INTRODUCTION

This assignment details the information about the company law.
This assignment’s content had include the clarification of nature of registered company,
the differences between different trading formats (such as sole trader, partnership and company,
the effect of registration of a company (such as separate legal entity limited liability, perpetual
succession and power to own property), types of companies (such as unlimited company,
company limited by guarantee and company limited by shares), incorporation of a company, the
procedure for incorporation, veil of incorporation, and lifting the evil of incorporation (by
automatic and discretionary)
These details are given in order to give a conclusion on whether to agree or not agree that
various authors have criticized metaphors commonly used by the court in veil-piercing cases
(such as ‘sham’, ‘simulacrum’, ‘mas’, ‘fiction’, ‘myth’) as being no more than conclusary
terms, which allow the courts to do as they please on the basis of policy.
This assignment was re!uested by "r. #openathan $aman %air, &ecturer of 'alaysian
(ompany &aw in )inary *niversity. +t was prepared by Tan (heng ,ing, accounting student in
)inary *niversity and submitted to "r. #openathan $aman %air on -.
th
/anuary .0-0.
Acknowledgments
1+ would lie to than my lecturer, "r. #openathan $aman %air, for his encouragement
and guidance, for the valuable advice and support he has given me in the writing of this
assignment. 'y deepest thans go to my parents, for her2his love, understanding and support.1
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QUESTION
Various authors hae critici!ed meta"hors commonl# used $# the court in eil%"iercing
cases &such as 'sham() 'simulacrum() 'mask() '*iction() 'm#th( as $eing no more than
conclusar# terms) which allow the courts to do as the# "lease on the $asis o* "olic#+ Do #ou
agree,
.
-+. NATURE O/ RE0ISTERED CO12AN3
-+- 4hat is a Registered Com"an#,
The first point in a study of company law is to define
precisely what is meant by a company.
The definition in the (ompanies 3ct -456 states that a company means a company
formed and registered under this 3ct or an e7isting company.
3s a conse!uence, a registered company can be defined as a company incorporated by
registration under the (ompanies 3cts, is regarded by the law as a person 8ust as a human being,
'r. 9mith or 'r. /ones, is a person &0eo**re# 1orse) Com"an# 5aw6+
:hen a company is formed, it is said to have become ;incorporated<. 3 registered
company is owned by multiple shareholders and is supervise by a board of directors, which hires
the business=s managerial staff.
6
7+. DI//ERENT TRADIN0 /OR1ATS
There are three basic trading formats> a company, a sole trader and a partnership.
7+- CO12AN3
7+-+- Structure
?ne option open to a person setting up a business is to form, or ‘incorporate’, a registered
company. There are different types of registered companies, depending on the uses to which they
are to be put.
The most common type of company in 'alaysia, and the one we will bear in mind most
carefully, is the public company limited by shares, the typical
‘@AT$?%39(, the short form for ‘@etroliam %asional )erhad,’.
7+7+7 Registration
The process of forming and registering a company in accordance with legislation is
nown as ‘incorporation’. Thus, the ey feature of a company is that it is a
legal entity (or person) in its own right, legally different from the people
who own it, nown as a ‘separate legal personality’. The advantage of
limited liability results from this.
B
7+7 SO5E TRADER
7+7+- Structure
3 sole trader is simply an individual who carries out the trade or business
single handedly. This, he is responsible for the all the affairs pertaining to the
business.
7+7+7 Registration
The sole trader has the choice to trade under his or her own name or under a registered
business name, for e7ample, ‘/ohn C )aery’.
This allows the sole trader to do business with a name other than their legal name and
also allows them to open a business account with baning institutions. Dowever, a registered
business name has no legal implications other than allowing you to use and trade under that
name instead of your own.
7+7+8 Num$er o* mem$ers
*sually, in sole trader, there is no one to assist himE it is a ;sole< trader in the sense that
the owner has no partnersE though in some cases he might eep an assistant or a helper.
7+7+9 1anagement
For sole trader, hiring employees may be difficultE this form of business will have limited
liability, therefore, if the business is sued, it is the owner’s problem. De cannot shrug his
responsibilities. De will not be able to protect himself by saying that the act was committed by
his business and not by him.
G
7+7+: Ca"ital and lia$ilit#
+n the eyes of the law, both the owner and his business are the same. The law does not
mae any distinction between the owner and his business. Therefore, his liability is unlimited, if
the business goes banrupt or receivership, the owner will have to cough money from his own
assets and financial reserves to pay to the creditors and lenders.
3 sole trader has no separate legal personalityE hence, any profits or losses made by the
business are bear by the sole trader, which is seen as the greatest ris of this form of business.
For e7ample, there is a cae manufacturer, who is also a sole trader, who introduces a
new variety of cae, thining that there is demand for this particular variety. +f the product turns
out well, he can tae the credit. +f the product fails and as a result he suffers losses, then he will
be held for the losses.
3 sole trader may have difficulty in raising finance, because they are small, many
financial institutions consider sole trader as risy ventures and will not lend them large sums and
they will not be able to use any other form of long-term finance unless they change their
ownership status.
9ole trader may not able to raise capital on his own not lie in partnership where they are
able to share the financial burden of raising funds.
5
7+8 2ARTNERS;I2
7+8+- Structure
3 partnership is defined by the 2artnershi" Act -<=. in s+ -&-6 as an
association of two or more parties carrying on a business in common with a
view to a profit.
3 partnership is alie to the coming together of two or more sole
traders, with all partners sharing the profits and losses.
@artnership can be considered as a form of business organization grew out of the
limitations of individual proprietorshipE in sole proprietorship, the financial resources,
managerial sill, ris bearing capacity were limited.
:hen business activities started e7panding, a need for more capital is arise, more persons
are needed to supervise the business affairs, thus, the partnership form of organization was
developed to overcome the weaness of sole trading organization and to meet up the e7panding
needs of a business re!uiting a moderate amount of capital.
7+8+7 Registration
@artnerships, unlie companies, are not re!uired to go through any complications
registration process when they are formed, a partnership only has few re!uirements to be formed
and there are no minimum or ma7imum limits for capital, and, again unlie companies, they are
under no obligation to mae their accounts public, and, the business for partnership is fle7ible in
its operations as it can engage in any other operations without any restriction as it may be the
case with the companies.
+f the business of a partnership is carried on under a name which consists of the surnames
of all the partners, no restrictions apply (s. - )usiness %ames 3ct -4HG).
I
7+8+8 Num$er o* mem$ers
The ma7imum number of persons who could be members of a particular partnership was
usually .0 &s+ >-? Com"anies Act &CA6 -=<:6) and it is formed by maing a written or oral
agreement that they will 8ointly assume full responsibility for the conduct of business.
The agreement should identify the partnersE their respective business-related duties and
responsibilitiesE how income will be sharedE the criteria for additional investments and
withdrawalsE and the guidelines for adding partners, the withdrawal of a partner, and li!uidation
of the partnership.
7+8+9 Constitution
The life of a partnership may be set up as a certain number of years by the agreement.
The death, inability to carry out specific responsibilities, banruptcy, or the desire of a partner to
withdraw automatically will terminates the partnership, if no such
agreement is made. 3 new partnership agreement is re!uired every time
when a partner withdraws or is added, if the business continues to
operate as a partnership.
The partnership=s business may continue with proper re!uirements, and
the termination or withdrawal of the partnership will be a certification issue that does not impact
ongoing operations of the partnership.
7+8+: 1anagement
The business of partnership may be carried on by all the partners or by any of them acting
for all. For itself, one partner may legally bind the partnership to a contract or agreement that
