No. Title Page No.

1. Introduction

2. Case of Salomon v Salomon & Co

3. Effects of Corporation

4. Exceptions to Separate Legal Entity

Judicial Lifting
5.

Statutory Lifting
6.

7. Conclusion

8. References
Discuss the importance of the principles established in the case of (Salomon v
Salomon & Co) [1897] AC 22 and explain why courts are willing to lift the veil of
incorporation in certain situations.

Introduction

Salomon v Salomon & Co1 is very important to the Legal Entity of the
company and courts have carried out lifting of the veil of incorporation to settle many
disputes and issues.

The Companies Act of 1965 (CA 1965) is the main legislation maintaining
the forming or operations of companies in Malaysia. The CA 1965 allows individuals
to form certain types of organisations and also incorporations. The Registrar of
Companies (ROC) are the ones who monitors and enforces the CA 1965 and all
companies need to register with the ROC before starting any business activities.

A company is considered a legal entity in which is called incorporated when

formed. When a business is incorporated, it is given a special corporate personality
that separates itself from the shareholders or members of the company. This means
that a company can be treated as a legal person on its own and is able to enter into
contracts under law. Salomon v Salomon & Co. is the very first case that formed the
existence of Separate Legal Entity (Lee, 2009). It has helped solve many more
disputes regarding the legal entities between companies and people.

1 [1897] AC 22
Case of Salomon v Salomon & Co. [1897] AC 22

There was a sole proprietor named Salomon who was involved in the shoe
leather trade. After a while of doing business, he formed a private limited company
and named it Salomon & Co. Limited. A company needed 7 shareholders at the
time, so Salomon owned 20,001 of the shares while giving 1 share each to his wife
and 5 children. After a while, he sold his business for 39,000 and gained debentures
of 10,000 to the new company. He became the main shareholder and creditor of the
company therefore.

The company later did not do well and wound up. Salomon was the main
secured creditor as he owned majority of the share and was given compensation in
priority. Other unsecured creditors could not get their compensation and tried to sue
Salomon. It was ruled that Salomon was not held accountable and was not liable for
the liquidation of the business. He was considered a separate legal entity from the
business, even though he was the one who created it. Therefore, the concept that
shareholders are fully liable for any liabilities incurred by the company depends on
the situation of the case. Shareholders have only certain limited liabilites
(LawTeacher, 2013).
Effects of Corporation

When a business is incorporated, there are some effects that will be brought forth to
company.

Limited The company is liable for a certain limit, but the members of a
Liablilities company have till a certain limit of liability. If a company is
liquidated, the members are not fully liable.

Contractual The company can use its own name to sue or be sued.
Capacity
E.g.: Foss v Harbottle2 - A company was established where there
was certain property was misapplied. Mortgages were wrongly
imposed for the property. The shareholders tried to sue the directors
but it was held that it was an injury to the company itself. The
shareholders and the company are of separate legal entity and only
the company should be the one to sue instead. Besides that, they had
to follow the proper plaintiff rule by vindication of the company
itself. Also the majority rule principle applies where if the
wrongdoing can be ratified by majority of members, the court shall
not have interference of the case.

Business Property Any property that the company owns is considered separate from the
members of the company. If the company owns the property, it is not
the property of the members howsoever and vice versa.

E.g.: Macaura v Northern Assurance3 - A person owned a timber

state but formed another company and transferred to it and insured it

2 [1843] 67 ER 189

3 [1925] AC-619
 under his own name. A fire destroyed his timber but he couldnt
claim the insurance as the timber belonged to the company instead.

Transferable Shares or interests of members can be freely transferred.

Membership

Perpetual The company would still continue to operate even if there is a death
Succession of or removal of members.

