IAI Actuarial Core Principles · Business Management

Separate legal personality, directors' duties, shareholders and partnerships: formula sheet

Full chapter guide

Key formulas

Separate legal personality: Company ≠ its members ≠ its directors; A registered company is a legal person distinct from those who own and run it. Source case: Salomon v Salomon & Co Ltd (1897).
Limited liability (company limited by shares): Maximum loss of a member = unpaid amount on their shares; Fully paid shares mean no further liability to the company or its creditors, apart from exceptions where the veil is lifted or a statute applies.
Who owns company property: Company assets belong to the company, not to the members; A shareholder has a right in the shares, not in the assets themselves.
Grounds for lifting the veil: Fraud or improper conduct | Sham or façade | Statutory provisions; These are exceptions. The default is that the veil stays in place.
Company limited by shares: Member liability = unpaid amount on shares held; Once shares are fully paid, the member has no further liability to the company.
Company limited by guarantee: Member liability = amount undertaken in the MoA, payable on winding up; Used by clubs, charities and trade bodies. It may or may not have share capital.
Unlimited company: Member liability = no limit; Members are liable for all debts if assets are insufficient.
Public vs private company: Private = restricts share transfer and bars public invitation; Public = not a private company; The definition of public is by exclusion. Do not describe a public company as one that must be listed.
MoA vs AoA: MoA = external, objects and liability; AoA = internal management rules; Articles are subject to the Act and the memorandum.
Effect of incorporation: Certificate of incorporation → separate legal person with perpetual succession; The company exists from the date stated in the certificate.
Section 166, Companies Act 2013: Director's duties = act per articles + good faith + due care, skill, diligence and independent judgment + avoid conflict + no undue gain + no assigning office; This is the core list. Learn the headings, not the section wording.
Fiduciary duty test: Loyalty = best interests of company + proper purpose + no conflict of interest + no secret profit; Focus is on honesty and loyalty, not on whether the decision was wise.
Duty of care test: Standard = reasonably diligent person with the general knowledge, skill and experience expected of the role, and any higher actual skill the director has; This is partly objective and partly subjective. The actual skill can only raise the standard.
Undue gain rule: Liability = amount of undue gain, payable to the company; Section 166 provides that a director who achieves undue gain must pay the company an amount equal to it.
Remedies for breach: Compensation for loss, account of profits, rescission of contract, injunction, statutory penalty; Choose the remedy that fits the facts: loss, gain or an ongoing act.
Ordinary resolution: Votes in favour > votes against (of votes cast); Simple majority of votes cast by members entitled to vote, as defined in s.114 of the Companies Act 2013. Used for routine business such as approving accounts or declaring a dividend.
Special resolution: Votes in favour ≥ 3 × votes against (at least three-fourths of votes cast); Defined in s.114 of the Companies Act 2013. Used for major matters such as altering the articles. Votes cast are those of members entitled to vote, in person, by proxy or electronically, not all members or all shares.
Rule in Foss v Harbottle: Wrong to the company → company is the proper claimant; Courts do not interfere in internal management where the majority can ratify the act. This is the starting rule that the exceptions qualify.
Derivative action: Member sues in the company's name; any recovery goes to the company; Typically available where there is fraud on the company and wrongdoers control the company.
Oppression and mismanagement (ss 241-242, Companies Act 2013): s.241(1)(a): conduct prejudicial to the company or its members, or oppressive to a member, and facts would justify a just and equitable winding up but winding up would unfairly prejudice the members → NCLT may make orders under s.242. s.241(1)(b): material change in management or control likely to prejudice the company's interests → no winding-up requirement; Under s.241(1)(a), the Tribunal must be of opinion that the facts would justify a just and equitable winding up, but that winding up would unfairly prejudice the members. Under s.241(1)(b), a material change in management or control likely to prejudice the company's interests does not carry that requirement. In both cases the Tribunal may then make orders under s.242.
Definition of partnership: Partnership = agreement + business + profit sharing + carried on by all or any of them acting for all; All four elements must be present. Sharing profits alone does not always prove a partnership; look at the whole relationship.
Partner as agent: Act in ordinary course of firm's business → binds the firm and all partners; Applies only to acts within the usual scope of the business. Acts outside it may not bind the others.
Liability in a general partnership: Liability = unlimited + joint and several; A creditor can claim the whole debt from any partner. That partner can seek contribution from the others.
LLP liability: Partner liability = limited to agreed contribution (own wrongful acts and fraud excepted); The LLP is a separate legal entity. Partners are not liable for the independent acts of other partners.
Legal personality: Partnership firm: no separate personality. LLP: separate legal personality.; This single difference drives most differences in liability, property and continuity.
Registration: Partnership: registration optional, but if the firm is unregistered, s.69 bars the firm or its partners from suing third parties to enforce contractual rights. LLP: incorporation under the 2008 Act is required.; The s.69 bar applies to suits by the firm or its partners against third parties, so registration matters in practice.

