Lecture 2-LIFTING THE VEIL OF

INCORPORATION
by
Darmar Pathmanathan
LLB(hons) London, LLM(London)(with merit),
Grad ICSA, Dip Arb., CLP

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• A company is a distinct legal person entirely different from the
members of that company. This principle is referred to as the 'veil
of incorporation'
• This principle was found in Salomon v Salomon & Co. Ltd. (1897)
Although the company was controlled by Salomon, who was the
controlling director and majority shareholder, the court held that
the company was a separate legal entity and was solely
responsible for its own debts.
• The issue arises when the company’s business ends up being a
failure. The value of the assets was insufficient to pay off both Mr
Solomon and other creditors.

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• Assets: $6000
• Liabilities
❖ Solomon as debenture holder: $ 10 000
❖ Unsecured creditors: $7000
The unsecured creditors claimed priority over
Solomon as the company and Solomon were
seen as one. The courts held that the assets
must be utilised in payment of the debentures
first in priority to unsecured creditors.
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The very foundation of company law is that:
• A company is regarded as an artificial legal
person.
• It is a body corporate being separate from its
members.
• Case: Salomon v Salomon & Co Ltd [1897].

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 LIFTING THE VEIL OF
INCORPORATION

Objective
Although the principle of separate legal entity and veil of
incorporation is an advantage that protects the interest of its
shareholders, the law has created exceptions to this general rule
because there have been situations in the past where this principle
was abused by those who incorporated the company to commit fraud
etc.
The following section elaborates on case law and statutory
exceptions to this principle.

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• The veil of incorporation basically is to protect the shareholders
from personal liability to creditors. Thus the veil protects the
members’ personal assets from lawsuits.
• Although the company is a separate legal entity from its members,
in certain situations under common law and statute, this principle
may be disregarded. This is referred to as the ‘lifting of the veil of
incorporation’.
• When the court lifts the veil of incorporation this means the court
no longer regards the company and its members as separate. By
doing so the law can make a company officer or member
responsible for the company‘s liability.
• The courts usually would not violate this principle but in certain
circumstances the courts is prepared to do so where justice
requires that the corporate veil be lifted. 6
 LIFTING THE VEIL OF INCORPORATION-JUDICIAL
EXCEPTION (CASE LAWS)

Jones v Lipman
• In the case of Jones v Lipman, Mr Lipman had
entered into a contract to sell certain land to Mr
Jones.
• After changing his mind, , he transferred the land
to a company that he controlled.
• The court found that the company was a sham
had been used by Mr Lipman solely for the
purpose of evading the transaction or legal
obligation or agreement with Mr Jones.
• The veil of incorporation was lifted.
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Gilford Motor Company v Horne
• Mr Horne set up a new company and began to attract or solicit his
former company’s clients
• This was against his service agreement.
• The new company was a “mere cloak or sham allowing him to go
against the contractual obligation he had with his former
company.
• The veil of incorporation was lifted.

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Smith, Stone & Knight Ltd v Birmingham Corporation
(1939):
• Smith, Stone & Knight (SSK) owned some land, and a
subsidiary company operated on this land.
• Birmingham Corporation(BC) issued a compulsory
purchase order on this land.
• Since the subsidiary company did not own the land, BC
claimed they were entitled to no compensation.
• The courts held that the subsidiary company was an
agent of the parent company and BC must pay
compensation to the parent company.
(BC is the local authority)
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Hotel Jaya Puri Sdn Bhd V National Union Bar & Restaurant Workers
• The plaintiff in this case was the holding company and a restaurant
within its premises was a subsidiary company.
• The workers in the restaurant were retrenched and the issue before
the court was whether the holding company was liable to pay.
• The court held that the holding company had to pay the
compensation. This was because the hotel and the restaurant were
inter-dependent –where a number of senior officers such as the
managing director and secretary were common to both the hotel
and the restaurant.
• The corporate veil was lifted because of the demands of justice

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Re FG (Films) Ltd:
• In Re FG, FG wanted to operate and register its films as
British films for tax purposes.
• Thus, it incorporated a British company, 90% of shares
owned by the US company and the remaining 10% in
an English man.
• It was held on the facts that the British entity acted in
all purposes and occasions as the nominee and agent
of the US Company that had incorporated it.
• Thus, the corporate veil was lifted because court
looked into actual shareholders and not just the
company as registered in England.

