Legal Personality
These notes will consider and explain legal personality.
Legal personality refers to the status and rights conferred on individuals and groups in English law.
In law, the word ‘legal person’ is used to describe not only individual human beings, but also groups of individuals making up one body, such as corporations. There are 2 types of legal persons, ‘natural’ and ‘artificial’.
Natural Legal Persons
This term refers to individual human beings. There are several types of natural legal persons, each having a different position in English law. Most can sue and be sued or prosecuted in the English courts. Special rules apply to others as follows:
Children
In English law children (that is persons below the age of 18 ) are called ‘minors’ and treated differently in both the civil and criminal law. In civil law, their status is different to that of adults (persons over the age of 18). See the examples below in contract and tort.
Contract.
For instance, under the law of contract, if a child enters into a contract with an adult, contract law will protect the child and will treat the majority of contracts made by a minor as ‘voidable’ (which means the infant can escape from the terms of the contract if he wants to).
There are 2 exceptions to this rule however: (a) where the contract is for a particular service beneficial to the minor, he will be bound by it. For example, Chaplin v Leslie Frewin (Publishers) Ltd [1966] Ch. 71 a minor entered into a contract under which the publisher had the exclusive right to publish his memoirs.
It was argued that the contract was not binding because the contents of his memoirs could damage his reputation. However, as he stood to make substantial profits on publication, the contract was held to be binding on him; (b) where the contract is for ‘necessaries’, it will be binding on the minor.
Necessaries refers to items necessary to maintain the quality of the minor’s life, such as food and clothing. They must have some benefit to the minor.
In Nash v Inman [1908] 2 KB 1, a Savile Row Taylor sued a minor who was attending Trinity College, Cambridge. The minor ordered 11 ‘fancy waistcoats’ and other items and failed to pay for them. Held, the plaintiff’s claim failed because he did not show that the items of clothing were necessaries.
Tort.
In the law of tort, children may be sued for torts they commit. There is an exception to this rule. Parents may be held responsible for the tort of their child if the parent is partly responsible for the tort. In Bebee v Sales 32 TLR 413 the defendant’s child shoot another with the defendant’s air gun. As the father, he was held responsible because he knew his son was using the gun irresponsibly.
The status of a child is also different in criminal law as follows.
Crime.
In criminal law, children under the age of 17 are again treated differently from adults. Between the age of 10 to 13, they are know as ‘children’ and between 14-17, called ‘young persons’. Children under the age of 10 are treated as not being able to form criminal intent, (Children & Young Persons Act 1933, s.50). In other words, in the eyes of the law, there is an absence of guilt. Children between 10-13 are treated as ‘doli incapax’, that is, in the eyes of the law they are presumed not to be able to form criminal intent. However, this presumption can be rebutted if the prosecution can establish that the child realised that what he was doing was ‘seriously wrong’. This presumption does not apply to young persons.
In the majority of cases, children and young persons are tried in the ‘Youth Court’, a special court set up in most magistrates’ courts to deal with these cases. They are not sent to prison, can be detained, usually in Young Offender’s Institutions.
The Mentally Ill.
Different rules apply to the mentally ill in civil and criminal law. For instance, in contract, if such a person enters into a contract, it will be binding, unless it is proved that the other party to the contract knew of the mental illness. This also applies to the purchase of necessaries by the mentally ill. In tort, they are treated the same as adults. In criminal law, where insanity can be established, this can act as a defence to certain criminal offences. Defences where insanity is established will be dealt with in Criminal law.
Drunkards
In contract, drunkenness is a defence, where it prevents a person from understanding what was going on and the other party to the contract knows this to be the case. The same applies to the purchase of necessaries. Drunkenness also provides a defence in some torts. However, in criminal law, it may not act as a defence.
The Monarch and Servants of the Crown
The Queen is in a special position within the English legal system. As the courts are her courts, and the judges of these courts are appointed by her, she cannot sue or be sued in any English court. It would be odd if the Queen were to be prosecuted in her own courts by her own appointed judges. However, following the Crown Proceedings Act 1947, servants of the Crown (for example members of Her Majesty’s government) can be sued in contract and tort the same as any other individual and the Crown (in the form of the government) can be held vicariously liable for the acts of its appointed officers (i.e., civil servants). There are exceptions to this rule applying to members of the armed forces and the Post Office.
