COMPANY LAW CORPORATE PERSONALITY

TOPICS

1. Incorporation and its effects

2. Separate legal personality

3. Case studies

INCORPORATION AND ITS EFFECTS

• s.16(5) CA 1965 provides that “ on and from the date of incorporation specified in the certificate of incorporation but subject to the Act the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an incorporated company and suing and being sued and having perpetual succession and a common seal with a power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is provided by this Act.”

INCORPORATION AND ITS EFFECTS

• Therefore upon incorporation, a company is considered as an artificial legal person, i.e. a person created by statute.

• S.16(5): ‘body corporate’

1.A company’s obligations and liabilities are its own, and not those of its participants;

2.A company can sue and be sued in its own name;

3.A company has perpetual succession;

4.A company’s property is not the property of its participants;

5.A company can contract with its controlling participants

THE SEPARATE LEGAL ENTITY DOCTRINE – THE CORPORATE VEIL

• The company is a legal person separate from its participants;

• in the event of winding up, members are liable up to their unpaid shares only. They are not liable to contribute if they have had paid up their shares.

• This means that: • its obligations and property are its own and not those of

its participants

• its existence continues unchanged even if the identity of the participants changes

THE SEPARATE LEGAL ENTITY DOCTRINE – THE CORPORATE VEIL

• Thus person from its members and those who

manage its operation

• There is a corporate veil that separates the company

from its members

• the law treats a company as being a separate

THE SEPARATE LEGAL ENTITY DOCTRINE – THE CORPORATE VEIL

• Case studies:

1. Salomon v Salomon & Co. [1897] AC 22

2. Macaura v Northern Assurance Co. [1925] AC 619

3. Lee v Lee’s Air Farming [1961] AC 12

SALOMON V SALOMON (1897)

Salomon

– sole

trader

Family

Pty Ltd

Company

Leather Business

Cash, Debenture

20,001 shares

6 shares

MACAURA V NORTHERN ASSURANCE CO. [1925]

Macaura:

Estate &

Timber

Timber

Irish

Canadian

Saw Mill

Share Capital

Insurance

Fire

LEE V LEE’S AIR FARMING [1961]

Mr. Lee

Lee’s Air

Farming

•Owned all

•Governing

Director

•Chief pilot

Incorporation

Plane crash

Death

Compensation

THE SEPARATE LEGAL ENTITY DOCTRINE IN MALAYSIA

• Malaysian courts have accepted the Salomon principle as being

an integral part of Company Law.

• In Goh Hooi Yin v Lim Teong Ghee (1977) the court was of the

view that it was incumbent on the courts to apply the doctrine.

THE SEPARATE LEGAL ENTITY DOCTRINE IN MALAYSIA

• Abdul Aziz bin Atan & 87 Ors v Ladang Rengo Malay Estate Sdn. Bhd. [1985]Shankar J.:

“It is trite law that an incorporated company is a legal person separate and distinct from the shareholders of the company…The whole point of forming a limited company is that the shareholders can have in their hands the management of the business without incurring the risk of being under unlimited liability for the debts of the company…”

THE SEPARATE LEGAL ENTITY DOCTRINE IN MALAYSIA

• Perman Sdn. Bhd. v European Commodities Sdn.

Bhd. (2005) per Gopal Sri Ram JCA:

“… a principle which lies at the heart of company law.

It is that a company is a separate person from its

shareholders. The latter have no interest, legal or

beneficial over the property of the former.”

SALOMON: PROBLEMS AND ISSUES

• In the High Court, the learned judge said the company had a right

of indemnity against Mr Salomon. He said the signatories of the

memorandum were mere dummies, the company was just Mr.

Salomon in another form, an alias, his agent.

SALOMON: PROBLEMS AND ISSUES

• The Court of Appeal [1895] confirmed the High

Court’s decision against Mr Salomon, though on

the grounds that Mr. Salomon had abused the

privileges of incorporation and limited liability,

which Parliament had intended only to confer on

"independent bona fide shareholders, who

had a mind and will of their own and were not

mere puppets". Per Lindley LJ.

SALOMON: PROBLEMS AND ISSUES

• The House of Lords unanimously overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the subscribers (i.e. the shareholders) should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient.

SALOMON: PROBLEMS AND ISSUES

• "The company is at law a different person altogether from the [shareholders] ...; and, though it may be that after incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands received the profits, the company is not in law the agent of the [shareholders] or trustee for them. Nor are the [shareholders], as members, liable in any shape or form, except to the extent and in the manner provided for by the Act."