Quick revision

A company is a separate legal person: it owns property, contracts and sues in its own name.
Shareholders are not liable for company debts beyond the amount unpaid on their shares, in a company limited by shares.
The corporate veil may be lifted only in limited situations such as fraud or sham use of the company.
A company is created by incorporation, which gives it its own legal identity and continuity.
A private company and a public company differ in how shares are held and transferred and how many members they may have; check the figures in your study material.
Directors owe duties to the company, not usually to individual shareholders.
Core director duties include acting in good faith, with care and skill, and avoiding conflicts of interest.
Directors who breach duties may face personal liability to the company.
Shareholders can vote, receive dividends if declared, and seek remedies against oppression or mismanagement.
Majority shareholders control ordinary decisions, and minority protection exists to stop abuse of that power.
In an ordinary partnership, partners usually share unlimited personal liability.
An LLP combines a partnership-style structure with limited liability for partners, and it is a separate legal entity.

Common mistakes

Treating separate legal personality and limited liability as the same thing. Fix: Say that personality is the principle and limited liability is one consequence. The veil is the barrier between them and the members.
Saying a majority shareholder is liable for company debts because he controls the company. Fix: Salomon v Salomon shows that control by one person does not remove separate personality. Liability is limited unless an exception applies.
Treating limited by shares and limited by guarantee as the same. Fix: Shares: liability is the unpaid share amount. Guarantee: a fixed sum promised, payable only on winding up.
Saying a public company must be listed on a stock exchange. Fix: A public company is simply one that is not private. It may be unlisted.
Treating fiduciary duty and duty of care as the same thing. Fix: Remember loyalty versus competence. Fiduciary duty is about honesty and conflicts. Duty of care is about reasonable care and skill.
Saying directors owe their duties directly to each shareholder. Fix: The general rule is that the duty is owed to the company. Section 166 also requires directors to consider shareholders, employees, the community and the environment, but the main claim belongs to the company.
Saying a shareholder can sue directly for any loss the company suffers. Fix: State that the company is the proper claimant for its own wrongs. A member sues directly only for breach of their own rights.
Saying the proceeds of a derivative action go to the member who sued. Fix: Write that the claim is brought for the company and recovery goes to the company.
Saying a general partnership is a separate legal entity. Fix: Remember that a partnership firm is only a collective name for the partners. Only a company or an LLP has separate personality.
Saying LLP partners can never be personally liable. Fix: State that liability is limited for the LLP's debts, but a partner remains liable for their own wrongful acts and for fraud.

Exam tips

Always name Salomon v Salomon & Co Ltd (1897) and state its holding in one line: valid incorporation gives a separate person, even when one person controls the company.
In MCQs, watch for options that say shareholders own the assets or are always liable. Both are wrong.
For a numerical limited liability question, compute unpaid amount = number of shares × (face value − amount paid).
Give a short conclusion every time: veil holds, or veil lifted and why.
Link to actuarial practice if asked: a company, not its actuary or members, is the contracting party, but professional duties remain personal.
Learn the classification by liability and by public access as two separate lists. Examiners often test one against the other.
In written answers, apply the rule to the facts given. Name the company type, then give the consequence.
Learn the memorandum and articles as a two-column comparison so you can reproduce it quickly.