Separate Legal Personality in Company Law

Introduction

Separate legal personality means a company is recognised as a person in law, distinct from its shareholders, directors and employees. Once formed, the company can own property, enter contracts, borrow, and sue or be sued in its own name. This separation is often called the veil of incorporation.

The effect is significant: shareholders are not directly liable for company debts beyond any amount unpaid on their shares. Directors manage the company, but personal liability usually arises only in specific situations (for example, wrongful trading). To achieve and maintain this separation, the company must be properly incorporated and then run in line with statutory governance and reporting rules.

This guide explains the core rule from Salomon v A Salomon & Co Ltd, when the courts may look through the company (Prest v Petrodel), and how separate personality plays out in contracts, torts, insolvency and group structures.

What You'll Learn

• What separate legal personality is and how it arises on incorporation
• How limited liability protects shareholders, and where director liability can still arise
• Why company property is not shareholder property (Macaura) and why that matters for insurance
• How a company can contract with its own controller (Lee v Lee’s Air Farming)
• When courts may pierce the corporate veil (Prest) and classic evasion cases (Gilford Motor, Jones v Lipman)
• How group companies remain separate (Adams v Cape) and when a parent may still owe a duty of care (Chandler v Cape)
• Practical compliance steps to maintain the veil and reduce personal exposure
• Key statutory touchpoints: Companies Act 2006 and Insolvency Act 1986 (including s.214 wrongful trading)

Core Concepts

What Separate Legal Personality Means (and How You Get It)

• A company becomes a separate legal person on incorporation. The certificate of incorporation is conclusive evidence that legal requirements have been met (Companies Act 2006, s.15), and the company exists as a body corporate from that date (s.16).
• Consequences:
  • The company owns its assets; shareholders do not.
  • The company has its own rights, duties and liabilities.
  • The company can contract, borrow and litigate in its own name.
  • The company continues despite changes in membership or management.

This rule was confirmed in Salomon v A Salomon & Co Ltd [1897] AC 22: once a company is properly formed, it is separate from those who own or control it.

Limited Liability: What It Does and Doesn’t Do

• Shareholders in a company limited by shares risk only the amount unpaid on their shares. Their personal assets are generally out of reach of company creditors.
• Limited liability does not shield directors from:
  • Wrongful trading (Insolvency Act 1986, s.214) if they continue trading when insolvency is unavoidable and fail to take every step to minimise loss to creditors.
  • Fraudulent trading (s.213) and misfeasance (s.212).
  • Personal guarantees, misrepresentation, breaches of fiduciary duty, or unlawful dividends.
• Creditors often manage risk with security, guarantees and warranties because the company and its owners are separate.

Property, Insurance, Contracts and Employment

• Company property: Assets belong to the company, not to shareholders or directors. In Macaura v Northern Assurance [1925] AC 619, a shareholder could not claim on an insurance policy held in his own name over timber owned by the company. He lacked an insurable interest.
• Contracting with controllers: In Lee v Lee’s Air Farming [1961] AC 12, the Privy Council held that a controlling shareholder-director could also be an employee. Separate personality makes such arrangements legally possible.
• Litigation: The company sues and is sued in its own name. Shareholders are not parties to company litigation unless they have independent obligations or rights.

Groups and the Corporate Veil

• Group companies are separate. In Adams v Cape Industries [1990] Ch 433, the Court of Appeal declined to treat a group as a “single unit” for liability purposes. Each company’s rights and obligations are its own.
• There are limited routes to reach a parent or controller without piercing the veil:
  • Agency: where facts show one company acted as agent for another.
  • Assumption of duty of care: in Chandler v Cape plc [2012] EWCA Civ 525, a parent owed a direct tort duty to a subsidiary’s employee due to its knowledge and involvement in health and safety.
• Veil piercing is rare and confined (see next subsection).

Piercing the Corporate Veil: Rare and Targeted

• In Prest v Petrodel Resources Ltd [2013] UKSC 34, the Supreme Court confirmed two ideas:
  • Concealment: using a company to hide the real actors; courts look at the reality without piercing the veil.
  • Evasion: interposing a company to defeat an existing legal obligation; veil piercing may be allowed to prevent that evasion.
• Classic evasion cases include:
  • Gilford Motor Co Ltd v Horne [1933] Ch 935: an injunction prevented a former employee using a company to sidestep a non‑compete covenant.
  • Jones v Lipman [1962] 1 WLR 832: specific performance ordered where a company was used to avoid a land sale.
• Recent emphasis: In Invest Bank PSC v El‑Husseini [2022] EWHC 894 (Comm), the High Court stressed that acts of a company are not automatically those of its controller, and vice versa; attribution requires more than mere control.