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Re Bugle Press Ltd (1960),

• The Court had lifted the veil of the new company and disallowed the bid.

• The court lifted the veil of incorporation of J&S Holdings Ltd

• It was held that J&S Holdings Ltd was a sham.

• It was incorporated to enable the majority shareholders of J&S Holdings Ltd,

namely J and S, to expropriate from the majority shareholder, that is,T.
Prest v Petrodel Resources Ltd (2013):
The judgment does contain clear guidelines (albeit obiter) on
when a company‟s corporate personality may be disregarded.
The guidelines are very restrictive. Lord Sumption explains that
the only instance when the courts can disregard a company‟s
corporate personality is where the evasion principle‟ applies.

This is where “a person is under an existing legal obligation or

liability or subject to an existing legal restriction which he
deliberately evades

or whose enforcement he deliberately frustrates by

interposing a company under his control”.

He also explains that piercing the veil is a remedy of last resort

and should not be used unless no other means exists to reach
the required outcome.
 STATUTORY EXCEPTION - Lifting of veil of
incorporation by statute.

Section 540. (1)

• According to this section, If in the course of the winding up of a
company or in any proceedings against a company the Court finds
that the business of a company has been carried on with intention
to defraud creditors or for any fraudulent purpose it may declare
that any persons who were knowingly parties to carrying on the
business in this fashion shall be personally liable for the debts of
the company as the court may decide

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• Section 123 CA 2016 This section prohibits a company from giving financial
assistance for the purchase of its own shares or shares of its holding company. This
is a prohibited transaction and any officer of the company who authorizes such a
transaction will be convicted and have to pay compensation to the company or
another person who has suffered loss as a result of the contravention.
• Section 244 and 247 CA 2017 Although a holding company and its subsidiary are
separate entities, s 247 provides that the directors of every holding company
should take steps to ensure that the financial year of its subsidiary coincides with
its own financial year. This must be done within two years of the commencement
of the holding company-subsidiary relationship. The purpose is to enable group
accounts to be prepared.
• Section 539(3) -If in the course of winding up of a company or in any proceedings
against a company, an officer of the company enters into the contract to borrow
money knowing that the company is unable to pay the debt, that officer commits
an offence and shall, on conviction, be liable to imprisonment for a term not
exceeding five years or to a fine not exceeding five hundred thousand ringgit or to
both.

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 INCORPORATION OF A COMPANY
UNDER THE 2016 ACT
The Companies Act 2016 introduces a super form for
incorporation.
What is actually the super form?
• The super form is an electronic template which will
replace the various form currently required for
incorporation process (i.e. Form 6, Form 48A and
M&A 7 under the previous Companies Act 1965).
• The form is accessible through the MyCoID 2016
Portal.

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 Application for incorporation
• Section 14. (1) - A person who desires to form a company shall
apply for incorporation to the Registrar.
• Section 14. (2) - A company shall not be formed for any unlawful
purpose.
• Section 14. (3)- The application for incorporation under this
section shall include a statement by every person who desires to
form a company containing the following particulars:
• the name of the proposed company;
• the status of whether the company is private or public;
• the nature of business of the proposed company;
• the proposed address of the registered office of the proposed
company;
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• the name, identification, nationality and the ordinary place of
residence of every person who is to be a member of the company
and, where any of these persons is a body corporate, the
corporate name, place of incorporation, registration number and
the registered office of the body corporate;
• the name, identification, nationality and the principal place of
residence of every person who is to be a director;
• the name, identification, nationality and the principal place of
residence of the secretary, if any;

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• in the case of a company limited by shares, the details of class and
number of shares to be taken by a member;

• in the case of a company limited by guarantee, the amount up to

which the member undertakes to contribute to the assets of the
company in the event of its being wound up; and

• any other information as the Registrar may require.

