Concept of Corporate Personality in Business Law - Essay Example

BUSINESS LAW Explain and evaluate the concept of ‘corporate personality’, considering the attitude of the courts to this important part of company law. Your name …………………….. Course ………………………… Date of submission …………… Introduction A business organization is a body of persons associated together for the purpose of trade. Among different forms of business ownerships, sole proprietorship and general partnerships are commercial unincorporated business forms and those engaged in such business together are treated by law no differently from their business. The business legal system perceives that these businesses are not separate from their owners. By contrast, an incorporated business is an entity separate from its owners and members. The incorporated businesses may be limited or unlimited depending on the liability of the shareholders and private or public depending on whether they are prohibited to issue shares to the public or not. According to the business and company laws, incorporated companies are ‘legal persons’ and therefore they have ‘corporate personality’ This piece of research paper is an attempt to explain and evaluate the concept of ‘corporate personality’. Based on legal cases, this paper examines how courts responds to the specific cases of corporate personality and analyze the court’s attitude to this part of the law. Concept of Corporate Personality In legal perspectives, a corporate person is an association like a business firm, a educational or religious institution, which has been incorporated in order to become a ‘corporate person in law’, with certain rights, duties, obligations and privileges that can be subjects matters of legal dispute (Corporate Personality). Members and the corporation or business entity is legally different and therefore the rights and liabilities of the corporate person are never similar with that of its owners or members. For instance, when the managing director or all of the managers resign from their duties without assigning the duties to new successors, the business and its trading don’t come to an end and it will still be legally a corporate body. When a business is registered as a company under the Company Registration Act, the business becomes an entity in its own rights, with legal boundaries of responsibilities, rights and duties that are entirely different from those of its members. In the modern system of company registration, the incorporated company turns to be a business with ‘separate legal entity’, and this outcome is referred as ‘corporate personality’ (Talbot, p. 23). The company incorporated under the Companies Act has been established as a distinct entity by the House of Lords’ decision. The concept that a non-human entity could be treated as the subject of rights and duties in law had been legally approved and accepted from 1897 onwards and it has enjoyed a wide acceptance in English legal system (Grantham and Rickett, p. 4). According to the Company Act 1948, from the date of incorporation, which is mentioned in the certificate of incorporation, the subscribers of the memorandum of association together with those persons who may from time to time become members of the company, shall be a body corporate by the name which is included in the memorandum of the company (Sealy, p. 36). From the above legal points, it is clear that the company together with its members are considered to be the ‘corporate personality’. The case law of Salomon vs A. Salomon & Co Ltd, 1897, has been one of the most quoted company law excerpt for ‘separate legal entity’ of the company. Both sole proprietorship and general partnership are extensions of the individual owner or owners, whereas the incorporated company is regarded as ‘legal person’ and thus it is, in many respects, treated as artificial person under law, unless the specific law provides otherwise. The incorporated company is therefore subject to a number of duties and responsibilities under the law as a natural person. Because the corporation itself is considered as separate ‘person’, it is bound and liable for any debts, liabilities and obligations that it incurs. The owners, share holders, managing directors and members are never liable for the debts and obligations that the corporation has incurred. Basic features of ‘Corporate Personality’ A company incorporated under the Company Law is legally a person, having ‘corporate personality’. The basic features of this part of legal doctrine are detailed below: The company is vested with a corporate personality, The company is legally distinct from owners and its members, The company can sue others or can be sued by others The company can own properties and enter in to any legal dealing with it. The company’s liabilities are legal responsibilities of the company and members will not be liable for company’s debts. No one can legally claim any ownership rights in the assets of the company. ‘Corporate personality, liability and Crime’ An incorporated company is considered as a separate legal body in law, but, does it mean that the company will be perfectly similar to the natural person? Will a corporate person commit a sin or crime? And will it be punished in the same manner… There are number of questions regarding this. Miller and Jentz found that, until recently, it was thought that a corporation could not incur criminal liability, because, even though it is regarded as a legal person, it does it only through its members or agents like directors, employees etc (p. 134). But, according to the modern criminal