appears to be in line with the partnership=s operations.
H
7+8+? Ca"ital and lia$ilit#
3lthough partners may limit a partner=s ability to enter into contracts
on the company=s behalf, this limit only applies if the third party entering into
the contract is aware of the limitation. +t is the partners= responsibility to notify third parties that a
particular partner is limited in his or her ability to enter into contracts. Thus every partner is an
agent of other partners and at the same time of the firm.
3 partnership has no separate legal personality either. :hen the partnership cannot meet
its obligations, the partners may be called on to use their personal assets to satisfy partnership
debts. The other partners can be held individually liable by the creditor re!uiring payment, if one
partner does not have enough assets to meet his or her share of the partnership=s debt.
7+8+> T#"es o* "artners
There are two types of partners.
#eneral partnership is a partnership in which all partners are individually liableE it has an
obligation of strict liability to third parties in8ured by the partnership. #eneral partners may have
8oint liability or 8oint and several liabilities depending upon circumstances.
:hereas, a limited partnership has two classes of partners where often nown as silent
partner or sleeping partner, their liability is limited to the amount of their investments and is
often used when investors will not be actively involved in the business and do not want to ris
their personal assets. 3 limited partnership must include at least one general partner who
maintains unlimited liability.
4
8+. E//ECT O/ RE0ISTRATION O/ A CO12AN3
8+- Se"arate 5egal 2ersonalit#
(orporate personality refers to the fact that as far as the law is concerned a company
really e7ists.
The registered company lie a statutory company or a chartered company is a
‘corporation’, i.e. in the eye of the law it is an artificial legal person as opposed to individuals
who are nown as natural persons. 3s a person, a company can do almost everything a human
person can doE it can mae contracts, employ people, borrow and pay money, sue and be sued,
among other things.
The company becomes a legal person in its own right, with powers and liabilities as an
individual but is distinguished from the members it may have from time to time, distinct from the
shareholders and management. This was seen in the famous case of 9alomon v 9alomon C (o
&td (-H4I).
Salomon v Salomon & Co Ltd (1897) AC 22
'r. 9alomon had a boot manufacturing business which he decided to
incorporate into a private limited company. 'r. 9alomon had become the
company=s principal shareholder and its creditor in 9alomon C (o. &td at
the same time, since he sold his business to the newly formed company, 3
9alomon C (o &td, and too his payment by shares and a debenture or debt
of J-0,000. Thus, he has become a secured creditor by taing a mortgage debenture which gives
him a right to be entitled to be paid first as a secured debenture holder when the company into
li!uidation some years later.
The li!uidator and the other creditors ob8ected to this and ased the court to reserve
9alomon’s debenture on the ground that he could not owe money to himself, claiming that it was
unfair for the person who formed and ran the company to get paid first.
-0
Dowever, the Douse of &ords held that the company was a different
legal person from the shareholders, and thus 'r. 9alomon, as a shareholder
and creditor, was totally separate in law from the company 3 9alomon C (o
&td. The result was that 'r. 9alomon was entitled to be repaid the debt as the
first secured creditor. The decision confirmed that the use of debentures
instead of shares can further protect investors.
--
8+7 5imited 5ia$ilit#
?nce incorporated, a company’s members en8oy limited liability, provided that their
shares are fully paid up and it is a limited company. For e7ample, if a company goes into
li!uidation owing -00, 000, the debt is the debt of the company, not of the shareholders. The
shareholders’ debts are limited to any money they owe for the purchase of their shares.
3 company formed in compliance with the regulations of the (ompanies 3cts is a
separate person and not the agent or trustee of its controller. 3s a result, the debts of the company
were its own and not those of the members. The members’ liability was limited to the amount
prescribed in the Com"anies Act@ section -8&86 K i.e. the amount they invested.
3nother good illustration is Lee v Lee’s Air Farming (1961) A.C. 12 (P.C.). 'r. &ee
incorporated a company, &ee’s 3ir Farming &imited which he owned all the shares and also been
employed as chief pilot of the company. +n 'arch, -4G5, 'r. &ee was illed in the plane crash
while he is woring, leaving a widow and four infant children.
The matter came to the %ew Lealand (ourt of 3ppeal who found that 'r. &ee
was not a ‘worer’ within the meaning of the :orers’ (ompensation 3ct and so no
social welfare compensation was payable as the widow claimed she was allowed to be
compensated under the 3ct as the widow of a ‘worer’.
Dowever, in the @rivy (ouncil in &ondon, it held that there was a contractual relationship
for 'r. &ee to be employed as the chief pilot of the company as the company and 'r. &ee were
distinct legal entities and therefore capable of entering into legal relations with one another. The
widow was therefore entitled to compensation.
-.
8+8 2er"etual Succession
3 company does not die, once it formed, it will continue until such time as its name is
struc off or dissolved through a legal process nown as winding up or li!uidation even though
without any directors, members, employees, business etc and a good e7ample is shown in the
case of e !oel "edman #oldings Pt$ Ltd (1967) %d &61.
'oreover, in A'd(l A)i) *in Atan & 87 +rs v Ladang "engo ,ala$ -state Sdn *.d
(198&) 2 ,L/ 16& 0ase1 it shows the fact that a member, even one holding one hundred per cent
of the company’s shares, dies has no effect on the legal e7istence of the company i.e. members
may come and go but this still does not affect the legal personality of the company.
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8+9 2ower to own "ro"ert#
3 company is capable of owning property, maing contracts, employing people and being
sued or of suing. Thus, a company may own property distinct from the property of its members.
The property of the company belongs to the company itself and not to the individual
members, so that even the largest shareholder has no insurable interest the property of the
company. Therefore, a change in membership of a company will have no effect on the ownership
of the company’s assets.
+n ,a0a(ra v !ort.ern Ass(ran0e Co. (192&) AC 6191 'r. 'acaura who owned an
estate and some timber, stored the timber, which amounted to nearly the
entire assets of the company on the estate and he insured the timber in his
own name. Two wees later, a fire destroyed all the timber on the estate.
The insurance company refused to pay out arguing that he had no
insurable interest in the timber as the timber belonged to the company when
'r. 'acaura tried to claim under the insurance policy but.
The Douse of &ords held that the timber belonged to the company and not 'r. 'acaura.
Aven though 'r. 'acaura, owned all the shares in the company, but he had no insurable interest
in the property of the company.
-B
9+. T32ES O/ CO12ANIES
3 registered company may be limited or unlimited in terms of liabilities.
3 limited company possibly limited by guarantee or by shares.
3 company limited by shares perhaps is a private or public company.
9+- An Unlimited Com"an#
+n unlimited company, the members are liable for the
debts of the companyE the shareholders will lose all their
money if the company goes banrupt, and also ris losing
their own property in order to pay the company=s debts which
is very similar to a partnership or sole proprietorship. They
may be liable without limit or liability may be limited to a
certain figure.
To avail of a corporate structure, for e7ample, when buying property, a person may
choose to form an unlimited company. 3s well, it has a privacy advantageE unlimited companies
do not have to attach accounts to the annual return
-G
9+7 A Com"an# 5imited $# 0uarantee
3 company limited by guarantee is a company that guarantees to pay its debts up to a
certain limit in the event of the company being wound up, while they are a member or within one
year of their ceasing to be a member.
+n #uarantee (ompany, the members do not provide money to the company on formation
or during its lifeE it does not have a share capital, but has members who are guarantors instead of
shareholders.
9o it is suitable for companies that wish to get legal personality and limited liability but
do not need to raise money from its members. This format is often used for charities, clubs and
nonprofit organizations.
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9+8 A Com"an# 5imited $# Shares
