youblisher.com 1062213 chapter 9 (1)

7/25/2019 Youblisher.com 1062213 Chapter 9 (1)

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Chapter 9 INCORPORATION & ITSEFFECTS


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Learning Outcomes

Students shall be able to:

State and explain the characteristics of a registeredcompany

Explain the concept of separate legal entity

Explain the concept of lifting the veil

Identify and describe the circumstances when theveil may be lifted.

Apply the law in solving certain problem.

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EFFECT OF INCORPORATION S a l mi a h

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S16(5)- On and from the date of incorporation specified in thecertificate of incorporation but subject to this Act the subscribers tothe memorandum together with such other persons as may fromtime to time become members of the company shall be a bodycorporate by the name contained in the memorandum capableforthwith of exercising all the functions of an incorporated companyand of suing and being sued and having perpetual succession and acommon seal with power to hold land but with such liability on the

part of the members to contribute to the assets of the company inthe event of its being wound up as is provided by this Act.

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EFFECT OF INCORPORATION(cont)

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Effect of incorporation:a. the company is a body corporate with the power of

an incorporated co,. b. it may sue and being sued in its own name,

c. it has perpetual succession,d. it may own land, ande. the liability of the members may be limited.

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1. Separate legal entity S a l mi a h

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The principle established by Salomons case. It is adopted in

Malaysia through the case of Sunrise Sdn. Bhd v First profile (M)Sdn. Bhd & Anor [1996].

XYZ Bhd.

ShareholdersOfficers

Corporate Veil

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Salomon v Salomon Co Ltd S a l mi a h

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Mr Salomon (sole trader

in manufacture boots and shoes

Salomon & Co. LtdSalomon 1 share

Wife 1 share5 children 1 share each

Insolvent only L6,000

- Formed a companyBiz transferredfor L39,000

The coissued20,000L1 share+

L10,000Debenture

Salomon

= shareholder& secured creditor

Owed L10,000

OwedL7,000 tootherunsecuredcreditor

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Salomons case (cont) S a l mi a h

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The unsecured creditor raised 2 arguments:

Salomon was still the owner of the business. Therefore he isliable for its debts. The co was irregularly formed because all the s/holders werenominees of Salomon. Therefore the co were one and thesame. So Solomon is liable.

Held by the House of Lord: that Salomon and his co were 2 separate person. Therefore:

The biz was owned by and its debts were liabilities of thecompany and not of Salomon personally.Salomon was also be a secured creditor with enforceable rightsagainst the company in that capacity.

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Salomon v Salomon Co Ltd.(cont) S a l mi a h

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Lord Macnaghten observed:When the memo is duly signed and registered,

the subscribers are a body corporate...the company is atlaw a different person altogether from the subscribersto the memo and although it may be that afterincorporation the business is precisely the same as itwas before and the same persons are managers and thesame hands receive the profits, the company is not inlaw the agent or trustee for the members.

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Effects of separate legal entity S a l mi a h

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Members cannot be made liable for the debts/liabilities ofthe company. Only the company liable.

A companys existence will not be affected by the death of itsmembers.

a company has ability to own property in its own name.Shareholders have no proprietary interest in those assets.

a company has ability to sue and be sued in its own name forany wrong.

a company can make contract with its own members.

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2. Co has ability to own property - Macaura v Northern Assurance Co Ltd

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Macaura(Owned an estate)

The company-Macaura hold all shares

-Macaura is the substantial creditor)

Insurance Co

Sold

the timber

Insured the timberin his own name.The timber destroyed in fire.

claim

efusedHouse of Lord

supported the insurance company. WhenMacaura sold the timber to the company, he gaveup his interest in it. He had no interest that hecould insured.Therefore, the insurance was void for want of aninsurable interest and the insurance company wasnot obliged to pay.

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E f f e c t of i n

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Perman Sdn Bhd &ors v European Commodities& Anor [2006] 1 MLJ 97

Fimaly

9th D51% 46%

2nd p3%(150,000 share)Perman (Rj Zainal)

RangoonwalaPay for the share

of Perman

Held: there was no doubt whatsoever that the true owner of theFimaly shares was the Perman and not Rj Zainal. If anyone wasto be a trustee of the Fimaly share, it had to be the Perman. Noone, including Rj Zainal had the power to declare himself atrustee of the Perman. A company is a separate legal personfrom its shareholder. The shareholders have no interest, legal orbeneficial over the property of the company. Macauras case

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3. Limited Liability of shareholder

Members cannot be sued personally for the debtsor liabilities of the company.