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 Registration for incorporation
Section 15. states that If the Registrar is satisfied that the
requirements of this Act as to the application for incorporation are
complied with and upon payment of the prescribed fee, the Registrar
shall—
• enter the particulars of the company in the register;

• assign a registration number to the company as its company

registration number; and

• issue a notice of registration in the form and manner as the

Registrar may determine.

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• The notice of registration is conclusive evidence
that the requirements of this Act in respect of
registration and matters precedent and incidental
to such registration have been complied with and
that the company is duly registered under this
Act-S 19 CA 2016
• Upon an application by a company and on
payment of a prescribed fee, the Registrar may
issue to the company a certificate of
incorporation in the form and manner as the
Registrar may determine-S17 CA 2016

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Power to refuse registration of incorporation
• Section 16(1) - The Registrar shall not register an application
unless he is satisfied that all the requirements of this Act in
respect of the registration and any matter relating to the
registration has been complied with.
• Section 16 (2) - The Registrar shall refuse to register the
application of a proposed company where he is satisfied that the
proposed company is likely to be used for an unlawful purpose or
for purposes prejudicial to public order, morality or security of
Malaysia.

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 CONSTITUTION
• Companies will no longer have its Memorandum of Association
and Articles of Association. These will be replaced by a document
called the Constitution. A company constitution is a
core corporate governance document that governs the
management of your company.
• Section 32(1) provides that a company may adopt a constitution
for the company and the adoption shall be by way of special
resolution.
• Companies limited by shares can have the option of adopting a
Constitution or not. However, a company limited by guarantee
must have a Constitution. –Section 31(1)
LEGAL EFFECT OF CONSTITUTION
• Section 32(3) provides subject to the provisions of this Act, the
constitution adopted under subsection (1) shall be binding on the
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company, its directors and its members.
• If a company does not have a constitution, the
rights, powers, duties and obligations of the
company, directors and shareholders as set
out in the Companies Act automatically
applies- Section 31

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Contents of a company’s constitution
Section 35(1) - subject to the provisions of this Act, the
constitution of a company may contain provisions relating to—
• the objects of the company;

• the capacity, rights, powers or privileges of the company if the

provision restricts such capacity, rights, powers or privileges;

• matters contemplated by this Act to be included in the

constitution; and

• any other matters as the company wishes to include in its

constitution.

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• Section 35(2) -if the constitution sets out the objects of a
company—

• the company shall be restricted from carrying on any

business or activity that is not within those objects; and

• the company shall have full capacity and powers to

achieve such objects, unless the constitution provides
otherwise.

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 Company may amend the
Constitution

• Section 36. (1) states that a company having a constitution

may, by a special resolution, alter or amend its constitution
unless the constitution itself prohibits the alteration or
amendment.

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 Company limited by guarantee shall
have a constitution

Section 38. (1) - A company limited by guarantee shall have a

constitution.

Section 38(3) - The constitution shall state—

• that the company is a company limited by guarantee;
• the objects of the company;
• the capacity, rights, powers and privileges of the company;
• the number of members with which the company proposed to
be incorporated;

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• matters contemplated by this Act to be included in the
constitution; and
• any other matters as the company wishes to include in its
constitution

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S45 (1) A company limited by guarantee shall be formed with the following
objects:

– providing recreation or amusement;

– promoting commerce and industry;
– promoting art;
– promoting science;
– promoting religion;
– promoting charity;
– promoting pension or superannuation schemes; or
– promoting any other object useful for the community or country.

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 COMMON SEAL

A company can choose to have a common seal.

A company that does not have a common seal
can still enter into a contract.

A company seal (sometimes referred to as the

corporate seal or common seal) is an official seal
used by a company

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