CHAPTER 3:
COMPANY AS A
CORPORATION
INCORPORATION AND
ITS EFFECT
LAW485 CORPORATE LAW
INCORPORATION
CONTENTS:
Incorporating a company
➢The process and procedure of incorporation
➢The certificate of incorporation;
➢Restrictions on commencement;
• The co as a corporate entity
• The effects of incorporation.
• Lifting the corporate veil
CORPORATE LAW / Z.ELIAS
INCORPORATION OF A COMPANY
• Company - an artificial creation of the law
regulated by the S. 20 & 21 CA 2016
• To form a company, certain procedures under
the Companies Act must be complied with.
• Application to Registrar of Companies (ROC)
through the Companies Commission of Malaysia
(CCM)…. CCM manage and govern all companies
and businesses in Malaysia.
CORPORATE LAW / Z.ELIAS
Process and Procedure of Incorporation
ABC APPLY FOR
INCORPORATION OF
CO.X
i. NAME OF PROPOSED CO.
ii. WHETHER PTE OR PUB.
iii. NATURE OF BUSINESS S.14
iv. DETAILS OF MEMBERS
v. MEMBERS SHARE HOLDING.
Vi,other details ROC may require
ROC (CCM)
X ROC issues CERTIFICATE
COMPANY OF INCORPORATION
S.17
CORPORATE LAW / Z.ELIAS
The effects of incorporation are;
as soon as registered, a company is a corporate
body or a corporation with the name as registered..
S.18 CA 2016.
• S.20 CA 2016 ….Co. is separate legal entity,
an artificial legal person, recognized at law
separate from the persons who took steps to
form the company, and it will continue to exist
until removed from the Register.
CORPORATE LAW / Z.ELIAS
S.21 CA 2016- A company shall be capable of
exercising all the functions of a body corporate.
This means the co. is a legal “person” that have the
full capacity :
◦ To sue and be sued
◦ To own property
◦ To do any act to enter into transactions.
◦ Enjoys Perpetual Succession.
The registered company is now a corporate
personality, a legal entity as in Salomon v A.
Salomon & Co Ltd [1897] AC 22
CORPORATE LAW / Z.ELIAS
EFFECTS OF INCORPORATION
COMPANY
CAN SUE
POWER TO
AND
ACQUIRE, OWN,
BE SUED BODY or DISPOSE OF
CORPORATE PROPERTY
S. 20
CAN ENTER INTO C.A.2016
ENJOYS
ANY TRANSACTION
CONTINOUS
EXISTENCE
CORPORATE LAW / Z.ELIAS
“Veil of Incorporation”
Once a company is incorporated, the veil of
incorporation (a fictional curtain) is drawn
separating the company from its members
the
COMPANY
Veil of Incorporation
CORPORATE LAW / Z.ELIAS
Co. as a Body Corporate
Landmark case - company as an individual
having a separate legal personality in the case
of:Salomon v A. Salomon & Co. Ltd [1897]
AC 22
Salomon
A. Salomon & Co.
(sole trader) incorporate Ltd.
Boots and shoes maker
(S, Mrs S. & 5 Ss)
Boots and shoes maker Payment: £20,000 in fully pd
business sold for shares, £10,000 debentures
£39,000 to A.S &Co.Ltd £ 9,000 (cash)
Main issue : can A.S & Co. issue debenture to Salomon
(the sole trader)?
CORPORATE LAW / Z.ELIAS
CASE: SALOMON V A. SALOMON & CO LTD [1897] AC 22
Salomon, a sole trader, ran a successful business in
boots and shoes.
In 1892 he formed a company, A. Salmon & Co.
Ltd., and sold his sole trading boots and shoes
business to the company.
The company had seven shareholders made up of
Salomon (the major shareholder), his wife and his
five children (holding 1 share each).
The company paid Salomon the price for the boots
and shoes business partly in 20,000 £1 shares
(which made him major shareholder), partly in cash,
and partly in debentures secured by a floating
charge.