as well as company law, a corporation may be held liable fro crimes. Even though a corporation cannot be imprisoned, some levels of punishments can be implemented like fine, denial of legal privilege etc. The incorporated organization is legally a ‘person’ within which a number of individuals are involved. The company or the incorporated organization takes extreme care not to be committed a crime and therefore the organization puts efforts to create an organization culture in which the management, owners and employees are expected to follow certain organizational policies as well rules. If an employee commits a crime, it can create negative impacts on the company and therefore management may terminate or dismiss him not to repeat same as it may cause legal liabilities. In such cases, the company will be sued by others. When company faces financial loss due to the crime or illegal activities of others, the company can sue against them because the company is considered as a ‘corporate person’ in law. Courts’ attitude to the Corporate Personality concept Basically, court and the concerned legal system perceive that the corporation is legally a person. the fundamental concept of this legal point is that the incorporated company is legally a separate person and therefore it can sue or can be sued. From 1897 onwards, this legal principles has been widely accepted throughout the courts in the UK (Grantham and Rickett, p. 4). Talbot emphasized that the doctrine of ‘corporate personality’ is overwhelmingly important in Anglo-American corporate law. This is also one that the court defends against huge social pressures. An American law case of Peoples’ Pleasure Park Co v Rohleder gave significant legal position regarding the corporate personality of the company (p 23). It is also helpful to evaluate the attitude of courts to this doctrine. The above case has been regarding the ownership of a land, which was owned and restricted by ‘coloured persons’. The court held that a corporation was incapable of having a colour and as the company is legally a separate person, it was not restricted from holding the property. The court held that the company is the owner, and not Johnson, who bought land for the company (Talbot, p. 23). The case of Macaura v Northern Assurance Co1925, also describes the essential features of doctrine of Corporate Personality. In this case law, the court has held that the properties of a company belong to the company and not to the members. The court has held that neither the shareholder nor a creditor of the company has insurable interest in the properties of the company and therefore they cannot take insurance for the properties of the company (Sealy, p. 52). The court has held that the properties (timber in the case) are not belonging to him and he does not have insurable interest on it. A person is legally able to take insurance only on those properties on which he has sufficient insurable interest. The properties of the company is under the ownership of the company itself and therefore the members or managers of the company has no ownership on such properties. Significance of Salomon v Salomon Co Ltd in the doctrine of Corporate Personality The case of Salomon v Salomon Co Ltd was one of the most famous case that the articulation of Corporate Personality was established by the House of Lords. This case and court’s judgments have very long been applied in a large number of law cases regarding separate legal entity. Talbot found that the Salomon v Salomon Co Ltd is considered to be a central point to the doctrine of Corporate Personality for two main reasons. Firstly, the court’s conclusion applied judicial understanding of Corporate personality, which had previously been applied only to large business entities, to a small private company. Secondly, Court’s speeches articulated the nature and consequences of incorporation so that this case has been cited in many cases concerning the ‘Corporate Personality’ (p. 25). The case of Salomon v Salomon Co Ltd has also illustrated how the normative values and significance of the company law can set out in to factual scenario. The above case’s court judgment has proved that even though there is no greater factual differences between shareholders and partners as shareholders are factually so close to the company, but, treating the company distinct from the shareholders seems to be factual reality and it shows how legal norms have been imposed on it (Talbot, p. 25). Conclusion A business which is incorporated under the Company Law is considered to be a separate legal person. These companies can sue and can be sued and therefore it has significant legal position as a ‘legal body’. Some of the major cases are Salomon v Salomon Co Ltd and Macaura v Northern Assurance Co, that have shed lights on corporate personality and its relevant features like legal points regarding the ownership of the company’s properties. This paper has evaluated and explained the doctrine of Corporate Personality and highlighted its salient features. References ‘Corporate Personality’, Palgrave Macmillan Dictionary of Political Thought. Basingstoke: Macmillan Publishers Ltd, 2007. Credo Reference. Web. 18 October 2010. Grantham, R and Rickett, C.E.F, Corporate personality in the 20th century, Hart Publishing, 1998 Miller, R.L and Jentz, G.A, Fundamentals of Business Law: Excerpted Cases, Second illustrated edition, Cengage learning, 2009 Sealy, L.S, Cases and materials in company law, Illustrated edition, Cambridge University Press, 1971 Talbot, L, Critical company law, Routledge, 2007 Read More