3 company limited by shares is the most common type of company in 'alaysia, is the
type of company commonly used for forming a small business.
+n this type of company, the liability of shareholders for the debts of a company is limited
to any amount unpaid on their shares.
%ormally, when shareholders buy shares, they pay for them fully, so they then have no
liability to the company if it goes into debt, they have no responsibility to pay more than the
amount they have invested.
The purpose of this type of company is to trade and mae profits 9hares are issued and
directors are appointed by the shareholders.
(ompanies limited by shares may divide into two categories which are public limited
companies and private limited companies.
-I
9+8+- A 2riate 5imited Com"an#
3 @rivate limited company restricts the rights to transfers shares of the companyE it
cannot sell the shares to general public. The name of private limited company ends with the word
19endirian )erhad1 or abbreviation 19dn. )hd.1. The minimum number of member is two for
private limited companyE the ma7imum is fifty, e7cluding members who are employees or e7-
employees of the company.
9+8+7 A 2u$lic 5imited Com"an#
@ublic companies must have a minimum of two membersE there is no ma7imum number
of members. They show their position by using the abbreviation 1)hd.1 or the word 1)erhad1
after their name.
@ublic limited companies increase capital by selling shares and are manage by a board of
directors selected by shareholders. The shares are freely transferable by sale on the 9toc
A7change or elsewhere. @ublic limited companies can only offer shares to the public if a
prospectus which meets the terms with the re!uirements of the (ompanies 3ct -45G has been
registered with the $egistrar of (ompanies.
@ublic listed companies are listed either on the 'ain )oard or the 9econd )oard of the
M&9A. 3ny subse!uent issue of securities such as the issue by way of a rights or bonus re!uires
the approval of the 9ecurities (ommission.
-H
:+. VEI5 O/ INCOR2ORATION
:+- 4hat Is the Veil o* Incor"oration,
?nce a company incorporates, it becomes a legal personality, a 8uristic entity, separate
and distinct from its members and shareholders and capable of having its own rights, duties and
obligation such as owning property or entering into contracts, and it can sue or be sued only in its
own name.
:+7 /unction o* Veil o* Incor"oration
The veil of incorporation ensures that a company is a legal person, thus a legal entity,
separate and distinct from the people who formed, own or invest in itE they do not get sued, the
corporation does as a result this protect the personal assets of owners and investors from
lawsuits.
Thus, incorporation is a way of limiting the liability of the individuals that own a
corporation. +f two persons incorporate a company, the company will become a third person
separate and different from these two persons individually or collectively.
Therefore, the courts usually do not loo behind 1the veil1 to as why the company was
formed or who really controls it.
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?+. 5I/TIN0 T;E CO2ORAETE VEI5
?+- EAce"tions &5i*ting the Veil6
+n some cases, the =veil= that shields the owner(s) from liability can be removed, and the
owners can be en8oined into the law suit. 9uch incidences happen when a corporation is not
supported with enough assets to balance its debts and liabilities.
Dowever, in some conditions, the courts have tae place to disregard or ignore the doctrine of
corporate personality and limited liability especially in dealing with group companies and
subsidiaries and where the corporate form is being used as a vehicle to commit fraud or as a
1mere faNade concealing the true facts.1
The corporate veil can be lifted in two ways>
(-) )y specific provision in legislation
(.) 3nd by discretion of the courts.
3lthough the cases when the veil has been lifted vary with the facts of the cases, there are said to
be three main reasons why this may be done>
(-) To enforce the provisions of company lawE
(.) To avoid fraudE
(6) To deal with a group of companies.
&egislative lifting of the veil is usually for purposes of enforcing company law, whereas
the courts usually lift the veil to prevent fraud.
.0
?+7 5i*ting the Veil $# 5egislationBAutomatic
The veil will be lifted automatically and there is no freedom of choice, when it is
specified in the (ompanies 3cts that the corporate veil will be lifted
?+7+- 4here the num$er o* mem$ers is less than two
*nder Section 8?) CA -=?8 if the number of shareholders of a company (e7cept a
company whose issued shares are wholly held by a holding company) is reduced below two and
the company trades for more than si7 months while the number is so reduced, every shareholder
who nows that the company is trading with less than the statutory minimum, is personally liable
for all the debts of the company contracted after those si7 months and may be sued therefore, and
shall also be guilty of an offence against the 3ct. The classical case is !is'et v S.e2.erd (1993)
*CC 91.
?+7+7 Use o* an incorrect com"an# name
*nder Section -7-) CA -=?8, an officer of a company (the officers of a company are the
directors and secretary) who signs or authorizes to be signed on the company’s behalf any bill of
e7change, che!ue or promissory note where provided that the company fails to affi7 its name is
not properly or legibly written thereon, will be personally liable for the amount if unpaid by the
company.
4(r.am Fan0$ 5oods v ,i0.ael /a06son (Fan0$ 5oods) Ltd (1968) 2 %* 879
3 director of the defendant company authorized a che!ue made out to ‘'. /acson (Fancy
#oods) &td’ without correcting it as the true name of the company is ;'icheal /acson (Fancy
#oods) &imited< where ;'< is not an abbreviation of ;'icheal<. The court held that the
plaintiffs had accepted an incorrect version of the name, thus could not rely on section -.-.
.-
Lind.olst & Co A8S v Fo9ler (1988) *CLC 166
The plaintiff prepared four bills of e7change in the name of ‘(orby (hicen (o.’. The defendant
was a director of the (orby (hicen (o. &td. De signed che!ues referring to the ‘(orby (hicen
(o.’ without adding the suffi7 ‘&td’ and was liable under section -.- which held by the (ourt of
3ppeal.
?+7+8 /raudulent Trading
Section 8.9 &-6 o* the Act states @ersons who were nowingly a party to the carrying on
of any business of the company with the intent to defraud creditors or for any fraudulent purpose
may be personally liable to mae such contribution to the assets of the company as the court may
thin proper
Fraudulent trading is very difficult to prove and is not defined by statute because it must be
shown that the directors, in incurring the debts in !uestion, new that the company would be
unable to pay them.
?+7+9 TaA O**ences
*nder s-9. &-6 o* the Income TaA Act -=?> allows the "irector-#eneral of +nland
$evenue to ignore transactions which have the effect of avoiding or escaping ta7> S*P Sdn *.d
v 4ire0tor 5eneral o: ;nland even(e (1988) ,S"C 237.
..
?+8 5i*ting the Veil $# the CourtsBDiscretionar#
The cases that deal with the courts’ lifting of the veil do not fall into neat categories, but
many of the cases have a common thread. +n these cases, the court will have considerable
discretion in deciding whether to lift the veil of incorporation.
?+8+- 4hen the Com"an# 4as /ormed *or /raudulent 2ur"oses
The court may e7tremely give an e!uitable remedy against both the company and the
shareholder, if the company is set up as a ‘cloa or sham’ with the dishonest purpose of escaping
the promoter or shareholder’s e7isting obligations.
5il:ord ,otor Co v #orne (1977) C.. 97&
# was a manufacturer of vehicles and supplier of spare parts. D was a managing director of the
company, and left #. Dis contract stated that he wasn’t allowed to sell to #’s customers for a
period after leaving. ?n the termination of his employment, D set up a company which then
approached his former customersE D argued that firstly his company was approaching the
customers, not himE and secondly, if there was a wrongdoing, his company was liable and not
him. The courts held that the company was sham, and granted an in8unction against his company
as well as him.
/ones v Li2man (1962) ; All - 332
&ipman sold to /ones a house by a written contract but refused to complete
the sale and then wished to get out of the contract. De formed a company,
transfers the house to it, to avoid the transaction and then claimed he could
no longer sell the house to /ones. The court held that this company was formed as a ‘device or
sham’ to frustrate the sale contract, and an order of specific performance of the sale contract was
granted to /ones.
.6
?+8+7 4hen the courts recogni!e an agenc# relationshi"+
+f a subsidiary company having power to act as an agent may do so as an
agent for its parent company, or certainly for all or any of the individual
