LAW485 – Corporate Law

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Course Learning Outcomes

• Describe the principles of company law and the pertinent sources

of law applicable to specific company activities.

• Present the principles of company law relating to company

activities.
• Relate the principles of company law as an important governance
of business entities to a given factual situation.

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 COMPANY AS A CORPORATION
• Concept of Incorporation

• Effects of Incorporation

• Separate Legal Entity / Veil of Incorporation

• Lifting the Veil of Incorporation

• Statutory
• Judicial Exceptions

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Concept of Incorporation
• Section 2 Companies Act gives the definition that
means a company incorporated
2016 ‘companyunder this Act or under
any corresponding previous written law.’
• Section 9 Companies Act states that a company shall
a) A name
2016 have
b) One or more members, having a limited or unlimited
liability for the obligation of the company
c) In the case of a company limited by share, one or more shares; and
d) One or more directors

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Effects of Incorporation
• Section 18 Companies Act 2016: Upon the date of incorporation
specified in the notice of registration, there shall be a company by
the name and registration number as stated in the principal register
kept by the Registrar.

• A company that has been incorporated pursuant to the Companies

Act 2016 is a body corporate and shall have a legal personality
separate from that of its members and continue in existence until it
is removed from the (Section 20 Companies Act
register 2016).

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 Separate Legal Entity / Veil of Incorporation
• The principle of separate legal entity has been established by the
case Salomon v A Salomon & Co. Ltd.
• This principle is also known as ‘the veil of incorporation.’
• It has been codifiedin the Companies Act 2016. Section 20(a)
Companies Act 2016 provides that ‘a company incorporated
this Act is a body corporate
underand shall have legal personality separate
from that of its members.’
• Section 192(1) Companies Act 2016 further provides that a member
of the company shall not be liable for an obligation of a company by
reason only of being a member of the company. A company shall be
liable for its debts.

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Salomon v Salomon & Co.
• Mr Salomon had a successful business as a sole trader for 30 years.
Ltd.
His business was to manufacture boots and shoes.

• He later formed a company named ‘Salomon & Co Ltd’. The

company, Salomon & Co Ltd, issued one share each to Salomon, to
Salomon’s wife, and his five children.
• Salomon’s wife and children each held their shares as Salomon’s
nominees.

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• Salomon then sold his boots and shoes manufacturing business to the
company. It was sold for 39000 pounds.
• The payment from the company to Salomon was made in the form
issuance of shares, issuance of debentures secured by a floating charge,
and also cash withdrawn from the business.
• As the result, Salomon became the majority shareholder and a debenture
holder or a secured creditor of his company, Salomon & Co Ltd.
• Eventually, Salomon & Co Ltd had financial difficulty and became insolvent.
It had to be dissolved.
• During the liquidation, the company’s assets were only 6000 pounds. The
company also owed Salomon 10000 pounds, and owed other unsecured
creditors 7000 pounds.

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The unsecured creditors argued
that:
• The sale of the company by Salomon was a sham. Therefore,
Salomon was still the owner of the business and liable for the debts
of the company.
• The company Salomon & Co Ltd was irregularly formed. This is
because the 7 shareholders were mere nominees of Salomon.
Salomon and the company were one, and the same.
• The UK House of Lords heard the appeal from the Court of Appeal,
and held that Salomon and his company were two separate persons
and as such:
• The business was owned by the company, and the company’s debts were the
liabilities of the company. They are not Salomon’s personal responsibility.

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• Although Salomon owned beneficially all the issued shares of the
company, he could also be a secured creditor having enforceable
rights against the company in that capacity.
• As Salomon was a secured creditor, the remaining assets of the
company was used to settle his debt, in priority over the other
unsecured creditors of the company. As the assets of the company
were not enough, the unsecured creditors did not receive anything.
• This case highlights the main effects of separate legal entity:
1) Only the company is liable for its own debts and liabilities.
Neither the members nor the officers are personally liable for
the company’s debts and liabilities.
2) A company can enter into a valid contract with its own
members or officers.

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 EFFECT OF SEPARATE LEGAL ENTITY: COMPANY CAN ENTER
INTO CONTRACT
Lee v Lee’s Air Farming
Ltd
•Lee established a company by the name Lee’s Air Farming
Ltd. Lee owned all shares in the company, except for 1 share
which was owned by his wife.
•Lee was the sole governing director, the chief and the only
pilot in the company. One day, while flying for the company,
Lee was involved in an air crash and died. His wife claimed
for compensation from the company, for his death.
•The Court determined the issue regarding whether Lee was a
worker (a person who has entered a contract of service with
an employer).

