Company Law in Malaysia – Separate Legal Entity Sample

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In a modern capitalist market economic system. companies are a familiar portion of mundane life. Companies ain supermarkets, supply H2O, gas, electricity and crude oil merchandises we are depending on. They publish the newspapers and supply our Internet services. We deal with companies so frequently as buyers and users of their merchandises and services that the image ‘company’ brings to mind is normally of an administration concerned with selling and roll uping payment for merchandises which the company has made ( or bought in ) or services it has provided. It is necessary to travel behind this image to acquire to the company which is the topic of company jurisprudence. As we all know in Malaysia there are different types of concern entities. Local or foreign investors are coming to Malaysia to get down a concern.

Company has been defined as any formal concern entity for net income which may be a corporation. a partnership. association or single proprietary. Often people think the term “company” means the concern is incorporated. but that is non true. In fact. a corporation normally must utilize some term in its name such as “corporation. ” “incorporated. ” “corp. ” or “inc. ” to demo it is a corporation.

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In Malaysia. a “company” is a concern administration that is registered ( or “incorporated” ) under the Companies Act. 1965 or its predecessor statute law. Section 14 two or more individuals. if they agree to go associated for any lawful intent may integrate a company. In world. a company or a corporate individual is an association of individuals who have agreed to set about their lawful projects through a company.

In order to integrate a company. there are two phases that we have to travel through. which are. pre-incorporation and station incorporation. In the pre incorporation phase. the booster is responsible to convey the company into the legal being and guarantee its successful running. and in order to carry through his duty he may come in into some contract on behalf of prospective company. Promoters are the individuals involved in formation of a company. They will set about the enterprise to fix necessary paperss and do other important plants in order to register the company. Sometimes they become the first managers of the company one time the company has been registered or they might happen new managers.

While in the station incorporation phase. we have to guarantee that all the things that have been stated in memoranda and article of association will be exercised. A company is besides required to keep the statutory books such as. Register of Members as has been provided in Section 158. Register of Significant Stockholders as in Section 69L. Books of Accounts Section 167 etc. The duties will increase one time the company is incorporated. A company is an unreal individual. which is capable of having belongings. Who owns the company and benefits from the wealth which the company has. and who controls what the company does with its assets? Therefore. we will discourse more sing the responsibilities of the boosters and the effects of incorporations in Malaysia.

PromotersBefore a company can be formed. there must be some individuals who have an purpose to organize a company and who take the necessary stairss to transport that purpose into operation. Such individuals are called ‘promoters’ . Harmonizing to Cockburn CJ in Twycross V Grant ( 1877 ) . a booster is a “person who undertakes to organize a company with mention to a given object and put it traveling and takes the necessary stairss to carry through the purpose” .

A booster is one who starts off a venture-any venture-not entirely for himself. but for others. but of whom. he may be one. ” The booster lays the foundations for a Company in footings of dialogues. enrollment of the Company. obtaining managers and stockholders and fixing all the paperwork. However. because the booster is such an of import individual in the formation of the company. the jurisprudence places several duties on him. These are known as fiducial responsibilities.

The boosters have fiducial relationship with the company significance that the boosters have a really close relationship with company and they acted as legal guardian of the company. The fiducial duties arise automatically one time a individual identified as a booster. Therefore. boosters have fiducial responsibilities towards company which is non to do any secret net income without company’s consent and to give full revelation to the company any involvement boosters have in any dealing to be entered into by the company.

The boosters must do full revelation of the net income made to the independent board of managers. If the boosters or some of the boosters are in the board of the managers. the board would non be considered as an independent board of the managers. If that’s the instance. the revelation of involvement of boosters should be made to the members of the company.

Cotton LJ in Re Cape Breton Co ( 1885 ) said that his responsibility as a booster may originate even at the clip he purchases a belongings with the belongings with the purpose of selling it to the company he is traveling to integrate. Therefore. his function as the company’s booster does non stop instantly once the company is incorporated. as in Erlanger v New Sombrero Phosphate Co ( 1878 ) . In this instance a mob purchased a rental of an island in the West Indies.

