QUESTION:

Citing relevant cases and with references to the 2019 companies code, write short
notes on the following

1. Pre-Incorporation contract
2. Lifting the corporate Veil.

1. Pre- Incorporation Contract:

Pre-Incorporation Contract:
Definition: A pre-incorporation contract refers to an agreement entered into by
individuals or promoters on behalf of a company that has not yet been formally
incorporated.
2019 Companies Code Reference: Section X of the Companies Code of 2019 outlines the
provisions regarding pre-incorporation contracts, specifying the legal implications and
requirements.
Case Law: Salomon v Salomon & Co. Ltd. (1897) established the principle that once a
company is incorporated, it becomes a separate legal entity from its promoters, thereby
not being liable for pre-incorporation contracts unless it adopts them post-incorporation.

The key issue in this case is whether either Lead Balloon or Jeremy will be bound by the
pre-incorporation contract. To answer this several underlying legal issues must be looked
at from two different angles, one being the general law and the other statutory laws.

The common law position of such contracts is that a person who acts on behalf of the
company that is not incorporated cannot have any authority as an agent for the company
as no legal authority exists. (Kelner v Baxter) [i] This implies that non-incorporated
businesses have no legal capacity and powers of an individual stated in Section 124(1) of
the Corporations Act 2001 (Cth). [ii] Kelner v Baxter [iii] case confirms that a
corporation cannot ratify a contract that an agent purported to enter into on behalf of the
corporation as the corporation did not exist at the time of the formation of a contract.
However if there is a clear intended contract, only way in which there could be a valid
contract was if the person who represented the company was the other contracting party.
Hence person who entered contract was liable in the case. [iv] However further
interpretations were made after Kelner’s case and that is promoter is only liable if it can
be said that it was intended in the circumstances that the promoter be a party to the
contract (Newborne v Sensolid). [v] In Black v Smallwood & Cooper it has been held
that if a pre-incorporated contract objectively has an intention to bind the company only
then the promoter does not necessarily takes the liability especially if the promoter had
not known the fact that the company had not been incorporated. In this case it was held
 that the company did not exist hence it was a promise with a non-existent party and
therefore no contract at all (Black v Smallwood & Cooper). [vi]

If the common law position was to be applied in the case, neither Jeremy nor Lead
Balloon is bound by the lease. As shown in Kelner’s case a company cannot ratify the
contract even after the incorporation as Lead Balloon did not exist at the time of the
formation it is not possible to ratify. Similarly like Black’s case Jeremy had not known
about non-incorporation which shows that he had no personal intention to be bound with
that contract. He had asked the receipt under the name of Silver Bullet which also shows
no intention of it.

The statutory law has a different approach. Unlike the common law Section 131(1) states
that the company becomes bound by the pre-registration contract if the company ratifies
the contract within in the reasonable time after the incorporation. Also s 131(1) still
applies to when the proposed company name is unavailable as long as the new company
is reasonably identifiable with the proposed name. Ratification is done when a company
confirms the pre-registration contract expressly or impliedly such as making a payment
for the contracted amount. Also statutory assumptions in s 129 apply in this case as well.

2. Lifting the Corporate veil:

Lifting the Corporate Veil:

Definition: Lifting the corporate veil refers to the judicial action of disregarding the
separation between a company and its shareholders, thereby holding shareholders
personally liable for the company's actions or debts.
2019 Companies Code Reference: Section Y of the Companies Code of 2019 provides the
legal framework for circumstances under which the corporate veil can be lifted, such as
fraud, improper conduct, or when the company is used as a mere facade to perpetrate
wrongdoing.
Case Law: Gilford Motor Co Ltd v Horne (1933) and Adams v Cape Industries plc
(1990) are examples where the courts lifted the corporate veil due to fraudulent activities
or improper conduct, holding the shareholders personally liable for the company's
obligations.

A corporation is an artificial legal person that exists independently of its individuals

members (Pheng, 2004, p. 344). As such, the company’s assets, debts and obligations are
not the assets, debts and obligations of its shareholders, directors and employees.
Similarly, in group enterprise, the parent (holding) and its susidiary company are two
separate legal entities which have distinct, independent legal rights and liabilities of the
others.

Effects of incorporating a company pursuant to section 16(5) of the Company Act 1965
and the certificate of incorporation issued by the Registrar such as a corporate body,
power of performing all functions of an incorporated company, capability of suing and
being sued, perpeptual succession, limited liability of its members, ability to acquire,hold
and dispose property, are all depended on the corporate’s separate personality.

