Legal Personality and Limited Liability

Introduction

**Legal personality** is the foundation on which the whole of company law is built. Once a company is incorporated under the **Companies Act 2006**, it becomes a **separate legal entity**, distinct from the shareholders and directors who own and run it. This chapter introduces the **doctrine of separate legal personality** established in **Salomon v A Salomon and Co Ltd [1897] AC 22**, the closely related concept of **limited liability**, and the exceptional circumstances in which the courts will **'pierce' the corporate veil** to reach the individuals behind the company. The leading authorities — **Salomon**, **Macaura**, **Lee v Lee's Air Farming**, **Adams v Cape Industries** and **Prest v Petrodel** — must be mastered for SQE1 FLK1.

Assessment focus

For the SQE1 FLK1 assessment you need to understand the **separate legal personality** of a company and the principle of **limited liability**, both of which flow from incorporation under the Companies Act 2006. You should be able to apply **Salomon v A Salomon and Co Ltd** and the supporting authorities (**Macaura**, **Lee v Lee's Air Farming**, **Barings**) to client scenarios, and to identify when the courts will **pierce the corporate veil**. Following **Prest v Petrodel Resources Ltd [2013] UKSC 34**, the veil will be pierced only in narrow circumstances — essentially under the **evasion principle**, where a person under an existing legal obligation deliberately interposes a company to evade or frustrate that obligation; **Adams v Cape Industries plc [1990] Ch 433** confirms that there is no general 'single economic entity' or 'interests of justice' ground. Questions are single best answer questions (SBAQs) set in **realistic client-based scenarios**: you must **apply** the doctrine, not merely recall it. This is a closed-book assessment — ensure you can recall each case, its principle and its facts from memory.

Study tips

1) Memorise the ratio of **Salomon v A Salomon and Co Ltd [1897] AC 22**: a duly incorporated company is a **separate legal entity** liable for its own debts. 2) Link each case to its principle — **Macaura** (company assets belong to the company, shareholder has no insurable interest); **Lee v Lee's Air Farming** (company can contract with / employ its own controller); **Barings** (parent cannot sue for a loss suffered by its subsidiary). 3) Distinguish **limited liability** (members' liability capped at the amount unpaid on their shares, or the guarantee) from **separate legal personality** (the company is a distinct person). 4) Remember the veil may be set aside in **two ways**: by **statute** or by the **common law**. At common law the veil is pierced only under the narrow **evasion principle** in **Prest v Petrodel Resources Ltd [2013] UKSC 34**; **Adams v Cape Industries plc [1990] Ch 433** rejects any general 'single economic entity' or 'interests of justice' ground. 5) Note that limited liability protects **directors** only where they have given no personal guarantee and have not acted fraudulently or wrongfully.