Better borrowing It is easier to borrow money as the company has a personal liability
powers
Exceptions to Separate Legal Entity

As incorporation takes place, a company can have its own separate legal entity on its
own. Because of the Salomon case, it is found that members of a company are
different from their company. This term was coined as Veil of Corporation. This
veil provides a separation of the company and its members, making them different
persons on their own. An example would be the case of:

Lee v Lees Air Farming Ltd4

Mr. Lee formed a company and was the principal shareholder of the company. He was
the director and chief pilot who died during a plane crash. His wife tried to claim
damages and compensations from the insurance company. But it was claimed that Mr.
Lee had to be a worker under contract to the company with an employer to be liable
and that he was just a director. The court held that his wife was allowed to get the
compensation as Mr. Lee and the company was of separate legal entity (Lawteacher,
2013).

Even though having the company as a separate legal entity from its members
would be benefits for certain companies, it might give rise to certain illegitimate
activities or frauds. Members who commit crimes or fraudulent activities could
misuse this advantage to take cover under the veil to protect themselves from
punishment. As such, the exception of Lifting of Corporate Veil was brought up.
This allows the court to disregard corporate veils to see the individuals behind the
company conducting the illegal activities. Under the exception, courts can pierce the
corporate veil to take action and hold individuals, directors and related members
liable for debts and activities done. With these exceptions, sometimes the companies
are not to be sued instead for the wrongdoings of certain individuals (Sadhu, 2012).

4 [1961] UKPC 33
To lift the corporate veil, there are two ways to do so:

i) Judicial Lifting
ii) Statutory Lifting

Judicial Lifting

Judicial lifting is a way to lift the veil of corporation. It is part of the unwritten law,
which is not in the CA 1965 but adapted through certain cases. Examples of judicial
lifting are:

Public interest
Agency
Evasion of Obligation
Fraud
Group Enterprise

Public Interest

Public Interest could be the reason for the lifting of veil as certain cases might
cause the general public damage or issues if allowed to be continued. It could be a
matter of politics, environmental or any issues that would affect the public in general.
Example:

Daimler Co Ltd v Continental Tyre & Rubber5

Daimler company was incorporated in England but the shareholders were German
except for one person. War broke out and England became enemies with Germany.
Daimler asked for payment for debt owed to them but Continental refused to pay as it
would be treated as assisting the enemy of war. The Court of Appeal ruled that
Daimler can be compensated for the debts as it was separate from the enemies and as
one of their shareholders were an English person.
Evasion of Obligation

5 [1916] AC 307
 Evasion of Obligation is when an individual might use the corporate veil to
protect him for when he carries out activities which are not allowed under contracts.
He could mask himself with another company name to carry out fraudulent activities
without being considered as him doing it. An example of this would be:

Gilford Motor v Home 6

In this case, Mr. Horne was an employee of The Gilford Motor Co. His company had
him under contract saying he cannot solicit customers of the company by himself. To
evade this contractual obligation, he incorporated a limited company under the name
of his wife. With the newfound company, he went on to solicit customers of his
current company. Gilford Motor sued him for evasion of obligation and the Court of
Appeal ruled that he was hiding behind the veil. They used the exception of lifting the
corporate veil and separated him and his wifes company. He was then considered
acting out of obligation of contract.

Fraud

Fraud can be carried out using the veil of corporation. An individual might use
the veil to escape from being punished for fraud committed on his own. Fraudulent
activities can be dealt with by lifting of the veil to separate An example would be the
case of:

Jones v Lipman7

In the case, Mr. Lipman tried to sell his house to Mr. Jones for around 5000
and signed a contract for the sale. He later changed his mind and wanted to keep the
house but he was under the contract to give the house to Jones. He knew that under
the court, he would have to surrender the house either way under specific
6 [1933] Ch 935

7 [1962] 1 WLR 832

performance. To avoid giving up the house, he transferred ite beforehand to the
ownership of another company. He thought that this way, the court could not impose
specific performance to take the house away as it is under the name of the company
instead and is of separate legal entity. However, the court ruled that it was a fraudulent
activity and imposed the lifting of corporate veil to separate the entity of the company
and Mr. Lipman. The house was then given to the Jones as promised in the contract by
specific performance.

