be established as a legal precedent.
However, the idea of personhood truly came from a landmark British case known as Salomon v. Salomon & Company, Ltd.
Since much of what is now Western law takes as its tradition English law, it is fitting that a precedent set in Britain is the landmark established in this case. In Salomon v. Salomon & Company, Ltd.;
“The House of Lords confirmed beyond doubt that a company incorporated in the UK possesses its own separate legal identity as set out in the 1862 Companies Act. In the legal sense, a corporation is a distinct person with its own personality separated from and independent of the persons who form it, who invest money in it, and who work in it” (Podnar & Melewar, 2010).
This case is considered foundational, even though there had been others that dealt with the personhood of a company, because of the words “confirmed beyond any doubt.” The British House of Lords ruled that Mr. Salomon could not be held responsible for legal issues which had to do with his company. The rationale for devising this system is simple to see in consequence.
At the time when a company is incorporated, the original shareholders decide what the nature of the corporation will be. Limited liability corporations are made because the partners do not wish to have the legal responsibility to pay back creditors if the company is sued or, for some reason, is dissolved. Because of the separate personality of the corporation, the shareholders are not responsible to the creditors for the debts that the corporation has incurred. Shub (2005) points out that “a companys property is not the property of the members, and its debts are not the debts of its members.” This may be problematic when it comes to separating assets if a partner leaves, but there are legal precedents for this action also. The primary rationale is that the people who own shares in the company do not want to be held financially responsible if the company defaults for some reason. The courts and creditors are only able to go after the corporation itself.
The shield that this type of arrangement provides for the shareholders of a company is only part of the rationale behind the original intent of the practice. A person, despite the fact that the corporation they owned has incurred debts or some other actionable offense, has the right to certain property. A person should be able to protect assets that had nothing to do with the running of the company. Thus, the rationale for the courts setting up this rule is that a person is separate from the business that they own. A corporation may have been given life (so to speak) by a certain individual, but that person does have a life that is separate from the corporation. Therefore the courts have worked to ensure that the dividing line is kept inviolate — in most cases.
2. Describe the circumstances under which the courts will set aside this doctrine and allow claimants to proceed directly against the owner of the company. When considering a case you should outline the case and explain the ratio decidendi which the court has expressed in reaching its decision.
Many court cases exist in which a group of creditors sought to “pierce the corporate veil” (Ilg, 2008). The reason that the creditors wish to do this is because they have may not be able to retrieve all that is owed to them from the corporation. The owner or owners may also use the legal precedent of the veil to excuse their actions which were a distinct part of the reason that a company failed. Ilg (2008) wrote that “Common law courts have demonstrated a willingness to pierce the corporate veil in circumstances when upholding the assumption of separate corporate legal identity would, for example: endorse an instrument that appears simply a sham; would permit for behavior akin to fraud; or lead to a result to fragrantly opposed to justice.”
Three separate reasons are here given for the courts to discount the separate corporate personality. It is the job of the court to try and see through the owners contention that they are not personally responsible for the actions of the company, and that is often the truth. However, there are many instances of fraud, sham and attempts to counter justice.
Courts do not want to take this action because if a precedent is set it is often difficult to rule otherwise. As a matter of fact, if a higher court has set a precedent that applies to the case before the lower court, the lower court must abide by that prior been settled. However, there are exceptions to this precedent. Following are some instances from different countries which detail why the precedent was defeated.
Jones v. Lipman is a small case that established that it is illegal to form a company for the sole purpose.