CORPORATE LAW / Z.ELIAS
..Salomon v A. Salomon & Co. Ltd [1897] AC
22
Being a debenture holder, Salomon became a secured
creditor of co.
Issue:
When the co had to be wound up due to the failure of its
business, the other creditors tried to claim that Salomon
had no right to the remaining assets as Salomon and the
co. were in fact one and the same, that the sale of his
business to the co. was a sham, and that his wife and
children were merely his nominees.
The House of Lords held that:
Upon incorporation, the company and Salomon
were two separate legal entities. The co. was thus
capable of giving debenture to Salomon.
CORPORATE LAW / Z.ELIAS
Application from Salomon’s case:
Where company and members/shareholders are 2 separate entities. : Lee v
Lee’s Air Farming Ltd
Only co. can sue and be sued under its own name.: Foss v Harbottle
Co. is able to own property in its own name. : Macaura v Northern Assurance
Co Ltd
Co. enjoys perpetual succession : Re Noel Tedman Pty Holdings Ltd.
CORPORATE LAW / Z.ELIAS
LEE V LEE’S AIR FARMING LTD
Lee formed a company, Lee’s Air Farming Ltd. in which he
owned all the shares but one.
He was the company’s sole director and was also employed by
the company as its chief and only pilot. Lee died in an
accident while flying the plane for his company.
His wife made a claim for Workmen’s Compensation under the
New Zealand workmen’s compensation legislation.
Payment of such compensation depended on the fact whether
Lee was a worker employed by the co, or was a controller of
the co.
The Privy Council held Mrs. Lee was entitled for compensation
because even though Lee may be a controller of the Co., the
company is a separate legal entity that could employ Lee
as its worker.
CORPORATE LAW / Z.ELIAS
Co. can sue and be sued
As company is a separate legal entity, it can sue and be sued
in its own name.
The members of the company generally cannot represent the
company to take any legal action on behalf of the company.
Only the company itself can enforce its rights.
• This is called the ‘proper plaintiff’ rule and it was
established in the case of:
Foss v Harbottle [1843] 2 Hare 461
The two shareholders of a company brought action against
directors of the company for misapplication and improper use
of company’s property.
The court held that as the injury complained of was injury to
the company, the members could not take action. Only the
company had the right to sue.
CORPORATE LAW / Z.ELIAS
PERPETUAL SUCCESION – S. 20(b)
The company enjoys perpetual succession
…meaning having a continuous life. It will
continue to live until it is properly wound up or
struck off the register.
Even if all the member dies, the business still
exists.
Case: Re Noel Tedman Pty Holdings Ltd
The company’s only shareholders, were a
husband and wife who were also the
directors of the co. Both died together in a
traffic accident, but their co. continued to be
in existence.
CORPORATE LAW / Z.ELIAS
Power to own property
S.21 refers to ‘To acquire, own, hold, develop, or dispose
of any property meaning that a co can own property like
humans.
A co’s property is owned by the co, and it is not the
property of its members. Even if a member holds almost all the
shares of a company, he does not have any proprietary interest
in the company’s property. The property belongs to the
company, and the member has no right or interest in it.
: Macaura v Northern Assurance Co. Ltd. [1925] AC 619;
The House of Lord held that Macaura had no right to claim,
because when he sold the timber to the company, he had given
up his interest in it. The timber was the property of the
company and Macaura no longer had insurable interest in it.
CORPORATE LAW / Z.ELIAS
The Veil of Incorporation
Once a company is incorporated, the veil of
incorporation (a fictional curtain) is drawn
separating the company from its members
the COMPANY
MEMBERS
CORPORATE LAW / Z.ELIAS
What is the Veil of Incorporation?
It is a legal concept that separates the
personality of a company from
the personalities of its shareholders, and
protects the shareholders from being personally
liable for the company's debts and other
obligations.
the COMPANY
CORPORATE LAW / Z.ELIAS
The Veil of Incorporation
Once incorporated, a company has its own
‘personality’, & as such the court would not look
behind that personality or look through the
‘corporate veil’ to see who is behind the company
and why the company was established.
