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VEIL OF INCORPORATION

Used to protect shareholders from personal liabiltiy to creditors (i.e.: protecting members’ personal
assets from lawsuits)
1. Salomon v Salomon & Co Ltd
 Fact: Company was controlled by Salomon, who was the controlling director and
majority shareholder. He contracted debts from creditors under the name of the
company.
 Held: Company was separate legal entity and solely responsible for its own debts.
 See also: Fairview Schools Bhd v Indrani Rajaratnam & Ors
2. Effects of incorporation – S16(5)
 On and from the date of incorporation (after receiving certificate of incorporation), the
company shall be a…
i. Body corporate
ii. Capable of suing and being sued in its own name (Foss v Harbottle)
iii. Having perpetual succession (In Re Noel Tedman)
iv. Common seal with power to hold properties (Macaura v Northern Assurance Co
Ltd)
PIERCING THE VI
The court will exercise caution and there must be a reason when called upon to lift VI – Yap Sing Hock
& Anor v Public Prosecutor
1. Judicial Exception
 Instrument of fraud: Gilford Motor Co Ltd v Horne
 Fact: Mr EB Horne was formerly a managing director of the Gilford Motor Co
Ltd. His employment contract stipulated not to solicit customers of the company
if he were to leave employment of Gilford Motor Co. Mr. Horne was fired,
thereafter he set up his own business and undercut Gilford Motor Co's prices.
The company had no such agreement with Gilford Motor about not competing,
however Gilford Motor brought an action alleging that the company was used
as an instrument of fraud to conceal Mr Horne's illegitimate actions.
 Held: VI is pierced as the company was set up for main purpose of
dishonestly/perpetuate fraud (in this case, the breach of contract).
 Avoid contractual duty: Jones v Lipman
 Fact: Mr Lipman contracted to sell a house to Mr Jones. He changed his mind
and refused to complete. To try and avoid a specific performance order, he
conveyed it to a company formed for that purpose alone, which he alone owned
and controlled.
 Held: VI is pierced where the corporate form was set up to avoid a contractual
duty (to avoid performance of the contract).
 Company employed as agent of its controller: Smith, Stone & Knight Ltd v Birmingham
Corp
 Fact: SSK owned some land, and a subsidiary company operated on this land. BC
issued a compulsory purchase order on this land. Any company which owned
the land would be paid for it, and would reasonably compensate any owner for
the business they ran on the land. Since the subsidiary company did not own the
land, BC claimed they were entitled to no compensation.
 Held: The subsidiary company was an agent and BC must pay compensation.
 Groups of companies: DHN Food Distributors Ltd v Tower Hamlet
 Fact: A subsidiary company of DHN owned land which LBTB issued a compulsory
purchase order on.
 Held: DHN was able to claim compensation because it and its subsidiary were a
single economic unit.
 Company as façade: In Re FG (Films) Ltd
 Fact: An American company registered their movie under the British Film
Association to take advantage of monetary incentives – the right to screren their
movies in Europe, and to participate in British Film Fair Award.
 Held: Although owned by a UK company, was considered "made" by the
Americans who financed and worked on it. The company was registered as a
mask to fraud the system.
2. Statutory Exception
 Only one director: S36
 If a company carries on business without at least two members for more than
six months, he will be personally liable for the debts of the company.
 The law under S122(1) requires at least two directors in a company.
 Untrue statements: S46(1)
 An officer shall be personally liable to pay compensation for any untrue
statements made in company’s prospectus to persons who relied on it.
 Certificate of Commencement: S52(4)
 Any contract made by a company before the date at which it is entitled to
commence business shall be provisional only, where the officers can be
personally liable.
 Share buyback: S67(3)
 Where the company contravenes the prohibition against providing financial
assistance for share buyback, its officers shall be guilty of an offense against this
Act.
 Loan repayment: S303(3), 304(2)
 If the officer contracting a debt had no reasonable or probable ground of
expectation to repay the debt, the officer shall be guilty.
 Where a person has been convicted of an offence under subsection 303(3) the
Court, may declare that the person shall be personally responsible without any
limitation of liability for the payment of the whole or any part of that debt.
 Fraud: S304(1)
 If it appears that any business of the company has been carried on for any
fraudulent purpose, the Court may do declare that any person who is carrying
on of the business shall be personally responsible.
 Dividends: S365
 (1) No dividend shall be payable to the shareholders of any company except out
of profits.
 (2)(b) Every director or manager of a company who wilfully pays or permits to
be paid any dividend out of what he knows is not profits shall be liable to the
creditors.