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• The Privy Council allowed for the claim by Lee’s wife.
• Even though Lee was the controller of the company, in the eyes of
the law, Lee and his company were two separate entities.

• As such, Lee could enter into a valid contract of service with its
own company, and be considered as a worker or employee of the
company.

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 EFFECT OF SEPARATE LEGAL ENTITY: COMPANY CAN OWN
PROPERTY
MACAURA V NORTHERN ASSURANCE CO LTD
• Mr Macaura owned IRISH CANADIAN SAWMILLS LTD
• IRISH CANADIAN SAWMILLS LTD owned timber
• Mr Macaura took insurance policy for timber under own his name
• One day, there was fire over the timber, where the timber was destroyed
• Mr Macaura wanted to claim insurance, but the insurance company denied the claim

Judgment
• The insurance company was not liable to pay the insurance to the company, since
the timber that destroyed in the fire did not belong to Mr Macaura, who held the
insurance policy.
 Mr
Macaura
INSURANCE
Mr Macaura took COMPANY
insurance policy under
his name

Mr Macaura
owned Company
IRISH CANADIAN Insurance policy cannot
SAWMILLS LTD The company be claimed, because the
owned timber. timber is owned by the
The timber Company, not Macaura
destroyed by fire
 Lifting the Veil of Incorporation

•There are EXCEPTIONS to the principle of separate

legal entity.
•Insome circumstances, the veilof incorporation willbe
lifted, pierced or penetrated.
•When the veil is lifted, the company is no longer a separate
body.
•The members and the officers, and the company,
will become one single body.

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JUDICIAL EXCEPTIONS
The Court has the discretion to lift the veil of incorporation, some of the
situations are as follows:

When The Company Is Used To Evade Legal Obligations

JONES v LIPMAN
• Jones and Lipman entered into contract, where Lipman agreed to sell house to
Jones
• However, Lipman changed his mind and refused to sell the house
• Lipman incorporated a company, became the director and transferred his house
to the company, in order to avoid from selling the house to Jones
• Jones sued Lipman
• The decision of the court: Although the owner of the house was the company,
Jones could claim the house. It is because the company was used by Lipman to
avoid the contractual obligation with Jones.
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 When The Company Is Employed As An Agent
Or Alter Ego Of Its Controllers

• If the company is appointed as an agent by its controllers or

shareholders, the controllers or the shareholders being the principals
are liable for the company’s acts on normal agency principles.

Smith, Stone & Knight Ltd v Birmingham

Corporation

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Smith, Stone & Knight Ltd v Birmingham
Corporation
• The plaintiff, Smith, Stone and Knight Ltd (SSK), ran various businesses.
• SSK purchased a waste business and incorporated a subsidiary,
Birmingham Waste Co (Subsidiary), to operate the waste business.
• The City of Birmingham (City) compulsorily acquired land (under
legislation)
owned by SSK. This was the land which was occupied by the Subsidiary for the
purpose of operating the waste company.
• Under the legislation, the City had to pay compensation for the compulsory
acquisition and argued that it had to compensate the Subsidiary (rather than
SSK). This would benefit the City because it could remove any
“occupiers”, meaning it only had to compensate Subsidiary for any lease costs.
• SSK wanted the City to compensate SSK for the removal and disturbance of the
waste business that the Subsidiary operated. This would benefit SSK because it
could claim a higher amount (i.e., more than just the lease costs).
• The case turned on the application of the separate legal entity doctrine.
• The facts were such that the Subsidiary was an agent of SSK and would not be
treated as a separate legal entity in the way the City wanted it to be treated.
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 When The Court Is Asked To Promote Justice
Or To Exercise An Equitable Discretion

When The Company Is Used To Commit Fraud

Or Improper Purpose

Aspatra Sdn Bhd v

BBMB
• Lorrain Osman was a director of the Aspatra Sdn Bhd
• Bank Bumiputera sued the Lorrain Osmain for using Aspatra Sdn Bhd to make secret profit RM27.6
million

• One of the issue: Whether the corporate veil of the Aspatra Sdn Bhd could be lifted so that Lorrain can
be sued.