Bankrupts
A person who is declared bankrupt because of insufficient funds to cover civil debts (amounting to £750 or more) is also treated differently in law. If the individual fails to pay off debts, persons who are owed money (creditors) can apply to the court for a bankruptcy order under the Insolvency Act 1986. The court can then order someone (either an official ‘receiver’ or practitioner specialising in bankruptcy) to take over the financial affairs of the individual declared bankrupt and pay off as many creditors as possible.
Once declared bankrupt, the individual is restricted from carrying out a number of activities including the following: a bankrupt may not act as a company director, s.11, Companies Directors Disqualification Act 1986; neither may the individual become an MP or act as a member of a local authority.
A bankruptcy order lasts for a period of 3 years. After this time, the above restrictions come to an end. If there are outstanding debts owed after this time, they will no longer be payable by the bankrupt.
Artificial Legal Persons
This term refers to groups of individuals who, in English law, are seen as one legal person. In civil law, artificial legal persons can sue and be sued in the same way as natural legal persons. In criminal law, a corporation for example, can be prosecuted for a number of offences committed by its agents. There are 2 main types of artificial legal persons, corporations and unincorporated associations.
Corporations
A corporation is made of a group of individuals or members (i.e., directors and shareholders in a company and councillors in a local authority) and has a separate legal identity from these individuals. They include companies with limited liability (see below) set up under the various Companies Acts and companies set up by a special Act of Parliament.
How corporations come into existence.
Corporations can be created in 3 ways: either by an Act of Parliament, with the Act defining the powers of the company (for example, local authorities and public corporations like the former National Coal Board created by the Coal Industry Nationalisation Act 1946); or by the Crown using a Royal Charter (for example, the Royal Institute of Chartered Accounts, and universities); or under the Companies Act 1985, 1989 or the previous Companies Acts.
Companies incorporated under the Companies Acts.
Must observe the objects for which they are set up (stated in its Memorandum of Association, see below). Any act done outside the corporation's statutory powers or powers incorporated in the Memorandum of Association, will be held to be ultra vires (beyond the actual powers of the corporation) by the courts. Thus, anyone entering into a contract with a corporation which has acted ultra vires can have the contract ruled invalid by the courts. This rule does not apply to corporations created by Royal Charter. The rule here is that the Crown should withdraw the charter.
Setting up a company under the Companies Acts. In order to set up an incorporated or ‘registered’ company under the Companies Acts the following is carried out:
Apply to the Registrar of Companies at Companies House in Cardiff for registration. The following forms are then lodged with the Registrar:
Memorandum of Association.
Sets out the following; constitution of the company; the ‘Objects’ or powers of the company; name of company; whether liability of members is limited; the address of the Registered Office; the amount of the company’s Authorised Capital; and an Association Clause detailing number of shares to be held by members.
Articles of Association. Sets out: rules governing members of the company, such as powers of its directors.
Liability of members of corporations.
Members of a company can be shareholders or directors or both. As a corporation has a separate legal identity from the persons who make it up, it can be sued for debts owing or wrongful acts committed in its name. However, its members will not personally become liable. Their responsibility or liability is limited. A company may either be limited by shares or guarantee. For companies limited by shares, members are only liable to pay for shares they have purchased, they cannot be sued for debts owed by the corporation. For companies limited by guarantee, members are only liable for the amount they have agreed to pay if the company goes into liquidation (or is wound up, sometimes known as ‘going bust’). There are however companies with ‘unlimited liability’. Here members are fully liable for debts incurred by the company, but only if the company goes into liquidation.
Limited liability of members of corporations is best illustrated by the often cited case of Salomon v Salomon & Co [1897] AC 22. Mr Salomon ran a leather merchant and boot manufacturing business. He formed a limited company (Salomon & Co) to take over the leather and boot business, within which, he was the major shareholder with 20,000 £1 shares and his wife, daughter and 4 sons held one £1 share each. He loaned £10,000 to the company which made him a secure creditor of the company. In law, secure creditors are entitled to payment before unsecured creditors if the company goes into liquidation. The company subsequently had financial problems and a liquidator was appointed. After assessing the assets of the company, the liquidator found that the company had assets worth some £6,000. The unsecured creditors were owed some £8,000. They claimed the £6,000, arguing they were entitled to receive this amount before Mr Salomon because he and the company were one and the same and as such, he could not lend money to himself or give himself security over other creditors.