PROMOTERS
1. Pre-Incorporation Contracts & Provisional Contracts
 A: Common Law View
 The promoter cannot legally enforce payment from the company for services
rendered or expenses incurred because the company was incapable of incurring
any contractual liability. The contracts are null and void, cannot be ratified –
Newborne v Sensolid
 Company promoters will not be liable unless they were acting as principals. The
mere fact that a person signs a contract for a non-existent company does not
mean the person intends to be personally liable – Baxter v Kelner, Black v Small
Wood.
 B: Statutory View
 S52(1) Contracts entered into by a public limited company after obtaining its
Certificate of Incorporation but before it has obtained its Certificate of
Commencement – This does not apply to private limited companies.
 S52(4) Contracts are valid but unenforceable until it obtains Certificate of
Commencement.
 S35(1) Any PIC formed may be ratified by the company after its incorporation,
which then binds to the company.
 S35(2) If the company does not ratify the contract, the promoter shall be
personally bound by the contract.
 Phonogram Ltd v Lane – Promoters could avoid liability if there is an
express exclusion or disclaimer in the PIC.
2. Promoter’s Definition
 Promoter is a person who registers the company and makes necessary business
preparations for the pre-incorporated companies.
 Such a person is known as active partner – Twycross v Grant
 He may be interested in the company or professionals who incorporate a company
as a part of their business.
 S4 excludes any person by reason only of his acting in a professional capacity
 Passive promoter is a person who contributes to the initial working capital and will
benefit from the incorporation – Tracy v Mandalay Ptd Ltd
3. Significance
 Disclosure of any benefits given to promoters for public company when issuing
shares – Schedule 5, Prospectus, Para 14.
 Promoters owe fiduciary duties. It is useful to ascertain whether he has breached his
duty.
 S35(2) Promoter may be personally liable in pre-incorporation contracts.
4. Duties
 Bona fide in the best interest of the company
 No conflict of interest – avoid taking up a contract which belongs to the company
 Must not make secret profit - Fairview Schools Bhd v Indrani Rajarathnam
 Must make full and frank disclosure of any personal advantage he obtains as a
promoter EITHER to
 Independent Board of Directors – Erlanger v New Sombrero Phosphate Co
 Fact: Erlanger bought the lease of an island to set up New Sombrero for
phosphate mining for GBP55, 000. Later, he sold the island at GBP110,
000 to the company through a nominee. One of the directors is an
independent of the syndicate that formed the company. Erlanger
ratified the contract with no disclosure of such profits to the
independent director.
 Held: A promoter must make disclosures of any secret profits earned as
a promoter of a company
 OR to potential shareholders to the company – Gluckstein v Barnes
 Fact: The promoters disclose the profits made on the sale of premises to
the company but not the profits made on the repayment of the
debentures bought at discount.
 Held: Court allowed the liquidator to recover the undisclosed profits
from promoters. Further held that partial disclosure is insufficient.
 Duty not to disclose confidential information even after leaving the company
5. Remedies
 Rescission of contract (equitable remedy)
 Company has not ratified the contract after discovering the breach of duty
 Company does not delay in bringing an action in court for the breach
 Third parties have not acquired any rights under the contract
 Recovery of secret profit
 If rescission is not possible, the company may still recover the secret profit
made by the promoters – Gluckstein v Barnes
 Damages
 Company may sue for damages if it suffers loss as a result of the promoter’s
breach of duties
























COMPANY FORMATION
Procedure
1. Decide what type of company
a. Limited/Unlimited
b. Public/Private
2. Choose a suitable name under S22-24
3. Submit Form 13A to CCM to check the availability of the name
4. Prepare documents
a. Memorandum of Association – S18-21
b. Articles of Association – S30&31
c. Form 6 Statutory Declaration by Company Secretary
d. Form 48A Statutory Declaration of compliance by promoter
e. Form 48A SD of compliance by directors – S125 & S130
f. Other documents
 Eg: Form 46 for public company with share capital and share qualifications –
S123 & 124
g. Registered office and address – S19
5. Name of first two directors and secretary be named in MAA
6. Registration fee according to the authorized capital and fee schedule in the CA’65
7. Stamp duty of RM100

Certificate of Incorporation
If CCM is satisfied with the incorporation documents lodged, CI will be issued by the registrar:
Form 8 – Public Company
Form 9 – Private Company

S361 – CI is the conclusive evidence that all requirements of the Act in respect of registration have been
complied with.