members if it or they authorize it to do so, it may be bound by the same
liabilities and rights of its holding company.
9o long as those acts are within actual or apparent scope of the authority, the parent
company or the members will be bound by the acts of its agent.
)ut in the absence of an e7press agreement, there is no presumption of any such
relationship between the partiesE it will be difficult to establish one.
Thus, the corporate veil shall be lifted and the principal shall be liable for the acts of the
agent in cases where the agency agreement holds good and the parties concerned have e7pressly
agreed to such an agreement.
Though, no court has yet found subsidiary companies liable for their holding company’s
debts.
Smit.1 Stone & <nig.t Ltd v *irming.am Cor2oration (1979) All - 116
9mith, 9tone C Mnight &td owned some land, and a subsidiary company operated on this land.
The subsidiary company is )irmingham (orporation that occupied the land and operated a
business there. )irmingham (orporation had issued an enforced purchase order on this land. 3ny
company which owned the land would be paid for it, and would reasonably compensate any
owner for the business they ran on the land. )irmingham (orporation claimed they were entitled
to no compensation since they did not own the land. The courts held that the subsidiary company
was an agent and )irmingham (orporation must pay compensation.
.B
?+8+8 4hen the entities are considered to $e a single economic unit+
3s a general rule, the courts have treated each company in the group as separate> one
company is not liable for another’s debts, and this generally e7tends to other liabilities.
4.#.!. Food 4istri'(tors Ltd. v "o9er #amlets London *oro(g. Co(n0il =1976> 7 All -
362
3 subsidiary company of "D% Food "istributors &td owned land which &ondon )orough of
Tower Damlets issued a compulsory purchase order on. The company running the business was
the holding company and the premises were owned by the company’s wholly owned subsidiary.
The courts held that "D% Food "istributors &td‘s subsidiary was a single economic unit and
was able to claim compensation because it.
Adams v Ca2e ;nd(stries 2l0 and Anot.er (1991) 1 All - 929
3 worer, 3dams who wored for a *9 subsidiary of (ape +ndustries plc, which mareted
asbestos in the *9 had suffered in8uries through e7posure to asbestos
dust and wanted to sue. This case was brought against the *M parent
company because its *9 subsidiary had no assets, he would have
received no compensation since there was no money to pay out. The
court of appeal refused to treat the *M parent company, its *9 subsidiary and an independent *9
corporation through which it mareted asbestos in the *nited 9tate as a single economic unit, or
to lift the veil of incorporation. This means that the plaintiff even if successful in their action
against the *9 subsidiary would receive no compensation since the subsidiary had no assets.
.G
?+8+9 In cases o* national emergen0$) the courts ma# need to consider ownershi" o*
com"anies+
The courts have occasionally raised the ‘veil’ and looed at the shareholders to disclose a
company’s nationality in wartime, or other national emergencies where sanctions are imposed.
4aimler Co Ltd v Continental "$re and (''er (5*) Ltd (1916) 2 AC 7?7
(ontinental Tyre and $ubber (#)) &td were registered in )ritain. (ontinental Tyre and $ubber
(#)) &td sued "aimler (o &td for debts owing. (ontinental Tyre and $ubber (#)) &td was a
*M companyE however all shareholders but one were #ermanE almost all
of the shares were #erman owned. "aimler (o &td claimed that they
should not pay the debt to #erman individuals to prevent money going
towards #ermany’s war effort. The court held that (ontinental Tyre and
$ubber (#)) &td (-4-5) was #erman.
.5
>+. Conclusion
Through this assignment, we can understand and now that a company once
incorporated, it becomes an artificial legal person which recognized by the law that separate and
distinct from its members and shareholders and capable of having its own rights, duties and
obligation and can sue or be sued in its own name.
Thus, 8ust lie Am$rose Cierce &-<97%c+ -=-96) American writer said 1Corporation. An
ingenious device for obtaining individual profit without individual responsibility.1.
Dowever, there still have some circumstances that this doctrine or principle of corporate
personality which carries with the concept of limited liability may disregard or ignore by the
court especially in dealing with group companies and subsidiaries and where the corporate form
is being used as a vehicle to perpetrate fraud or as a 1mere faOPade concealing the true facts.1
The image of Sir Edward Coke &-::7%-?896) English Durist and "arliamentarian said
that "Corporations cannot commit treason, or be outlawed or excommunicated, for they have no
souls." had truly shown that a company is only an ‘artificial’ person only not a ‘real’ person.
3lthough it can sue people and mae contract under its name but it didn’t have mind and spirit to
commit fraud or illegal action or even disloyalty. That’s why there is an e7ception for the
company not to lift the ‘veil’ of incorporation because there may have someone used this
advantages as a vehicle to carry out fraud.
Thus, in my view, + will agree that various authors have criticized metaphors commonly
used by the court in veil-piercing cases (such as ‘sham’, ‘simulacrum’, ‘mas’, ‘fiction’, ‘myth’
as being no more than conclusary terms, which allow the courts to do as they please on the basis
of policy+ This is because these criticized metaphors shows the court’s responsibility for giving a
truthfully and acceptable 8udgment based on the veil-piercing cases they heard.
+n general, the main reason of forming a company certainly is to earn profits by running
the business smoothly 8ust lie AleAandre Dumas &-<.7%-<>.6) "roli*ic /rench author o*
.I
"la#s) "o"ular romances) and historical noel said that "Business, that's easily defined; it's
other people's money."
;arold S+ 0eneen) an American $usinessman said that 1n business, words are words;
explanations are explanations, promises are promises, but only performance is reality<.
9o in order to earn more money in the business, the performance that should contribute in
the business, the efficiency of using the nowledge and sill of handling a business in turn to
success is important although we have now the advantages and disadvantages of our business
form. 3nd based on this, we also should use the advantages of business form that we have in
proper way not inappropriate way 8ust lie those veil-piercing cases that had shown in the
assignment.
:e should use our ability of running the business properly, we should find solution to cut
the losses in which to eliminate the disadvantages appear in the business, and let the profit run
sufficiently where using the advantages of the business efficiently not sining at the bac of the
veil of incorporation doing something that is not the purpose for running a business, for forming
a company.
Thus, + thin that those criticized metaphors commonly used by the court in veil-piercing
cases are necessary since this give those outlaw a lesson and this also show the degree of
illegitimate that they had committed which let the people now the rules and regulation more
clearly and precisely.
Thus, in the end, we must learn that, we should run the business legitimately and should
be down-to-earth, instead of surreptitiously running it improper on the sly because this
nevertheless will be found and held by the court once and for all.
.H
RE/ERENCE
)oos>
#eoffrey 'orse. (harlesworth’s (ompany &aw. -6th edition.
%otes>
%otes from lecturer, "$. #?@A%3TD3% $3'3% %3+$
+nternet>
Delplinelaw.com. .006-.00G. ;&aw Firm - %epal &awyers - nepal +ncorporation of (ompany -
&aw ...< Q?nlineR
http>22www.helplinelaw.com2article2nepal2.46 Qaccessed .4 "ec .004R
;9alomon v. 9alomon C (o. - )acground< Q?nlineR
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:Tipedia. .005. ;9alomon v. 9alomon C (o. 9ummary< Q?nlineR
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'd. $odzi Darun. -44H. ;%ature of a (ompany< Q?nlineR
http>22members.tripod.com2Usyariat2essential-.html Qaccessed .4 "ec .004R
:iimedia Foundation, +nc. .004. ;&imited liability company - :iipedia, the free
encyclopedia< Q?nlineR
http>22en.wiipedia.org2wii2&imitedSliabilityScompany Qaccessed .4 "ec .004R
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Q?nlineR
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eDow, +nc. -444-.004 . ;:hat +s the Veil of +ncorporationW X eDow.com< Q?nlineR
http>22www.ehow.com2aboutSBI.IH4GSwhat-veil-incorporation.html Qaccessed .4 "ec .004R
;)usiness &aw> (+'3 ,ear ?ne &ifting the Veil of +ncorporation< Q?nlineR
http>22www.economic-truth.co.u2cima2notes2law-6.pdf Qaccessed .4 "ec .004R
/ones (ommunications &td. .00G - .004. ;&ifting The Veil ?f +ncorporation< Q?nlineR
http>22www.8onesbahamas.com2news2-6G23$T+(&A2--5IG2.00I-0.-.6.html Qaccessed .4 "ec
.004R
60

