Company Law and the Corporate Veil

August 5, 2017 Law


As the twenty-four hours company is formed, it can be said that the company is “incorporated” . As the company singularity is that it provides for effectual separation of resources and directions of its resources and it is further compounded on the fact that the proprietor of the capital can restrict his or her liability to the 3rd parties. Therefore the company is recognized as a separate entity and it is treated in its ain capacity. In nowadays concern companies, it can be seen that companies have both advantages and disadvantages in mensurating the limited liability of the stockholders on the footing that the company is apt for its debts and duties. Therefore, double-edged blade is created which means it has both good and bad elements.

In this assignment, inside informations about the philosophy of separate legal entity will be analyzed. Besides statements of characteristics of company as separate legal entity and fortunes the head covering of incorporation will be lifted will be analyzed with mention to some instances.

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Doctrine of separate legal entity

In company jurisprudence of Malaysia, a company is treated as a separate legal entity from its members constituted in it which is its stockholders and managers. This is the philosophy of separate legal rule.

The company is a different separate organic structure from its member. Therefore, the members of the company are non apt for the company debts. For case, when a company bend into a contract, the company itself will personally liable for the contract instead than the stockholders and the managers. Therefore, a company is a corporate organic structure. A corporation is an unreal legal individual that exists independently of the persons who at any given clip are the members of the corporate organic structure. This rule was established by the House of Lords inSalomon v Salomon & A ; Co Ltd[ 1 ] .

The regulation of Agency

An bureau is a relationship where one individual consents or is deemed to hold consented that the other individual should move on its behalf so as to impact its dealingss with 3rd parties.

Features of Separate Legal Entity

At the clip the company is incorporated, it is a separate legal individual, it brings forth some consequence which can be the characteristics of it. Under subdivision 16 ( 5 ) of theCompanies Act 1965provinces that, one time a company had been incorporated, the company had all the ability as an integrated company. For cases, it is means that the company can bask its right and map as a legal individual. Company that incorporated is a legal personality that is created and recognized by the jurisprudence as stated bySalleh Abbas F.J in Tan Lai V Mohamed bin Mahmud.

When a company registry under Companies Act, it becomes vested with corporate personality which is an independent legal individual and separate from its members. For case, the company is a legal individual. InSalomon v. Salomon & amp ; Co. Ltd. ( 1987 )[ 2 ] , unbarred creditors claimed that the company ne’er had an being of independent although it was incorporated. They claimed that it was Salomon himself merchandising under another name, but the House of Lords held Salomon & amp ; Co. Ltd. must be regarded as an independent individual from Salomon. This is because of the fact that the company was non function as an agent for the member. Therefore, Salomon and the others are mere endorsers of the company although he owned all the issued portions. Hence, Salomon could implement its rights against the company as a secured creditor.

Furthermore, the company besides has the ability to action and be sued in its ain name. Therefore, a company can do legal action to implement its right. It was established in the instanceFoss V Harbottle[ 3 ] where action brought by the members of the company made an hurt complain towards the company and it was fail. Therefore the member could non take action on behalf of the company.

Besides, a company has ageless sequence which means members may fall in and go forth, but the company will go on travel on. When a company become incorporation, it will go on operate until it is dissolved harmonizing to theCompanies Act 1965. Under the instance ofRe Noel Tedman Holdings Pty Ltd[ 4 ] , the tribunal allowed the representative personal of the deceased to name the managers of the company so that the managers could let the transportation of the portions to child. This proves that although the stockholders had leave but the company is still go outing and go on travel on.

Other than that, a company besides has ability to ain belongings on its ain name. Harmonizing to subdivision 16 ( 5 ) a company has power given to have personal land and other types of belongings. While company is separate legal individual from its member, the member has no legal right and involvement with the belongings and it is belongs to company. In instanceMacaura V Northern Assurance Co. Ltd[ 5 ] , Macaura owned a tree plantation which was covered by an insurance policy. Subsequently he sold the plantation to a company which he was the lone stockholder. After the sale, Macaura continued to see the plantation in his ain name. A fire broke out and the plantation was destroyed. Macaura so attempted to claim on the insurance policy but the insurance company refused to pay. The issue was whether Macaura had an insurable involvement at the clip of the loss. It was aid that the insurance company was right in non paying. The plantation company was a legal entity in its ain right, separate from its stockholders.

Other than that, in a corporate organic structure, the stockholders of the company can bask limited liability. While a company is a separate legal entity, the stockholders are non apt for the debts and the liability is limited by portions. Therefore, creditors have no rights to take any legal action against the stockholders. In instanceYe Yut Een 1978[ 6 ] , the manager of the company is non apt for the company’s debt. It is the company who had non complied with the processs related to the retrenchment benefits.

