Properties of Separate Legal Personality in a Company Setup UK in terms of Ownership of Assets and Contracting Authorities


In order to form a company UK the first step is to get the company registered. After registration of a company, it becomes a separate legal personality. Entitling a company as a separate legal person means to make its right and responsibilities independent from the legal persons of the company. These legal persons may include shareholders and directors. However, there are certain other properties associated with separate legal personality of a company setup UK. Amongst them, one is the right of a company for owning the property and another is the right of a company to sign contracts. This article discusses case studies regarding these properties.

Ownership of Property of a Company

The ownership of the belongings of a company rests with the company. The members do not own company’s property. Moreover, the members as well as the creditors do not enjoy any insurable interest in the belongings of the company. However, the secured creditors may be given such a benefit. For further illustration, the case study of Macaura is presented below.

Macaura v Northern Assurance Corporation

The ownership of the Killymoon estate belonged to Macaura in County Tyrone. Macaura auctioned the total timber belonging to a corporate body to a corporation named, Irish Canadian Sawmills Ltd. In return he was given forty-two thousand shares where each share cost £1. These shares were held by him and his representatives. Macaura was also the creditor of the company for a sum of £19000. However, he was not given any security. The timber was insured in the name of Macaura against the fire. After the passage of two weeks, unfortunately, the timber was set on fire and nearly all the timber got burnt. It was claimed by Macaura to grant him any insurable interest on the destroyed timber. However, his claim was overruled by the court.

It was held by Lord Sumner that:

  • There was no insurable interest given to Macaura on the burnt timber. He did not possess the ownership of the timber. The timber’s ownership lied solely with the company named Irish Canadian Sawmills Ltd.
  • Macaura was not given any security in the form of lien. The timber although was kept in an area that belonged to Macaura, yet, there was no agreement signed between the company and Macaura that made him liable to any harm happening to the timber or that allowed him to keep the timber as a debt.
  • A great number of shares in the company were held by him. Also, the company had to give him a good sum of money. Yet there was no such right given to him that could make him hold insurance on the assets either as a creditor or as shareholding member.
  • The timber was set on fire and not the shares or the debt. The fact that he was the sole virtual creditor of the company and the company had only timber as its assets, does not have any impact on my views.
  • He neither was in lawful manner related to the timber nor was there any equitable relation between them. Hence, the insurance of timber concerned Macaura in no way at all. He was only related to the company and not to the belongings of the company. Hence the appeal should be discarded.

Lord Buckmaster and Lord Wrenbury gave similar verdicts and Lord Atkinson and Lord Phillimore also had concurring views.

Trustee and Beneficiary of the Property 

There is no such allowance given by any of the law of company to make a company the trustee of the assets belonging to it and terming the members and shareholders as the beneficiaries of it. As in the case of JJ Harrison.

Division of Company’s Property with regards to Matrimonial Relations

In the case of Petrodel, the parties were being divorced and hence were taking a legal action over the distribution of a 50 million pounds worthy estate. However, the shares were held by representative companies. It was held by most of the Court of Appeal that in regards to Section 24(1) (a) of the Matrimonial Causes Act 1973, that no verdict for the property belonging to the company could be given in support of the wife. Although all the shares were held by the husband who also controlled all the companies completely, the veil of incorporation could not be pierced as long as there were no legal reasons to do so. Neither the ownership of the shares nor the control over the corporate bodies were enough to justify the piercing of the veil of incorporation.

Contractual Authorities of a Company

Being a separate legal person, another property that is attributed to a company is that it has the independence of signing contracts with either any of its members or the third parties. Companies Act 1985 also states about the contracts for business formation UK or in Wales.

Regulations for Contracting in England and Wales

This section is especially dedicated for England company register. In the 36th Section of Companies Act 1985, it is mentioned that, any contract may be signed following the laws of England or the laws of Wales by either of the following:

  • Any company, by preparing a written document of the contract authenticated by the seal of that company.
  • Any agent of the company, authorised for representing the company.

In addition to this rule, all the formalities related to contracting may be found applicable as long as there is no contradicting intention apparent, to the agreement made by the company or its agent.