QUESTION Various authors have criticized metaphors commonly used by the court in veil-piercing cases (such as ‘sham’, ‘simulacrum’, ‘mask’, ‘fiction’, ‘myth’ as being no more than conclusary terms, which allow the courts to do as they please on the basis of policy. Do you agree?

2

1.0 NATURE OF REGISTERED COMPANY 1.1 What is a Registered Company? The first point in a study of company law is to define precisely what is meant by a company. The definition in the Companies Act 1963 states that a company means a company formed and registered under this Act or an existing company. As a consequence, a registered company can be defined as a company incorporated by registration under the Companies Acts, is regarded by the law as a person just as a human being, Mr. Smith or Mr. Jones, is a person (Geoffrey Morse, Company Law). When a company is formed, it is said to have become “incorporated”. A registered company is owned by multiple shareholders and is supervise by a board of directors, which hires the business's managerial staff.

3

the key feature of a company is that it is a legal entity (or person) in its own right. and the one we will bear in mind most carefully.2 Registration The process of forming and registering a company in accordance with legislation is known as ‘incorporation’. Thus. or ‘incorporate’. 2. is the public company limited by shares.1 COMPANY 2. The advantage of limited liability results from this. depending on the uses to which they are to be put. There are different types of registered companies. 2.0 DIFFERENT TRADING FORMATS There are three basic trading formats: a company. a registered company.’. The most common type of company in Malaysia.1. legally different from the people who own it. the typical ‘PETRONAS’. 4 . a sole trader and a partnership.2.1 Structure One option open to a person setting up a business is to form. known as a ‘separate legal personality’. the short form for ‘Petroliam Nasional Berhad.2.

though in some cases he might keep an assistant or a helper. therefore. in sole trader. However. 2. ‘John & Bakery’.3 Number of members Usually. He cannot shrug his responsibilities.2 SOLE TRADER 2.2. this form of business will have limited liability. for example. it is a “sole” trader in the sense that the owner has no partners. if the business is sued. 2. it is the owner’s problem. 2. This allows the sole trader to do business with a name other than their legal name and also allows them to open a business account with banking institutions. there is no one to assist him. he is responsible for the all the affairs pertaining to the business.1 Structure A sole trader is simply an individual who carries out the trade or business single handedly. a registered business name has no legal implications other than allowing you to use and trade under that name instead of your own.2.4 Management For sole trader. hiring employees may be difficult.2.2. 5 . He will not be able to protect himself by saying that the act was committed by his business and not by him. This.2.2 Registration The sole trader has the choice to trade under his or her own name or under a registered business name.

both the owner and his business are the same. Therefore. which is seen as the greatest risk of this form of business. 6 . any profits or losses made by the business are bear by the sole trader.2. because they are small. his liability is unlimited.2. The law does not make any distinction between the owner and his business. A sole trader has no separate legal personality. Sole trader may not able to raise capital on his own not like in partnership where they are able to share the financial burden of raising funds. who introduces a new variety of cake. many financial institutions consider sole trader as risky ventures and will not lend them large sums and they will not be able to use any other form of long-term finance unless they change their ownership status. he can take the credit. If the product fails and as a result he suffers losses. If the product turns out well. the owner will have to cough money from his own assets and financial reserves to pay to the creditors and lenders.5 Capital and liability In the eyes of the law. if the business goes bankrupt or receivership. For example. hence. thinking that there is demand for this particular variety. then he will be held for the losses. there is a cake manufacturer. A sole trader may have difficulty in raising finance. who is also a sole trader.

1(1) as an association of two or more parties carrying on a business in common with a view to a profit. the business for partnership is flexible in its operations as it can engage in any other operations without any restriction as it may be the case with the companies. Partnership can be considered as a form of business organization grew out of the limitations of individual proprietorship. thus. 2. a need for more capital is arise. more persons are needed to supervise the business affairs. a partnership only has few requirements to be formed and there are no minimum or maximum limits for capital. risk bearing capacity were limited.2.3. When business activities started expanding. and. no restrictions apply (s. the financial resources. with all partners sharing the profits and losses. A partnership is alike to the coming together of two or more sole traders. are not required to go through any complications registration process when they are formed.3. unlike companies.3 PARTNERSHIP 2. 7 . they are under no obligation to make their accounts public. If the business of a partnership is carried on under a name which consists of the surnames of all the partners. and. managerial skill. again unlike companies.1 Structure A partnership is defined by the Partnership Act 1890 in s. the partnership form of organization was developed to overcome the weakness of sole trading organization and to meet up the expanding needs of a business requiting a moderate amount of capital. 1 Business Names Act 1985).2 Registration Partnerships. in sole proprietorship.

716 Companies Act (CA) 1985).5 Management The business of partnership may be carried on by all the partners or by any of them acting for all. The agreement should identify the partners.3. 2. 2. their respective business-related duties and responsibilities. and the termination or withdrawal of the partnership will be a certification issue that does not impact ongoing operations of the partnership. the withdrawal of a partner.2. and liquidation of the partnership. if no such agreement is made. For itself. or the desire of a partner to withdraw automatically will terminates the partnership.3. inability to carry out specific responsibilities. the criteria for additional investments and withdrawals. if the business continues to operate as a partnership. The death. how income will be shared.4 Constitution The life of a partnership may be set up as a certain number of years by the agreement.3 Number of members The maximum number of persons who could be members of a particular partnership was usually 20 (s. 8 . bankruptcy.3. The partnership's business may continue with proper requirements. and the guidelines for adding partners. one partner may legally bind the partnership to a contract or agreement that appears to be in line with the partnership's operations. and it is formed by making a written or oral agreement that they will jointly assume full responsibility for the conduct of business. A new partnership agreement is required every time when a partner withdraws or is added.