However, there are a number of exceptions to the
principle of veil of incorporation, where the court
“PIERCES or LIFTS THE VEIL” due to some
undesirable consequences of incorporation.
CORPORATE LAW / Z.ELIAS
Lifting The Veil of Incorporation
• The law looks at the exceptional circumstances &
situation and will ignore the separation between the
company and its members or officers.
• When the court lifts the corporate veil or pierce the
corporate veil, the actual people who run the
company or officers will be made liable for the
company’s obligations.
• The corporate veil is lifted :
i. under situations provided by statute, and
ii. according to the judicial decisions under
the common law.
CORPORATE LAW / Z.ELIAS
Law of Assoc I/ Z.Elias
LIFTING THE CORPORATE VEIL
CORPORATE LAW / Z.ELIAS
LIFTING THE
CORPORATE
VEIL
STATUTORY JUDICIAL
EXCEPTIONS EXCEPTIONS
CORPORATE LAW / Z.ELIAS
STATUTORY EXCEPTIONS
1. INCOME TAX ACT 1967
2. COMPANIES ACT 2016
The provisions given are only some
examples where the Corporate veil is lifted.
They are not the only instances.
CORPORATE LAW / Z.ELIAS
INCOME TAX ACT 1967
The corporate veil is consistently lifted in the area of taxation.
The Director General of Inland Revenue Malaysia may ignore transactions
made by the co, where it is found incidences of alterations or evasions to
avoid any liability to tax.
These transactions often conceal the true nature of the company’s affairs
and the DG may disregard them in his assessment of taxes payable.
CORPORATE LAW / Z.ELIAS
S. 30(2) COMPANIES ACT 2016
A company’s registered name and
registration number must appear on orders,
invoices or other demands of payment, etc
that is issued by the co.
If the name of the co does not properly
appear on such co’s document, liability is
imposed on the person who signs,
issues or authorizes the signing or issue
of such documents.
CORPORATE LAW / Z.ELIAS
S. 123(4) COMPANIES ACT 2016
A company shall not give any financial
assistance, for the purpose of purchasing of
any shares in the company.
Where a person has convicted for the offence
under this section, and the Court is satisfied that
the company or another person has suffered
loss or damage as a result of the offence, the
Court may order the convicted person to pay
compensation to the company or the person,
as the case may be, such amount as the Court
may specify.
CORPORATE LAW / Z.ELIAS
S. 131(1) COMPANIES ACT 2016
Where dividends are paid even though there
are no available profits out of which to pay
them, then the directors who declared
the dividends will be liable to the
creditors of the company if the company is
unable to pay the creditors in the event of
liquidation, to the extent by which the
dividend exceeded the available profits.
CORPORATE LAW / Z.ELIAS
S. 540 (1) COMPANIES ACT 2016
In the case of fraudulent trading, if the company is formed or the business
of the company is carried on for fraudulent purposes, the person who is
knowingly a party to the carrying on the business in that manner will be
personally liable for the debts of the company if the company goes into
liquidation.
CORPORATE LAW / Z.ELIAS
LIFTING THE CORPORATE VEIL
TO EVADE LEGAL DUTY /
CO AS VEHICLE OF FRAUD
EXCEPTIONS
TO ATTRIBUTE MENTAL/PHYSICAL STATE
JUDICIAL
CO. AS AGENT
CO USED AS A FRONT
CO. WITHIN A GROUP
CORPORATE LAW / Z.ELIAS
JUDICIAL EXCEPTIONS
Malaysian courts have been careful in lifting
the corporate veil. It would only disregard
the corporate personality as if the company
is not a separate entity from the members
under certain situations.
Instead of just making the company liable,
the directors or/and managers would be
made liable for the debts or obligations.
CORPORATE LAW / Z.ELIAS
Judicial Lifting of the Veil
Where the company is formed to evade legal duty
or used as a vehicle fraud.
Gilford Motors Co. v Horne [1933] Ch. 935
Horne, the MD of the co., had entered into an
agreement with the plaintiff co. not to take away their
customers after the end of his service with them.