Statutory Lifting

As for statutory lifting, it is not based on cases but sections. Examples:

Membership Numbers: S 36 CA 1965

Trading: Fraudulent S 304 (1), Wrongful S 303 (3)
Dividend Payments: S 365 (2)
Taxation: S 140 (1)
Misdescription: S 121 (2)

Trading

Trading comes under two sections of Fraudulent and Wrongful.

i) Fraudulent

It is under Section 304 (1). This section is for the statutory lifting for when a
company wounds up or if any activities of a business is carried out that because
defrauding creditors of the company or creditors of other people. The court can rule
that the liquidator of the company or anyone that the creditor deem responsible for the
fraud faces liability caused by the activity. The person shall be liable for the debts
caused for the company (SSM, n.d.).
ii) Wrongful

It is under Section 303 (3). Wrongful trading is when a company is wound up

or has any proceedings against a company that a director of the company who was
involved in a contract that has incurred debt. If the director is liable, he shall be guilty
of the offence made against this act (SSM, n.d.).

Misdescription

Misdescription is from Section 121 (2) of the CA 1965. If a director or any

other officer of the company is:

a) Using or allows use of any of the companys seal onto wherever the seal is not
allowed to be on
b) Allowing or authorising issues important business documents such as business
letters, account statements, official notices or publications from the company
where the name (or former name) of the company is not mentioned: or
c) Signing issues or authorising signatures on behalf of the company for any bill,
promissory notes, cheques or other forms of instrument or other endorsements,
orders, receipts or letters of credits where the name (or former name) is not
mentioned;

the person shall be found guilty of offence towards the Act. If the person has issued,
signed or give authorisation to signing issues on behalf of the company for any bill,
promissory notes, cheques or other forms of instrument where the company name (or
former name) is not mentioned, the person will be liable for the instrument or order
amount due (unless paid by the company). (SSM, n.d.).
Conclusion

In summary, I feel that it is very important to have the exceptions for Separate
Legal Entities. Judicial and Statutory lifting give a chance for the court to punish
criminals or wrongdoers who hide behind the convenience of corporate veils. Without
the lifting, these criminals would have more chances of committing more crimes in
the future without a proper control to stop them. Without control, many frauds and
unjust activities would be carried out, causing injustice and difficulties for the public.

Furthermore, I have learned a great value in the effects of incorporation. I have

learned various benefits of incorporation such as the ability to sue and be sued on a
companys own, having better borrowing powers, perpetual succession and etc.

In general, these cases that brought up the problems regarding the piercing of
corporate veil, both judicial and statutory, are great examples in teaching future
generations an important lesson and the way people overcome certain issues.
References

LawTeacher, UK. (November 2013). Salomon V A Salomon. Retrieved from

http://www.lawteacher.net/cases/company-law/salomon-v-a-salomon.php?
cref=1

LawTeacher, UK. (November 2013). The Separate Entity Principle. Retrieved

from http://www.lawteacher.net/free-law-essays/company-law/the-separate-
entity-principle.php?cref=1

Lee, M., & Detta, I. (2009). Business law. Shah Alam: Oxford Fajar/Oxford
University Press.

Sadhu A. (2012). Lifting The Corporate Veil - Corporate law.

Legalserviceindia.com. Retrieved 29 March 2016, from
http://www.legalserviceindia.com/articles/corporate.htm

SSM. (n.d.). ACT 125, Section 121. COMPANIES ACT 1965. Retrieved 29
March 2016, from http://www.ssm.com.my/acts/fscommand/act125s0121.htm

SSM. (n.d.). ACT 125, Section 303. COMPANIES ACT 1965. Retrieved 29
March 2016, from http://www.ssm.com.my/acts/fscommand/act125s303.htm

SSM. (n.d.). ACT 125, Section 304. COMPANIES ACT 1965. Retrieved 29
March 2016, from http://www.ssm.com.my/acts/fscommand/act125s304.htm