General partners may have joint liability or joint and several liabilities depending upon circumstances. this limit only applies if the third party entering into the contract is aware of the limitation. A limited partnership must include at least one general partner who maintains unlimited liability. A partnership has no separate legal personality either. a limited partnership has two classes of partners where often known as silent partner or sleeping partner. When the partnership cannot meet its obligations. the partners may be called on to use their personal assets to satisfy partnership debts. It is the partners' responsibility to notify third parties that a particular partner is limited in his or her ability to enter into contracts. if one partner does not have enough assets to meet his or her share of the partnership's debt. 2. The other partners can be held individually liable by the creditor requiring payment. 9 . their liability is limited to the amount of their investments and is often used when investors will not be actively involved in the business and do not want to risk their personal assets. Whereas.3.3.7 Types of partners There are two types of partners. it has an obligation of strict liability to third parties injured by the partnership. General partnership is a partnership in which all partners are individually liable.2. Thus every partner is an agent of other partners and at the same time of the firm.6 Capital and liability Although partners may limit a partner's ability to enter into contracts on the company's behalf.

A Salomon & Co Ltd.0 EFFECT OF REGISTRATION OF A COMPANY 3. a company can do almost everything a human person can do. This was seen in the famous case of Salomon v Salomon & Co Ltd (1897). As a person. sue and be sued. and took his payment by shares and a debenture or debt of £10. it can make contracts. Mr.000. since he sold his business to the newly formed company. 10 . Salomon had become the company's principal shareholder and its creditor in Salomon & Co. The liquidator and the other creditors objected to this and asked the court to reserve Salomon’s debenture on the ground that he could not owe money to himself. The company becomes a legal person in its own right.3. employ people. claiming that it was unfair for the person who formed and ran the company to get paid first. Thus. i. he has become a secured creditor by taking a mortgage debenture which gives him a right to be entitled to be paid first as a secured debenture holder when the company into liquidation some years later. distinct from the shareholders and management. Ltd at the same time. The registered company like a statutory company or a chartered company is a ‘corporation’. in the eye of the law it is an artificial legal person as opposed to individuals who are known as natural persons. Salomon v Salomon & Co Ltd (1897) AC 22 Mr. with powers and liabilities as an individual but is distinguished from the members it may have from time to time. borrow and pay money.1 Separate Legal Personality Corporate personality refers to the fact that as far as the law is concerned a company really exists.e. Salomon had a boot manufacturing business which he decided to incorporate into a private limited company. among other things.

However. The decision confirmed that the use of debentures instead of shares can further protect investors. Salomon. as a shareholder and creditor. was totally separate in law from the company A Salomon & Co Ltd. 11 . The result was that Mr. and thus Mr. the House of Lords held that the company was a different legal person from the shareholders. Salomon was entitled to be repaid the debt as the first secured creditor.

A company formed in compliance with the regulations of the Companies Acts is a separate person and not the agent or trustee of its controller. Lee incorporated a company. The matter came to the New Zealand Court of Appeal who found that Mr.C. Lee were distinct legal entities and therefore capable of entering into legal relations with one another. the debt is the debt of the company. 000. The members’ liability was limited to the amount prescribed in the Companies Act: section 13(3) – i. 12 . the debts of the company were its own and not those of the members. a company’s members enjoy limited liability. For example. the amount they invested. Lee was killed in the plane crash while he is working.2 Limited Liability Once incorporated. Lee to be employed as the chief pilot of the company as the company and Mr. 1956. if a company goes into liquidation owing 100.C. provided that their shares are fully paid up and it is a limited company. However. leaving a widow and four infant children.). The widow was therefore entitled to compensation. Mr. The shareholders’ debts are limited to any money they owe for the purchase of their shares. As a result. in the Privy Council in London.3. Lee’s Air Farming Limited which he owned all the shares and also been employed as chief pilot of the company. In March. Mr. Lee was not a ‘worker’ within the meaning of the Workers’ Compensation Act and so no social welfare compensation was payable as the widow claimed she was allowed to be compensated under the Act as the widow of a ‘worker’. 12 (P. Another good illustration is Lee v Lee’s Air Farming (1961) A. it held that there was a contractual relationship for Mr.e. not of the shareholders.

even one holding one hundred per cent of the company’s shares. it shows the fact that a member. business etc and a good example is shown in the case of Re Noel Tedman Holdings Pty Ltd (1967) Qd R 561.e. 13 .3. Moreover. once it formed. members may come and go but this still does not affect the legal personality of the company. members.3 Perpetual Succession A company does not die. employees. it will continue until such time as its name is struck off or dissolved through a legal process known as winding up or liquidation even though without any directors. in Abdul Aziz Bin Atan & 87 Ors v Ladang Tengo Malay Estate Sdn Bhd (1985) 2 MLJ 165 case. dies has no effect on the legal existence of the company i.

The House of Lords held that the timber belonged to the company and not Mr. Macaura who owned an estate and some timber. Mr. Thus. 14 . Therefore. Two weeks later. owned all the shares in the company. Macaura tried to claim under the insurance policy but. a company may own property distinct from the property of its members. a change in membership of a company will have no effect on the ownership of the company’s assets. making contracts. so that even the largest shareholder has no insurable interest the property of the company. a fire destroyed all the timber on the estate.4 Power to own property A company is capable of owning property. Macaura. employing people and being sued or of suing. Macaura. but he had no insurable interest in the property of the company. The insurance company refused to pay out arguing that he had no insurable interest in the timber as the timber belonged to the company when Mr. The property of the company belongs to the company itself and not to the individual members. stored the timber.3. In Macaura v Northern Assurance Co. Even though Mr. (1925) AC 619. which amounted to nearly the entire assets of the company on the estate and he insured the timber in his own name.

the shareholders will lose all their money if the company goes bankrupt. A limited company possibly limited by guarantee or by shares. As well. it has a privacy advantage. for example. To avail of a corporate structure. 4. They may be liable without limit or liability may be limited to a certain figure. unlimited companies do not have to attach accounts to the annual return 15 .4. A company limited by shares perhaps is a private or public company.0 TYPES OF COMPANIES A registered company may be limited or unlimited in terms of liabilities. and also risk losing their own property in order to pay the company's debts which is very similar to a partnership or sole proprietorship.1 An Unlimited Company In unlimited company. a person may choose to form an unlimited company. the members are liable for the debts of the company. when buying property.

4. the members do not provide money to the company on formation or during its life. while they are a member or within one year of their ceasing to be a member. 16 . it does not have a share capital. clubs and nonprofit organizations.2 A Company Limited by Guarantee A company limited by guarantee is a company that guarantees to pay its debts up to a certain limit in the event of the company being wound up. In Guarantee Company. but has members who are guarantors instead of shareholders. This format is often used for charities. So it is suitable for companies that wish to get legal personality and limited liability but do not need to raise money from its members.

is the type of company commonly used for forming a small business. Companies limited by shares may divide into two categories which are public limited companies and private limited companies. In this type of company. they have no responsibility to pay more than the amount they have invested.3 A Company Limited by Shares A company limited by shares is the most common type of company in Malaysia. so they then have no liability to the company if it goes into debt. 17 . The purpose of this type of company is to trade and make profits Shares are issued and directors are appointed by the shareholders. when shareholders buy shares. Normally. the liability of shareholders for the debts of a company is limited to any amount unpaid on their shares.4. they pay for them fully.