Contracts signed prior the Incorporation of the Company

The contracts that are signed before the official formation of company are effective as well. Regarding such contracts, it is stated in Section 36C of Companies Act 1985 that:

  • Any contract that is purportedly made before the official business formation UK has the same impact as the contract signed by a purported actor or agent of the company and there is an individual contractual liability on him/her. However, this may be subjected to any contradicting agreement.
  • The previous provision is applicable on any deed made under the law of England or Wales as well as on restrictions undertaken under the Scottish law in a similar way as it is applicable on signing a contract.

Company Signing Contracts with Members 

A company is allowed to make agreements with any one of its members. The contract will be effective and a valid one. Moreover, it is absolutely permissible for any member to be the sole controller of the company as its main shareholding member and only director as well as be an employee of that company. For further elaboration consider the case of Lee v Lee Air Farming.

Lee v Lee Air Farming 

Lee was the late husband of the appellant. He was the founder of the respondent company, which was formed for the purpose of running his business. The business was related to spraying the fertilisers on farms via air. The company had 3000 shares in total, out of which 2999 shares were held by him. Lee was given the sole directorship of the company under the constitution of the company. Additionally, he was also given salary as a chief pilot, again, under the constitution of the company. He died in an air crash while travelling for the company. If Lee was considered as a worker, the company was bound to make a compensation to the widow under the Workers’ Compensation Act 1922 of New Zealand. Worker is defined as someone who works with the employer under any agreement or service in return of either wages, pay or any other form. The company was liable to compensate the workers under that statutory laws. New Zealand’s Court of Appeal had held that Lee could not be termed as a worker when he was also the employer at the same time. However, Mrs. Lee claimed against this verdict and was successful.

It was held by Lord Morris of Borth-Y-Gest that:

  • It was realised by the Court of Appeal that a director was allowed to sign any contract of service with the company but believed that in the case of Lee, he was the sole director as well as the controller of the company and hence could not work as a servant under any contract.
  • Their Lordships find it uneasy to ignore the point that the aerial actions were performed actively under any contractual binding. Any such contractual binding arose only when the deceased person being a legal person was eagerly agreeing to sign a contract with the company which was another legitimate entity. Any contractual binding may only exist when there was a consent between both the contracting parties. 
  • There is nothing giving an evidence for the company being a sham. It is also a fact that a director can sign contracts with the company. If the separate legal identity of the company is accepted by their Lordships, the authenticity of provisions of any contract signed between the deceased and the company cannot be questioned.
  • Neither are the Lordships of the view that because the deceased had full control over the company, the restrictions of the contract could be considered void. As the company was not a sham, the company’s ability to contract with Lee could not be contravened only because Lee also used to negotiate as an agent to the company.
  • According to their Lordships, logically, a resulting factor of the principle of Salomon is that a person can hold dual responsibilities. Hence there is no reason apparent that may prevent the inclusion of any contract of service in the valid contractual bindings between two parties. And even if the contract signed between the deceased and the company was negotiated by the deceased on behalf of the company, there can be no objection made to it.
  • It is argued that this was not possible for the deceased to simultaneously give the order and obey that order. However, the control remains with the company and does not get affected by the fact that who is acting as an agent to the company.
  • If the deceased person had the authority to give orders on behalf of the company, it was still a fact that both the parties were separate legally. If there was a contract of service between the deceased and the company, the company enjoyed a controlling right.
  • As both the parties were accepted as separate legal persons, the right of control of the company could not be discarded.

Conclusion

The case of Lee was quite clear cut in its understanding and fair enough in its final judgement, the same treatment cannot be given to every scenario. For instance, in the case of laws regarding the redundant remittances, the court may order that any such person may not be treated as an employee and given any compensation in return of any unjust discharge. As in Buchan. In Secretary of State for Business, the Lee case was affirmed by the court but pointed out certain difficulties that may be faced while determining that whether the contract was a façade or not in similar scenarios. The concept of legal personality isolated from the legal persons is more strictly observed in cases related to England company register. Whereas different other countries have embraced the concept of piercing the corporate veil.  However, in New Zealand’s case of Lee, separate legal personality prevailed.

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