Corporations and legal personality
The most important idea in company law is that a company is a legal person separate from the people who own and run it. It explains why shareholders are not liable for the company's debts, why a company owns property and sues in its own name, and why it outlives its founders. LW tests it through the classic cases and through scenarios asking whether a court will look behind the company to the people controlling it.
LW-GLO examines company law in a general form, not the statute of any one country. National company laws, including Nigeria's Companies and Allied Matters Act 2020, differ in places, so in the exam apply the principles as these notes set them out, and in practice check the local statute. Where a specific figure helps, these notes give the UK rule as an example, labelled as such.
Sole traders, partnerships and companies
| Point | Sole trader | Ordinary partnership | Registered company |
|---|---|---|---|
| Legal personality | None: the trader is the business | None in common law systems | A separate legal person |
| Owners' liability | Unlimited | Unlimited for every general partner | Limited to any amount unpaid on shares (or the amount guaranteed) |
| Formation | No formalities | No formalities; an agreement is advisable | Registration, a constitution and fees |
| Management | The owner | Every partner | Directors, who may be different people from the members |
| Continuity | Ends with the owner | Usually dissolved when a partner dies or leaves | Perpetual succession: unaffected by changes of members |
| Raising finance | The owner's funds and loans | Partners' capital and loans | Can issue shares, and can grant floating charges to lenders |
| Publicity and regulation | Private | Private | Accounts and key information are filed publicly; more regulation |
Limited liability
Limited liability belongs to the members, not to the company. The company itself is liable for its own debts without limit. What is limited is the members' liability to contribute: in a company limited by shares, to any amount still unpaid on their shares; in a company limited by guarantee, to the amount each member agreed to contribute if the company is wound up. Once a member's shares are fully paid, it owes nothing more, however large the company's debts.
Limited liability shifts the risk of failure to creditors, so the law protects them through capital maintenance, public accounts and insolvency rules (areas E and G), and lenders to small companies often take personal guarantees from directors, undoing limited liability by contract.
Types of company
Companies may be limited by shares (the usual trading company), limited by guarantee (common for charities, clubs and other non-profit bodies) or unlimited. The key distinction is between private and public companies.
| Point | Private company | Public company |
|---|---|---|
| Offering shares to the public | Not allowed | Allowed; it may also seek a stock exchange listing |
| Name ending | "Limited" or "Ltd" | "Public limited company" or "plc" |
| Minimum share capital | Usually none | A statutory minimum before it may trade (£50,000 under the UK model) |
| Directors (UK model) | At least one | At least two |
| Company secretary (UK model) | Optional | Required, and suitably qualified |
| Regulation | Lighter | Stricter rules on accounts, meetings, capital and dealings with directors |
A listed company is a public company whose shares are traded on a stock exchange and which must also follow its listing rules; not every public company is listed. In a group, a parent company controls one or more subsidiaries, each of which is a separate legal person.
Separate legal personality and the veil of incorporation
On registration, a company becomes a legal person distinct from its members. In Salomon v A Salomon & Co Ltd (1897), given here as an illustration, Mr Salomon sold his boot-making business to a company in which he held almost all the shares, taking part of the price as a secured loan. When the company failed, its unsecured creditors argued that it was really Mr Salomon under another name. The House of Lords held that the company was a separate person, properly formed, so he was not liable for its debts and, as a secured creditor, was paid first.
The consequences:
- the company owns its property: a shareholder has no interest in the company's assets, even as sole owner;
- it contracts, sues and is sued in its own name, and is liable for its own debts;
- it has perpetual succession: it continues whatever happens to its members;
- it can employ its own members: in Lee v Lee's Air Farming Ltd (1960), given here as an illustration, the controlling shareholder and director was also held to be the company's employee, so his widow could claim compensation when he died at work.
This separation is often described as a veil of incorporation between the company and its members: outsiders deal with the company, and normally cannot reach behind it to the people who own it.
Lifting the veil
Sometimes statute or the courts ignore the separation and treat the company's acts or liabilities as those of its members or directors.
| Route | Examples |
|---|---|
| Statute | Directors ordered to contribute to the company's assets for fraudulent or wrongful trading (area H); directors of a public company trading without a trading certificate made liable if it defaults (UK model); a disqualified person who acts as a director made liable for debts incurred |
| The courts: evasion | The veil is lifted where a person deliberately uses a company under his control to evade an existing legal obligation. In Gilford Motor Co Ltd v Horne (1933), a former employee bound not to solicit his old employer's customers set up a company to do so, and an injunction was granted against both him and the company. In Jones v Lipman (1962), a seller who transferred land to his company to avoid completing a sale was ordered to complete. Both are given here as illustrations |
| The courts: a narrow rule | In Prest v Petrodel Resources Ltd (2013), given here as an illustration, the UK Supreme Court held that the veil may be pierced only in such cases of evasion, and only where no other legal route gives a remedy. It did not pierce the veil there, finding instead that the companies held the properties on trust for their controller |
| The courts: groups | Each company in a group is a separate person, and the courts will not treat a group as one entity merely because that would be fairer: Adams v Cape Industries plc (1990), given here as an illustration |
The common thread: the veil is respected even when it produces a harsh result for creditors (as in Salomon), but not when the company is used as a device to escape an obligation that already exists.
