CORPORATE PERSONALITY
EFFECT OF INCORPORATION A company is considered incorporated at the moment it receives its notice of registration. The life of the company starts from the date on the notice. Section 18 (1) provides on the effect of incorporation: (1) Upon the date of incorporation specified in the notice of registration issued under section 15, there shall be a company by the name and registration number as stated in the principal register kept by the Registrar for this purpose. (2) Every person whose name is stated as a member in the application for incorporation and on the incorporation of the company shall be entered as members in the register of members, together with such other persons who may become members of the company from time to time, are a body corporate by the name stated in the notice of registration.
(3)
(4)
In the case of a company having a share capital, every person whose name is stated in the application for incorporation becomes the shareholders as specified in the application for registration. The person named in the statement as a director or a secretary, if any, shall be deemed to have been appointed to that office
Characteristic of a Registered Company Effect of incorporation: a. the company is a body corporate with the power of an incorporated co, . b. unlimited capacity -it may sue and being sued in its own name, - it may own or dispose any land or any property c. it has perpetual succession, d. the liability of the members may be limited. e. common seal f. control & management
Characteristics of a registered Company 1
2
3
4
Separate legal personality/entity Salomon v Salomon Co Ltd Lee v Lee’s Air farming
Ability to own property Macaura v Northern Assurance Co ltd
5
6
7
Common Seal Ability to sue and be sued Foss v Harbottle
Limited liability of shareholders
Control and management
Perpetual succession Re Noel Tedman Holding Pty. Ltd.
1. Separate legal entity – S 20(1)(a) The principle established by Salomon’s case. It is adopted in Malaysia through the case of Sunrise Sdn. Bhd v First profile (M) Sdn. Bhd & Anor [1996]. S 20(1) stated: “A company incorporated under this Act is a body corporate and shall have legal personality separate from that of its members”. XYZ Bhd. Corporate Veil Shareholders Officers
Salomon v Salomon Co Ltd The co issued 20,000 L1 share + L10,000 Debenture
Mr Salomon (sole trader in manufacture boots and shoes Biz transferred for L39,000
Salomon = shareholder & secured creditor
- Formed a company Owed L10,000
Salomon & Co. Ltd Salomon – 1 share Wife – 1 share 5 children – 1 share each
Insolvent – only L6,000
Owed L7,000 to other unsecured creditor
Salomon’s case The unsecured creditor raised 2 arguments: • Salomon was still the owner of the business. Therefore he is liable for its debts. •The co was irregularly formed because all the s/holders were nominees of Salomon. Therefore the co were one and the same. So Solomon is liable. Held by the House of Lord: that Salomon and his co were 2 separate person. Therefore: •The biz was owned by and its debts were liabilities of the company and not of Salomon personally. •Salomon was also be a secured creditor with enforceable rights against the company in that capacity.
Salomon v Salomon Co Ltd.(cont) Lord Macnaghten observed: “When the memo is duly signed and registered, the subscribers are a body corporate...the company is at law a different person altogether from the subscribers to the memo and although it may be that after 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 company is not in law the agent or trustee for the members.�
Effects of separate legal entity •
Members cannot be made liable for the debts/liabilities of the company. Only the company is liable.
•
A company can make contract with its own members.
• A company has ability to sue and be sued in its own name for any wrong.
• A company has ability to own property in its own name. Shareholders have no proprietary interest in those assets. • A company’s existence will not be affected by the death of its members.
2. Perpetual succession - S 20(1)(a) • In a partnership, the death of a partner usually brings the life of the partnership to an end (unless agreed otherwise). The situation is different with a company. • This is because upon incorporation, a company is a body of perpetual succession. • This means the life or the existence of a company is not affected by the death of a shareholder. • Even if all the members and controllers of the company die or killed by the most powerful weapons or by a big wave of tsunami, the company survives and continues to exist. • This is also due to the fact that the company and its members are two separate entities. • Therefore, if a member dies or members die, only him or them is or are to be buried, not the company as well. The life of the company only ends when it is properly wound up or struck off the register.
