The Relevance of Salomon v Salomon in Malaysia

July 30, 2017 Philosophy
  1. Promoter

Happy Sdn Bhd looking an issue whether the pre-incorporation contract which entered by Promoter is valid or nothingness. Promoter is person who originates the thought of get downing the concern, plans the formation or advancing a company as per subdivision 16 ( 1 ) Calcium 1965 and convey to existence. Fiduciary responsibilities of Marion as Promoter is, should move with extreme good religion and avoid doing secret net incomes out of their publicity( Malayan Institute of Accountants ( MIA ) , 2012 ).

Under visible radiation of common jurisprudence, the pre-incorporation contract that involved by the Promoter is null because, harmonizing to Section 16 ( 5 ) Calcium 1965, a company would non hold legal capacity to map as a legal entity to come in into a contract before incorporation( Arjunan, 2006 ). Therefore, the pre-incorporation contract is non valid and the booster will be personally apt. It is reflected in the instance ofKelner V Baxter ( 1886 )where Promoter of the hotel goes into pre-incorporation contract, purchased and consumed the stuff. During settlement, the Promoter argued that he is non apt. However, it was held that the company was non-exist and the Promoter will be personally apt for the contract(Malayan Institute of Accountants ( MIA ) , 2012 ).

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Based on statue jurisprudence, pre-incorporation contracts that occurred may be ratified after its formation where the company will be bound by it upon such confirmation harmonizing to subdivision 35 ( 1 ) Calcium 1965. In Malaysia, the jurisprudence allows to sign any contract that entered into or behalf of its incorporation. Happy Sdn Bhd may jump and entitled to the benefit of the contract by Marion as if it had been existence at the day of the month of the contract. Once ratified under subdivision 35 ( 1 ) , it relates to day of the month of original contract made, any subsequent that cause to be sued will be face by the company merely( OBAYEMI and ALAKA, 2014 ). Case ofCosmic Insurance Corpn Ltd V Khoo Chiang Poh 1981explains in the fact where Mr.khoo Chiang Poo was appointed as the pull offing manager and enter into pre-incorporation contract. Upon incorporation, it was stated in AOA that Mr. Khoo Chiang Oh shall be the pull offing manager for life unless he resigns. The tribunal upheld that confirmation of pre-incorporation contract did non impact or annul the assignment Khoo as manager( OBAYEMI and ALAKA, 2014 ).

Happy Sdn Bhd have rights to take to non sign the contract that have been entered by Marison. Thus, Marison will be personally bound by the contract but he may except his personal liability by express understanding harmonizing to subdivision 35 ( 2 ) Calcium 1965 as reflected in the instance ofKelner V Baxter 1886 above.Assuming, the contract made by Promoter has struggle of involvement, therefore the company can take non to rectify the contract. This is reflected in theCase of Perman Sdn Bhd 5 European Commodities Sdn Bhd( 2006 ).It was held that first suspect had ratified the the joint venture understanding and there was no grounds to propose the contrary express understanding as per subdivision 35 ( 2 ) , therefore the determination was the contract to be held personally and non the company(Malayan Institute of Accountants ( MIA ) , 2012 ).


  1. Separate legal entity

The issue that confronting is whether Adam and Jimmy can claim the insurance for damaged goods in recent fire incident.

The company is an unreal legal individual that has ‘born’ out of procedure of jurisprudence and it has its ain rights, responsibilities, liabilities, legal entity and legal position similar to a populating individual. The construct is applicable in both common and statue jurisprudence. Based on common jurisprudence, a company has separate legal entity from its members. The philosophy of separate legal entity has mirrored in the instance of Salomon V Salomon where the House of Lords held that a company at jurisprudence is a different individual wholly from endorser to the memoranda. Thus, members non allowed to claim insurance on the belongings that owned by the company as legal entity(, 2011 ).

In the position of statue jurisprudence, Happy Sdn Bhd is seen as separate legal entity or individuality and independent of the individuals, Jimmy and Adam who are members of the company. It is described in subdivision 16 ( 5 ) Calcium 1965 which explains the consequence of incorporation from the day of the month incorporate where a company becomes body corporate with capable of exerting all the maps such it can be Sue or being sued, has ageless sequence and common seal with power to keep land(, 2011 ). This was affirmed in the taking instance ofABDUL AZIZ BIN ATAN & A ; 87 ORS V LADANG RENGO MALAY ESTATE SDN BHD ( 1985 ) 2 MLJ 165where the issue was the tribunal had to find whether a alteration of employer took topographic point as the fact was all the stockholders sold and transferred their full retentions of the company to a certain purchaser. It was held that an integrated company is a legal separate legal entity and it is distinguishable from its stockholders(, 2006 ).