The island contained sedimentations of phosphate of calcium hydroxide. Mr. Erlanger was the head in the mob. The mob purchased the rental of island for ?55. 000. Subsequently a company was formed by the mob and it sold the island to the new company for ?110. 000 through a campaigner. As a consequence the mob earned ?55. 000 secret net income. The articles of the company empowered the managers to follow the purchase of the rental. which was finally done. A prospectus was issued by the company giving a really favorable history of the strategy and many people bought portions.

The existent fortunes of the purchase were non disclosed to the stockholders despite being questioned by the stockholders. Later an probe commission was formed to look into the incidence and it recommended the remotion of the original managers and assignment of a new board of managers. The new board of managers was appointed and it rescinded the purchase contract and claimed for refund of the money and portions which had passed to the mob.

The House of Lords held that the purchase contract could be rescinded. He may go on to be a booster even after the company has been incorporated. for the intent of securing capital for the company. A booster can be compelled by the company to manus over any secret net income which he has made without full revelation to the company. The company can besides action for the recission of the contract of sale by the booster where the booster has non disclosed his involvement therein.

In the instance where the secret net income is recoverable. the company decides non to revoke the contract as in Gluckstein v. Barnes. A company was able to retrieve the amount of ?20. 000 made as secret net income which was non to the full disclosed by the boosters. In this instance a mob consisting of four individuals bought a belongings known as ‘Olympia’ for ?140. 000 from a murderer. Then it sold the belongings to a company which it promoted for ?180. 000 and made ?40. 000 net income. The mob made another 20. 000 net income by purchasing securities on the belongings at a price reduction. A prospectus was issued by the company to the populace to raise capital. In this prospectus the boosters disclosed ?40. 000 net income but non the other ?20. 000 net income.

The company went into settlement within four old ages of its incorporation. The murderer sued the mob to retrieve 20. 000 unrevealed net income. House of Lords held that the revelation of secret net income was non full and allowed the murderer to retrieve 20. 000 unrevealed net income from the mob. A booster is capable to the following liabilities under the assorted commissariats of the companies act. The liability of boosters is stated in Section 130 of Companies Act 1965.

This Section provides that if a individual is convicted of any offense in connexion with the publicity. formation or direction of a corporation. he shall be disqualified automatically from being a manager or booster for five old ages from the day of the month of strong belief or from the day of the month of release from gaol if he was imprisoned. However. the individual can be appointed for such a place if he has obtained the leave of tribunal. If a individual is convicted on allegations of an offense in connexion with the publicity of a company. he might be disqualified by the tribunal to go a manager in the company.

On and from the day of the month of incorporation specified in the certification of incorporation but capable to this Act. the endorsers to the memoranda together with such other individuals as may from clip become members of the company shall be a organic structure corporate by the name contained in the memoranda capable forthwith of exerting all the maps of an incorporated company and of actioning and being sued and holding ageless sequence and a common seal with power to keep land but with such liability on the portion of the members contribute to the assets of the company in the event of its being wound up as is provided by this Act.

The rule of separate legal entity which is. after the incorporation of a company. it is regarded as an arti?cial individual or juridical individual. who has the rights and duties similar to a populating individual. has been widely accepted and applied in the universe of concern. trade and industry. Once it is incorporated by following with the prescribed process. it comes into being and is a separate legal entity from its members and officers. This rule differ a company from a partnership.

A company as a separate individual has members. who are efficaciously its proprietors. and it has managers. who control what it does and pull off its concern. But merely the company as a separate individual is responsible for the debts incurred in transporting on its concern. It will be qualified to action or being sued by others for any wrongs committed against it. The rule that company is a legal entity separate from its members once it is incorporated was asserted in the instance of Salomon v Salomon & A ; Co Ltd ( 1897 ) .

