Separate Legal Personality

Page 43

Chapter 3

Separate Legal Personality

3.1 MEANING OF SEPARATE LEGAL PERSONALITY

The classic case recognising the principle of separate legal personality for incorporated bodies is Salomon v Salomon & Co Ltd.¹Salomon had run a successful manufacturing business for over 30 years but then formed a limited company to run the business. In return for selling the business to the company, he received 20,000 shares, the other members of his family acquiring six between them, and an agreement by the company to pay him £10,000 secured on its assets. When the company became insolvent, Salomon, as a secured creditor, was paid ahead of the unsecured creditors. The court held that Salomon and the company were separate even though it was effectively a oneman company. Since the transactions were between separate individuals, they were valid. Lord Macnaghten said (at p 51):

The company is at law a different person altogether from the subscribers to the memorandum; and, although it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the company is not in law the agent of the subscribers, or trustee for them.

3.2 GENERAL PARTNERSHIPS
3.2.1 Lack of separate legal personality

General partnerships in England and Wales do not have separate legal personality (although Scottish partnerships do; s 4(2) of the Partnership Act).

¹Salomon v Salomon & Co Ltd [1897] AC 22.

Page 44

In 2003 the Law Commission and the Scottish Law Commission proposed that separate legal personality be introduced for general (and limited) partnerships,²but the government rejected this.

3.2.2 Consequences

Some of the advantages which flow from, or are enabled by, separate legal personality, can be achieved by English and Welsh partnerships by other, rather more complicated, means; for example, in relation to ownership of the firm’s property (see 4.1), continuity of the firm on a change of partner (see 11.1.1) and the firm’s ability to bring and defend litigation (see 10.1.1). However, other potential advantages cannot, such as limited liability and the ability to grant floating charges (other than agricultural floating charges; see 8.1.2). The Law Commission of England and Wales recommended that partnerships acquire the right to grant floating charges,³but this has not as yet been taken forward.

Perhaps surprisingly, the Court of Appeal has held that it is possible, in principle, to render a partnership criminally liable as a separate entity from the partners. In W Stevenson & Sons (A Partnership) and Bick v R,⁴the applicants – a partnership, its partners and an employee – sought to challenge the conviction of the partnership for offences under the Sea Fishing (Enforcement of Community Control Measures) Order 2000.⁵The Court of Appeal held that a partnership was a relationship that enabled transactions to take place, under a single firm name, on behalf of a group of persons who were jointly liable in respect of those transactions, and jointly and severally liable for damage caused or penalties imposed for which the firm had become liable. Its conviction did not expose the partners to liability, and fines could only be imposed against partnership assets. The Order permitted partners to be made defendants only if they were complicit in the alleged offence.

²Partnership Law (Law Com No 283 and Scot Law Com No 192, Cm 6015, 2003), available at www.lawcom.gov.uk.

³Company Security Interests (Law Com No 296, Cm 6654, 2005), available at www.gov.uk/...