Chapter 9

INCORPORATION & ITS

EFFECTS

SalmiahSallehCompanylawEffect of
incorporatiom/

Learning Outcomes
Students shall be able to:
State and explain the characteristics of a registered
company
Explain the concept of separate legal entity
Explain the concept of lifting the veil

Identify and describe the circumstances when the

veil may be lifted.
Apply the law in solving certain problem.

2015

SalmiahSallehCompanylawEffect of
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2009

EFFECT OF INCORPORATION
S16(5)- On and from the date of incorporation specified in the
certificate of incorporation but subject to this Act the subscribers to
the memorandum together with such other persons as may from
time to time become members of the company shall be a body
corporate by the name contained in the memorandum capable
forthwith of exercising all the functions of an incorporated company
and of suing and being sued and having perpetual succession and a
common seal with power to hold land but with such liability on the
part of the members to contribute to the assets of the company in
the event of its being wound up as is provided by this Act.

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EFFECT OF INCORPORATION(cont)

2009

Effect of incorporation:
a. the company is a body corporate with the power of
an incorporated co,
. b. it may sue and being sued in its own name,
c. it has perpetual succession,
d. it may own land, and
e. the liability of the members may be limited.

SalmiahSallehCompanylawEffect of
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Characteristics of a registered Company

1

Separate legal personality/entity

Salomon v Salomon Co Ltd
Lee v Lees Air farming

Ability to own property

Macaura v Northern
Assurance Co ltd

Common Seal
Ability to sue and be sued
Foss v Harbottle

Limited liability of shareholders

2009

Control and
management

Perpetual succession
Re Noel Tedman Holding Pty. Ltd.

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1. Separate legal entity

The principle established by Salomons case. It is adopted in
Malaysia through the case of Sunrise Sdn. Bhd v First profile (M)
Sdn. Bhd & Anor [1996].

XYZ Bhd.
Corporate Veil
Shareholders
Officers

2009

SalmiahSallehCompanylawEffect of
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The co
issued
20,000
L1 share
+
L10,000
Debenture

Salomon v Salomon Co Ltd

Mr Salomon (sole trader
in manufacture boots and shoes
Biz transferred
for L39,000

Salomon
= shareholder
& secured creditor

2009

- 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

SalmiahSallehCompanylawEffect of
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Salomons case (cont)

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.

2009

SalmiahSallehCompanylawEffect of
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2009

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.

SalmiahSallehCompanylawEffect of
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Effects of separate legal entity

Members cannot be made liable for the debts/liabilities of

the company. Only the company 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 companys existence will not be affected by the death of its

members.
2009

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SalmiahSallehCompanylawEffect of
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2. Co has ability to own property - Macaura

v Northern Assurance Co Ltd
Macaura

Sold
the timber

The company
-Macaura hold all shares

(Owned an estate)

-Macaura is the substantial creditor)

claim

refused

Insured the timber

in his own name.
The timber destroyed in fire.

Insurance Co

House of Lord
supported the insurance company. When
Macaura sold the timber to the company, he gave
up his interest in it. He had no interest that he
could insured.
Therefore, the insurance was void for want of an
insurable interest and the insurance company was
not obliged to pay.

2009

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Effectofincorporation/salmiahsalleh

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. Macauras case
was followed.
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3. Limited Liability of shareholder

Members cannot be sued personally for the debts
or liabilities of the company.
However, as members, they have some liabilities
but the liabilities is limited.
Directors and officers are also not responsible for
cos debts
Re Application by Yee Yut Ee
Double Acre

2009

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SalmiahSallehCompanylawEffect of
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4. Company has ability to sue and be sued Foss v Harbottle

Sued the directors

Directors
2 shareholders
The company

Mismanaged &
misapplied the money
of the co.
The co suffered loss

Held : the action was not maintainable. The wrong done to

the co. The co should take action not the shareholder.

2009

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Companylaw/salmiahsalleh

5. Perpetual succession Re Noel

Tedman Holding Pty Ltd
Re Noel Tedman
2 shareholder /directors died in a road accident.
The infant child survived.
Held : The company continued to exist.

