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The Principles of Corporate Personality &The Effect of Incorporation Summary : Summary Companies, Partnerships & Sole Traders Effect of Incorporation Characteristics of a company Other Characteristics The principles of corporate personality Lifting the veil of incorporation Lifting the veil by statute to enforce the law Lifting of veil by courts – Judicial Lifting Common law lifting of veil 1. Companies, Partnerships & Sole Traders : 1. Companies, Partnerships & Sole Traders The word company is used to describe a company incorporated pursuant to the Companies Act 1965: Section 4. The process of incorporation is to register the company with the CCM. Upon the registration CCM will issue a certificate of incorporation certifying that the company is incorporated from the date specified on the certificate. 2. Effect of Incorporation : 2. Effect of Incorporation Section 16 provides that on and from the date of incorporation the subscribers to the memorandum together with other persons who may from time to time become members of the company shall be a body corporate with certain characteristics. Essentially the company becomes a legal person distinct and separate from its members. The separate legal personality was established in the case of Salomon v Salomon the whole scheme of the Act is predicated upon the company’s separate existence. 2. Effect of Incorporation : 2. Effect of Incorporation The principle of corporate entity was established in the case of Salomon v A. Salomon, now referred to as the ‘Salomon’ principle. The facts of this case were that the owner of a business sold it to a company he had formed, in return for fully paid-up shares to himself and members of his family, and secured debentures. When the company went into liquidation, the owner, because of the ownership of the debentures, won his claim to be paid off in priority to other creditors, as the secured debt ranked at a higher priority to those debts and successfully proved that he did not have to indemnify the company in respect of its debts, as it had a separate legal personality. The House of Lords affirmed this principle, and stated that the company was also not to be regarded as an agent of the owner, as stated by Lord Macnaughten in the House of Lords as the company is at law a different person altogether from the subscribers to the memorandum and the company is not in law the agent of the subscribers or a trustee for them. There are occasions when it seems that the Salomon principle may be unfair, and then the courts are under pressure to review the principle and make decisions contrary to it upon various grounds. This is termed as ‘piercing the corporate veil’. 3. Characteristics of a company : 3. Characteristics of a company As provided in Section 16 the characteristics of a separate legal personality are and include: The company may sue and be sued in its own name - A company like any other legal person may sue and be sued in its own name The company has perpetual succession - A change of membership or the death of a member is not a change in the company itself. It may own land - A company has the power to hold land and the company’s property or assets belong to the company and the company alone and not the members who have no legal or equitable interests in them: Macaura v Northern Assurance Company Ltd. The liability of the members may be limited - The company is liable without limit for its own debts. The members are not liable to contribute more than the amount outstanding [if any] on their shares or if it is company limited by guarantee the amount of their guarantee. 4. Other Characteristics : 4. Other Characteristics Transferable shares The interest of member is seen in the shares he holds Capital Sums paid by its members in return for their shares Supervision Company created by the legal process of incorporation Management Company cannot as an artificial person manages itself Written constitution A company has no mind of its own to decide what to do 5. The principle of corporate personality : 5. The principle of corporate personality The essential feature of a company is that it exists as a legal entity or person distinct from its members. This distinction between a company and its members as different legal persons sometimes called the veil of incorporation was authoritatively established by the House of Lords in 1897 in the case of Salomon v Salomon Ltd. 6. Lifting the veil of incorporation : 6. Lifting the veil of incorporation Exceptions are made called ‘lifting the veil of incorporation’ in some specific situations – the effect of so doing is either: To identify the company with other persons that is its members or directors or To treat a group of companies as a single commercial entity 6. Lifting the veil of incorporation : 6. Lifting the veil of incorporation The general purpose is to: Enforce statutory rules of company law or Prevent fraud or other evasion of legal obligations by the use companies or Recognize that in economic reality the entity is group and not the individual companies within it. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Liability of a sole member for a company’s debts Every company must have a minimum membership of at least two members: Section 14. One surviving member is made liable [with the company] for its debts if: The company carries on business after six months from the time when the membership is reduced to one and The surviving member knows that it is carrying on business with himself as a sole member Section 36: the member’s liability is not retrospective and extends only to debts of the company incurred after the six months have expired. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Fraudulent trading If when a company is wound up it appears that its business has been carried on with intent to defraud creditors or others the court may decide that the persons [usually the directors] who were knowing parties to the fraud shall be personally responsible for debts and other liabilities of the company: Section 304. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Liability where the company’s name is improperly used Under Section 121[1A] if any officer signs, issues or authorizes to be signed or issued on the company’s behalf any bill of exchange, cheque or promissory note where the company’s name is not mentioned or not legibly written the officer shall be liable to the holder of the instrument or order for the amount due thereon unless it is paid by the company. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Liability for incurring debts where there is no reasonably ground for repayment If it appears that an officer of the company who was knowingly a party to the contracting of a debt had at the time of the debt was contracted no reasonable or probable ground of expectation that the company is able to pay the debt, he is guilty of an offence under Section 303. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Liability for payment of dividends out of capital Dividends can only be declared out of available profits: Section 365. Thus if a director or manager willfully pays or permits to be paid any dividend out of which he knows is not profit he shall in addition of being guilty of an offence be also liable to the creditors of the company for the amount of the debts due by the company to the extent by which the dividends so paid have exceeded the profits. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Consolidated group accounts Section 169 provides that directors of a holding company are required to prepare consolidated accounts consolidating the financial position of the holding company and its subsidiaries. 7. Lifting the veil of by statute : 7. Lifting the veil of by statute Other legislation Section 140 Income Tax Act 1967 allows the Director-General of Inland Revenue to ignore transactions which have the effect of avoiding or evading tax: SBP Sdn Bhd v Director-General of Inland Revenue  8. Lifting the veil of by courtsJudicial Lifting : 8. Lifting the veil of by courtsJudicial Lifting Lifting the veil to prevent fraud or evasion of legal obligations Where company is used as a vehicle for fraud or to evade their legal or contractual obligations Re Darby Aspatra Sdn Bhd & Others v Bank Bumiputra Malaysia Gilford Motor Company Ltd v Horne Jones v Lipman 8. Lifting the veil of by courtsJudicial Lifting : 8. Lifting the veil of by courtsJudicial Lifting Public interest In time of war it is not permitted to trade with ‘enemy aliens’ - Daimler Company Ltd v Continental Tyres & Rubber Company Ltd. The question of nationality may also arise in peacetime where it is convenient for a foreign entity to have a British façade on its operations: Re FG Films Ltd 8. Lifting the veil of by courtsJudicial Lifting : 8. Lifting the veil of by courtsJudicial Lifting Evasion of liabilities Where directors ignore the separate legal personality of two companies and transfer assets from one to the other in disregard of their duties in order to avoid contingent liability: Creasey v Breachwood Motors Ltd & Re H & Others 8. Lifting the veil of by courtsJudicial Lifting : 8. Lifting the veil of by courtsJudicial Lifting Quasi-partnership Where individuals who have operated contentedly as a company for years fall out and one seeks to remove the other. The courts are willing to consider the central relationship between directors rather than to look at the bare bones of the company: Ebrahimi v Westbourne Galleries Ltd 9. Common law lifting of veil : 9. Common law lifting of veil Common law lifting of veil Where an element of fraud exists or where there is an abuse of separate entity principle When it is necessary to give effect to the true intentions of the parties to an agreement Where the group entity is essentially a single unit Where the veil is merely a mask to defeat justice 9. Common law lifting of veil : 9. Common law lifting of veil Salomon v A Salomon & Co Ltd (1897) Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Workers & Anor (1980) The High Court held that although technically the restaurant and the hotel were separate legal entities in reality the two companies were functionally one 9. Common law lifting of veil : 9. Common law lifting of veil Yap Sing Hock & Anor v Public Prosecutor (1992) Directors of a company were prosecuted under Section 67(3) of Companies Act 1965 in relation to breach of the financial assistance provision of that legislation and criminal breach of trust in relation to two sums of money. The two accused were directors of the company and one of the accused was the beneficial owner of all shares in the company. The accused was convicted and appealed on the grounds that inter alia a person who is the sole beneficial shareholder could not be liable for breach of trust. 9. Common law lifting of veil : 9. Common law lifting of veil Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor (1996) The Federal Court said we are in complete agreement with the basic principle of the fundamental attribute of corporate personality ie that the corporation is a legal entity distinct from its members be they individual or corporate bodies a principle firmly established since Salomon v Salomon & Company Ltd (1897) 9. Common law lifting of veil : 9. Common law lifting of veil Aspatra Sdn Bhd & Ors v Bank Bumiputra Malaysia Bhd (1988) Respondents sued Lorrain Osman for an account of secret profits that he allegedly made while he was their director and chairman; also made an ex parte application for a Mareva injunction to restrain appellant from transferring his assets out of jurisdiction. The Supreme Court held that the court could lift the veil to do justice particularly where an element of fraud was involved. Tay Tian Liang v Hong Say Tee & Ors (1995) You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.