doctrine of separate_legal_entity company law

The effect of incorporation

GLUP3064 - Separate legal entity1

Doctrine of separate legal entity – the company and its members are two separate/ distinct entities

Salomon lwn. A Salomon co. & LtdLee lwn Lee’s Air Farming Ltd.

Characteristics of a company


S 16(5) CA 1965Power of a corporationCan sue and be suedPerpetual successionCan hold property under its own nameLiability of a member



1. Power of a corporation

As from the date of incorporation, a company acquires a legal entity. It becomes a legal person. It is distinct from its own members.



2. Can sue and be sued

A company can sue and be sued under its own name

Foss lwn Harbottle



3. Perpetual Succession

A company will still continue to exist even though all its members died.

Re Noel Tedman Holdings Pty Ltd.



4. Power to hold property

A company may hold property under its own name.

Macaura lwn Northern Assurance Co Ltd.



5. Liability of members

A member would not be personally liable for the company’s debt. The member’s liability depends on the type of company being incorporated.

LIFTING OF THE CORPORATE VEIL


The corporate veil refers to the doctrine of separate legal entity.

All the company’s liabilities is separated from the members’ liabilities.

The Court would not lift the veil in order to find out who actually is liable on the company’s debt.



The Court would however lift the corporate veil in order to find out who the wrongdoer is or the person liable for the company’s debt under TWO circumstances.


2 SITUATIONS:


Statutory exception Judicial exception


Statutory exception


1. S 36 CA 1965

- Statutory prohibition on carrying a business with members less than two.


Statutory exception


2. S 121(2)(c)- an officer signing an incomplete document on behalf of the company would be liable on the mistake so made.


Statutory exception


3. SS 303(3) + 304(2)- the officer making loan on behalf of the company and believing that the company is incapable of settling the debt; the officer would then be liable on the loan so made.


Statutory exception


4. S 304(1)- For a company carrying on the business in the form of fraudulent trading, the Court upon application by creditor/ contributor/ liquidator may order the officer concerned be made liable for the company’s debt.


Statutory exception


5. S 365(2)(b)- director would be made liable on the dividend paid not from profit.


Judicial Exception


1. The company has been used to manipulate or evade liability.

- Gilford Motor Co. lwn Horne- Jones lwn Lipman- Re Darby


Judicial Exception


2. The company has been agent or ‘alter ego’ to its members.

- Aspatra S/B lwn Bank Bumiputra Malaysia Bhd.


Judicial Exception


3. When the company has been used as mask to cover a wrongful act.

- Re FG(Films) Ltd.


Judicial Exception


4. When the Court acts on analogy and equity

- Orri lwn Moundreas


Judicial Exception


5. When it involves group of companies

- Hotel Jaya Puri Bhd. lwn National Union of Hotel, Bar & Restaurant Workers

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