However, as members, they have some liabilitiesbut the liabilities is limited.

Directors and officers are also not responsible forcos debts

Re Application by Yee Yut Ee

Double Acre

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C om

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5. Perpetual succession Re NoelTedman Holding Pty Ltd

Re Noel Tedman

2 shareholder /directors died in a road accident.The infant child survived.Held : The company continued to exist.


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6. Common seal7. Control and management

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Santapan Minda & Rohani

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Lifting the veil of incorporation S a l mi a h

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General rule - when a co has been formed and registered theveil will drop to protect all its members from any cos liability.(Solomons case).

StatutoryLifting the veil Judicial/commonlaw lifting the veil

Exceptions - the veil lifted i.e. the members can be held liable on

cos liability.

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E f f e c t of i n

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Separate legal entity

XYZ Bhd.

Shareholders

Officers

Corporate Veil

CreditorsWorkers

SuppliersPurchaserscontractors

They can sue theshareholder/officersif the veil lifted


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Statutory lifting the veil

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S 121(2)(c)

303 (3) readwith s 304(2).

S 304 (1)

S 365(2)(b)

S 48(4)

S 140(1) of the IncomeTax Act.

Judicial Lifting the veil

Use of co to evade legalobligations.(the mere faade

principle)

Company employed as an

agent or alter ego of itscontrollers.

Where the court is asked topromote justice or to exercise

an equitable discretion.

Group of companies.

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S 36 C om


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1/1 1/2 1/8

A & B A

Bank X Bank Y Bank Z

A is personally liable for debt with Bank Z as it is

contracted after 6 months from the date the numberis reduced below 2.Except: Not awareHolding co

The veil lifted


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S121(2)(c) C om


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XYZ

Sdn Bhd

3rd party

X is liable personally to the 3 rd party for thevalue of the cheque

TheDirectors


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S300(3) & 304(2) C om


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XYZSdn Bhd

Bank A,the creditor

Y is liable personally to the Bank A for the payment of the whole debt.

TheDirectors


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S304(1) C om


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XYZSdn Bhd

the creditoror others

Z is liable personally for all or any of thedebts / liabilities of the XYZ Sdn. Bhd.

TheDirectors


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S365(2)(b) C om


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XYZSdn Bhd(no profit)

shareholders

The directors are liable personally to thecreditors for the debts due by the co to them.

TheDirectors

creditors

se o co to eva e ega o gat on or


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se o co to eva e ega o gat on - orMotor v Horne

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Horne The companyFormer managing director

(Agreed not to solicit thecustomer of the companyafter his termination)

JM Horne & Co Solicit the customer

Held granted injunction against both H and his company,having held that he had breached his covenant. Both Horne andhis company was considered as a single entity as Hornes had used

his company to evade legal obligation under the agreement.2009

J Li


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Jones v Lipman S a l mi a h

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Lipman Jones

Alamed Ltd

Agreed to sell his house

Changed his mindFormed Transfer

The houseSought an order ofspecific performance.

Defense the company was not a party against whom SP could beordered.

HeldAlamed Ltd was the creature of Lipman, a device and a shame, amask which he hold before his face in an attempt to avoid legalobligation. Both Lipman and the co were ordered to specifically

perform the contract to sell the house.

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C l d g t


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Company employed as an agent oralter ego of its controllers -

Smith, Stone & Knight Ltd vBirmingham Corporation.

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In this case, since the company acting as agentfor its shareholder, the shareholder was heldliable for the act of the company on normalagency principles.

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ere t e court s as e to promote ust ce


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ere t e court s as e to promote ust ceor to exercise an equitable discretion.

Aspatra Sdn. Bhd v BMBB

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1. BBMB & BMF Vs Lorraine Osman for making secret profit.2. In the meantime BBMB Vs LO for M/Injunction to restrain LO

from transferring its asset out of jurisdiction.3. Injunction was extended to Aspatra (a co controlled by LO)

Thus Aspatra also was restrained from transferring its asset outof jurisdiction.

4. Aspatra Vs BBMB - to challenge the injunction. Based onseparate legal entity principle.

Held: the court could lift the veil to determine whether the asset ofthe co were really owned by them or whether there was an abuse ofthe principle that a co is a separate legal personality. As LO was thecontroller of Aspatra, the veil was lifted. This is especially so as itinvolve fraud.2009


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Yap Sing Hock, Peh Swee Chin SCJ:

Court lift the veil to do justice limited to a fewpurposes:

For the purpose of tax cases in order to ascertain taxliability or detecting tax evasion,

To detect any trading with enemies

For some illegal purpose

On account of equitable consideration

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G f i i lit i l it


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Group of companies in reality a single unity orone economic unit.

