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GLUL 3033

Undang-Undang Syarikat

PRINCIPLES OF CORPORATE VEIL EXCLUSION

The fact that the company has its own entity separate from its members may be viewed as the existence of corporate veil that will separate the companys liability to its members. Normally, once the company is incorporated, the court will no longer look behind the curtain to find out who is actually in control or manage the company. As explained above in the case of Solomon, the existence of corporate veil, this will ensure that the company will not be liable for company debts.

However, the application of the principle of separate entity would create some problems that are not desirable because there are parties who are not responsible for the misuse of this principle of personal benefit or to avoid responsibility. For example, a company director can use the name of the company to owe and use the money for personal gain. To avoid having to pay a debt is made, the director can claim he is not liable for the debt in the name of the company and only company to be liable. Such things will happen if a separate entity principle applies without any exception. As you know, the law established for justice.

Therefore, in addition to adopting a general rule, the law also has exemptions in certain circumstances to seek justice. The principle of separate entity is a general rule that refers to the separation of liability and the company. In certain circumstances, this general rule shall not apply. Instead the court will rely on the exemption or reveal the corporate veil to identify the individual who committed the offense, which would have been liable. This is the principle of waiver corporate veil. This principle will be discussed from two perspectives, namely the exemption in accordance with the statute and exclusions based on court decision known as judicial waiver.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

EXEMPTION STATUTORY

Exception from the application of the principles of this entity is based on the provisions contained in the Companies Act 1965 and other acts related. It can be divided into the following sections:

a.

Section 36

36.

Prohibition of doing business with members less than the minimum statutory.

If at any time for members of a company (other than a company in which all the shares issued are held by the parent company) is reduced to below two, and it carries business for more than six months when members of such reduction, the person who is a member of the company in which it does business so after six months, and aware of the fact that the company is doing business with less than two members, is responsible for payment of all amounts owed to the company the companys business after a period of six months and may be charged against him, and that the company and the member shall be guilty of an offense against this Act if the conduct of such business after six months.

Penalty: Two thousand dollars, default penalties.

Provisions section at the top means that if the membership of less than two persons, after a period of six months from the date of membership is reduced those found doing business alone would be liable for payment of all debts of the company made at the time. The company and the member is deemed to have committed an offense under the Companies Act 1965 for companies doing business with a member only after a period of six months.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

b.

Section 121(2) (c)

121(2) If the officer of the company or any person on his behalf

(c)

Signing of the publications or authorize to be signed or issued on behalf of any bill of exchange, promissory notes, checks or other negotiable instrument or any endorsement of receipt of order or letter of credit in the name and the name first (if applicable) is not specified.

According to the provisions of the above, any officer found to sign or issue any document with the name that is not perfect or even consent to such action, will be liable for any errors that occur. For example, if a director made a mistake when signing a check and write your company name does not accurately be personally liable on the amount of the check is signed.

c.

Section 303 (3) read together with section 304 (2)

303 (3) If the winding up of companies or in any proceedings against a company is shown that an officer of the company is known as a party to the contract on the debt, the debt contracted, no reasonable excuse, or perhaps in the hope, after accounting for other dependents, if any, by the company at that time, the company can pay the debt, the officer shall be guilty of that offense. Penalty: Prisons a year or five thousand dollars.

304 (2) Where a person has been convicted of an offense under section 303 (3) in connection with the contract for any debt as referred to in that section of the Court, on application of the liquidator or any creditor or contributory of the company, may, if thinks proper to do so, declaring that the person shall be personally responsible without any limitation of liability for payment of all or any part of the debt.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

For example, if an officer owes to the company but at the same time the officer believes the company can not pay this debt, the officer will be personally liable to pay the whole or part of the debt.

d.

Section 304 (1)

If the company does business that seeks to defraud creditors or any other form of cheating whatsoever (fraudulent trading), the court may issue an order that the parties involved in the fraud liable for company debts. Section 304 (1) provides:

304 (1) If the winding up a company, or on any proceedings against companies are shown that any company has done business with intent to defraud creditors of the company or creditors of any other person or for other fraudulent purposes, the Court of the application solution or any creditor or contributory company may if it thinks proper, to do so declare that any person who is known as a party to a business trip on the way to be responsible on their own, with no limit of liability, for all or any debts or other liabilities of the company as directed by the Court.

e.

Seksyen 365 (2) (b)

365 (2) Every director or manager of a company that knowingly pay or allow the payment of any dividend from a non-profit knows, except pursuant to section 60 (b) There shall also be liable to creditors of the company for the amount of debt owing by the company to them as to any dividends paid from profits that exceed the amount recoverable by creditors or liquidators who sue on behalf of creditors.