Held: when fraud is involved and for purpose of justice, the court may lift the corporate veil. Lorrain can be
sued.
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 When Groups Of Companies Are In
Reality A Single Economic Unit
• There are some instances where a group of companies were treated as a
single entity, if they are in reality a single unit or one economic unit.

Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant
Worker
• Hotel Jaya Puri Bhd has a subsidiary company (Restaurant)
• The subsidiary company suffered heavy losses. As the result, the subsidiary company had to
terminate the employment contract of the workers.
• The workers claimed the compensation for the termination from Hotel Jaya Puri Bhd (the parent
company), but Hotel Jaya Puri Bhd.
• Hotel Jaya Puri said it is the obligation of the subsidiary company to pay the termination
compensation
• The decision :
The hotel company and the restaurant company were one group enterprise. The employees were in
fact working for one entity. Therefore, the workers could claim from the parent company.
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Statutory Exceptions

Section 539(3) and Section 540(2) Companies Act 2016

When Debts Contracted At The Time The
Company Has No Ability Of Repayment

• If an officer contracted debts on behalf of the company, and at the time

the debts were contracted, he had no reasonable or probable expectation
that the against
offence company thewould be ableAct
Companies to 2016
pay the debts, he shall be guilty for an
(Section 539(3) Companies Act
2016).
• The court may declare that officer to be personally responsible without any
limitation of liability for the payment of the whole or any part of the debts
(Section 540(2) Companies Act 2016).

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 Section 540(1) Companies Act 2016
• When Involved In Fraudulent Trading

• If in the course of winding up or proceeding taken against the company, it appears that
there is any part of business carried with intent to defraud creditors, or fraudulent
purpose.

• The Court may declare any person who is knowingly a party to the carrying of the business
in that manner to be personally responsible.

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Chin Chee Keong v Toling Corporation
•The Court of Appeal found that the business of the company
was carried on with the intent to defraud creditors, or for
fraudulent purposes.
•This is based on the evidence that the company’s audited
account showed the company was facing cashflow problem,
in financial difficulty and had no reasonable prospects of
paying debts.
•Despite these, the company placed large orders of raw
material from the plaintiff.

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 Section 186(4) Companies Act
2016
Failure Of Obtaining Minimum Subscription

• If a company issued a prospectus and minimum prescription not

received within four months of the issue of prospectus, all moneys
received from applicants for shares shall be refunded to the
applicants without interest or returns.
• If the money is not refunded to applicants within five months after
the issue of the prospectus, the directors shall be jointly and
severally liable to refund that money. The director, however is not
liable if he can prove that the default in the repayment of the money
was not due to any misconduct or negligence on his part.

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 Section 123(4) Companies Act
2016 Of The Financial Assistance Rule
Breach

•A company is prohibited from giving financial assistance for

the purchase of shares of the company or its holding
company (Section 123 of the Companies Act 2016).
•Any officer who contravenes this and convicted, may be
liable to pay compensation to the company as the result of
the breach (Section 123(4) of the Companies Act 2016).

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 Section 140(1) Income Tax Act 1967
Avoiding Payment Of Tax

• The Director-General of Inland Revenue is allowed to ignore

transactions which have the effect of avoiding and evading tax
liability.
• This means that he may disregard the separate legal personality of a
company where that is a mere façade concealing the true state of
affairs.

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 Section 46 Employee Provident Fund (EPF) Act
1991
• Failure Of The Company To Remit
Contribution To The Fund

•If an employer is a company, failed to contribute to the fund, it is an

offence. Section 46 of the EPF Act provides that the Directors of the
company at the time the action was taken and the directors at the time
of non-contribution are jointly and severally liable with the company.

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 Section 108A Employees Social Security Act 1969
Failure Of The Company To Remit The Premium To The
Social Security Organisation (SOCSO)

• If an employer is a company, any failure to remit the premium to

SOCSO may cause the directors of the company at the time the
action is taken and the directors at the time of non-payment to be
jointly and severally liable with the company.

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 Offences Under
Employment Act
The
1955
• Section 101B Employment Act provides that where an
has committed an offence, the directors
1955 and managers at the time
employer
the offence was committed may be charged jointly with the
company.

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Thank
you Sources
: Companies Act
2016
Chan Wai Meng, Essential Company Law in Malaysia: Navigating the Companies Act
2016 Salmiah Salleh, Introduction to Partnership & Company Law (Second
Edition), 2018

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