On appeal to the House of Lords it was held that Salomon had a separate legal identity from the company, (the company was therefore separate and distinct from him), so he was entitled as a secure creditor to claim the remaining asset in payment of his loan.
Lifting the veil of incorporation.
In order to prevent members of corporations abusing their independent legal status and avoiding responsibilities imposed on them by law, the courts are willing to look behind the ‘corporate veil’, that is, they ignore the separate identity of the company from its members and treat the company as if it is being run by its members.
For instance, in Gilford Motor Co Ltd v Home [1933] Ch 935, Home worked for Gilford. He agreed to be bound by a restraint of trade clause in his contract of employment, which prevented him from approaching Gilford’s customers in order to get them to transfer their custom to any similar business which Home might set up.
He subsequently left his job with Gilford and set up a similar business. The business was incorporated (or registered). Home then tried to get Gilford’s customers to transfer their custom to him. Gilford applied to the court for an injunction to stop Home contacting Gilford’s customers. Home argued he himself was not competing, but his company which was not affected by the restraint of trade clause. Held, the injunction was granted against Home and his company. The court stressed that Home could not hide behind the veil of incorporation to avoid his lawful contractual duties under the restraint of trade clause (which was not to compete with Gilford).
Unincorporated Associations
These are made up of groups of individuals who form an association which is not is set up by Act of Parliament, under the Companies Acts or Royal Charter. Examples of these are social clubs, societies and partnerships . Unincorporated associations do not have a separate legal identity from its members, so individual members can become liable for debts run up by the association. In contract, if a member of an association enters into a contract on behalf of the association, that member will be liable. Other members will only become liable if they authorised the member to make the contract or confirm the contract after it is made.
In tort, individual members will become liable for torts they commit and the association or club can be held vicariously liable for torts committed by its employees.
These notes will consider and explain legal personality.
Legal personality refers to the status and rights conferred on individuals and groups in English law.
In law, the word ‘legal person’ is used to describe not only individual human beings, but also groups of individuals making up one body, such as corporations. There are 2 types of legal persons, ‘natural’ and ‘artificial’.
Natural Legal Persons
This term refers to individual human beings. There are several types of natural legal persons, each having a different position in English law. Most can sue and be sued or prosecuted in the English courts. Special rules apply to others as follows:
Children
In English law children (that is persons below the age of 18 ) are called ‘minors’ and treated differently in both the civil and criminal law. In civil law, their status is different to that of adults (persons over the age of 18). See the examples below in contract and tort.
Contract.
For instance, under the law of contract, if a child enters into a contract with an adult, contract law will protect the child and will treat the majority of contracts made by a minor as ‘voidable’ (which means the infant can escape from the terms of the contract if he wants to).
There are 2 exceptions to this rule however: (a) where the contract is for a particular service beneficial to the minor, he will be bound by it. For example, Chaplin v Leslie Frewin (Publishers) Ltd [1966] Ch. 71 a minor entered into a contract under which the publisher had the exclusive right to publish his memoirs.
It was argued that the contract was not binding because the contents of his memoirs could damage his reputation. However, as he stood to make substantial profits on publication, the contract was held to be binding on him; (b) where the contract is for ‘necessaries’, it will be binding on the minor.
Necessaries refers to items necessary to maintain the quality of the minor’s life, such as food and clothing. They must have some benefit to the minor.
In Nash v Inman [1908] 2 KB 1, a Savile Row Taylor sued a minor who was attending Trinity College, Cambridge. The minor ordered 11 ‘fancy waistcoats’ and other items and failed to pay for them. Held, the plaintiff’s claim failed because he did not show that the items of clothing were necessaries.
Tort.
In the law of tort, children may be sued for torts they commit. There is an exception to this rule. Parents may be held responsible for the tort of their child if the parent is partly responsible for the tort. In Bebee v Sales 32 TLR 413 the defendant’s child shoot another with the defendant’s air gun. As the father, he was held responsible because he knew his son was using the gun irresponsibly.