The facts in this instance disclosed that a company had been incorporated by Mr. Salomon in which he and members of his household were the lone stockholders. The instance came into spotlight when the company’s concern turned out to be a failure. The value of the assets was deficient to pay out both Mr. Salomon and the company’s other creditors. Consequently. the creditors raised an issue whereby they argued that Mr. Salomon should non hold received the payment from the company because the grade of control he exercised over the company.

It was held by the House of Lords that despite Mr. Salomon holding the control over the company. it was neither his agent nor legal guardian. This is because a company was treated as runing the concern in its ain right. and as being separate from its accountant. for illustration like in this instance of Mr. Salomon. Therefore. the charge given by the company to Mr. Salomon was valid and he was entitled to be paid his debt even though other creditors of the company would non be paid because the company had deficient assets to pay all its creditors. The determination confirms that a company upon its incorporation is a separate legal entity from its members.

It is immaterial that the company bought over the concern from its endorsers. and operated it as earlier ; that 3rd parties dealt with the same forces ; and that the same individuals received the net incomes generated by the concern. antecedently as the spouses and now as members of the company running that the concern. As the debts were incurred by the company. the creditors can look merely to the company. and non its members for refund. Since the company and its members are separate legal entity. the liability of the members merely limited to the sum of whatever they still owe the company. In the instance of Salomon. Lord Macnaghten besides commented that “there is nil in the Act necessitating the endorsers to the memoranda should be independent or unconnected. or that they or any of them should take significant involvement in the project. or that they must hold a head and will of their ain. ” Therefore the fact that all the portions held for the benefit of one individual will non impact the position of the company as a separate legal entity. It does non do the company and the exclusive good proprietor of the portions to be one legal individual.

The rule was strengthened by the Privy Council in the instance of Lee v Lee’s Air Farming Ltd ( 1961 ) . This instance was about the head covering of incorporation and separate legal personality. Mr Lee is the proprietor and exclusive working manager of a company engaged in the concern of aerial harvest spraying. Mr Lee held 2999 of 3000 portions was the exclusive manager and employed as the head pilot. He besides took insurance for his employees. While he was executing his responsibilities as a pilot. he was killed in an accident. His widow. the complainant. attempted to roll up what was truly due to a widow of a adult male killed on the occupation.

The existent suspect was an insurance company. The company was insured ( as required ) for worker compensation. The Lee’s Air Farming instance confirmed the Salomon rule. Lee’s Air Farming Ltd. was non a mere fake. It was a legitimate corporation. established for legitimate intents. and had carried on a legitimate concern. His employment by the corporation was well-documented through authorities records of revenue enhancement tax write-offs. workmen’s’ compensation parts. etc. . and was non something his widow had attempted to patch together after the fact of his decease.

There was no ground in jurisprudence why a individual could non execute corporate maps and employee maps within the same corporation. Mrs. Lee won the instance and the compensation was paid. In another instance. Macaura v. Northern Assurance Co. Ltd. [ 1925 ] . Mr Macaura. had formed an estate company. Then he sold his owned lumber estate for 42. 000 to the estate company. whereby the purchase money was paid by the company in the signifier of issue of 42. 000 to the full paid portions of 1 each. Macaura had affected an insurance policy on the lumber in his ain name. and non in the company’s name.

On 23 February 1922. most of the lumber was destroyed by. Thus. Macaura claimed under his insurance policies. However. it was ruled by the tribunal that Macaura had no insurable involvement. The insurance policy effected by him could merely be on the footing of a creditor or a stockholder of the company. which neither two has an insurable involvement in the assets of the company based on the rule that a company is an independent entity. As was mentioned earlier. once a company is incorporated it will be a separate legal entity. which would measure up it to action and being sued for any wrongs committed against it. The members are non permitted to take legal action on behalf of the company against the incorrect actor.