Worked example
Scenario 1. Emeka sells his catering business to Emeka Foods Ltd, a fictional company, for $500,000: $200,000 in shares (99% of the total) and a $300,000 loan secured by a fixed charge over the company's assets. Two years later the company is wound up. Its assets realise $320,000 and it owes unsecured trade creditors $250,000, who argue that the company and Emeka are the same person.
| Step | Analysis |
|---|---|
| Issue | Can the creditors treat the company as Emeka, and defeat his security? |
| Rule | A properly registered company is a separate legal person, even if one person owns almost all its shares (Salomon, 1897). |
| Application | There is no evidence of fraud or of a sham to evade an existing obligation. Emeka is a secured creditor of a separate company. |
| Conclusion | Emeka is paid first from the charged assets: $300,000. The unsecured creditors share the remaining $20,000, about 8 cents per $1 owed. Emeka is not personally liable for the trade debts. |
Scenario 2. Chidi, a former sales director of a paint company, agreed not to solicit its customers for 12 months after leaving. He then forms a company, owned by his wife, which immediately solicits them.
| Step | Analysis |
|---|---|
| Issue | Can Chidi avoid his promise by acting through a company? |
| Rule | The courts lift the veil where a company is used to evade an existing legal obligation (Gilford Motor Co Ltd v Horne, 1933). |
| Application | The company was formed to do what Chidi had promised not to do, and he controls its activities. |
| Conclusion | The court can grant an injunction against both Chidi and the company. |
Common mistakes
- Saying the company has limited liability. The company is liable without limit; its members' liability is limited.
- Thinking a sole shareholder owns the company's assets.
- Assuming the courts lift the veil whenever it would be fair to creditors. Salomon shows they will not.
- Treating a group of companies as one legal person.
Exam technique
Start every question from the rule: the company is a separate person. Then ask whether an exception applies: a statute imposing personal liability, or a company used to evade an existing obligation. If neither applies, the separation stands, however one-sided the result looks.
Study with AI
I am studying ACCA Corporate and Business Law (LW-GLO), sub-area D3: corporations
and legal personality. Give me five short scenarios, one at a time, in which someone
tries to make a shareholder or director personally liable for a company's debts or
acts, or to treat a company and its owner as the same person. Ask whether the veil
of incorporation will be lifted, then mark my answer and explain the rule or case.AI assistants sometimes overstate when courts lift the veil: check every answer against these notes.
Lecturer's note: Salomon is not an old curiosity; it is the engine of modern business. Separate personality lets people invest in ventures they do not manage, and lets entrepreneurs take risks without staking their homes. That is why courts guard the veil carefully and pierce it only when someone uses a company to dodge an obligation they already owe. Hold that purpose in mind and most veil questions answer themselves.
Key points
- A registered company is a legal person separate from its members: it owns property, contracts, sues and is sued, and has perpetual succession.
- Limited liability means the members' liability is capped at any amount unpaid on their shares or their guarantee; the company's own liability is unlimited.
- Private companies cannot offer shares to the public; public companies can, subject to a minimum capital and stricter rules.
- Salomon v A Salomon & Co Ltd (1897) established that a properly formed company is separate even when one person owns almost all its shares.
- The veil is lifted by statute (for example fraudulent and wrongful trading) and by the courts where a company is used to evade an existing legal obligation.
Quick check
- Musa owns all the shares in a company that owns a warehouse. He insures it in his own name, and it burns down. Does he have an insurable interest?
- Fatima holds 10,000 fully paid $1 shares in an insolvent company with debts of $2 million. How much must she contribute?
- A director transfers her house to a company she controls, to avoid completing a sale she has already agreed to make. What will a court do?
Answers
- No. The warehouse belongs to the company, a separate person, as Macaura v Northern Assurance Co Ltd (1925) illustrates.
- Nothing. Her shares are fully paid, so her liability is exhausted.
- Lift the veil and order her and the company to complete the sale, as in Jones v Lipman (1962): the company is being used to evade an existing obligation.