Separate Legal Entity Doctrine in Corporations Law

This document provides an explanation of the 'separate legal entity doctrine' in Corporations Law, including its origins and implications. It also discusses the duties of directors in Australian companies and provides an overview of different types of companies in Australia. The document includes relevant case laws, articles, and online resources for further reading.

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Title page
Name of the student
Student ID

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Contents
Topic 1 - Separate Legal Entity Doctrine........................................................................................3
Explain the ‘separate legal entity doctrine’ in Corporations Law...................................................3
Solution 2 - Types of Companies in Australia.................................................................................4
(a) Differences between a company limited by shares and a company limited by guarantee 4
(b) Differences between a proprietary company and a public company................................5
(c) The meaning and main obligations of an ASX-listed company.......................................5
Topic 3 – Duties of Directors of Companies in Australia...............................................................6
Bibliography....................................................................................................................................8

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Topic 1 - Separate Legal Entity Doctrine
Explain the ‘separate legal entity doctrine’ in Corporations Law
The leading case of (Salomon v A Salomon And Co Ltd [1897], is a landmark case in the law of
contract which has laid the foundatyion for the standard of Separate Legal Entity.
In 1897, Salomon v A Salomon And Co Ltd was decided. In the given case, Mr Saloman was
running a business as a soel trader. Llatyer he formulated a compoany and the business is moved
to the company wherein he is the majpor shareholder and there are 6 other shareholders who are
his family meembers. He soiught debenmtures and shares of the company and is also the
cvreditor of the company agiant the assets of the company. When the company is lioquiadted, the
court held that when Mr Saloman formed the company, then, it is a company which can be
regarded as separte from his sharehjolders and creeditors. Thus, the compoany and Mr Salo,man
are distimct persons who ahev their own personality in law. (Radin, 1932)
The concept of separte legal persoanlity was laid and the cpoiurt held that a company have its
own personlity in law ands thus is not reagaded as the same of its shareholders or creditors.
Separate legal personality
Section 124 of the corpoatrtion Act 2001 submits that when any company is formulated then
there are various attributes that can be associated with the same, that is, a company has perperual
succession, can enter into contracts, can acquire and sell property and has a separate legal entity
and is evaluted in the leading case of Gas Lightning Improvement Co Ltd v IRC (1923).
The basis and fundamental of separate legal entityy signifies that a veil is present which brings a
distinction between a company and its shareholdesrs and directors. A companty is considered to
be having its own personalty in law and has the power to carry out all the functions that can be
assocaited with a normal human being. Any act that is carried out by the officers or the directors
of the company are carried out in the name of the company and the directors and officers are not
held liable for the same.
Justificatrion for the concept of separate legal entity
With the coming of the decision of Salomon v A Salomon And Co Ltd, the law is very clear that a
company is totally distinct from its members and any acts of the company is carried out in its

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own name. The justification to the concept of separate legal personality can be analyzed with the
help of three leading cases laws: (Teacher, 2018)
i. In the leading case of Lee v Lee's Air Farming Limited (1961), a company was made
by Mr lee in which he was the shareholder and the employee at the same time. Mr lee
dies while catering the services of the company. The court held that the wife of Mr
Lee must be allotted with the social welfare compensation as when Mr Lee dies, then,
he at that time was acting as the employee of the company. The company made by
him is totally different in law and has a separate legal entity in law and thus the acts
carried out by him are distinct from the acts that are carried out by the company. The
court held that thus Mrs Lee can seek the compensation from the company.
ii. In the leading case of Farrar v Farrars Ltd (1888), the court held that when any sale
is undertaken by the sales person of the company then the same are carried in the
name of the company alone and the sales are not associated with the salesperson in
any manner because of the presence of the concept of separate legal personality.
iii. In the leading case of Macaura v Northern Assurance Co (1925), the court held that
the veil of the company can pnly be lifted in special circusmtbcxes and thus the
sanctity of the concept of separate legfal entity cannot be deviated at any cost.
Thus, the law behind seprate legal personality concept is very precise nd clera and ot brings a
ddistinction amid the company and iots shatrehoklders and directors and the acts that are
carried out by the officers of the company are carried out in the name of the company and the
officers are not held personally liabpe for the same
Solution 2 - Types of Companies in Australia
There are several kinds of companies that can be registered in Australia under the Corporations
Act 2001 (Cth). Some of them are analyzed herein under:
(a) Differences between a company limited by shares and a company limited by guarantee
A company limited by shares is those types of companies in which the liability of the
shareholders is limited to the extent of the unpaid amount on the shares of the shareholders. The
liability of the shareholders is thus limited in nature.

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The company limited by guarantee is those types of companies in which the liability of the
shareholders is limited to the amount of guarantee that is confirmed by the shareholders when the
company would be wound up. The guarantee which is given by the shareholders is decided and
static.
Both the kinds of companies are rightly established under section 9 of the Corporation Act 2001.
(Lo, 2016)
(b) Differences between a proprietary company and a public company
Section 45A of the Corporation Act 2001 defines a proprietary company as a company which
is registered under the Act. A proprietor company can be a company limited by shares or an
unlimited company with share capital with not more than 50 non –employee’s shareholders.
It is mainly a private company and can be either small or large in nature.
As per section 9 of the Corporation Act 2001, a public company is a company which is not a
proprietary company and considering section 195 of the Act it includes a body corporate that
is registered in a state or territory but not under the Act and is part of the list of
a prescribed financial market. As per section 112 of the Act, a public company is mainly of
four kinds, that is, a company limited by shares, a company limited by guarantee, an
unlimited company with share capital and no liability company. (Clarke and Wilson,
2018)
(c) The meaning and main obligations of an ASX-listed company
Those companies which are public companies and which are listed on ASX are called ASX listed
companies. There are various obligations that an ASX listed companies must comply with which
includes:
i. To make sure that all the acts are carried on with fair, orderly and transparent;
ii. That the clearing and settlement services are carried out in fair and effective manner;
iii. That a conflicting mechanism must be established so that disputer can be resolved;
iv. Adequate system for monitoring and enforcing compliance with its Listing Rules
must be prepared;