If a wrong has been committed against the company. the member can non take action on behalf of the company as in the instance of Foss v Harbottle ( 1843 ) . Certain burgesss in Manchester purchased park land to give to the so inheritress of the throne Princess Victoria. The park opened to great acclaim but troubles shortly followed. It was alleged by some of the company’s members that some managers had misapplied company’s belongings. The instance was heard by Wigwram VC. He held that the action could non continue as the single stockholders were non considered as proper complainant. He held that a incorrect was committed against the company. and merely the company could take the legal action. The members did non hold legal standing to action the offenders because the members and the company were separate legal entities. In the instance of Newborne v Sensolid ( GB ) Ltd ( 1954 ) 1 QB 45 a cargo of canned jambon was sold to Sensolid under a contract headed “Leopold Newborne ( London ) Ltd” and stoping “Yours faithfully” . Leopold Newborne ( London ) Ltd” and signed by Leopold Newborne.

Sensolid refused to take bringing of the jambon. It was held that neither the so unincorporated company nor Mr Newborne personally could action on the contract. Lord Goddard held that this contract purports to be a contract by the company ; it does non purport to be a contract by Mr Newborne. He does non purport to be selling his goods but to be selling the company’s goods. The lone individual to hold any contract here was the company. and Mr Newborne’s signature simply confirmed the company’s signature.

The tribunal held that an integrated company is a legal individual separate and distinguishable from its stockholders. The company. from the day of the month of incorporation. has ageless sequence and did non alter its individuality or personality even though the full portion retention of the company changed custodies. In another instance. Re Noel Tedman Holdings Pty Ltd. ( 1967 ) QdR 561. The company had a hubby and a married woman as its lone stockholders. They were besides the company’s managers. They died in an accident. go forthing behind an infant kid. After their decease the company was still in being.

The job that arose was. as the stockholders and managers had died. the portions could non be transferred harmonizing to the will of the deceased to the infant kid. The tribunal therefore allowed the personal representative of the deceased to name managers of the company. so that these managers could let the transportation of the portions to the kid. Therefore. the company may even go on to be despite the decease of all its stockholders and managers. It will last until it is deregistered or ‘wound up’ . Another consequence of the incorporation is the common seal.

A Company is an Artificial Person in eyes of Law. it has no psyche. and it takes birth by the operation of jurisprudence and ends its life by the operation of jurisprudence. Like a natural individual. it can non subscribe on its ain. As still it’s an unreal individual and as it operates in the universe market. there arises some state of affairs where jurisprudence asks a company to subscribe by seting its common seal on the paperss. Section 121 ( 1 ) ( a ) of the Companies Act 1965 requires every company to hold a common seal with its name and company figure looking on it. The common seal is affixed on contracts made by the company.

The mode of affixation is prescribed in the company’s articles of association. Normally. a board of directors’ declaration is required and it may be affixed in the presence of one manager and secretary or another manager. A company is besides entitled to keep land. However such power is to be read capable to Section 19 ( 2 ) of the Companies Act 1965 which provides that a company formed for the intent of supplying diversion or amusement or advancing commercialism. industry. art. scientific discipline. faith or any other object non affecting trading for net income. shall non get land unless it has obtained the anterior blessing of the curate charged with the duty for companies.

Therefore. the belongings will be treated as the company’s ain and non the shareholder’s even if a individual owns all the portions in the company. He does non have the company’s belongings nor does he hold any legal or just involvement in that regard. Here the instance of Macaura Vs Northern Assurance Co. Ltd 1925 can be mentioned as an illustration. Here the tribunal held that no portion holders have any right to any point of belongings owned by the company. As in the instance of Nicoll v. New York & A ; Erie R. R. Co.