2. Perpetual succession - S 20(1)(a)
Re Noel Tedman Pty Ltd In this case, the company had only two shareholders, a husband and wife. The shareholders were the only directors of the company. Both were involved in a traffic accident and died. Their infant child survived. The court held that even though all shareholders and directors were dead, the company still existed. So the shares in the company were transferred to the beneficiary
3. Unlimited Liability Section 21 provides: (1) A company shall be capable of exercising all the functions of a body corporate and have full capacity to carry on or undertake any business or activity including: (a) To sue and being sued (b) To acquire, own, hold or develop or dispose any property and (c) To do any act which may do or to enter into any transactions (2) A company shall have the full rights, powers and privileges for the purpose mentioned in subsection (1).�
a. Company has ability to sue and be sued Section 21(1)(a) -Foss v Harbottle Sued the directors
Directors 2 shareholders The company
Mismanaged & misapplied the money of the company. The company suffered loss
Held : The court held that the members could not maintain such an action since the injury complained of was an injury to the company. As the company and its members were two different bodies and not the same, it was for the company to sue, not the members.
b. Co has ability to own property (s21(1)(b) Macaura v Northern Assurance Co Ltd Macaura (Owned an estate)
Sold the timber
The company -Macaura hold all shares -Macaura is the substantial creditor)
Insured the timber in his own name. The timber destroyed in fire. House of Lord The House of Lord held that the Insurance Insurance Co Company was right. This was because when Macaura sold the timber to the company, the timber then belonged to the company. Macaura had no longer a right or interest in it. He had no refused interest that he could insure. Therefore the insurance contract was void for want of an insurable interest and the insurance company was not under an obligation to pay the claim.
claim
Perman Sdn Bhd &ors v European Commodities & Anor [2006] 1 MLJ 97
Fimaly 9th D 51%
46% 2nd p
Rangoonwala Pay for the share of Perman 3%(150,000 share) Perman (Rj Zainal)
Held: there was no doubt whatsoever that the true owner of the Fimaly shares was the Perman and not Rj Zainal. If anyone was to be a trustee of the Fimaly share, it had to be the Perman. No one, including Rj Zainal had the power to declare himself a trustee of the Perman. A company is a separate legal person from its shareholder. The shareholders have no interest, legal or beneficial over the property of the company. Macaura’s case was followed.
Law Kam Loy & Anor v Boltex sdn. Bhd &ors [2005] 3 CLJ 355
1st P
vs Transfer of share
Boltex (transfer executed by P & 2nd – 6th D) shares
Dragonbite
Held – 1. no conclude and enforceable agreement between the parties. 2. The shares belong to Boltex. 2nd – 6th Ds have no ownership right in those shares to transfer it. Boltex was not a party to the agreement. Therefore the agreement was no enforceable. The co is a Separate legal entity. The property owned by the company belongs to it and not to its shareholders.(macaura’s). 3. No justification whatsoever in law to pierce the corporate veil of Boltex for the purpose of treating its property as the property of the 2nd to 6th Ds.
The company is liable for its own debts or liabilities and not the members or the shareholders. Therefore, the members cannot be sued personally for the debts and liabilities of the company. In other words the members are protected and their personal money cannot be taken to pay debts or liabilities. However, as members, they have some liabilities but the liabilities are limited as stated in s192(1) of the CA 2016.
Section 192(1) of the CA 2016 provides that a member shall not be liable for an obligation of a company by reason only of being a member of the company. The liability of a member of a company is limited toa) In the case of a company limited by share, any amount unpaid on a share held by the member; b) In the case of a company limited by guarantee, any amount which the member has undertaken to contribute to the company in the event of it being wound up; c) Any liability expressly provided for in the constitution of the company; and d) Any liability as provided for under this Act.
Re Application by Yee Yut Ee In this case, the High Court held that except in cases of fraud, breach of warranty of authority or other exceptional circumstances, a director is not liable for the debts of an incorporated company. Another important point in this case is that members and directors may change; the company will remain the same. [1978] 2 MLJ 142
• Unlike human beings, a company cannot sign on its own. Instead section 16(5) of the CA 1965 requires a company to have a common seal. The company must use the common seal in any dealing with anybody to make it binding on the company. • However, under section 61 of the CA 2016, a company may or may not have a common seal. It is optional. If a company chooses to have a common seal, it must have its name and registration number engraved in legible romanised characters on the seal. • Every officer will be committing an offence if the seal does not bear the name and registration number which is punishable upon conviction to a fine not exceeding RM50,000. • Under the previous 1965 Act, common seal is required for share certificate and in case of a certificate of appointment of a corporate representative .
