Legal personality & limited liability

BLP.02 — Legal Personality & Limited Liability

Core principle

On incorporation a company becomes a separate legal person distinct from its members and directors (Salomon v A Salomon & Co Ltd [1897] AC 22; CA 2006 s.16(2)). It can own property, contract, sue and be sued, and continues in perpetual succession regardless of changes in membership.

Consequences of separate personality:

• The company's assets are its own — members have no proprietary interest in them (Macaura v Northern Assurance [1925] — shareholder had no insurable interest in company property).
• The company contracts in its own name; a director is not personally liable on company contracts merely as an agent acting within authority.
• A sole shareholder/director who is also an employee can sue/be a creditor of the company (Lee v Lee's Air Farming [1961]).

Limited liability

Separate personality ≠ limited liability — they are distinct concepts. Limited liability protects the members, not the company. The company is always fully liable for its own debts.

• Company limited by shares (s.3(2)): member's liability is capped at any amount unpaid on their shares. If shares are fully paid, the member owes nothing further on insolvency.
• Company limited by guarantee (s.3(3)): members guarantee a nominal sum payable on winding up (common for charities/clubs).
• Unlimited company (s.3(4)): members fully liable.

Piercing the corporate veil

Courts respect separate personality and rarely look behind it. Prest v Petrodel Resources Ltd [2013] UKSC 34 confined veil-piercing to the narrow "evasion principle": where a person under an existing legal obligation deliberately interposes a company to evade it or frustrate enforcement. Distinguish the "concealment principle" (look at who really controls — not true piercing). On the facts in Prest, assets were reached via resulting/constructive trust, not veil-piercing (Adams v Cape Industries [1990] confirms the high threshold).

Common traps for SQE1

• Don't conflate separate legal personality (a feature of every registered company) with limited liability (depends on company type).
• A company has personality only from the date on the certificate of incorporation (s.16) — pre-incorporation contracts bind the promoter personally (s.51), even if signed "for and on behalf of" the company.
• Veil-piercing is a last resort — only if no conventional remedy (agency, trust, tort, fraud) is available, and only on the evasion principle.
• Directors can incur personal liability separately — e.g. personal guarantees, fraudulent/wrongful trading (IA 1986 ss.213–214), breach of duty, or tortious acts they personally commit. This is not piercing the veil.
• Group companies: each subsidiary is a separate person; a parent is not liable for subsidiary debts absent a recognised basis (Adams v Cape).