LAW OF ASSOCIATION I

LAW604

ASSIGNMENT (Q1)

NAME : AHMAD FAROUQ BIN AMIR

STUDENT ID : 2010313869

GROUP : LWB05R

NAME OF LECTURER : PUAN NURUL HUDA BT AHMAD

Q1.

A company is a group of persons associated together for the attainment of a common

end, social or economic. It has no strictly technical or legal meaning. Section 4 of Companies

Act 1965 states that a company means a company formed and registered under the Companies

Act or any of the preceding Acts. Thus, a Company comes into existence only by registration

under the Act, which can be termed as incorporation.

In contrast with partnership, company is a corporate body or a corporation. It is an

artificial legal person, separate form, and independent of the person who took steps to form the

company and who are seen as members of that company. This is stated under section 16(5)

where it tell us that members of the company shall be a body corporate by the name set out in the

memorandum. In other words, the issue of a certificate of incorporation from the Registrar of

Companies brings into existence a new legal entity, separate from its members. This is referred

to as ‘separate legal entity’.

As a separate legal entity, the incorporation of companies provides few advantages.

According to section 16(5) once a company had been incorporated, it is recognized as a body

corporate and along with that several advantages are available for them. Which means that, it can

exercise its function and right as a body corporate. A body corporate is an artificial person that is

created and given recognition by the law as expressed by Salleh Abbas F.J in Tan Lai v

Mohamed bin Mahmud.

By registration under Companies Act, a company becomes vested with corporate

personality, which is independent of, and distinct from its members. A company is a legal

person. By virtue of Salomon v. Salomon & Co. Ltd. (1897), unsecured creditors argued that

although the company was incorporated, it never had an independent existence. It was Salomon

himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be

regarded as a separate person from Salomon. This is due to the fact that the company was not an

agent or trustee for the member. Thus although Salomon beneficially owned all the issued shares

of the company, he and the others are mere subscribers of the company. Therefore, Salomon

could be a secured creditor with enforceable rights against the company.

Besides that a company also has the ability to sue and be sued in its own name, either to

get rights that it has or if it has liabilities, third parties may sue against it. It must be noted only

the company can initiate legal action to enforce its right. This is called proper plaintiff rule and

it was established in the case of Foss v Harbottle where action brought by the members of the

company had failed as the injury complained of was the injury towards the company. Therefore

the member could not take action on behalf of the company.

A company also enjoys perpetual succession. Members may come and go, but the

company will go on forever. After a company is incorporated, it continues until it is dissolved

according to the law or it is struck off the register. This can be seen in the case of Re Noel

Tedman Holdings Pty Ltd where the court allowed the personal representative of the deceased

(the only shareholder of the company) to appoint the directors of the co so that these directors

could allow the transfer of the shares to child. This showed that the company is still existing and

continuing although the shareholders had died in an accident.

Apart from that, a company is given power to own property on its own name. By virtue

of section 16(5) a company is given a power to hold land and at the same time it can also own

other types of property too. No members, not even all the members, can claim ownership of any

asset of company’s assets. The property belongs to the company, and the member no longer has

any right or interest. In Macaura v Northern Assuarance Co. Ltd, it was held that Macaura had

no right to claim, because when he sold the timber to the company, he had given up his interest

in it. The timber was the property of the company and Macaura no longer had insurable interest

in it.

As a corporate body, liability of the members in a company is limited. Since a company

is a separate legal entity and leads its own business life, the members are not liable for its debts.

The liability of members is limited by shares; each member is bound to pay the nominal value of

shares held by them and his liability ends there. Thus, creditors for the company cannot take any

action against the member, because the members are separated from the company. In Re Ye Yut

Een 1978, the director of the company is not liable for the company’s debt. It is the company

who had not complied with the procedures related to the retrenchment benefits.

Apart from having several advantages, incorporation of a company also has its defects.

Therefore, the court comes with the approach of lifting the veil of incorporation. The veil of

incorporation is a fictional curtain separating the company from its members. Generally, once a

company is incorporated, as a legal personality, the court would normally not look behind the

corporate veil to see who is behind the company and why the company was established.

However, due to certain circumstances, the court do think that it is necessary to look at the

persons behind the corporate veil.

The corporate veil is lifted under situations provided by statute and according to judicial

decision under the common law. For instance, section 304(2) of CA 1965 allows the court to

declare persons who carried on the company’s business with the intention to defraud creditors,

be personally liable to the creditors of the company on winding up. Besides that section 303(3)

of the same Act provided that an officer of a company can be made personally liable for the

company’s debt if he enters into a contract knowing that there is no probable or reasonable

expectation of the debt being paid. Based on section 365(2)(b) Director of a company can also be

made personally liable towards the creditors of the company if they paid dividends to the

shareholders when there are no profits available. Section 36 CA 1965 states that when a

membership of a company falls below the minimum of two, any person who knowingly carries

on business for more than twelve months will be personally liable for all the debts of the

company incurred after the sixth month.

At common law there are circumstances where the court held that it is appropriate to lift

the veil. The situation that permits lifting the veil of incorporation is where the company is

formed to evade legal duty or used as a vehicle fraud. In Jones v Lipman 1962 in order to avoid a

contract having to transfer the house to Jones, Lipman set up a company and transferred the

house to it. The court held that the company was a device and a sham, a mask which he holds

before his face in an attempt to avoid the eye of equity. Hence, the court ordered Lipman and the

company to specifically perform the contract to sell the house. The court also lifts the corporate

veil in order to determine physical character or identity of a company. For instance, it requires

the court to look at the controllers of the company. In time of war, the nationality of the

controllers would determine the nationality of the company.

In addition, veil of corporation will be lifted where company is used as an agent. It should

be noted that a company has a capacity to act as an agent. Possibility of the members or

controllers to use the company as such is not excluded by the court. Hence the principles would

be liable for the acts the company has entered to. In Smith, Stone, & Knight Ltd v Birmingham

Corporation, SSK was a company that carried on its business through a subsidiary, Birmingham

Waste Corp (BWC). The local authority compulsorily acquired land owned by SSK which was

occupied by BWC that was operating a business on it. Owner-occupier was entitled to

compensation on the basis of disturbance of business. SSK claimed compensation. The local

authority refused to pay as BWC being the occupier was a separate entity from SSK. SSK

claimed that although BWC had in fact conducted the business, the business in every aspect was

owned and controlled by SSK. The court held that the subsidiary company was an agent of the

parent company and so the occupation by the subsidiary amounted to occupation by the parent

company.

Last but not least, incorporating a company requires formality and expense. For instance,

incorporation is a very expensive affair. It requires a number of formalities to be complied with

both as to the formation and administration of affairs. Furthermore, a company is not considered

a citizen as explained in State Trading Corporation of India v. CTO, the SC held that a company

though a legal person, it is not a citizen neither under the provisions of the Constitution nor under

the Citizenship Act.

As a conclusion, it can be said that the doctrine of legal entity works as a double-edged

swords. Even though it has many advantages it also has several disadvantages towards the

company itself and in certain situation, the creditors. However, the approach of lifting the

corporate veil by the court may reduce the defects of incorporation.