Principle of Separate Legal Existence

Principle of Separate Legal Existence

The Principle of Separate Legal Existence is a fundamental principle in the field of company law. According to this principle, the company is treated as an entity separate from its members.

Functions of Separate Legal Existence

  • In order to create a company, the promoters of the company must produce certain documents to the registrar of companies.
  • The registrar presides over the government agency known as the Companies House.
  • After checking the documents, the registrar will issue a certificate of incorporation and the company starts to exist as a corporate body.

Separate Legal Entity

The most important consequence of incorporation is that a company is regarded as a person. It has its own rights and the rights are different from the rights of its owners.

Limited Liability

  • When Shareholders buy shares from a certain Company and pay a certain percentage amount of the shares rather than paying the full amount, and when the company is dissolved, then the shareholders are liable to pay the rest of the amount.
  • If a shareholder has paid the full amount, he/she is not liable to pay any amount upon dissolution of the company.
  • Therefore, shareholders have a limited liability.

Perpetual Succession

This refers to the existence of any organization despite the death, bankruptcy, insanity, change in membership of any member from the business. In such instances, the shares are passed on to the next generation.

Ownership of Property

Certain properties can be owned by a company. These properties continue to be owned by the companies regardless of their shareholders and members.

  • These properties are used when a company needs to borrow money as a security.
  • These properties may be the present or future assets.

Contractual Capacity

  • A company has the ability to make contracts.
  • The company can sue or be sued on the basis of these contracts.
  • The power to make contracts is delegated to human agents working for the company.
  • The contracts are carried out by the directors and other agents of the company.
  • The company, as a person itself, is subjected to the rights and liabilities imposed by the contract.

Criminal Liability

  • For someone to be found guilty of committing a crime, the individual’s actions and mindset must fit the crime.
  • It is generally perceived that companies cannot commit any crime as they do not have minds of their own.
  • However, the courts assume the controllers of the company to be the minds of the company.

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