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v. Operating rules along with enforcing and monitoring compliance must be established.
Topic 3 – Duties of Directors of Companies in Australia
When any company is registered as per the rules of the Corporation Act 2001, then, such
company acquires the status of a separate legal entity in law and is rightly analyses in the leading
case of Salomon v A Salomon And Co Ltd [1897]. A companty is considered to be having its
own personalty in law and has the power to carry out all the functions that can be assocaited with
a normal human being. Any act that is carried out by the officers or the directors of the company
are carried out in the name of the company and the directors and officers are not held liable for
the same. However though the directors have powers to bind the cmpany by their act, but, there
are few duties that must also be comply with by such directors. The duties includes: (Latimer,
2012)
(a) Duty of good faith and proper purpose – One of the civil obligations that are imposed on the
directors of the company is to act in good faith and proper purpose and this duty is mentioned
under section 180 of the Corporation Act 2001. Every company director and officers has the duty
to carry out their conduct in good faith and for proper purpose. The acts of the directors must be
carried out in the best interest of the company and is rightly evaluated in the leading case of
Australian Metropolitan Life Assurance Co Ltd v Ure (1923). In the leading case of Hindle v
John Cotton Ltd (1919) the court held that whether the directors have comply with their duty of
good faith must be analyzed with surrounding circumstances.
It was further held in Re Smith & Fawcett Ltd [1942], that the court will consider that the duties
are comply with when the directors acts in a manner that constitutes the interest of the company
and not what is analyzed by the courts. The concept was also rightly evaluated in The Bell Group
Ltd v Westpac Banking Corporation (no 9) [2008] and ASIC v Adler [2002].
(b) Duty to avoid conflicts of interest and the duty of disclosure
One of the prime duties that are imposed on the directors of the company is that the director must
ensure that there should not be any condition that may arise which result in any conflicting
situation and is rightly highlighted under section 191 – 195 of the Corporation Act 2001. In the

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leading case of Aberdeen Railway Co v Blaikie Bros (1854), the court held that when there is any
conflicting situation, then, the director must ensure that it is the interest of the company must
prevail over the interest of the company.
(d) Duty of care, skill and diligence
Yet another duty that can be imposed on the directors of the company is to act with all
care and diligence like a reasonable prudent man would act in the given situation. The
law was rightly established under section 180 (1) of the Act. It is the court which has to
evaluate whether the directors have comply with the duty of care or not and is held in the
leading case of ASIC v Adler (2002).
Further, if the director is found to be in violation of section 180 (1) of the Act, then, in
such situation, the director can protect himself by relying on section 180 (2) of the Act
which deals with the business judgment rule. The business judgment rule simply
establishes that if the director can prove that the acts that are carried on by him were
carried on by relying on the advice of an expert or that the he has taken adequate care
before acting or that all the other directors are informed, etc, then, in such situation, the
director can raise the defense and can protect his position.
(e) Duty to prevent insolvent trading
The duty to prevent insolvent trading is rightly held under section 588G of the Act. The section
submits that no director must raise any dent while catering his directorial duties which might
result in the insolvency of the company or when the company is already solvent, Thus, the
director must make sure that by no acts of his the company went into any kind of liquidation and
is rightly held in Woodgate v Davis ((2002).
Thus, these are some of the duties that are imposed on the directors of the company and the
directors must ensure that all the duties must be comply with otherwise there are consequences
that can be faced by the directors of the company which includes disqualification, compensation
and fines.

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Bibliography
Books/Articles/Journals
Clarke, ER and Wilson, M. (2018). Accounting: An Introduction to Principles and Practice 9ed.
Cengage AU.
Latimer, P. (2012). Australian Business Law 2012. CCH Australia Limited.
Lo, S. (2016). In Search of Corporate Accountability : Liabilities of Corporate Participants.
Cambridge Scholars Publishing.
Puig, G. (2000). A Two-Edged Sword: Salomon and the Separate Legal Entity Doctrine.
Murdoch University Electronic Journal of Law , Volume 7, Number 3.
Case laws
ASIC v Adler [2002] NSWSC 171.
Aberdeen Railway Co v Blaikie Bros (1854) 1 Macq 461
Australian Metropolitan Life Assurance Co Ltd v Ure (1923) 33 CLR 199
Farrar v Farrars Ltd (1888) 40 ChD 395
Gas Lightning Improvement Co Ltd v IRC (1923).
Hindle v John Cotton Ltd (1919) 56 Sc LR 625
Macaura v Northern Assurance Co (1925).
Lee v Lee's Air Farming Limited (1961), AC 12.
Re Smith & Fawcett Ltd [1942] Ch 304
Salomon v A Salomon And Co Ltd , AC 22 [1897] ).
The Bell Group Ltd v Westpac Banking Corporation (no 9) [2008] WASC 239.
Woodgate v Davis ((2002) 20 ACLC 1314)
Online material
Teacher, T. L. (2018). The Principle of Saloman. Retrieved August 8, 2018, from
https://www.lawteacher.net/free-law-essays/business-law/the-principle-of-salomon-business-
law-essay.php

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