Nicoll gave a title to the New York and Erie Railroad Company of a strip of land across his farm for the right-of-way of the railway. Subsequently. he wished to recover it from the railroad company and brought this action to hold the corporation ejected from the ownership. on the land that it did non hold power to buy land. nor to take a title to the fee. The company was chartered for 50 old ages. and this. it was claimed. made it impossible for it to take more of a rubric than a fifty-year involvement. while the title purported to convey the whole ownership. for all clip. to the corporation and its replacements. It was held that the company was entitled to retain the land.

The Court said. in an sentiment by Mr. Justice Parker: “The power to buy lands. where it is necessary for the other intents of the corporation. is a power incident at common jurisprudence to all corporations. unless they were specially restrained by their charters or by legislative act. It is true. that corporations are in most provinces. expressly prohibited from keeping land that is non used for the corporate concern. and corporations. for the intent of purchasing and keeping existent estate. are non frequently permitted. But one of the general powers of any corporation is the keeping. buying. and conveying of such existent estate as the intents of the corporation require. ”

Section 16 ( 5 ) of the Companies Act 1965 besides states that members of the company shall be apt to lend to the assets of the company in the event of being wound up. The liability of the members depends on whether the company is a limited company or an limitless company and Section 18 ( 1 ) requires the company’s memoranda of association to qualify so. A limited company does non intend that the company’s liability is limited ; it is still apt to carry through all its duties. It means that its members’ liability to pay the company’s debts and duty is limited. A member of an limitless company is apt for all debts of the company.

Whether a member of a limited company is apt for the debts of the company depends on the whether he has to the full paid up on his portions or otherwise. he may be called upon at any clip by the company to pay up the unpaid part. If the company should endure losingss. the stockholder is non apt to lend any more to the company if he has to the full paid for his portions. His existent loss would be the sum he has paid for the portions. Creditors of the company can non take any action against the members. because the members are separate from the company. In the instance of Re Application by Yee Yut Ee ( 978 ) 2 MLJ 142. Yee was the secretary of a company that was a wholly-owned subordinate of an American corporation.

The company had retrenched their staff and difference arose as to the retrenchment benefits. The affair was brought to the Industrial Arbitration Court where an award was made in the company’s absence. As the company did non follow with the award. the Arbitration Court ordered that Yee be personally apt as he had been appointed manager by so. The High tribunal held that a manager is non apt for the company’s debts. In Fairview Schools Bhd v Indrani Rajaratnam & A ; Ors. Mahadev Shanker J said that. “Limited companies are formed so that its stockholders are non exposed to limitless liability for the company’s debt. In exchange for this unsusceptibility. portion capital is pumped into the company which therefore becomes available to the company’s creditors. ”

Veil of IncorporationMost people decide to make a company instead than keeping a exclusive proprietary or partnership due to the liability protection factor. This is because a “company veil” will be created between the personal assets of members and stockholders with the company. The head covering can besides be described like a wall between the company and the members. Anton Behr said that. “Stand behind the head covering of incorporation is the rule of limited liability that the tribunal will utilize to order that a company will be responsible for all the debts that have been incurred alternatively of its stockholders or members. ”

This company head covering is one of the chief advantages of set uping a company as it will supply a liability protection against cases and creditors. In add-on. members and stockholders can bask limited personal liability up to the capital invested in the company when the company was weaving up. However. it is important to retrieve that there are times where there are some exceeding fortunes where the tribunal would disregard the company rule of separate legal entity and deprive the company members’ and shareholders’ limited liability that they enjoy. This is called the “lifting head covering of incorporation” . Raising the head covering of incorporation is a legal determination which will handle the rights and duties of a corporation as the rights or liabilities of its proprietor. The members will be responsible in transporting out their fiducial responsibilities towards the company. If they act in bad religion. the tribunal will raise the company head covering and they shall hold a personal liability. There are two factors that can be shown. whether there is fraud/injustice or there must be a deficiency of separate being.

