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What does separate legal entity mean for a company?

The concept of separate legal entity has been around for more than 500 years and it simply means that the company is separate in all spheres of its activities. One of the main advantages of incorporating a company is that it is a separate legal entity , which means that it is treated as an entity separate from its members that make up the company and as a “person” by law. Due to this separation between the company and an individual, the members’ liability is also limited. Being a legal person, the company has the following rights and obligations like a natural person:

  • Sue and be sued in its own name.

  • Enter into contracts in its own rights.

  • Assets of the company are separate from its members

  • Enjoy perpetual succession and will continue to exist until it is dissolved by court order or liquidation.

A prominent case law Salomon v A Salomon and Co Ltd [1897] AC 22 clarifies the separate legal personality of a company which is independent of that of its members.

Facts of the case

  • Mr Salomon was a shoemaker in England. His sons wanted to become his business partners so he converted his business into a limited company (A Salomon & Co Ltd).

  • A Salomon & Co Ltd purchased Mr Salomon’s business for above market value.

  • His wife and his five children became subscribers. The two eldest sons became directors of the company.

  • Mr Salomon was allocated 20,001 of the company’s 20,007 shares.

  • The company gave Mr Salomon £10,000 in debentures and received an advance of £5,000 from Edmund Broderip, on security of the debentures.

  • Salomon’s business eventually failed and it defaulted on its interest payments on the debentures (half held by Broderip). Broderip sued to enforce his security.

  • The company went into liquidation. Broderip was repaid his £5,000. This left £1,055 company assets remaining. Salomon claimed this amount under his retained debentures. This would leave nothing for unsecured creditors.

  • The company’s liquidator argued that Salomon should be responsible for the company’s debts. Salomon sued for the £1,055.

Ruling The Court of Appeal, declaring the company to be a myth, reasoned that Salomon had incorporated the company contrary to the true intent of the then Companies Act, 1862, and that the latter had conducted the business as an agent of Salomon, who should, therefore, be responsible for the debt incurred in the course of such agency.

The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held that, as the company was duly incorporated, it is an independent person with its rights and liabilities appropriate to itself, and that “the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are”.3 Thus, the legal fiction of “corporate veil” between the company and its owners/controllers4 was firmly created by the Salomon case.

Corporate Veil Members of a company are protected from personal liability should the business fail. Due to the principal of a company being a separate legal entity, the courts have been reluctant to hold members liable for the acts of the company. There have been past cases where members or officers of a company made use of the corporate veil doctrine to protect themselves from personal liability. However, there have also been past cases demonstrating through case law that corporate veil doctrine is not an iron curtain. The court will pierce the corporate veil under exceptional circumstances such as fraud and reckless trading or where the sole purpose for which the company was incorporated is fraudulent or illegal. The court of law can disregard the corporate veil in order to ensure justice. A company will come into existence upon incorporation under the Singapore Company Law. When starting a business in Singapore, it is important to understand the different types of structures and the rights and duties each bestow.




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