• As it is optional for a company to have common seal under the CA 2016, it is now flexible for companies to execute documents without imposing administrative instrument such as common seal • Section 63 of the CA 2016 allows a company to adopt a common seal as its official seal for securities issued by the company or document evidencing such securities. Such a seal shall be an exact copy of the company’s common seal and has the same effect of the common seal when affixed to a document. • As having a common seal is optional under the CA 2016, section 64 provides that a contract may be made: • By a company, in writing under its common seal; • On behalf of a company, by a person acting under its authority, express or implied; or • On behalf of a company, orally, by any person acting under its authority, express or implied.
• Further, section 66 provides a document is executed by a company: • a) By affixing of its common seal or • b) By signature. • Where the document is executed by signature, it shall be signed on behalf of the company: • a) By at least 2 authorised officers, one of whom shall be the director; or • b) In the case of a sole director company, by that director in the present of witness who attests the signature.
• Unlike a partnership, members of a company have no right to interfere in the management of the company. • The power to control and to manage the company is mainly vested on the board of directors. • This is provided under section 211 of the CA 2016, where the business and affairs of a company shall be managed by or under the direction of the Board. • The Board has all the powers necessary for managing and for directing and supervising the management of the business and affairs of the company subject to any modification, exception or limitation contained in this act or in the constitution of the company. However, the company’s members can be involved in the management only during company’s meeting or if he is properly appointed as a member of the board of directors
Lifting the veil of incorporation General rule - when a co has been formed and registered the veil will drop to protect all its members from any co’s liability. (Solomon’s case). Exceptions - the veil lifted i.e. the members can be held liable on co’s liability.
Statutory Lifting the veil
Judicial/common law lifting the veil
Separate legal entity Creditors Workers Suppliers Purchasers contractors
XYZ Bhd. Corporate Veil Shareholders Officers
They can sue the shareholder/officers if the veil lifted
Statutory lifting the veil
Judicial Lifting the veil
Section 539 (3) and section 540(2)
Use of co to evade legal obligations.
Section 540 (1)
Company employed as an agent or alter ego of its controllers.
Section 186(4)
Where the co is a shame or mere facade concealing the true facts.
Section 140(1) of the Income Tax Act 1967
Where the court exercises an equitable or analogous discretion. Group of companies.
Section 539 (3) and section 540(2) XYZ Sdn Bhd
Bank A, the creditor
The Directors
Y is liable personally to the Bank A for the payment of the whole debt.
• According to section 539(3) if an officer contracted debts on behalf of the company and at the time the debts are contracted he had no reasonable or probable expectation that the company would be able to pay the debts, he shall be guilty of an offence against this Act and shall, on conviction, be liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding RM500,000 or both. • Further, under section 540(2) the court may, on application of the liquidator or any creditor or contributory of the company, declare that officer to be personally responsible without any limitation of liability for the payment of the whole or any part of the debts to make good the loss due to the creditor
Section 540 (1) – When involving in fraudulent trading the creditor or others
XYZ Sdn Bhd The Directors
Z is liable personally for all or any of the debts / liabilities of the XYZ Sdn. Bhd.
Section 140(1) of the Income Tax Act 1967 - Avoiding payment of tax โ ข Under the section, the Director-General of Inland Revenue is allowed to ignore transactions which have the effect of avoiding and evading any liability to tax. In other words, he may disregard the separate legal personality of a company where that is a mere faรงade concealing the true state of affairs.
Section 186(4) - failure of obtaining minimum subscription • If a company issues a prospectus and the minimum subscription is not received within four months of the issue of the prospectus, all moneys received from applicants for shares shall be refunded to the applicants without interest or returns. • If such money is not refunded within five months after the issue of the prospectus, the directors shall be jointly and severally liable to refund that money with interest or return at the rate of 10% per annum from the expiration of the period of five months to the applicants. • 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.
Use of co to evade legal obligation Gilford Motor v Horne Horne
Former managing director
The company
(Agreed not to solicit the customer of the company after his termination)
JM Horne & Co
Solicit the customer
Held – The court granted injunction against both H and his company, having held that he had breached his covenant. Both Horne and his company was considered as a single entity as Hornes had used his company to evade legal obligation under the agreement.
Jones v Lipman Lipman
Agreed to sell his house
Jones
Changed his mind Formed
Transfer The house
Alamed Ltd
Sought an order of specific performance. Defense – the company was not a party against whom SP could be ordered.
Held Alamed Ltd was the creature of Lipman, a device and a shame, a mask which he hold before his face in an attempt to avoid legal obligation. Both Lipman and the co were ordered to specifically perform the contract to sell the house.
