Doc faces a number of difficulties, which result from the operation of the doctrine of separate personality. When a company registers under the Companies Act 2006 it becomes a corporation, with the effect that, from then on it is treated as having its own distinct legal personality, completely separate from its members. This doctrine of separate personality applies equally to single person enterprises as it does to the largest of transnational enterprises. The doctrine of separate personality is an ancient one, although the clearest expression of it can be found in the famous case of Salomon v Salomon (1897). A number of important consequences flow from the fact companies are treated as having a legal personality in their own right, but there are also a number of situations when the courts will ignore the separate legal personality of the company. In such situations the courts will treat the shareholders as being, or being responsible for the actions of, the company.
(a) One consequence of the doctrine of separate personality is that companies have full contractual capacity in their own right. Equally, companies can sue and be sued in their own right, so once a company enters into a contract, it is the company, rather than its individual members, which is liable for any default. In the first situation, it is clear from the contract document that Doc has entered into an agreement, not with Ed as he thought, but with the company, Ed Ltd. He cannot, therefore, take action against Ed personally. As a member of a limited company, Ed’s only liability will be to pay any amount remaining unpaid on the shares he holds in Ed Ltd. Doc will have to claim as an ordinary unsecured trade creditor of the company, and the fact that it has gone into insolvent liquidation makes it unlikely that he will recover much, if anything, from the company.
(b) Where, however, an individual looks to misuse the doctrine of separate personality, the courts will ignore the separate personality of the company and will enforce corporate liability against the members. Thus in Jones v Lipman (1962), Lipman had entered into a contract to sell a house to Jones, but before completion of the contract, and in order to avoid it, he sold the house to a company that he had set up for that purpose. Thus Lipman was attempting to hide behind a company to avoid his personal contractual obligation. In that instance the court held that the company was ‘the creature of the defendant’ and no more than a sham and required Lipman to complete his contractual obligations.
A further example of the misuse of the corporate form in an attempt to avoid a legal obligation may be seen in Gilford Motor Co Ltd v Horne (1933), a case similar to the facts in the problem scenario, where a former employee tried to avoid the consequences of a restraint of trade clause by working for a newly established company. In that case the Court of Appeal held that the company was a mere sham used to conceal the defendant’s breach of a contractual agreement and the individual concerned was required to abide by the agreement he had entered into. Following the above cases, and in particular Gilford Motor Co Ltd v Horne, it is extremely likely that the court will ignore the separate personality of Gen Ltd and allow Doc to enforce the restraint of trade clause against Fitt. |