Key Examples or Case Studies

Salomon v A Salomon & Co Ltd [1897] AC 22

• Facts: Mr Salomon incorporated his boot business, held most shares, and was a secured creditor. On insolvency, the liquidator said the company was his agent.
• Key point: A properly incorporated company is separate from its members and controllers.
• Application: Treat the company as the contracting and liable party; do not assume controllers are personally on the hook.

Lee v Lee’s Air Farming [1961] AC 12

• Facts: A controlling shareholder-director was killed while piloting for the company. Was he also an employee for workers’ compensation?
• Key point: Separate personality allows a controller to have a contract of employment with the company.
• Application: Employment and contractor arrangements with directors are possible, but follow approval and conflict rules.

Macaura v Northern Assurance [1925] AC 619

• Facts: A shareholder insured timber in his own name; the timber belonged to the company.
• Key point: Shareholders have no insurable interest in company assets purely by owning shares.
• Application: Place insurance in the company’s name for company property.

Adams v Cape Industries [1990] Ch 433

• Facts: Attempt to enforce a US judgment against an English parent by treating the group as a single unit.
• Key point: Each company in a group is legally distinct; no general “single economic unit” rule.
• Application: Use guarantees and clear intra‑group contracts if you need recourse beyond a subsidiary.

Prest v Petrodel Resources Ltd [2013] UKSC 34

• Facts: Family proceedings where properties were held by companies linked to the husband.
• Key point: Veil piercing is a narrow doctrine, relevant only to prevent evasion of existing obligations; most cases are resolved using orthodox property or trust law.
• Application: Avoid using new companies to sidestep liabilities already owed; courts may intervene.

Invest Bank PSC v El‑Husseini [2022] EWHC 894 (Comm)

• Facts: Allegations that asset transfers by a company should be treated as the controller’s own acts.
• Key point: The controller and company are separate; attribution requires specific facts showing more than mere control.
• Application: Keep transactions clearly within the company’s decision‑making processes and records.

Practical Applications

• Form the company correctly

  • Ensure the certificate of incorporation is in place before trading as a company.
  • Use the exact registered name on contracts, invoices and bank mandates.

• Maintain separation in daily operations

  • Separate bank accounts; no mixed personal and company spending.
  • Board meetings and written resolutions for key decisions; keep minutes.
  • Keep statutory registers up to date (members, directors, PSCs); file accounts and confirmation statements on time.

• Manage contracts and conflicts

  • Make sure the company (not an individual) is the named party to contracts.
  • For director interests, follow Companies Act 2006 rules: declare interests (ss.177/182), and obtain approvals where required (e.g., substantial property transactions, s.190).
  • Use proper authority (board resolutions, delegated authority) so external parties can rely on s.40 CA 2006 protections.

• Structure groups with clear risk allocation

  • Use separate subsidiaries to ring‑fence activities, but assume each is liable only for its own obligations.
  • Where needed, provide guarantees or security rather than relying on “group responsibility.”
  • Document intra‑group services, loans and transfers on arm’s‑length terms.

• Reduce veil‑piercing and attribution risks

  • Do not use new companies to defeat existing obligations; avoid asset transfers that look like evasion.
  • Keep records showing genuine independent decision‑making and proper consideration of duties.
  • Avoid statements suggesting the company and controllers are interchangeable.

• Insolvency and director exposure

  • Monitor solvency; take advice early if distress arises.
  • If insolvent liquidation is unavoidable, take every step to minimise creditor losses (to avoid s.214 wrongful trading).
  • Be aware of fraudulent trading (s.213) and misfeasance (s.212) risks, and potential disqualification.

• Insurance and asset protection

  • Ensure company assets are insured in the company’s name, not a shareholder’s.
  • Check that group policies correctly list insured and additional insured parties.

• Employment and tax

  • Where directors have service contracts, document terms and approvals.
  • Keep employment, PAYE and benefits arrangements clearly between the company and the individual.

Summary Checklist

• The company exists as a separate person once incorporated (CA 2006 ss.15–16).
• Shareholders’ exposure is limited to unpaid amounts on their shares.
• Company assets are not shareholder assets; insure in the company’s name (Macaura).
• A controller can also be an employee or contractor of the company (Lee).
• Treat group entities as distinct; use guarantees if you need recourse to a parent (Adams).
• Veil piercing is rare and aimed at evasion of existing obligations (Prest).
• Record director interests and obtain approvals for related‑party dealings (CA 2006 ss.177, 190).
• Keep corporate formalities: separate accounts, minutes, registers, and filings.
• Watch for wrongful trading in distress (IA 1986 s.214); seek advice early.
• Use clear contracting: correct party name, authority, and board approvals.

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