186 12: Corporations and legal personality Part D The formation and constitution of business organisations
In accounting terms, a company is small if it meets two of the following applicable criteria:
(a) Balance sheet total of not more than £3.26 million
(b) Turnover of not more than £6.5 million
(c) 50 employees or fewer on average
For audit purposes, a company is classed as small if it qualifies on the above criteria, but must meet both
of conditions (a) and (b).4.4 Multinational companies
The vast majority of companies will simply operate in one country. However, some of the larger
companies in the world will operate in more than one country. Such companies are multinational.A multinational company is a company that produces and markets its products in more than one
country.4.4.1 Examples: multinational companies
Some examples of well-known multinational companies include; Wal-mart Stores, Royal Dutch Shell,
Exxon Mobil and Toyota.5 Effect of legal personality
The case of Salomon v Salomon & Co Ltd 1897 clearly demonstrates the separate legal personality of
companies.Salomon v Salomon & Co Ltd 1897
The facts: The claimant, S, had carried on business for 30 years. He decided to form a limited company to
purchase the business so he and six members of his family each subscribed for one share.
The company then purchased the business from S for £38,782, the purchase price being payable to the
claimant by way of the issue of 20,000 £1 shares, the issue of debentures, £10,000 of debentures and
£8,782 in cash.
The company did not prosper and was wound up a year later, at which point its liabilities exceeded its
assets. The liquidator, representing unsecured trade creditors of the company, claimed that the company's
business was in effect still the claimant's (he owned 20,001 of 20,007 shares). Therefore he should bear
liability for its debts and that payment of the debenture debt to him should be postponed until the
company's trade creditors were paid.
Decision: The House of Lords held that the business was owned by, and its debts were liabilities of, the
company. The claimant was under no liability to the company or its creditors, his debentures were validly
issued and the security created by them over the company's assets was effective. This was because the
company was a legal entity separate and distinct from S.The principle of separate legal personality was confirmed in the following case.Lee v Lee’s Air Farming Ltd 1960
The facts: Mr Lee, who owned the majority of the shares of an aerial crop-spraying business, and was the
sole working director of the company, was killed while piloting the aircraft.
Decision: Although he was the majority shareholder and sole working director of the company, he and the
company were separate legal persons. Therefore he could also be an employee with rights against it when
killed in an accident in the course of his employment.Key termFAST FORWARD