Separate Legal Entity in UK Law

We all know that in many respects a group of companies are treated together for the purpose of general accounts, balance sheet and profit and loss account. This is especially the case when a parent company owns all the shares of the subsidiaries - so much so that it can control every movement of the subsidiaries. These subsidiaries are bound hand and foot to the parent company and must do just what the parent company says.

It is “hornbook” law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders: Salomon v A Salomon & Co Ltd [1897] AC 22; referred to by Rose LJ in Re H and others (restraint order: realisable property): [1996] 2 All ER 391 at 401F.

What then is the correct approach to distinguishing between an organ of the State and a separate legal entity? And is this distinction relevant not only to questions of immunity, but also to questions of substantive liability and enforcement? A similar recognition of their existence and separateness would be expected for purposes of liability and enforcement.

But constitutional and factual control and the exercise of sovereign functions do not without more convert a separate entity into an organ of the State. The presumption will be displaced if in fact the entity has, despite its juridical personality, no effective separate existence.

This is a helpful enumeration of factors relevant when determining whether an entity is a department or organ of State. The Board sees particular value in the propositions that the existence of State control will not be a sufficient criterion, that the possession of a range of functions coupled with independence in their exercise will militate against a conclusion that an entity is an organ, and, generally, that caution is required before treating a separate legal personality as an organ.

On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the Company's net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. But in the case of a small private company like this company, the correspondence is exact.

As Sir Godfray submitted, save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v. Salomon merely because it considers that justice so requires.