Horne left the co and formed his JM Horne Co. The
plaintiff company sought an injunction against Horne
to restrain him from breaching their agreement.
The court granted an injunction against Horne, as he
had used the co as instrument for wrong doing.
CORPORATE LAW / Z.ELIAS
…Judicial Lifting of the Veil
To attribute mental state or physical character to
co.
A co. is a legal creation and has no mental or physical
existence. Its ability to act is through the human
persons behind it. Where it is necessary to attribute
some mental state to the co., then the courts will have
to look at ‘mind and will’ of those controlling the co.
Tesco Supermarkets Ltd. v Nattrass [1972] AC 153;
to determine whether the co. had the guilty mind, the
courts considered whether the person who was the
‘directing mind and will’ of the company had the
intention to commit the crime.
The courts did not consider ‘mere employees’ as the
‘directing mind and will’ of the company.
CORPORATE LAW / Z.ELIAS
…Judicial Lifting of the Veil
• To determine the physical character or
identity of a company requires the courts to look
at who are the controllers of the company. In
times of war, the nationality of the controllers
would determine the nationality of the company.
Daimler Co. Ltd. v Continental Tyre & Rubber
Co. (GB) Ltd. [1916] 2 AC 307 – during the First
World War when Britain was at war with Germany,
the English co. was considered an enemy alien
when the courts lifted the corporate veil and
looked at the shareholders who were majority
German nationals.
Law of Assoc I/ Z.Elias
CORPORATE LAW / Z.ELIAS
…Judicial Lifting of the Veil
Where co. is used as an agent or alter ego of its
controllers.
A co. has the capacity to act as an agent …the
possibility of the members or controllers using the co.
as such. The courts have on occasions construed an
implied or express agency of the co. for its members.
As such the members as principals would be liable for
the acts the co. has entered into.
:Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd
(1988)1 MLJ the Supreme Court decided that it is
proper to lift the corporate veil as the majority
shareholder held almost all the shares in the company
and was regarded to be the alter ego of the company.
The court had considered the interest of the
creditors,(in this case, the banks),in ordering that the
veil of incorporation be lifted.
CORPORATE LAW / Z.ELIAS
Judicial Lifting of the Veil
Where the co. is used as a front to hide the true facts.
Where the controllers of the co. take advantage of the law
establishing a co. as a front/a facade to hide their true
intentions, the courts will lift or pierce the corporate veil and
treat the co. and the members as one.
Re Bugle Press Ltd. [1961] Ch.270;
Two of the co’s shareholders, who together held 90% of the co’s
shares wanted to buy out the third shareholder who refused
their offer. The 2 of them then formed a new co, and used this
co to offer to buy up all the shares of the earlier co. because a
provision of the Companies Act allows a co. holding 90% of the
shares of another co. to buy up the remaining 10%.
The court held that the two shareholders formed the new co.
to hide their true intention to buy out the third shareholder.
CORPORATE LAW / Z.ELIAS
…Judicial Lifting of the Veil
Co.s associated as a group
Although the general rule is that each co. is a distinct legal
entity, the courts have sometimes been willing to look at a
group of co.s as one economic unit.
Hotel Jaya Puri Bhd. v National Union or Hotel, Bar and
Restaurant [1980] 1 MLJ 109;
A restaurant that was run by a subsidiary co. of Hotel Jaya Puri
Bhd. had retrenched their workers when they closed down. The
union claimed for the workers dismissed from employment, but
first had to determine the actual employer. The subsidiary that
employed the workers was no longer in existence, but the co.
running the Hotel was still in existence.
The court held that although technically the Subsidiary and the
Hotel were two separate entities, in reality the two
companies were one.
It is important to note that the above instances where the courts
have treated the companies as one, two aspects are present;
unity of ownership and CORPORATE
unity LAW of
/ Z.ELIAScontrol.
the
CERTIFICATE OF
COMPANY INCORPORATION
CORPORATE LAW / Z.ELIAS