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SalmiahSallehCompanylawEffect of
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16
2009

6. Common seal
7. Control and management

SalmiahSallehCompanylawEffect of
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17
2009

Santapan Minda & Rohani

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2009

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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 cos liability.
(Solomons case).
Exceptions - the veil lifted i.e. the members can be held liable on
cos liability.

Statutory
Lifting the veil

2009

Judicial/common
law lifting the veil

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Effectofincorporation/salmiahsalleh

Separate legal entity

Creditors
Workers
Suppliers
Purchasers
contractors

XYZ Bhd.
Corporate Veil

Shareholders
Officers

They can sue the

shareholder/officers
if the veil lifted

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s36
S 121(2)(c)
303 (3) read
with s 304(2).
S 304 (1)
S 365(2)(b)
S 48(4)

Judicial Lifting the veil

Use of co to evade legal

obligations.(the mere faade
principle)

SalmiahSallehCompanylawEffect of
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Statutory lifting the veil

Company employed as an
agent or alter ego of its
controllers.
Where the court is asked to
promote justice or to exercise
an equitable discretion.

Group of companies.

S 140(1) of the Income

Tax Act.
2009

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Companylaw/salmiahsalleh

S 36
Bank X

A&B
1/1

Bank Y

Bank Z

A
1/2

1/8
The veil lifted

A is personally liable for debt with Bank Z as it is

contracted after 6 months from the date the number
is reduced below 2.
Except:
Not aware
Holding co

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Companylaw/salmiahsalleh

S121(2)(c)
XYZ
Sdn Bhd

3rd party

The
Directors

X is liable personally to the 3rd party for the

value of the cheque
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Companylaw/salmiahsalleh

S300(3) & 304(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.
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Companylaw/salmiahsalleh

S304(1)
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.
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Companylaw/salmiahsalleh

S365(2)(b)
XYZ
Sdn Bhd
(no profit)

shareholders

creditors

The
Directors

The directors are liable personally to the

creditors for the debts due by the co to them.
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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 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.
2009

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SalmiahSallehCompanylawEffect of
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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.
2009

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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.

2009

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SalmiahSallehCompanylawEffect of
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2009

Where the court is asked to promote justice

or to exercise an equitable 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.

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Yap Sing Hock, Peh Swee Chin SCJ:

Court lift the veil to do justice limited to a few
purposes:
For the purpose of tax cases in order to ascertain tax
liability or detecting tax evasion,
To detect any trading with enemies

For some illegal purpose

On account of equitable consideration

2009

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Group of companies in reality a single unity or

one economic unit.
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.

M.Director

Restaurant closed down

Retrenched workers
2009

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SalmiahSallehCompanylawEffect of
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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.
= one economic unit.
2009

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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 Puris 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.

2009

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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

Hotel Shangrila
(Hotel Berjaya Sdn. Bhd)

P ran & manage Golden Million

Cabaret & Night Club

2009

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SalmiahSallehCompanylawEffect of
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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 place 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.

2009

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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 premisesHaving 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 justiceI find it as of fact that Hotel Berjaya
and RRR are actually two-in-one and one-in-two entityby
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.
2009

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SalmiahSallehCompanylawEffect of
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2009

Vismanathan a/l Perumal v Mona Industries

Msia Sdn Bhd.
The holding co(2nd D) was held liable for the debts
of the wholly owned subs co (1st D). Following the
case of Hotel Jaya Puri.

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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.

2009

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SalmiahSallehCompanylawEffect of
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Santapan Minda
Ada 4 dipandang sebagai ibu, iaitu:
Ibu dari segala UBAT adalah SEDIKIT MAKAN
Ibu dari segala ADAB adalah SEDIKIT BERBICARA
Ibu dari segala IBADAT adalah TAKUT BUAT DOSA
Ibu dari segala CITA-CITA adalah SABAR

2009

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Companylaw/salmiahsalleh

Santapan Minda
(iaitu) orang yang beriman dan hati mereka
menjadi tenang/tenteram dengan mengingati
Allah. Ingatlah, hanya dengan mengingati Allah
hati menjadi tenteram.
Ar-Rad 13:28

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