Company employed as an agent or alter ego of its controllers Smith, Stone & Knight Ltd v Birmingham Corporation.
In this case, since the company acting as agent for its shareholder, the shareholder was held liable for the act of the company on normal agency principles.
Where the co is a shame or mere facade concealing the true facts Woolfson v Strathclyde Lord Keith : “it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it is a mere facade concealing the true facts�.
Where the court exercises an equitable or analagous discretion. Aspatra Sdn. Bhd v BMBB 1. BBMB & BMF Vs Lorraine Osman for making secret profit. 2. In the meantime BBMB Vs LO for M/Injunction to restrain LO from transferring its asset out of jurisdiction. 3. Injunction was extended to Aspatra (a co controlled by LO) – Thus Aspatra also was restrained from transferring its asset out of jurisdiction. 4. Aspatra Vs BBMB - to challenge the injunction. Based on separate legal entity principle. Held: the court could lift the veil to determine whether the asset of the co were really owned by them or whether there was an abuse of the principle that a co is a separate legal personality. As LO was the controller of Aspatra, the veil was lifted. This is especially so as it involve fraud.
Group of companies. Hotel Jaya Puri Bhd v National Union of Hotels, Bar & Restaurant Workers
The restaurant Situated in the Hotel
Hotel Jaya Puri Bhd Wholly owned subsidiary
Jaya Puri Chinese Garden Restaurant Sdn. Bhd. Restaurant closed down
Retrenched workers
M.Director
• The union claimed that the workers had been dismissed from their employment. • argument – the actual employer was the hotel. The hotel was still in business. Therefore the workers could not have been said to have been retrenched on the disclosure of a business. • the Industrial Court accepted this argument and made an order against the hotel. Appealed to The High Court. Held : Although technically the restaurant and the hotel were separate legal entities, in reality the 2 companies were functionally one. Thus although technically a person working for the restaurant was an employee of the restaurant, the reality was that the workers were employees of the Hotel. The court was prepared to ignored the separate entities of the restaurant and the hotel and treat them as one single entity.
National Union of Hotel, Bar and Restaurant Workers v Hotel Malaya Sdn. Bhd. Hamzah SCJ was not prepared to hold that the hotel company was the employer of the workers of the Restaurant Co. This is because, unlike Jaya Puri’s case, in this case only the General Manager was common to both Hotel and Restaurant Co. Further, in this case the Hotel company only held 90.75% of the paid up share capital of the Restaurant Co. the two companies were two separate entity.
Tiu Shi Kian v Red Rose Sdn Bhd.[1984](datuk Hong Kim Sui v Tiu Shi Kian [1987] PC
Albert Teo & Datuk Hong Directors Red Rose Restaurant (Red Rose Sdn Bhd) Wholly owned subsidiary
P ran & manage Golden Million Cabaret & Night Club
Hotel Shangrila (Hotel Berjaya Sdn. Bhd)
•Dispute between RRR & the P. P applied interim injunction vs RR(the D) to restrain the D from disturbing the P quiet use & enjoyment of the Hotel Shangrila Night Club and Restaurant (14/3/1983). •16/3/1983- the P found RRR closed and locked by David(General Manager of the Hotel Berjaya Sdn. Bhd) + advertisement placed in local newspaper informing the public of the closure of the cabaret & Restaurant. • the P brought civil contempt proceeding vs Albert Teo & Datuk(the R). The R argued that the disclosure and the advertisement complained of were placed by separate entity ie. Hotel Berjaya Sdn. Bhd. T/fore the D and the R should not be responsible for such acts. Despite this, High Court found the R guilty of civil contempt.
Wan Mohemed J : The R had attempted to mask themselves by making use of Hotel Berjaya Sdn. Bhd to say that the RRR was dispossessed of the licensed premises…Having explained and understood that the two corporate bodies are in fact one single authority, I find it is just like the right hand telling the left hand to commit an act with the hope that the right hand will not be blamed for it. This sort of device should not be allowed to defeat justice…I find it as of fact that Hotel Berjaya and RRR are actually ‘two-in-one’ and ‘one-in-two’ entity…by adopting the test… of business realities(DNN case) of the situation plus the functional integrity(Hotel Jaya Puri). So, RRR and Hotel Berjaya = one single entity. Management-wise- there is also unity as the directors of Hotel Berjaya are also directors of the RRR.