Corporate Capacity Essay

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Corporate Law
Lecture 3
Lecturer/stream details

Legal nature of companies
► The

separate entity doctrine
► Corporate capacity
► Limited liability
► Piercing the corporate veil
► Corporate liability

Separate legal entity doctrine
► The

company is a legal person separate from its participants
► This means that:
 its obligations and property are its own and not those of its participants
 its existence continues unchanged even if the identity of the participants changes Salomon v Salomon (1897) shoe business
Salomon
cash, debenture

20,001 shares family 6 shares

Pty Ltd company Salomon (cont)
► Issue

– was Mr Salomon entitled to priority under the debenture over other, unsecured creditors of the company? ► Depends on whether the company and its controller are separate legal entities and not agents or trustees for each other
► Court said “yes”

Characteristics of companies
► Important

features of companies arising from their separate legal personality  can incur obligations and hold rights, and sue and be sued, in their own name
 can contract with their controllers
 have perpetual succession
 are separate taxpayers
 participants (may) have limited liability

Companies are separate from their controllers
► Lee

v Lee’s Air Farming Ltd: issue – could Mr Lee be both the controller of a company and its employee?
► Macaura v Northern Assurance: issue – was Mr Macaura the
“owner” of property that belonged to a company controlled by him?

Corporate capacity
► Can

companies (which are artificial legal persons) do everything that natural persons can do?
► Companies can carry on business and other activities because the law confers on them the capacity to do so Corporate capacity (cont)
► Section

124 – Companies have the capacity to do most things that a natural person can do, and some additional things, including issuing shares Corporate capacity (cont)
► What

is the effect of internal limitations on powers, such as in the constitution? ► Section 125 – constitution may limit power or objects, but acts outside those limitations not invalid as against third parties
► Internal remedies may be available

Limited liability
► In

a company limited by shares, a member’s liability is limited to the amount (if any) remaining unpaid on their shares
► Allows investors to quarantine the risk of a particular venture from their other assets
 In practice, creditors may negotiate personal guarantees etc from controllers Limited liability (cont)
► Economic

benefits:

 reduces the need for investors to monitor their investment, allowing efficient diversification and reducing agency costs
 promotes free transferability of shares
► At

whose cost?

 Unsecured creditors
 Victims of negligence

What is the corporate veil?
► Expression

that lawyers use to describe the legal rules that keep participants
(members, officers) separate from the company in a legal sense
► Means that the law cannot look through the veil of incorporation and say that the
company’s
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