Law Group.docx

A company has a sperate legal identity from its members, officers and employees. (Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor (1996). The company has a separate legal personality. This means that the company has its own separate legal existence from the shareholders, officers, employees and others from the company. However, separate legal entity concept does not apply to sole proprietorship or partnership. The principles of separate legal entity were laid down in the case Salomon v Salomon & Co Ltd (1897). In the case, Mr Salomon was a sole proprietor that manufactured boots as shoes. As a sole proprietor, he managed the business all by himself which means that all the profits made were belong to him. He incorporated a company name “Salomon Co Ltd” as his family wanted a share in the business. He sold the business to the company. Mr Salomon and his family members were the only shareholders in the company. The company paid Mr Salomon part of the purchase price immediately in the form of shares in the capital of the company and agreed to pay the remainder to Mr Salomon over time. In order to secure the obligation to pay, the company gave Mr Salomon the security over the company’s assets in the form of charge. The effect of charge was the company’s assets had to be used to pay back Mr Salomon in full before it could be use to pay the company’s unsecured creditors. Mr Salomon controlled the company by holding majority of the shares in the company and with his position as the managing director through an agreement with the members of his family that they would exercise their rights in the management of the company in accordance to his directions. However, the value of the assets was insufficient to pay out Mr Salomon and other creditors of the company when the company’s business failed. The creditors argued that Mr Salomon should not receive the benefit of the charge which means he should not be given the right to be paid in priority to them. This is because the degree of control Mr Salomon exercised over the company meant that it should be treated as being his agent or trustee for him, in the conduct of business. If the company were the agent of Mr Salomon or were operating business as a trustee on behalf of him, he would have been required to indemnify the company for the debts it had incurred. However, the House of Lord held that despite the fact that Mr Salomon owns majority of the shares of the company and is controlling the company, it was not his agent or trustee. The company was treated as operating the business on its own right and as

being a separate from its controller, Mr Salomon. Therefore, the charge given to Mr Salomon was valid and he is entitled to the right to be paid his debt even though other creditors of the company would not be paid as the company has insufficient assets to pay the creditors. The principles laid down in Salomon v Salomon & Co Ltd (1897) has been applied in Malaysia in the case Abdul Aziz bin Ah Tan v Ladang Rengo Malay Estate Sdn Bhd (1985). In the case, the company owned an estate and shareholders sold all their shares to a buyer. The plaintiff, who were an employee at the estate later on made a claim under the Employment Act 1955 for the termination of benefits. The issues were whether the sale of shares meant that the estate was sold. It was held that a company is a legal person separate from its shareholders of the company. The shares belong to the company excluding the estate. There were no changes in the company’s identity. The estate belongs the company. Thus, the claim failed. Besides that, the Salomon principles were also applied in the case Lee v Lee Air Farming Ltd (1961). In the case, Lee incorporated a company and owns majority of the shares. He was the only governing director of the company and he hired himself as an employee as the main pilot in the company. He was responsible for to spray fertiliser from the air. One day, the plane crashed and he died. His wife has attempted to claim compensation on behalf of him. However, his wife failed as the board considered that Lee and the company were one and the same. This was because he incorporated the company on his own as a director and hired himself as an employee. The issues were whether a person can be both the director and major shareholder of the company and also an employee of the company on the other hand. The court held that even though Lee was the governing director, it does not prevent him from entering into an employment contract with the company. By applying the principles laid down in the Salomon case, both Lee and the company are two different separate legal entity. The employment contract of Lee with the company is valid. Thus, his wife is entitled to the compensation of behalf of Lee. However, in the case Macaura v Northen Assurance Co Ltd (1925), a different results were obtain based on the principles laid down in the Salomon Case. In Macaura v Northen Asssurance Co Ltd (1925), Macaura owned a timber business. The business was insured in his own name. Later on, he incorporated a company to buy the business.

Macaura was the only shareholder and substantial creditor of the company. One day, the timber was destroyed by the fire. Macaura had attempted to claim for compensation. The court held that the company incorporated by Macaura is separated from him. Macaura has no insurable interest in the timber. The timber belonged to the company and not to him. Thus, he is not entitled to claim for compensation. Rights, liabilities, assets and properties belonged to the company. The relationship Macaura had is with the company and not the timber. Aspatra Sdn Bhd v Bank Bumiputera Malaysia Bhd (1988) The supreme court held that the corporate veil was properly lifted when it was proven that the fraud was committed by Lorrain Osman as a director and chairman of two companies concerned. He had made a secret profit and was alter ego of Aspatra. Thus, the court held that it was necessary to identify all assets owned by Lorrain within the jurisdiction as well. https://www.academia.edu/9933752/Law346_-_Company_Law The doctrine can also be lifted under Companies Act 2016. Sec 539(3) of the CA 2016 provides that an officer who knowingly contracts a debt with no reasonable or probable ground of expectation that the company would be able to pay the debt is guilty of an offence. For example, director borrow money from creditors and bank and at that time, the director knew that the company were unable to pay back the money but nevertheless, the director goes on and borrow the money. The director had the intention to cheat the company. In this situation, the doctrine will be lifted. Next, Sec 540 of the CA 2016 provides that an officer can be personally liable to creditors for debts incurred by the company. This can happen if the company is being wound up but it still continues to trade and incur debts with the intention to defraud the creditors or for any fraudulent trading. For example, the directors are aware that the company are suffering losses every year but they are still not closing it down but use it for fraudulent trading instead. In this situation, the doctrine will be lifted. The court may on the application of the liquidator or any contributor of the company, declare that any person who was knowingly a party to carrying on the business is personally liable for all or any debts incurred.

Besides that, the doctrine can also be lifted in certain circumstances. For example, if the director of the company did not contribute to the EPF, the doctrine can be lifted. According to the Employee Provident Funds Act 1991, the directors as well as the former directors of the company are jointly and severally liable with the company for any contributions to the employee provident fund remaining unpaid by a company under Sec 46(1). The Income Tax Act 1967 provides allowance for piercing the corporate veil and the company’s members or officers are to be made liable for the company action in accordance to Sec 140(1) of the Income Tax Act 1967. Thus, the director of Inland Revenue may disregard the transactions and make the necessary adjustments to counteract the transactions which have the effect of avoiding or evading tax.