View/Open - Research Commons - The University of Waikato

CHAPTER 5: THE THEORY OF THE CORPORATION AND
5.1 Introduction
CORPORATE GROUPS
The decision in Salomon v Salomon & Co 1 Ltd has been described as calamitous as it
changed the intended purpose of corporate personality. 2 The principle in the
decision has been seen by many writers as problematic because it has been used by
companies to avoid liability at the expense of creditors, particularly in a group of
companies‟ situation. This chapter, therefore, will focus on the relationship between
the principles and creditors‟ protection. In order to do so, the area of director‟s duty
will be looked into to determine whether there is a duty owed to creditors, and if so,
in what circumstances. The legal response both at common law and statute will also
be addressed in the chapter.
5.2 Corporate Personality
The status of corporate personality was initially conferred by the Royal Charter or by
Act of Parliament. 3 Later, such status was obtained once the company complied with
the statutory requirements specified in the (UK) Companies Act 1844. 4 Corporate
personality is a concept whereby a corporation is conferred with characteristics akin
to a human being, hence it is also known as an artificial legal person. The notion of
1 [1897] A.C. 22.
2 See O. Kahn-Freud “Some Reflections on Company Law Reform” (1944) 7 MLR 54. The writer
described the decision in Salomon v Salomon Co Ltd as a calamitous one which changed the
intended purpose of corporate personality from being to enable capitalists to embark on risky
adventure without shouldering personal liability to allowing a sole trader taking advantage to set up
limited company even though no risk and outside capital were involved.
3 John Farrar and Brenda Hannigan Farrar’s Company Law (Butterworths, London, 1998) at 16;
Clive Schmitthoff Palmer’s Company Law, (Stevens, London, 1987) Vol 1 at 7
4 Schmitthoff above n3 at 8-9; L.C.B Gower Gower’s Principles of Modern Company Law (5 th ed.,
Sweet & Maxwell, 1992) at 39.
73