As explained above, Happy Sdn Bhd has separate legal entity since it is incorporated in January 2015 from Adam and Jimmy although there are stockholders and managers of the company. In the instance of Happy Sdn Bhd is a limited company, Adam and Jimmy as members may bask limited liability in the sense that their liability to lend to the assets of the company in the event of a settlement is limited to the sum.

Therefore, the rightful proprietor to claim the compensation of close to RM100,000 from the Insurance Company is Happy Sdn Bhd. The company can hold ain belongings by itself and any amendss to the belongings can be applicable for compensation. Adam and Jimmy does non allowed to utilize or take the compensation sum for personal usage as the sum belong entirely to Happy Sdn Bhd. The state of affairs about parallel toMacaura V Northern Assurance Co Ltd ( 1925 )where the insurance companies was non apt and merely the company ‘Macaura’ as a legal individual has the needed insurable involvement. Stockholders have no legal or other involvement that just in their company’s belongings. It shows that jurisprudence treats a company as being separate individual from its members and those who manage its operation( Advancement Wisdom Emblem, 2011 ).

  1. Doctrine of Ultra vires

Happy Sdn Bhd facing an issue whether the dealing with Grape Rocks Sdn Bhd is ultravires or intravires.

Ultra vires describes as ‘ultra’ defined as beyond while ‘vires’ bases for power( Gilani, 2011 ). Overall, extremist vires defines as beyond of power in act that carried out by a individual of organic structure. It is beyond the capacity of a company. While, intravires is resistance to ultravires where the activity of a company is within the powers or authorization of the company as per stated in Memorandum of Articles ( MOA ) and Articles of Association ( AOA )( Gilani, 2011 ). Harmonizing to Section 16 ( 1 ) Calcium 1965, every company incorporated obligatorily will hold MOA which is public papers that contains first director’s name, nature and object of the company’s concern. While Articles of Association ( AOA ) is internal ordinances which can non be override by MOA.

By the manner of common jurisprudence, any dealing that going from its objects of the company is entirely null. The nature of Happy Sdn Bhd is merely industry of plastic bottles and the trading soft drinks would non be in object clause and articles of incorporation. Therefore, any dealing made with Grape Rocks for spread outing company’s concern will be ultravires and the dealing is null and can non be ratified. The state of affairs is reflected in the instance ofAshbury Railway Carriage and Iron Co Ltd V Riche 1875, where it was held that the contract entered by manager is non in the range of company and therefore was physical( Gilani, 2011 ).

In Malaysian context, subdivision 20 ( 1 ) of CA 1965 explains the alteration that has been done to doctrine of ultravires. The subdivision states that the fact that the company do non hold the capacity to come in into a peculiar dealing is inappropriate and in contrast to 3rd parties. The event and the subdivision causes consequences of, extremist vires dealing are valid and adhering upon the company and 3rd party if it falls between 3 classs under subdivision 20 ( 2 ) ( a ) , ( B ) , ( degree Celsius )( Malaysia Institute Accounting, 2009 ).

In relate with Happy Sdn Bhd, their declaration to spread out the company concern is valid and adhering upon the company. However, one of their unsecured bond holders objected to the determination. Although extremist vires dealing valid, it does non intend that doctorine of extremist vires is non applicable in Malaysia where it’s intent to protect creditors every bit good. Therefore, the unsecured bond holder can object the determination of managers and use for the injunction to halt them successfully under subdivision 20 ( 2 ) ( a ) if Happy Sdn Bhd does non move within the range of the object clause and provided the contract must be an executory contract. Doctrine of extremist vires, the attack taken by CA will give security to commercial minutess to 3rd parties while continuing the rights of unsecured bonds and stockholders to keep the managers from affecting extremist vires dealing( Aiman Nariman Mohd. Sulaiman. , Zuhairah Ariff Abd. Ghadas. and Khan, 2011 ).

It is must take into consideration by unsecured bond holders that, if the particular declaration has been approved under subdivision 23 CA 1965 or contract between Happy Sdn Bhd and Grape Rocks Sdn Bhd is signed before expostulation, unsecured bond holder can non be apply for expostulation and has to be followed as per subdivision 20 ( 1 ) where extremist vires in nature may the dealing has already taken topographic point, therefore the given has to follow because no farther account given in the subdivision and it will be intravires. The instance ofPublic Bank Bhd v Metro Construction Sdn Bhd [ 1991 ]held that 3rd party was non extremist vires in the object clause of defendant company and presuming the 3rd party charges was extremist vires, subdivision 20 ( 1 ) Calcium 1965 could salvage them(, 2009 ).