Section above clearly shows if the director or manager company to pay or authorize payment of dividends is not of the company, they may be personally liable for payment of the dividend.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

JUDICIARY EXEMPTION

If you examine the statutory exceptions to the principle of separate entity above, you may think of the Companies Act 1965 is still not sufficient to ensure that these principles are not being misused by certain parties. The fact the company as an entity separate from its members does not mean that the two entities will be separated at all times. For example, if a company commits fraud against the creditors, the court will reveal the corporate veil to find individuals who play an important role in the management company may be involved in these scams. In this case, the company and its members are no longer two separate entities, but the court will treat both as one entity, where the guilty would be liable.

As you understand, the company made only one entity that does not have the physical characteristics and mental health as human individuals. As such, all business and individual business carried on by men who will represent the companys physical and mental. Usually consists of components from the board until the regular workers. If the company alleged to have committed fraud and found guilty then sentenced to prison, who will be imprisoned? Usually the court will look at the party played a major role and control of all matters for the company liable for errors, such as directors and auditors.

Next, you will see examples of where in certain circumstances the court would not wear a separate entity principle. Instead, the court will treat you and the company as an entity. This is the exception in the principles of judicial waiver corporate veil.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

a.

When companies used to avoid responsibility or fraud

The court would ever be in cahoots with the parties that commit fraud. The principle of separate entity is often misused as a shield to protect certain parties in their fraudulent activities. Usually those who commit fraud to hide behind the name of the company to prevent from being liable. You will better understand the situation after seeing following examples:

In the case of Gilford Motor Co. v. Horne (1933) Ch 935 (Court Of Appeal, England), Horne was the director of Gilford Motor Company. While serving in the company, he has signed a contract that prohibits him from taking customers from the company after he left the company. However, after resigned from Gilford Motor Company, he founded his own company, the JM Horne & Co. Ltd. and the company has been taking customers of Gilford Motor Company. The court issued the order and injunction to restrain the company from continuing the action.

In the case of Jones v. Lipman (1962) 1 WLR 832 (High Court, England), Lipman has agreed to sell a house to Jones. However, he has changed his mind. To avoid its responsibility to submit the property to Jones, he has established his own company known as Alamed Ltd. and transfer the house to the company. Jones has taken legal action against the company Alamed to get the house. Lipman explained that the Company is not the party to the contract of that hire purchase, because the contract only involve Jones with Lipman. The Court held, in fact Alamed Ltd. established as a shield to avoid responsibility for Lipman to submit the house to Jones. The court also instructed Lipman and Alamed Ltd. to transfer the title of the house to Jones.

The Court will also reveal the corporate veil to find those responsible for committing fraud in the company. This principle has been explained in the case of Re Darby (1911) 1KB 95 (High Court, England), where Darby is a person who has declared bankruptcy and was convicted of several fraud. He and his colleagues have established the City of London Investment Corporation Ltd. conducting business transactions quarry licenses and have committed fraud to his customers. His company had sold a quarry license to the Welsh Slate Quarries Company Ltd. with very high prices. Profits are divided between Darby and his colleagues. Welsh Slate Company has incurred losses and dissolved. The liquidator has
No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

claimed from Darby that it deems to claim benefits. Darby claimed, in the law between himself and company are two different entities. However, after studying the facts of this case the Court held Darby liable for fraud carried out by the company.

b.

When the company made an agent or alter ego to members of the company

You used to hear the word agent. For example, insurance agents and direct sales agents. The Company may act as agent for its members. According to the principles of agency, agent actions will lead to the principal agent is only liable for actions taken on behalf of the principal. Thus, if the company used as an agent for its members in a business, the court will look at the liability of members involved and not the liability of the company.

This principle has been described in the case of Aspatra PT. Ltd. v. Bank Bumiputra Malaysia Berhad, (1988) 1 MLJ 97 (Supreme Court of Malaysia). In this case, Bank

Bumiputra Malaysia Berhad (BBMB) and its subsidiary, Bumiputra Malaysia Finance Ltd. (BMF) claimed Lorrain to profit in secrets when he became chairman of directors of BBMB and BMF. BBMB and BMF also filed an application for a mareva injunction order to restrain Lorrain from transferring its assets. This injunction order also applies to the Aspatra PT. Ltd. who then filed an injunction in respect of the claim that the order be cancelled. The Company also claimed that the court should not consider the companys assets as personal assets of Lorrain because both are two distinct entities in law. Court finds Lorrain play a key role in holding the shares and the board Aspatra PT. Ltd. Therefore, the court has the right to reveal the corporate veil to determine whether assets of Aspatra PT. Ltd. was the assets of the company or has been abuse of the principle of separate entity. Based on the facts of this case clearly shows that Aspatra PT. Ltd. was used by Lorrain as a tool to transfer all the benefits of the results of malpractice committed by him.

Clearly based on the above case, the court will not see the liability of the company, otherwise the court will find members who act on behalf of the company if there is elements of fraud in which the members are involved in fraud will be liable. The members no longer can hide behind the name of the company to avoid liability.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

c.