1 A Private Limited Company A Private limited company restricts the rights to transfers shares of the company. Public listed companies are listed either on the Main Board or the Second Board of the KLSE.3.". Public limited companies increase capital by selling shares and are manage by a board of directors selected by shareholders. 18 . excluding members who are employees or exemployees of the company. Bhd. Any subsequent issue of securities such as the issue by way of a rights or bonus requires the approval of the Securities Commission. 4." or the word "Berhad" after their name. The minimum number of member is two for private limited company. Public limited companies can only offer shares to the public if a prospectus which meets the terms with the requirements of the Companies Act 1965 has been registered with the Registrar of Companies.3.4. there is no maximum number of members. the maximum is fifty.2 A Public Limited Company Public companies must have a minimum of two members. The shares are freely transferable by sale on the Stock Exchange or elsewhere. They show their position by using the abbreviation "Bhd. it cannot sell the shares to general public. The name of private limited company ends with the word "Sendirian Berhad" or abbreviation "Sdn.

incorporation is a way of limiting the liability of the individuals that own a corporation. own or invest in it. If two persons incorporate a company. separate and distinct from the people who formed. a juristic entity. the courts usually do not look behind "the veil" to ask why the company was formed or who really controls it. Therefore.5. duties and obligation such as owning property or entering into contracts. thus a legal entity.2 Function of Veil of Incorporation The veil of incorporation ensures that a company is a legal person. separate and distinct from its members and shareholders and capable of having its own rights. and it can sue or be sued only in its own name.0 VEIL OF INCORPORATION 5.1 What Is the Veil of Incorporation? Once a company incorporates. 19 . it becomes a legal personality. the corporation does as a result this protect the personal assets of owners and investors from lawsuits. the company will become a third person separate and different from these two persons individually or collectively. they do not get sued. Thus. 5.

However. 20 .0 LIFTING THE COPORAETE VEIL 6. Although the cases when the veil has been lifted vary with the facts of the cases." The corporate veil can be lifted in two ways: (1) By specific provision in legislation (2) And by discretion of the courts.1 Exceptions (Lifting the Veil) In some cases. Legislative lifting of the veil is usually for purposes of enforcing company law. (3) To deal with a group of companies.6. and the owners can be enjoined into the law suit. the courts have take place to disregard or ignore the doctrine of corporate personality and limited liability especially in dealing with group companies and subsidiaries and where the corporate form is being used as a vehicle to commit fraud or as a "mere façade concealing the true facts. (2) To avoid fraud. whereas the courts usually lift the veil to prevent fraud. there are said to be three main reasons why this may be done: (1) To enforce the provisions of company law. Such incidences happen when a corporation is not supported with enough assets to balance its debts and liabilities. in some conditions. the 'veil' that shields the owner(s) from liability can be removed.

CA 1963. every shareholder who knows that the company is trading with less than the statutory minimum.6. The court held that the plaintiffs had accepted an incorrect version of the name. 21 . will be personally liable for the amount if unpaid by the company. The classical case is Nisbet v Shepherd (1994) BCC 91. when it is specified in the Companies Acts that the corporate veil will be lifted 6.1 Where the number of members is less than two Under Section 36.2 Use of an incorrect company name Under Section 121. Jackson (Fancy Goods) Ltd’ without correcting it as the true name of the company is “Micheal Jackson (Fancy Goods) Limited” where “M” is not an abbreviation of “Micheal”.2 Lifting the Veil by Legislation—Automatic The veil will be lifted automatically and there is no freedom of choice. is personally liable for all the debts of the company contracted after those six months and may be sued therefore. 6. and shall also be guilty of an offence against the Act.2. an officer of a company (the officers of a company are the directors and secretary) who signs or authorizes to be signed on the company’s behalf any bill of exchange. CA 1963 if the number of shareholders of a company (except a company whose issued shares are wholly held by a holding company) is reduced below two and the company trades for more than six months while the number is so reduced.2. thus could not rely on section 121. cheque or promissory note where provided that the company fails to affix its name is not properly or legibly written thereon. Durham Fancy Goods v Michael Jackson (Fancy Goods) Ltd (1968) 2 QB 839 A director of the defendant company authorized a cheque made out to ‘M.

2.2.’ without adding the suffix ‘Ltd’ and was liable under section 121 which held by the Court of Appeal.3 Fraudulent Trading Section 304 (1) of the Act states Persons who were knowingly a party to the carrying on of any business of the company with the intent to defraud creditors or for any fraudulent purpose may be personally liable to make such contribution to the assets of the company as the court may think proper Fraudulent trading is very difficult to prove and is not defined by statute because it must be shown that the directors. knew that the company would be unable to pay them. Ltd. 6. 6.’.4 Tax Offences Under s140 (1) of the Income Tax Act 1967 allows the Director-General of Inland Revenue to ignore transactions which have the effect of avoiding or escaping tax: SBP Sdn Bhd v Director General of Inland Revenue (1988) MSTC 243. The defendant was a director of the Corby Chicken Co. in incurring the debts in question.Lindholst & Co A/S v Fowler (1988) BCLC 166 The plaintiff prepared four bills of exchange in the name of ‘Corby Chicken Co. 22 . He signed cheques referring to the ‘Corby Chicken Co.

On the termination of his employment.3 Lifting the Veil by the Courts—Discretionary The cases that deal with the courts’ lifting of the veil do not fall into neat categories. His contract stated that he wasn’t allowed to sell to G’s customers for a period after leaving.6. 935 G was a manufacturer of vehicles and supplier of spare parts. and an order of specific performance of the sale contract was granted to Jones. if the company is set up as a ‘cloak or sham’ with the dishonest purpose of escaping the promoter or shareholder’s existing obligations. H was a managing director of the company. He formed a company. 23 . his company was liable and not him. and secondly. transfers the house to it. Gilford Motor Co v Horne (1933) Ch.3. not him. H argued that firstly his company was approaching the customers. if there was a wrongdoing. In these cases. to avoid the transaction and then claimed he could no longer sell the house to Jones. but many of the cases have a common thread.1 When the Company Was Formed for Fraudulent Purposes The court may extremely give an equitable remedy against both the company and the shareholder. the court will have considerable discretion in deciding whether to lift the veil of incorporation. and granted an injunction against his company as well as him. The courts held that the company was sham. H set up a company which then approached his former customers. The court held that this company was formed as a ‘device or sham’ to frustrate the sale contract. 6. Jones v Lipman (1962) I All ER 442 Lipman sold to Jones a house by a written contract but refused to complete the sale and then wished to get out of the contract. and left G.

Birmingham Corporation had issued an enforced purchase order on this land. the corporate veil shall be lifted and the principal shall be liable for the acts of the agent in cases where the agency agreement holds good and the parties concerned have expressly agreed to such an agreement. the parent company or the members will be bound by the acts of its agent. Stone & Knight Ltd owned some land. Though.3. and would reasonably compensate any owner for the business they ran on the land.6. 24 . there is no presumption of any such relationship between the parties. The subsidiary company is Birmingham Corporation that occupied the land and operated a business there. or certainly for all or any of the individual members if it or they authorize it to do so. Any company which owned the land would be paid for it. But in the absence of an express agreement.2 When the courts recognize an agency relationship. Smith. and a subsidiary company operated on this land. no court has yet found subsidiary companies liable for their holding company’s debts. it may be bound by the same liabilities and rights of its holding company. So long as those acts are within actual or apparent scope of the authority. it will be difficult to establish one. Stone & Knight Ltd v Birmingham Corporation (1939) All ER 116 Smith. The courts held that the subsidiary company was an agent and Birmingham Corporation must pay compensation. Thus. If a subsidiary company having power to act as an agent may do so as an agent for its parent company. Birmingham Corporation claimed they were entitled to no compensation since they did not own the land.

