LAWS3100 Study Guide - Final Guide: Ultra Vires, Trading While Insolvent, Income Tax Assessment Act 1936
CHAP 3: THE LEGAL NATURE OF COMPANIES
The separate entity doctrine
Separate Legal Personality
-Company is treated as a separate person from its participants !
-Company continues unchanged even if the identity of the participants in it changes. !
-Company can enter into legal relationships with its participants (debtor and creditor, employer
and employee) !
-Companies are treated as separate entities liable for income tax under the Income Tax
Assessment Act 1936 (Cth)!
-Recognised in the 19th century decision of the English House of Lords in Salomon Case.!
Salomon v Salmon Co Ltd
From sole trader to company (himself and his family as the only shareholders), he sold his
business to the company. The company paid part of the purchase price (in the form of shares) and
agreed to pay the rest over time. To secure its obligations to pay, the company gave Mr. Salomon
security over its assets in the form of a company charge. The effect of the charge was that the
company’s assets had to be used to pay out Mr Salomon in full before they could be applied to
pay out the company’s other unsecured creditors. Mr. Salomon controlled the company by
holding almost all the shares in the company. !
When the business failed, the value of the assets was insufficient to pay out both Mr Salomon and
the company’s other creditors. The creditors argued that Mr. Salomon should not receive the
benefit of the charge (priority to be paid before them) as the degree of control he had over the
company meant it should be treated as being his agent, or trustee for him, in the conduct of the
business. He would have been required to indemnify the company for the debts it had incurred. !
The House of Lords held that, despite the fact that Mr Salomon controlled the company, it was
not his agent or trustee. The company was treated as operating the business in its own right and
as being separate from its controller (Mr Salomon). Therefore, the charge given to Mr Salomon
was valid and he was entitled to be paid his debt, even though other creditors of the company
would not be paid (since the company had insufficient assets to pay all its creditors) !
Consequences of treating the company as a separate legal entity !
-A company’s obligations and liabilities are its own, and not those of its participants !
-A company can sue and be sued in its own name (s119)!
-A company has perpetual succession !
-A company’s property is not the property of its participants (no ownership rights)!
-Unlike the beneficiaries of a trust, the participants in a company have no proprietary (legal
or equitable) interest in the company’s property.!
-A company can contract with its controlling participants !
$- a company and its participants can enter into contracts with each other. Eg in Solomon’s $
case, a company c an lend money to or borrow money from its controlling shareholders.!
Corporate capacity
The principle that a company is a legal person, that is, an entity that is recognised by the law as
being capable of interacting with others in a manner that has legal effect. !
Companies’ ability to do acts of legal effect= capacity!
How do companies do things of legal effect if they have no ‘physical’ identity? !
Acting directly through one of the organs of the company (board of directors or the members in
general meeting)!
Acting indirectly through their agents appointed under the principles of agency law. !
How wide are the powers of companies?!
Section 124 of the Corporations Act gives a company the legal capacity and powers of a natural
person. !
find more resources at oneclass.com
find more resources at oneclass.com
