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 controlling shareholder and director can also be the company’s employee under a contract of service (Lee v Lee’s Air Farming Ltd [1961] AC 12, PC, accepted in Secretary of State for BERR v Neufeld [2009] EWCA Civ 280, [29]–[32]). Control of the company does not erase its separate personality.

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)): each member's liability is limited to the amount the member has undertaken to contribute to the company's assets if it is wound up (common for charities and clubs).
• Unlimited company (s.3(4)): members’ liability has no specified limit. It is a liability to contribute to the company’s assets on winding up, not a general right for its creditors to sue the members directly (IA 1986 s.74). The statutory qualifications for past members still apply.

Other business vehicles

• A sole trader has no legal personality separate from the business and is personally liable, without limit, for all its debts.
• A general partnership in England and Wales has no separate personality. Partners are personally liable without limit: jointly for all the firm's debts and obligations incurred while they are partners, and jointly and severally for wrongs for which the firm is liable under PA 1890 ss.10–11 (ss.9, 12). Scottish firms have separate personality (s.4(2)).
• An LLP is a body corporate separate from its members (LLPA 2000 s.1). Members are not liable for its debts merely because they are members; their liability to contribute to its assets on a winding up is only as the legislation provides (s.1(4)). Limited liability does not protect a personal guarantee or a person's own independently actionable wrongdoing.
• Statutory exposures include fraudulent and wrongful trading as applied to LLPs, withdrawal clawback under the adapted IA 1986 s.214A, and the single-member rule in LLPA 2000 s.4A. Clawback applies, on the liquidator's application, to a member who withdrew LLP property (for example a profit share, salary or loan repayment) in the two years ending with the commencement of the winding up, if the member knew or had reasonable ground for believing that the LLP was then unable to pay its debts, or would become so after that withdrawal and any other members' withdrawals made at the same time or in contemplation of it, and the member knew or ought to have concluded that after each withdrawal there was no reasonable prospect of the LLP avoiding insolvent liquidation. Any contribution ordered cannot exceed the member's total withdrawals in that period (IA 1986 s.214A as inserted for LLPs by SI 2001/1090 Sch 3). The single-member rule applies after six months of business with one member to a member who knows the position, for debts contracted during the later period. See BLP.09.
• A limited partnership is different from an LLP: general partners are liable for all the firm's debts and obligations. In a limited partnership that is not a private fund limited partnership, a limited partner is not liable beyond the capital or property they contributed, but is liable up to any part of that contribution they draw out, and is liable as though a general partner for debts incurred while they take part in management (LPA 1907 ss.4(2)–(3), 6(1)). Private fund limited partnerships have special rules. A limited partnership registered in England and Wales has no separate legal personality (PA 1890 s.4(2)–(3)).

Piercing the corporate veil

Courts respect separate personality and rarely look behind it. In Prest v Petrodel Resources Ltd [2013] UKSC 34, Lord Sumption identified the narrow evasion principle: a person deliberately evades an existing legal obligation, liability or restriction, or frustrates its enforcement, by interposing a company under their control. Piercing is available only to remove the advantage otherwise gained from separate personality, and only where ordinary legal remedies do not suffice ([35]). Lord Mance and Lord Clarke left open other possible, very rare cases ([100], [103]); this is not a general fairness jurisdiction. Distinguish concealment: the court identifies the real actors hidden by a company where their identity is legally relevant. Looking behind the structure to establish the facts does not disregard the company’s separate personality and is not veil-piercing (Prest, [28]). In Prest itself, the veil was not pierced: no relevant existing obligation had been evaded. The companies held the properties on trust for the husband, based on resulting-trust principles and the funding evidence ([36], [48]–[51]). The earlier Adams v Cape Industries plc [1990] Ch 433 confirms that apparent fairness alone does not justify disregarding separate personality (quoted in Prest, [21]).

Public-company trading certificate

• A company formed as public must not do business or exercise any borrowing powers until the registrar has issued it with a trading certificate (s.761; see BLP.03). Contravention does not invalidate its transaction. If it then fails to perform within 21 days of being called on to do so, those who were directors when it entered the transaction are jointly and severally liable to indemnify the other party for resulting loss (s.767(3)–(4)).

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) — a contract purportedly made by or for a company before it exists generally takes effect as a contract with the person purporting to act for it, who is personally liable, subject to an agreement to the contrary (s.51(1)). Signing “for and on behalf of” the unformed company does not itself exclude liability; a clear contrary agreement is needed (Phonogram Ltd v Lane [1982] QB 938, explained in Royal Mail Estates Ltd v Maple Teesdale [2015] EWHC 1890 (Ch), [20], [40]).
• Veil-piercing is a last resort — do not disregard separate personality where an ordinary remedy, such as a trust or a claim against the wrongdoer, resolves the case.
• Directors (and in some cases others) can incur personal liability separately, which is not piercing the veil: under a personal guarantee they have given; under a court order, on the application of the liquidator (or, while the company is in administration, the administrator: IA 1986 ss.246ZA–246ZB), to contribute to the company's assets for fraudulent trading (IA 1986 s.213, which applies to anyone knowingly party to carrying on the business with intent to defraud creditors or for any fraudulent purpose) or wrongful trading (s.214, directors and shadow directors only); to the company for breach of their duties; and for torts they commit personally.
• Group companies: each subsidiary is a separate person; a parent is not liable for subsidiary debts absent a recognised basis (Adams v Cape).

Practise at the real standard

Strong on this topic? SQE1 tests 137 of them, and 58% did not pass in July 2026. See where you stand across all of them.

Complete includes

• ✓An AI tutor on every question. The tutor already knows the correct answer
• ✓5 full timed mock papers, plus unlimited drilling — no daily cap
• ✓The whole 2,263-question bank, with worked answers and references, all 137 topics
• ✓Your weak-spot map: exactly where you’re losing marks

One payment, nothing recurring. The 25-question diagnostic is free with no card.