Introduction

As the day company is formed, it could be said that the company is “incorporated”. As the company uniqueness is that it provides for powerful separation of assets and managements of its information and it is further compounded on the fact that who owns the capital can limit his / her liability to the third parties. Therefore the company is regarded as a separate entity and it is treated in its capacity. In today business companies, it really is seen that firms have both advantages and disadvantages in measuring the limited liability of the shareholders on the foundation that the company is liable because of its debts and obligations. So, double-edged sword is created which means it has both good and bad elements.

In this assignment, information regarding the doctrine of individual legal entity will be analyzed. As well statements of top features of company as different legal entity and instances the veil of incorporation will become lifted will become analyzed with regards to some cases.

Doctrine of separate legal entity

In company laws of Malaysia, a business is treated as another legal entity from its associates constituted in it which is its shareholders and directors. This can be a doctrine of different legal principle.

The enterprise is a different different physique from its member. Consequently, the members of the business are not liable for the company debts. For instance, when a company become a contract, the business itself will personally liable for the contract instead of the shareholders and the directors. Therefore, a organization is a corporate body. A corporation can be an artificial legal person who exists independently of the people who at any moment are the members of the corporate body. This theory was established by the House of Lords in Salomon v Salomon & Co Ltd[1].

The rule of Agency

An firm is a romantic relationship where one person consents or is regarded as to have got consented that your partner should act on its behalf to be able to have an effect on its relations with third parties.

Features of Separate Legal Entity

At the time the company is incorporated, this is a distinct legal person, it brings forth some effect that can be the features of it. Under section 16(5) of the Companies Act 1965 claims that, once a organization had been incorporated, the business had all of the ability as an included company. For instances, it is means that the business can enjoys its ideal and function as a legal person. Organization that integrated is a legal character that’s created and acknowledged by the law as mentioned by Salleh Abbas F.J in Tan Lai v Mohamed bin Mahmud.

When a provider register under Companies Act, it turns into vested with corporate individuality which can be an independent legal person and different from its members. For instance, the company can be a legal person. In Salomon v. Salomon & Co. Ltd. (1987)[2], unsecured creditors claimed that the business never had an existence of independent although it was integrated. They claimed that it had been Salomon himself trading under another brand, but the Property of Lords kept Salomon & Co. Ltd. should be regarded as an independent person from Salomon. That is because of the actual fact that the company was not role as an agent for the member. Hence, Salomon and others are mere members of the company although he owned all the issued shares. Hence, Salomon could enforce its rights against the business as a secured creditor.

Furthermore, the company also offers the ability to sue and be sued in its own name. Therefore, a firm can make legal action to enforce its best suited. It was established in the case Foss v Harbottle[3] where action brought by the participants of the business made an injury complain towards the business and it had been fail. Therefore the member could not take action on behalf of the business.

Besides, a business has perpetual succession which means members may join and leave, however the company will continue go on. Whenever a company become incorporation, it will continue operate until it is dissolved according to the Companies Act 1965. Under the circumstance of Re Noel Tedman Holdings Pty Ltd[4], the courtroom allowed the representative personal of the deceased to appoint the directors of the business so that the directors could permit www.testmyprep.com the transfer of the shares to child. This proves that although the shareholders got leave but the company continues to be exiting and continue continue.

Other than that, a company also offers ability to own property alone brand. According to section 16(5) a firm has power given to own private land and other styles of property. While provider is independent legal person from its member, the member has no legal right and interest with the house in fact it is belongs to company. In case Macaura v Northern Assurance Co. Ltd[5], Macaura owned a tree plantation which was covered by insurance coverage. Later he marketed the plantation to a organization which he was the just shareholder. After the sale, Macaura continued to insure the plantation in his personal brand. A fire broke out and the plantation was destroyed. Macaura then attempted to claim on the insurance policy but the insurance provider refused to pay. The issue was whether Macaura acquired an insurable interest during the loss. It had been help that the insurance provider was right in certainly not paying. The plantation provider was a legal entity in its right, distinct from its shareholders.

Other than that, in a corporate overall body, the shareholders of the business can appreciate limited liability. While a organization is a separate legal entity, the shareholders aren’t responsible for the debts and the liability is bound by shares. Therefore, creditors have no privileges to consider any legal actions against the shareholders. In case Ye Yut Een 1978[6], the director of the business is not responsible for the company’s debt. It’s the company who had not complied with the techniques linked to the retrenchment benefits.

Lifting The Veil of Incorporation

Although the business has privilege as individual legal entity, it must not be used for any unlawful or unlawful business purposes,

in the event a fraudulent or dishonest work with is constructed of the legal entity, the concerned individuals will never be allowed to consider the shelter of the organization personality. The court will overlook the corporate veil to see the real individuals behind it. Generally, the law will not go behind this veil of incorporation to check out the membership of the business. But the courts will ‘lift the corporate veil’ in some exceptional cases.