Related instances where the tribunal have lifted the company head covering I. In instances where national exigency involved.Mentioning to the instance of Daimler Co. Ltd v Continental Tyre & A ; Rubber Co happened during the clip when England was at war with Germany. Continental sued Daimler for money due in regard of goods supplied. Daimler claimed that the Company was really owned by German Nationals and paying them was illegal under the Trading with the Enemy Act. The Court lifted the corporate head covering to detect if this was so. and found as a fact that it was the Germans who were runing the concern. D was hence successful in its defense mechanism. two. In order to forestall a fraud from being committed

In Gilford Motors v Horne [ 1933 ] . Horne was at one clip the Managing Director of Gilford Motors. One of the footings of his employment contract was that. in the event that he leaves the Company. he will non beg the clients of the Company. Finally Mr. Horne left the Company and setup his ain Company by the name of JM Horne & A ; Co Ltd. through which he had concern traffics with the old Company’s clients. Gilford Motors sued Mr. Horne. Horne’s claimed that it was non him that was making the concern but the Company and that under Company Law they were two different people.

However the Court was non positive and lifted the head covering of incorporation. In this case. Mr. Horne was merely seeking to conceal behind a corporate head covering to steal concern from his former employer. It was held that the Court could raise the head covering to find whether the assets of the company were truly owned by them or whether there was an maltreatment of the principal that a company is a separate legal entity. In the instance of Jones v Lipman 1962. Lipman sold Jones a house by a written contract but subsequently refused to finish the sale and wished out of the contract. He formed a company. transferred the house to avoid the dealing to claim that he could no longer sell the house to Jones. The tribunal held that this company was formed as a ‘device or sham’ to thwart the sale contract. and an order of specific public presentation of the sale contract was granted to Jones.

The head covering of incorporation has been considered in Trustor AB v Smallbone [ 2001 ] . The significance in this instance lies in the manner advocate for the claimant invited the Court of Appeal to put down regulations as to when the head covering of incorporation may be lifted. Smallbone was a manager of Trustor AB. a Swedish registered company. Without the consent of the other managers. he transferred big sums of corporate financess into a company controlled by him. Introcrom Ltd. He so removed some of these financess from Introcrom Ltd’s bank history into his ain name. Being cognizant of all the fortunes. Smallbone was found to be jointly apt with Introcrom Ltd for those amounts received by him from its bank history. The tribunal so had to see whether Smallbone was apt for amounts paid from that history to other individuals.

DrumheadIn organizing a company. boosters will take all the duties to guarantee that the procedure runs swimmingly. Promoter owes a fiducial to the company every bit long as he is a booster. He may be one of the managers of the company. The company may action him if he is doing any secret net incomes. A booster can non besides claim for reimbursement for his disbursals incurred to advance the company unless the company has agreed to make so. Incorporation of a concern may convey benefits.

As had been mentioned. once the company is incorporated. it shall go an unreal legal individual which is recognized by the jurisprudence as a separate and distinguishable entity from its members and stockholders and capable of holding its ain rights. responsibilities and duties and it will be able to action or be sued in its ain name. However the rigorous application of the separate legal entity rule does hold its disadvantages. We have seen in Macaura’s instance where the application of the separate legal personality rule caused adversity to the 1 who owned about all the portions of the company and who could non claim for insurance taken under his ain name. There are besides instances where 3rd parties suffer. Where a company is limited liability company. the creditors will endure if the company incurs debts. as the stockholders are non apt beyond the sum they have contributed in full for their portions.

Due to some of the unwanted effects of incorporation. company jurisprudence recognizes a figure of exclusions to the rule of head covering of incorporation. Under these exceeding fortunes. the jurisprudence looks at the state of affairs and will disregard the separation between the company and its members or officers. This is called raising the head covering. When the tribunal lifts the corporate head covering. the members or officers will be made apt for the company’s duties. The corporate head covering is lifted under state of affairss provided by statue. and besides harmonizing to the judicial determination under the common jurisprudence.


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