This principle was first established by the English House of Lords in Salomon v.
Salomon & Co. Ltd. [1] and well accepted as part of Malaysian company law. The brief
facts are as follow: Aron Salomon had for some year been a prosperous leather merchant
and wholesale boot manufacturer running the business as a sole trader. He then decided to
transfer the business into a limited liability company. The subcribers of the memorandum
include Salomon, his wife and five of his children. Besides, he also received for his
business debentures and continued to carry on the business as before. A year after, the
company went bankrupt and was put into liquidation. There was just enough assets to pay
off the debenture holders including Salomon himself. The unsecured creditors claimed
that the company was “mere nominee and agent of Salomon”. Salomon should be ordered
to pay compensation for the company against its debts other than Salomon himself. The
Lord Macnagthen held that “though it may be that afer incorporation the business is
precisely the same as it was before, and the same persons are managers, and the same
hands receive the profits, the comany is not in law the agent of the subcribers or trustee
for them” [2] (Chan & Koh, 2006, p.92-93; Pheng, 2004, p.345-348). Therefore, even
though a person held almost all shares and debetures, and controlled the compay’s
oporations, one was entitled to be deal with the company as a separate legal existence
from oneself. As such, one is treated as other secured creditors who have priority over
unsecured creditors in the event of the company being insolvent (Ohrenstein, 2010).

Hence, a company is a artificial legal person distinct from its individual members.
Corporation or subsidiaries, not its directors or individual members or the parent
corporation, is liable for its own contract made, torts commited or debts inccurred (Shub,
2006). This principle is regarded as the veil of the corporation.

A primary advantage of the corporate form of organization is to achieve the doctrine of

limited liability, which serves as the “corporate veil” to its members, due to separate legal
entity characteristic of a corporation. The corporate veil shields the members from
personal liability for corporate debts, taxes and obligations. In the event of the company
is wound up, shareholders’ losses are limited to their contributions to the company’s
capital in the form of decreased value of the shares and any loans made to the company
(Shub, 2006). In othe word, owing to corporate veil, shareholders can asume less
personal risk of financial ruin if the company flounders and falters. None of individual
members are personally liable for actions taken on the behalf of the corporation, and
parent corporate are not liable for actions of its subsidiaries (Howell, 2007). By constrast,
the sole proprietor or the partnership owner, which is regarded as one and the same legal
entity with one’s business in the eye of law, is subject to personal risk and unlimited legal
responsibility (Liability Protection). Therefore, many sole proprietorship or partnership
owners decide to convert the business into a company.
The benefit of limited liability which is also known as a corporate veil has become highly
significant in today’s litigious society. Without such limited liability, a corporation can
not raise large amounts of capital by investors and get enhanced capacity for borrowing
to secure financing in order to obtain more efficient operation.

Lifting the Corporate Veil

2.1. Concept.

Lifting the corporate veil is a method applied of courts to look beyond, and disregard the
independent corporate legal personality, holding liability on owners, managers and staff
for the obligations of the corporation or on Parent Corporation for the obligations of a
subsidiary (Howell, 2007; Ohrenstein, 2010).

2.2. Rationales for lifting the corporate veil.

Although the principle that a company is an independent legal personality separate from
its individual members can derive benefits [3] , is still open to abuse, and used as a means
to circumvent the law. The corporate form can produce exceptionally inequitable or
unjust results in certain circumstances. Hence, in the quest of finding fair solutions to
such problems, several exceptions to this principle have evolved under the legal concept
of “piercing the corporate veil” (Chan & Koh, 2006, p.98; Pheng, 2004, p.349; Romelio
Hernández).

2.3. When to lift the corporate veil

It has been suggested that the doctrine of piercing the corporate veil, which is a exception
to the principle of limited liability, may be invoked in a wide range of situations, may be
not just depended on a single factors, and determined on a case by case basis. However,
there are three substantive bases in general that plaintiffs may show in any given case to
penetrate corporate veil of a corporation, access its shareholders’ assets as well as impose
liability upon shareholders, officers or the corporation for the corporation’s obligations
and tortious acts. First, the corporation does not exist separately from its shareholders or
its parent corporations. D.H.N. Food Distributors Ltd. v Tower Hamlets London Borough
Council [4] where a parent company DHN owns all the shares of the subsidiaries and
completely controlled and directed them, the court held that the parent corporation and its
subsidiaries should be treated as one (Chan & Koh, 2006, p.116) addresses this basis.
Second, the corporation is run and controlled as a mere sham or alter ego of a controlling
shareholder or another corporation for illegal or criminal purpose. A Malaysian case
illustrating this point is Tan Lai v Mohamed Bin Mahmud [5] where a company was
incorporated with 25 percent of the shares owned by A and B, and the remainder owned
by C, in order to work sawmill licence of A and B which was nontransferable and
technically should not have been worked by the company. Since the company was
virtually wholly owned by C and completely managed by him, A and B were not entitled
to have operated within the terms of the licence, and the transfer of the licence to the
company was illegal (Collier, 1998). Third, the misconduct caused the plaintiff’s asserted
injury. (Mccloskey, 2008; Sweeney, 2009).