The status of a child is also different in criminal law as follows.
Crime.
In criminal law, children under the age of 17 are again treated differently from adults. Between the age of 10 to 13, they are know as ‘children’ and between 14-17, called ‘young persons’. Children under the age of 10 are treated as not being able to form criminal intent, (Children & Young Persons Act 1933, s.50). In other words, in the eyes of the law, there is an absence of guilt. Children between 10-13 are treated as ‘doli incapax’, that is, in the eyes of the law they are presumed not to be able to form criminal intent. However, this presumption can be rebutted if the prosecution can establish that the child realised that what he was doing was ‘seriously wrong’. This presumption does not apply to young persons.
In the majority of cases, children and young persons are tried in the ‘Youth Court’, a special court set up in most magistrates’ courts to deal with these cases. They are not sent to prison, can be detained, usually in Young Offender’s Institutions.
The Mentally Ill.
Different rules apply to the mentally ill in civil and criminal law. For instance, in contract, if such a person enters into a contract, it will be binding, unless it is proved that the other party to the contract knew of the mental illness. This also applies to the purchase of necessaries by the mentally ill. In tort, they are treated the same as adults. In criminal law, where insanity can be established, this can act as a defence to certain criminal offences. Defences where insanity is established will be dealt with in Criminal law.
Drunkards
In contract, drunkenness is a defence, where it prevents a person from understanding what was going on and the other party to the contract knows this to be the case. The same applies to the purchase of necessaries. Drunkenness also provides a defence in some torts. However, in criminal law, it may not act as a defence.
The Monarch and Servants of the Crown
The Queen is in a special position within the English legal system. As the courts are her courts, and the judges of these courts are appointed by her, she cannot sue or be sued in any English court. It would be odd if the Queen were to be prosecuted in her own courts by her own appointed judges. However, following the Crown Proceedings Act 1947, servants of the Crown (for example members of Her Majesty’s government) can be sued in contract and tort the same as any other individual and the Crown (in the form of the government) can be held vicariously liable for the acts of its appointed officers (i.e., civil servants). There are exceptions to this rule applying to members of the armed forces and the Post Office.
Bankrupts
A person who is declared bankrupt because of insufficient funds to cover civil debts (amounting to £750 or more) is also treated differently in law. If the individual fails to pay off debts, persons who are owed money (creditors) can apply to the court for a bankruptcy order under the Insolvency Act 1986. The court can then order someone (either an official ‘receiver’ or practitioner specialising in bankruptcy) to take over the financial affairs of the individual declared bankrupt and pay off as many creditors as possible.
Once declared bankrupt, the individual is restricted from carrying out a number of activities including the following: a bankrupt may not act as a company director, s.11, Companies Directors Disqualification Act 1986; neither may the individual become an MP or act as a member of a local authority.
A bankruptcy order lasts for a period of 3 years. After this time, the above restrictions come to an end. If there are outstanding debts owed after this time, they will no longer be payable by the bankrupt.
Artificial Legal Persons
This term refers to groups of individuals who, in English law, are seen as one legal person. In civil law, artificial legal persons can sue and be sued in the same way as natural legal persons. In criminal law, a corporation for example, can be prosecuted for a number of offences committed by its agents. There are 2 main types of artificial legal persons, corporations and unincorporated associations.
Corporations
A corporation is made of a group of individuals or members (i.e., directors and shareholders in a company and councillors in a local authority) and has a separate legal identity from these individuals. They include companies with limited liability (see below) set up under the various Companies Acts and companies set up by a special Act of Parliament.
How corporations come into existence.
Corporations can be created in 3 ways: either by an Act of Parliament, with the Act defining the powers of the company (for example, local authorities and public corporations like the former National Coal Board created by the Coal Industry Nationalisation Act 1946); or by the Crown using a Royal Charter (for example, the Royal Institute of Chartered Accounts, and universities); or under the Companies Act 1985, 1989 or the previous Companies Acts.
Companies incorporated under the Companies Acts.
