Do the advantages of incorporation compensate for the drawbacks of incorporating a

company?
Discuss.

Company Act 2016 stated that company is a type of corporation. A corporation is an

artificial legal person created and recognized by law. One of the effects of incorporation is
the company will become an entity where the corporation will be separate from its members.
The powers and liabilities of a company are the direct consequence of its creation as a distinct
legal entity. A company is recognised by the law as having the same powers and liabilities as
an individual. Section 18(1) of the Company Act 2016 stated that upon the date of
incorporation, there shall be a company by the name and registration number as stated in the
principal register kept by the Registrar. Section 18(2) of the act stated that the member’s
name to be kept in the register of members. Section 20 of the Company Act 2016, stated a
body corporate shall have legal personality separate from that of its members and continue in
existence until it is removed from the register. From the date of incorporation, a new legal
entity is created.
In according, the new legal entity is separate from its members. This is where the
assets of company are not assets of its members; and those contracts entered by the company
will create rights and liabilities which given to the company and not its members. The
advantage which can be gain by the member in this separate legal entity of a company is the
members will not be responsible for the company debts except for the extend of their
investment in the company. The members of a corporation cannot own any duty of care in
respect of company’s acts, where, they cannot be liable in tort for the company acts. Section
20(2) of the Company Act 2016 also stated that company shall continue to exist regardless of
the identity of its members unless the name is removed from the register or deregistered by
the registrar. The company will be responsible for its own debts and contractual obligation.
It can be seen in the case decided by House of Lords, Salomon v. A Salomon & Co.
Ltd. Based on the facts of the case, Mr. Solomon had shoe and boots manufacture business.
‘A Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers which are
himself, his wife, a daughter and four sons. All shareholders held shares of UK pound 1 each.
The company purchased the business of Salomon for 39000 pounds, the purchase
consideration was paid in terms of 10000 pounds debentures conferring charge on the
company’s assets, 20000 pounds in fully paid 1-pound share each and the balance in cash.
The company in less than one year ran into difficulties and liquidation proceedings
commenced. The assets of the company were not even sufficient to discharge the debentures.
It was hold entirely by Salomon itself and nothing was left to the insured creditors. The
House of Lords solidly held that the company had been validly constituted, since the Act
only required seven members holding at least one share each and that Salomon is separate
from Salomon & Co. Ltd. The entity of the corporation is entirely separate from that of its
shareholders; it bears its own name and has a seal of its own; its assets are distinct and
separate from those of its members; it can sue and be sued exclusively for its purpose;
liability of the members is limited to the capital invested by them. Therefore, the legal
principle of "corporate veil" between the company and its owners was determinedly
established in the case of Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor (1996).

The above stated law and case law, the concept of separate legal entity brings legal
consequences in regard to the operations of the company and people dealing with it. Section
21 of Companies Act 2016 listed down the five legal effects that the company enjoys upon
being incorporated.
First effect is, the company has the ability to sue and be sued. A company can sue
and be sued on its own name. The members of the company cannot take any action on behalf
of the company. Only the company can take legal actions on behalf of itself. In the case of
Foss v Harbottle, there were two shareholders brought an action against the company’s
directors for misusing the company’s property. It was held that, the company and its members
are not the same. Therefore, members could not continue such a suit, and depend on the
company to sue.

Second effect is, company can act as a body corporate as it possesses a separate
legal entity. The company is capable of exercising all the functions of an incorporated
company in full capacity. This suggests that the company has full capacity to carry on or
undertake any business or activity. In the case of Tan Lai v Mohamed bin Mahmud, the
court stated that a body corporate is an artificial legal person that is created and given
recognition by the law.
The third effect is, enjoy a perpetual succession. The existence of the company will
never be affected by the death, insanity or insolvency of an individual member. In the case of
Tan Lai v Mohamed Mahmud, once the company has been incorporated, it will continue to
exist until dissolved properly. In the case of Re Noel Tedman Holdings Pty Ltd, states that
the company had two shareholders who are also the company’s directors, a husband and wife.
Due to the accident, both of them died and left behind their child, an infant. In a will, they left
all the shares to the infant. It was held that even though all the directors and members were
dead, the company still existed. The court allowed the personal representatives of the
deceased to appoint directors of the company in order for the directors to allow the transfer of
shares to the infant. Henceforth, it was clear that company still remain existed even though
the company directors are dead.
Fourth effect is, it will affect the liability of its members. When a company is
incorporated, the company will be liable on its own debts and obligations. However, the
liability of its members depends on the type of the company. In the case of Re Ye Yut Ee, the
high court held that Yee as the secretary, is not liable for the company’s debt as the company
has not complied with the awards related to the cut’s benefits.
The last effect is the company will be conferred the power to hold property or
land on its own. A company can own various forms of property including land. The propert
is only belongs to the company and not its member. In the case of Tai Choi Yu v Syarikat
Tingan Lumber Sdn Bhd, the court held that a mere shareholder of a company has no legal
or equitable interest, in the property of the company.
In conclusion, the five legal implications of the concept of separate legal entity that
shows how the corporate veil separates the company form the individual persons. Once the
company is incorporated, there is a veil established namely corporate veil. This veil divides
the company on one side and on the other side there will be the company’s members and
officers. Usually after incorporation takes place, court will not look behind the corporate veil
to know the reason of company’s formation and who control the company.

By applying to Section 224(1) and Section 225(1) of Companies Act 2016, Jojo Sdn.
Bhd is prohibited from giving loans to Latte and his son. According to Section 197 of
Companies Act 2016, person consider as connected with director including family members
and a body corporate which is associated with that director. Looking into our current
situation, Latter is also known as directors of Jojo Sdn. Bhd and Salt considered as family
members. These two persons are considered as person connected to the directors. Therefore,
Jojo Sdn. Bhd should not give loan to Latte and his son Salt as they are considered person
connected to director.