  1. Directors

The issue is whether Jimmy has rights for allowed to vacate his station as manager.

Jimmy faced with hard determinations where want to distance himself from the actions of the board and leads to surrender. Therefore, Jimmy can vacate every bit manager as the regulating proviso subdivision 122 ( 6 ) provides that the Jimmy can vacate anytime and does non necessitate blessing from the company but there are restriction where the figure of managers in company can non be minimum of two. The affair is reflected in instance ofGlossop V Glossop 1907,where Neville J explained that manager can release his office anytime with proper notice and the surrender is non dependent of any credence of the company( Kiong, 2015 ). Based on subdivision 122 CA 1965, every company should hold atleast two managers and the first managers shall be named in the memoranda or articles of the company( Company Directors ‘ Duties, n.d. ). Therefore, Happy Sdn Bhd merely have two managers which is Adam and Jimmy and the company merely have minimum figure of managers. Since Jimmy is vacating, the company has to happen for new manager within six months from the surrender. Failure to make will do other officer, Adam will go personally apt for the committednesss of the company.

B ) Decision of Salomon v Salomon & A ; Co Ltd ( 1897 ) still relevant today


There are people mistaken that the managers or stockholders of a company is the company itself. The effects causes instance of Salomon v Salomon & A ; Co Ltd ( 1897 ) which introduced new foundation to the universe which is ‘Doctrine of Separate Legal Entity’ from its most of import determination of all time made by the English tribunal in associating company jurisprudence. In other words, it is known as ‘Veil of Incorporation’ . The jurisprudence is still applied until today and it plays major function in the corporate universe where every company follows and signifier as pillar of modern company jurisprudence and landmark for current issues or instances relate with separate legal personal entity. The determination of Salomon instance still historically important and relevant today through philosophy of separate legal entity which still exist and followed by corporations under visible radiation of jurisprudence.

In the Salomon instance, House of Lords held that a company incorporated under the Companies Act has its ain legal entity and position and independent from its members( Forji, 2007 ). Therefore, despite Mr. Salomon controlled the company, it was treated the company runing the concern in its ain right and separate from accountant which defines the company as unreal individual. In add-on, the legal deduction from the determination is a company contract with its commanding member and litigate. It is explained in the instance ofLee V Lee’s Air Farming Ltd ( 1961 )which held that Lee should be a retainer of his company even as exclusive manager as he and his company are distinguishable legal individuals by Privy Council( Advancement Wisdom Emblem, 2011 ). The determination relevant as the companies at current epoch besides following the rule of being sued and able to action on its ain name, ageless being, enter into contracts and purchase or sell assets under its ain individuality.

Besides that, limited liability is effects of independent corporate personality which of a company enjoys until today. The limited liability makes the determination more relevant as it’s protect investors from impacting personally although confronting hazard of losing investing when a company does unlawful trading particularly investors whom does non take part in day-to-day footing( Karasz, 2015 ).

The determination of Salomon instance still relevant today because its provide benefits in term of efficiency where a concern treated such as partnership and leads to make contract in a really complicated manner. But, Salomon rule helps by concealing nature of rights and duty of single spouses and protect them as a company can include them entirely in contract under its name. In add-on, the determination benefits those personal one from position of those human existences in a company( Forji, 2007 ). For a exclusive bargainer who wants to change over into limited company, it may assist them by protecting their ain personal belongings from the failure concern.

Besides that, corporate veil straight acknowledged through Salomon V Salomon 1897 which it is described as being the separation between a company and its members( Puig, 2000 ). Corporate head covering jurisprudence created to protect separate legal entity and avoid it going as powerful arm in the manus on person who determined to carry on fraud and get the better ofing creditor’s rightful claim. There are fortunes where the head covering of incorporation between the company and members lifted to deny stockholders the protection that limited liability usually provides for the member who run the company take advantage by concealing behind the corporate from the unlawful trading committed( Ramsay and Noakes, 2001 ). The effects of Salomon determination creates corporate head covering which one of the factor that leads the determination of Salomon to be relevant boulder clay today. The instance ofPioneer Concrete Services Ltd v Yelnah Pty Ltddefines the corporate head covering construct that although a company formed as separate legal entity, tribunals will on occasions to look behind the legal personality to the existent accountants( Forji, 2007 ). Finally, the determination is relevant because a company exist continuously as it is protected by jurisprudence where as an unreal individual and the individual has no decease(, 2012 ).


In decision, the determination ofSalamon V Salomon & A ; Co Ltdmostly neutralised by joint legislative and by judial action. Therefore, the determination is relevant boulder clay today to hereafter.


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