Must observe the objects for which they are set up (stated in its Memorandum of Association, see below). Any act done outside the corporation's statutory powers or powers incorporated in the Memorandum of Association, will be held to be ultra vires (beyond the actual powers of the corporation) by the courts. Thus, anyone entering into a contract with a corporation which has acted ultra vires can have the contract ruled invalid by the courts. This rule does not apply to corporations created by Royal Charter. The rule here is that the Crown should withdraw the charter.
Setting up a company under the Companies Acts. In order to set up an incorporated or ‘registered’ company under the Companies Acts the following is carried out:
Apply to the Registrar of Companies at Companies House in Cardiff for registration. The following forms are then lodged with the Registrar:
Memorandum of Association.
Sets out the following; constitution of the company; the ‘Objects’ or powers of the company; name of company; whether liability of members is limited; the address of the Registered Office; the amount of the company’s Authorised Capital; and an Association Clause detailing number of shares to be held by members.
Articles of Association. Sets out: rules governing members of the company, such as powers of its directors.
Liability of members of corporations.
Members of a company can be shareholders or directors or both. As a corporation has a separate legal identity from the persons who make it up, it can be sued for debts owing or wrongful acts committed in its name. However, its members will not personally become liable. Their responsibility or liability is limited. A company may either be limited by shares or guarantee. For companies limited by shares, members are only liable to pay for shares they have purchased, they cannot be sued for debts owed by the corporation. For companies limited by guarantee, members are only liable for the amount they have agreed to pay if the company goes into liquidation (or is wound up, sometimes known as ‘going bust’). There are however companies with ‘unlimited liability’. Here members are fully liable for debts incurred by the company, but only if the company goes into liquidation.
Limited liability of members of corporations is best illustrated by the often cited case of Salomon v Salomon & Co [1897] AC 22. Mr Salomon ran a leather merchant and boot manufacturing business. He formed a limited company (Salomon & Co) to take over the leather and boot business, within which, he was the major shareholder with 20,000 £1 shares and his wife, daughter and 4 sons held one £1 share each. He loaned £10,000 to the company which made him a secure creditor of the company. In law, secure creditors are entitled to payment before unsecured creditors if the company goes into liquidation. The company subsequently had financial problems and a liquidator was appointed. After assessing the assets of the company, the liquidator found that the company had assets worth some £6,000. The unsecured creditors were owed some £8,000. They claimed the £6,000, arguing they were entitled to receive this amount before Mr Salomon because he and the company were one and the same and as such, he could not lend money to himself or give himself security over other creditors.
On appeal to the House of Lords it was held that Salomon had a separate legal identity from the company, (the company was therefore separate and distinct from him), so he was entitled as a secure creditor to claim the remaining asset in payment of his loan.
Lifting the veil of incorporation.
In order to prevent members of corporations abusing their independent legal status and avoiding responsibilities imposed on them by law, the courts are willing to look behind the ‘corporate veil’, that is, they ignore the separate identity of the company from its members and treat the company as if it is being run by its members.
For instance, in Gilford Motor Co Ltd v Home [1933] Ch 935, Home worked for Gilford. He agreed to be bound by a restraint of trade clause in his contract of employment, which prevented him from approaching Gilford’s customers in order to get them to transfer their custom to any similar business which Home might set up.
He subsequently left his job with Gilford and set up a similar business. The business was incorporated (or registered). Home then tried to get Gilford’s customers to transfer their custom to him. Gilford applied to the court for an injunction to stop Home contacting Gilford’s customers. Home argued he himself was not competing, but his company which was not affected by the restraint of trade clause. Held, the injunction was granted against Home and his company. The court stressed that Home could not hide behind the veil of incorporation to avoid his lawful contractual duties under the restraint of trade clause (which was not to compete with Gilford).
Unincorporated Associations
These are made up of groups of individuals who form an association which is not is set up by Act of Parliament, under the Companies Acts or Royal Charter. Examples of these are social clubs, societies and partnerships . Unincorporated associations do not have a separate legal identity from its members, so individual members can become liable for debts run up by the association. In contract, if a member of an association enters into a contract on behalf of the association, that member will be liable. Other members will only become liable if they authorised the member to make the contract or confirm the contract after it is made.
In tort, individual members will become liable for torts they commit and the association or club can be held vicariously liable for torts committed by its employees.