When a company made a mask to protect the real fact

Generally, if a company is established in order to make a mask to hide the facts, the court will not wear a separate entity principle. Instead the court will reveal the corporate veil and assume the company and its members as an entity.

Referring to the case of Re FG (Films) Ltd. (1953) 1 WLR 483 (High Court, England), where 90 percent of shares held by A, an American citizen and the remaining shares owned by B, British citizens. This company has no employees. In fact, the company established solely to publish a movie titled Monsoon. An agreement was made between the company and a company of American, Film Group Incorporated (FGI), which will contribute capital and related equipment of the film. FG (Films) Ltd. then wish to register the film Monsoon as a British film under Cinematography Act 1938-48. However, the application has been rejected due to the fact that the film is produced by the Company FGI. The Court ruled FG Films Ltd. Company is not the company that produced the film. Instead the company established just to qualify the film to be recognized as a British film. Therefore, the film Monsoon is not eligible for recognition as a British film since it was produced by American companies.

d.

When court decide on the basis of equity and analogies

Equity policy and the analogy means the court exercising its discretion and not according to the rule of law set forth in some cases requiring the decision of the court to do so for justice. For example, when the court issued the order requested delay implementation (stay of execution), the court will reveal the corporate veil to find the person concerned. Order of delay implementation is an order issued by the court to suspend the courts decision that has been made in certain cases. This principle can be seen in the case v. Orri Mounderas (1981) Com LR 168 (High Court, England). Orri chartered from a Panamanian company owned by the brother-in-law, Mounderas. A misunderstanding arose between the two sides, and the company claimed Orri Mounderas. In this case, he was ordered to pay the rent arrears ship. In this trial, Orri has claimed Mounderas to pay the loan given to him because in the past he had lent money to Orri Mounderas. This trial has nothing to do with the allegations against Orri Mounderas by the company.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

However, Orri has applied for a court injunction to postpone implementation of the action against him until his claim towards Mounderas completed. According to Judge J. Mustill, usually the order of delay implementation will not be allowed by the court if the parties involved in the two cases are different. The first case is between the companies with Orri, while the second case is between Orri with Mounderas. However, the court is entitled in certain circumstances to look behind the establishment of companies to find the relevant parties and then issue an order delay implementation. In this case the court has authorized the application of Orri to defer the decision of the court in claims against the company until the trial of Orris claim against Mounderas completed.

e.

When involving a group of companies

According to the general rule, the parent company and its subsidiaries considered as two different entities. However in some instances, a group of companies will be treated as a single entity. For example, lets look at the case of Hotel Jaya Puri Bhd. v. National Union of Hotel, Bar & Restaurant Workers (1980) 1 MLJ 109 (High Court, Malaysia). In this case, several employees of Jaya Puri Chinese Garden Restaurant Pte. Ltd. have lost their jobs after the restaurant closed. This company is actually owned subsidiary of Hotel Jaya Puri Bhd. Unions claimed that the workers had been dismissed by their employer whom actually the Hotel Jaya Puri Bhd. and the right to seek compensation. Workers should not be dismissed as Jaya Puri Hotel is still operating. Industrial Court has agreed with this claim and direct the Hotel Jaya Puri to pay compensation to the workers concerned. However, Hotel Jaya Puri refused to do so instead took the case to court. High Court ruled that, although technically Jaya Puri Chinese Garden Restaurant and Hotel Jaya Puri Sdn. Ltd. are two different entities, but in fact the two companies operated as one entity. The court also considered the restaurant workers as employees Hotel Jaya Puri.

Based on the above case clearly shows that if a group of company have the same functions and operate as a body owned and controlled by the same parties, the court will treat the company as an entity.

No Matrik: 125308

GLUL 3033

Undang-Undang Syarikat

CONCLUSION

The act of piercing the corporate veil until now remains one of the most controversial subjects in corporate law, and it would continue to remain so, even for the years to come. By and large, as discussed in the essay, the doctrine of piercing the corporate veil remains only an exceptional act orchestrated by courts of law. Courts are most prepared to respect the rule of corporate personality, that a company is a separate legal entity from it's shareholders, having it' own rights and duties, and can sue and be sued in it's own name.

As we move from jurisdiction to jurisdiction across the globe, it's application narrows down to how that system of the law appreciates the subject. Common law jurisdictions are examples par excellence where the piercing of the corporate veil has gained notoriety, and as the various cases indicate, courts under this system of the law generally appreciates every case by it's merits.

The above notwithstanding, there are general categories such as fraud, agency, sham or faade, unfairness and group enterprises; which are believed to be he most peculiar basis under which the common law courts would pierce he corporate veil. But these categories are just a guideline and by no means far from being exhaustive.

No Matrik: 125308

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