Raising The Veil of Incorporation

Although the company has privilege as separate legal entity, it must non be used for any improper or illegal concern intents, in instance a fraudulent or dishonest usage is made of the legal entity, the concerned persons will non be allowed to take the shelter of the corporate personality. The tribunal will ignore the corporate head covering to see the existent individuals behind it. By and large, the jurisprudence will non travel behind this head covering of incorporation to look at the rank of the company. But the tribunals will ‘lift the corporate veil’ in some exceeding instances.

Salomon v Salomon & A ; Co Ltdinstance have decided that the members of the company are non apt for any contract that contracted by the company. This will do they may hold a opportunity concealment behind the head covering to victimize the creditors and other parties that contracted with the company.

The tribunal will pierce the corporate head covering by using the rule known as ‘piercing the corporate veil’ . When there is no entity separate from members, the tribunal will pierce the corporate head covering and take action. After that the tribunal will do the company and its members apt for any breach of contract.

The head covering of incorporation can be lifted in harmonizing to state of affairs provided under statutory proviso and by judicial reading under the common jurisprudence. For case, subdivision 36,Companies Act 1965provinces that if the figure of members of a company is reduced to below two and its carries on concern more than six months, the individual who is a member of the company during the clip that is so carries on concern after those six months, and is cognizant of it, the individual is personally apt for all the debts that the company contracted after those six month and he may be sued therefor.

Harmonizing to the subdivision 304 ( 2 ) ,Companies Act 1965, together with the subdivision 303 ( 3 ) , provide that an officers who knowingly contract a debts on behalf of the company. It means borrow money and cognizing that that the company is most likely unable to pay the debt is guilty of an offense and on strong belief be made personally apt to pay that debt.

Under subdivision 304 ( 1 ) ,Companies Act 1965provides that when a company’s purpose is to intentionally victimize its creditors, the head covering of incorporation is lifted. In the class of the weaving up of a company or in any proceedings against a company it appears to the tribunal when hearing the application of the murderer or any creditor or contributory of the company that any concern of the company has been carried on with purpose to victimize creditors of the company or creditors of any other individual or for any deceitful intent, the tribunal may keep any individuals who were wittingly parties to the fraud personally responsible for all or any of the debts or other liabilities of the company as the tribunal directs.

Under subdivision 365 ( 2 ) ,Companies Act 1965provides that any payment of dividend non from net income is prohibited. Any payment made of dividends to stockholders is personally apt by the manager towards the creditors of the company when there are no net incomes available.

There are besides state of affairss where the tribunal thinks it is appropriate and it will raise the head covering of incorporation at common jurisprudence. The state of affairs whereby the head covering of incorporation is lifted where the company is moving as agent or spouse of the controlling or parent company. Group of the companies the jobs can be complex. Auxiliary ain and fund money of a concern has been held to make so as agent for the retention and parent company. So, keeping and parent company really runing concern. This is applied in instanceSmith, Stone and Knight Ltd V Birmingham Corporation ( 1939 )[ 7 ] .

Besides, the head covering of incorporation will be lifted when there is a group of companies, including keeping and subordinate company, the tribunal can raise the head covering and handle a company and its subordinate as one economic unit. In instanceDHN nutrient Distributors Ltd V Tower Hamlets London Borough Concil[ 8 ] , subordinate company owns a piece of land while the DHN which is parent company operated the concern on the land. The local authorization purchases the said land. The DHN claimed compensation for break. The local authorization refused to pay the compensation on the evidences that the land did non belong to DHN. The tribunal lifted the head covering of set up that DHN is connected with the subordinate company every bit treated as one economic unit, they did endure a loss as a consequence of acquisition from the local authorization and allowed to claim the compensation.

At last, raising the corporate head covering can besides help in the bar of fraud. In instanceAspatra Sdn Bhd & A ; Ors v Bumiputra Bank Malaysia Berhad ( BBMB )[ 9 ] , Lorrain Osman, one of the manager of Aspatra Sdn Bhd, was one time a manager of Bumiputra Bank Malaysia Berhad, must account for the secret net income he made in breach the fiducial responsibility. To avoid sensing Lorrain Osman had channeled the monies which is the secret net income he do into several companies that he controlled, one is the Aspatra Sdn Bhd. BBMB feared that the money Lorrain Osman took would go forth Malaysia and applied for an injunction. The head covering lifted to uncover that the assets of Aspatra Sdn Bhd belong to the Lorrain Osman and the injunction was accepted.


In decision, it clearly stated that the philosophy of separate legal entity have created double-edged blades to the stockholders of the company. Although it brings many characteristics to the stockholders but it besides have drawback towards the company itself and creditors in some state of affairs. Hence, there will be some defects of incorporation. However, raising the head covering of incorporation by the tribunal will cut down the defects of incorporation.


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