Salomon v Salomon & Co Ltd case have decided that the members of the company are not responsible for any contract that contracted by the business. This will cause they may have a opportunity hiding behind the veil to defraud the creditors and other parties that contracted with the company.

The court will pierce the corporate veil by applying the principle known as ‘piercing the corporate veil’. When there is no entity separate from people, the court will pierce the organization veil and do something. After that the court can make the company and its own members responsible for any breach of contract.

The veil of incorporation can be lifted in regarding to situation given under statutory provision and by judicial interpretation beneath the common law. For instance, section 36, Companies Work 1965 states that if the number of members of a business is reduced to listed below two and its own carries on business more than six months, the person who is an associate of the company during the time that is so carries on business after those half a year, and knows it, the person is personally liable for all of the debts that the company contracted after those six month and he may be sued therefor.

According to the section 304(2), Companies Take action 1965, alongside the section 303(3), provide an officers who knowingly contract a debts on behalf of the company. It means borrow money and knowing that that the company is most likely unable to pay the debt is guilty of an offence and on conviction be produced personally prone to pay that debt.

Under section 304(1), Companies Work 1965 provides that when a company’s intention is certainly to purposely defraud its lenders, the veil of incorporation is certainly lifted. In the course of the winding up of a provider or in virtually any proceedings against a organization it seems to the court when hearing the application of the liquidator or any creditor or contributory of the business that any organization of the business has been continued with intent to defraud lenders of the company or creditors of any additional person or for any fraudulent purpose, the courtroom may hold any persons who were knowingly get-togethers to the fraud individually in charge of all or the debts or various other liabilities of the company as the court directs.

Under section 365(2), Companies Take action 1965 supplies that any testmyprep payment of dividend not really from income is prohibited. Any repayment manufactured from dividends to shareholders is in person liable by the director towards the lenders of the company when there are no profits available.

There are also situations where the court thinks it is appropriate and it’ll lift up the veil of incorporation at prevalent law. The situation whereby the veil of incorporation can be lifted where the company is performing as agent or partner of the controlling or mother or father company. Group of the companies the issues could be complex. Subsidiary personal and fund funds of a organization has been held to take action as agent for the keeping and parent company. Therefore, holding and parent organization actually operating business. That is applied in case Smith, Rock and Knight Ltd v Birmingham Company (1939)[7].

Besides, the veil of incorporation will come to be lifted when there is a group of businesses, including having and subsidiary provider, the court can lift the veil and take care of a company and its own subsidiary as one financial unit. In case DHN food Distributors Ltd v Tower Hamlets London Borough Concil[8], subsidiary organization owns a piece of land as the DHN which is mother or father company operated the business on the land. The local authority buys the said terrain. The DHN claimed settlement for disruption. The local authority refused to pay for the compensation on the lands that the land did not participate in DHN. The court lifted the veil of establish that DHN is connected with the subsidiary firm as treated as you economic device, they did undergo a loss because of this of acquisition from the neighborhood authority and permitted to claim the compensation.

At last, lifting the organization veil can also assist in preventing fraud. In the event Aspatra Sdn Bhd & Ors v Bumiputra Lender Malaysia Berhad (BBMB)[9], Lorrain Osman, among the director of Aspatra Sdn Bhd, was once a director of Bumiputra Bank Malaysia Berhad, must account for the trick profit he manufactured in breach the fiduciary duty. In order to avoid detection Lorrain Osman got channeled the monies which is the secret profit he make into some companies that he controlled, one may be the Aspatra Sdn Bhd. BBMB feared that the amount of money Lorrain Osman took would keep Malaysia and requested an injunction. The veil lifted to disclose that the resources of Aspatra Sdn Bhd participate in the Lorrain Osman and the injunction was accepted.

Conclusion

In conclusion, it obviously mentioned that the doctrine of distinct legal entity have designed double-edged swords to the shareholders of the business. Although it brings many features to the shareholders but it also have drawback towards the company itself and creditors in some situation. Hence, you will have some defects of incorporation. Nevertheless, lifting the veil of incorporation by the court will reduce the defects of incorporation.

[1] SALOMON v SALOMON & CO LTD [1897] A.C. 22, House of Lords

[2] SALOMON v SALOMON & CO LTD [1897] A.C. 22, House of Lords

[3] Foss v Harbottle(1843) 67 ER 189

[4] Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561

[5] Macaura v Northern Assurance Co Ltd[1925] AC 619

[6] Yee Yut Ee(978)2 MLJ 142

[7] Smith, Natural stone & Knight Ltd v Birmingham Corp[1939] 4 All ER 116

[8] DHN Meals Distributors Ltd v Tower Hamlets London Borough Council[1976] 1 WLR 852

[9] Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988) 1 MLJ 97