Hotel Jaya Puri Bhd v National Union of Hotels,

Bar & Restaurant Workers

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Hotel Jaya Puri Bhd

Jaya Puri Chinese GardenRestaurant Sdn. Bhd.

Wholly owned

subsidiary

Retrenched workers

Restaurant closed down

The restaurantSituated in the Hotel

M.Director

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The union claimed that the workers had been dismissed fromtheir employment. argument the actual employer was the hotel. The hotel wasstill in business. Therefore the workers could not have been saidto have been retrenched on the disclosure of a business. the Industrial Court accepted this argument and made an orderagainst the hotel. Appealed to The High Court.

Held : Although technically the restaurant and the hotel wereseparate legal entities, in reality the 2 companies werefunctionally one. Thus although technically a person working forthe restaurant was an employee of the restaurant, the reality was

that the workers were employees of the Hotel. The court was prepared to ignored the separate entities of the restaurant and thehotel and treat them as one single entity.= one economic unit.

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National Union of Hotel, Bar and Restaurant Workers v Hotel Malaya Sdn. Bhd.

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Hamzah SCJ was not prepared to hold that the hotel companywas the employer of the workers of the Restaurant Co. This is

because, unlike Jaya Puris case, in this case only the GeneralManager was common to both Hotel and Restaurant Co. Further,in this case the Hotel company only held 90.75% of the paid upshare capital of the Restaurant Co.

the two companies were two separate entity.

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Tiu Shi Kian v Red Rose Sdn Bhd.[1984](datukHong Kim Sui v Tiu Shi Kian [1987] PC

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Hotel Shangrila(Hotel Berjaya Sdn. Bhd)

P ran & manage Golden MillionCabaret & Night Club

Red Rose Restaurant(Red Rose Sdn Bhd)

Wholly ownedsubsidiary

Albert Teo & datuk HongDirectors

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Dispute between RRR & the P. P applied interim injunctionvs RR(the D) to restrain the D from disturbing the P quietuse & enjoyment of the Hotel Shangrila Night Club andRestaurant (14/3/1983).

16/3/1983- the P found RRR closed and locked byDavid(General Manager of the Hotel Berjaya Sdn. Bhd) +advertisement placed in local newspaper informing thepublic of the closure of the cabaret & Restaurant.

the P brought civil contempt proceeding vs Albert Teo &Datuk(the R). The R argued that the disclosure and theadvertisement complained of were place by separateentity ie. Hotel Berjaya Sdn. Bhd. T/fore the D and the Rshould not be responsible for such acts. Despite this, HighCourt found the R guilty of civil contempt.

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Wan Mohemed J :The R had attempted to mask themselves by making use of HotelBerjaya Sdn. Bhd to say that the RRR was dispossessed of thelicensed premisesHaving explained and understood that the twocorporate bodies are in fact one single authority, I find it is just likethe right hand telling the left hand to commit an act with the hope that

the right hand will not be blamed for it. This sort of device should not be allowed to defeat justiceI find it as of fact that Hotel Berjayaand RRR are actually two -in- one and one -in- two entitybyadopting the test of business realities(DNN case) of the situation

plus the functional integrity (Hotel Jaya Puri).So, RRR and Hotel Berjaya = one single entity.

Management-wise- there is also unity as the directors of HotelBerjaya are also directors of the RRR.

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Vismanathan a/l Perumal v Mona IndustriesMsia Sdn Bhd.

The holding co(2 nd D) was held liable for the debtsof the wholly owned subs co (1 st D). Following thecase of Hotel Jaya Puri.

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Woolfson v Strathclyde

Lord Keith :

it is appropriate to pierce the corporateveil only where special circumstances existindicating that it is a mere facadeconcealing the true facts.

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Santapan Minda

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Ada 4 dipandang sebagai ibu, iaitu:

Ibu dari segala UBAT adalah SEDIKIT MAKANIbu dari segala ADAB adalah SEDIKIT BERBICARAIbu dari segala IBADAT adalah TAKUT BUAT DOSAIbu dari segala CITA-CITA adalah SABAR

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Santapan Minda

(iaitu) orang yang beriman dan hati merekamenjadi tenang/tenteram dengan mengingatiAllah. Ingatlah, hanya dengan mengingati Allah

hati menjadi tenteram. Ar-Rad 13:28

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