The company running the business was the holding company and the premises were owned by the company’s wholly owned subsidiary.3. he would have received no compensation since there was no money to pay out. or to lift the veil of incorporation. This means that the plaintiff even if successful in their action against the US subsidiary would receive no compensation since the subsidiary had no assets. Food Distributors Ltd.H. D. As a general rule.6.N. The courts held that DHN Food Distributors Ltd‘s subsidiary was a single economic unit and was able to claim compensation because it. 25 . its US subsidiary and an independent US corporation through which it marketed asbestos in the United State as a single economic unit. and this generally extends to other liabilities. the courts have treated each company in the group as separate: one company is not liable for another’s debts. Adams who worked for a US subsidiary of Cape Industries plc. v Tower Hamlets London Borough Council [1976] 3 All ER 462 A subsidiary company of DHN Food Distributors Ltd owned land which London Borough of Tower Hamlets issued a compulsory purchase order on. This case was brought against the UK parent company because its US subsidiary had no assets. Adams v Cape Industries plc and Another (1991) 1 All ER 929 A worker. The court of appeal refused to treat the UK parent company. which marketed asbestos in the US had suffered injuries through exposure to asbestos dust and wanted to sue.3 When the entities are considered to be a single economic unit.

4 In cases of national emergency. Daimler Co Ltd claimed that they should not pay the debt to German individuals to prevent money going towards Germany’s war effort. Continental Tyre and Rubber (GB) Ltd was a UK company. Daimler Co Ltd v Continental Tyre and Rubber (GB) Ltd (1916) 2 AC 307 Continental Tyre and Rubber (GB) Ltd were registered in Britain.6. or other national emergencies where sanctions are imposed. Continental Tyre and Rubber (GB) Ltd sued Daimler Co Ltd for debts owing. the courts may need to consider ownership of companies. The courts have occasionally raised the ‘veil’ and looked at the shareholders to disclose a company’s nationality in wartime. The court held that Continental Tyre and Rubber (GB) Ltd (1916) was German.3. almost all of the shares were German owned. however all shareholders but one were German. 26 .

1914).0 Conclusion Through this assignment. ‘myth’ as being no more than conclusary terms. or be outlawed or excommunicated. English jurist and parliamentarian said that "Corporations cannot commit treason. just like Ambrose Bierce (1842-c. This is because these criticized metaphors shows the court’s responsibility for giving a truthfully and acceptable judgment based on the veil-piercing cases they heard. duties and obligation and can sue or be sued in its own name. it becomes an artificial legal person which recognized by the law that separate and distinct from its members and shareholders and capable of having its own rights. An ingenious device for obtaining individual profit without individual responsibility.". for they have no souls.7. Thus. the main reason of forming a company certainly is to earn profits by running the business smoothly just like Alexandre Dumas (1802-1870). which allow the courts to do as they please on the basis of policy. ‘fiction’. American writer said "Corporation. That’s why there is an exception for the company not to lift the ‘veil’ of incorporation because there may have someone used this advantages as a vehicle to carry out fraud. ‘simulacrum’. However. In general. Thus. prolific French author of 27 . Although it can sue people and make contract under its name but it didn’t have mind and spirit to commit fraud or illegal action or even disloyalty. in my view. I will agree that various authors have criticized metaphors commonly used by the court in veil-piercing cases (such as ‘sham’. ‘mask’." The image of Sir Edward Coke (1552-1634)." had truly shown that a company is only an ‘artificial’ person only not a ‘real’ person. we can understand and know that a company once incorporated. there still have some circumstances that this doctrine or principle of corporate personality which carries with the concept of limited liability may disregard or ignore by the court especially in dealing with group companies and subsidiaries and where the corporate form is being used as a vehicle to perpetrate fraud or as a "mere façade concealing the true facts.

So in order to earn more money in the business. in the end. Geneen." Harold S. that's easily defined. the performance that should contribute in the business. it's other people's money. an American businessman said that "In business. we also should use the advantages of business form that we have in proper way not inappropriate way just like those veil-piercing cases that had shown in the assignment. we should run the business legitimately and should be down-to-earth. Thus. for forming a company. words are words. and let the profit run sufficiently where using the advantages of the business efficiently not sinking at the back of the veil of incorporation doing something that is not the purpose for running a business. and historical novel said that "Business. the efficiency of using the knowledge and skill of handling a business in turn to success is important although we have know the advantages and disadvantages of our business form. but only performance is reality”. we must learn that.plays. I think that those criticized metaphors commonly used by the court in veil-piercing cases are necessary since this give those outlaw a lesson and this also show the degree of illegitimate that they had committed which let the people know the rules and regulation more clearly and precisely. popular romances. instead of surreptitiously running it improper on the sly because this nevertheless will be found and held by the court once and for all. explanations are explanations. And based on this. Thus. we should find solution to cut the losses in which to eliminate the disadvantages appear in the business. promises are promises. We should use our ability of running the business properly. 28 .

com.org/wiki/Limited_liability_company [accessed 29 Dec 2009] Fairfax Digital.html [accessed 29 Dec 2009] 29 .tripod. Inc. 2003-2005. 2006.Nepal Lawyers . the free encyclopedia” [Online] http://en.com. [accessed 29 Dec 2009] Md.smh.bookrags. “Limited liability company . 1998. DR..Wikipedia.com/wiki/Salomon_v. Summary” [Online] http://www.com/article/nepal/293 [accessed 29 Dec 2009] “Salomon v.html [accessed 29 Dec 2009] Wikimedia Foundation.com/salomon_v_salomon_amp_co_-_background [accessed 29 Dec 2009] Wíkipedia. Salomon & Co. 2009.Background” [Online] http://www. “Nature of a Company” [Online] http://members. “Salomon v.” [Online] http://www. ..helplinelaw._Salomon_&_Co. Salomon & Co.com/~syarikat/essential1.experiencefestival.wikipedia. “The Sole Trader” [Online] http://smallbusiness.REFERENCE Books: Geoffrey Morse. 2009. 13th edition. Rodzi Harun. “Law Firm . Charlesworth’s Company Law. GOPENATHAN RAMAN NAIR Internet: Helplinelaw. Notes: Notes from lecturer.nepal Incorporation of Company Law .au/starting/legal/the-sole-trader-906996502.

“Lifting The Veil Of Incorporation” [Online] http://www.com/about_4727895_what-veil-incorporation. 2009.com/news/135/ARTICLE/11675/2007-02-23.wikipedia.economic-truth.Wikimedia Foundation.uk/cima/notes/law13.2009.org/wiki/Sole_proprietorship [accessed 29 Dec 2009] eHow.jonesbahamas. 2005 .co.Wikipedia. Inc. 1999-2009 . “What Is the Veil of Incorporation? | eHow. the free encyclopedia” [Online] http://en.ehow.html [accessed 29 Dec 2009] “Business Law: CIMA Year One Lifting the Veil of Incorporation” [Online] http://www. “Sole proprietorship . Inc.com” [Online] http://www.pdf [accessed 29 Dec 2009] Jones Communications Ltd.html [accessed 29 Dec 2009] 30 .

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