PCL0012

INTRODUCTION TO COMMERCIAL
LAW
CHAPTER 1: INTRODUCTION TO
BUSINESS ENTITIES
Prepared by Saidatul Nasuha binti Jamaludin
LEGAL NATURE OF COMPANY AND EFFECT OF INCORPORATION
• The powers and liabilities of a company are the direct consequence of its
creation as a distinct legal entity
• In most respects a company is recognized by the law as having the same
powers ad liabilities as an individual.
 BODY CORPORATE (CORPORATE PERSONALITY)
• The most important effect of incorporation is the creation of a new legal entity known as body
corporate/corporation. The company becomes an artificial person and exist independently/separately
from it members and those who manage its operations (directors)
• This principle of separate legal entity was recognized in the case of Salomon v Salomon & Co. Ltd
(1897) AC 22.
• This principle is also known as “the veil of incorporation”/corporate veil. Once a company has been
duly incorporated, the courts usually not look behind the veil to find out the person who actually
formed or control the company.
• Generally, the members of the company will not be personally liable for the liabilities of the company.
• Only the company will be liable for all debts.
• The separate entity principle applies even when companies are related as holding and subsidiary
companies.
• A subsidiary’s profit cannot be regarded as the profit of its holding company
People’s Insurance Case [1986] 1 MLJ 68
- Although the plaintiff company is a subsidiary of the first defendant company, the plaintiff company
maintains it own separate legal entity.
 SALOMON V SALOMON
• Mr. Aron Salomon run a boot manufacturing business as a sole trader.
• He decided to expand this business by forming a company.
• He incorporated a company Salomon & Co. Ltd under UK Companies Act 1862
whereby he and his family members were the shareholders. He and 2 of his sons were
appointed as directors.
• He sold the sole business to the company. The company paid part of the purchase
price and indebted the balance. As security, the company issue debenture to him. As a
result he become secured creditor.
• Later, the company floundered and went into liquidation. The value of the company’s
assets was insufficient to paid out the creditors. But, the company paid to Mr Salomon
as secured creditor.
• Dissatisfied, the unpaid creditors through the liquidator sued Mr. Salomon claiming
that he and the company was actually the same entity.
• House of Lords held that it is not contrary to the Act 1862, public policy or detrimental
to the interests of the creditors. Incorporation of a company created a separated
person
SALOMON V SALOMON
Lord Macnaghten:
“The company is at law a different personal together from the subscribers to
the memorandum; and, though it may be that after incorporation the business
is precisely the same as it was before, and the same persons are managers,
and the same hands received the profits, the company is not in law the agent
of the subscribers or trustee for them. Nor are the subscribers, as members,
liable in any shape or form, except to the extent and in the manner provided
by the Act”
 The effects/consequences of becoming a body
corporate:

(1) It may enter into contracts with anyone, including its members, directors or
employees; suppliers and customers.
(2) The company’s obligations, liabilities and rights are its own and not those of its
participants
(3) It may sue and be sued
(4) It has perpetual succession
(5) It has a common seal
(6) It has power to hold land (and other properties)
THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
a. Able to Enter into Contracts
As a separate legal entity, a company is able to enter into contracts with its members,
directors or employees; suppliers and customers.

Lee v Lee’s Air Farming [1961] 1 AC 12

Lee was a pilot and formed a company to conduct the business. Workers insurance
was taken out naming Lee as an employee. Lee was killed when his airplane crashed
and his widow made a claim. Her claim was first rejected on the ground that Lee is
not a worker. Privy Council however held that since the company was a separate
entity, it could enter into a contract of employment with Lee. Therefore, Lee is a
worker for the purpose of insurance.
THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
b. Liabilities are its Own
-If a company has incurred obligations in contract it is primarily liable because its debts are
separate from its members.
- Directors are not personally liable for a contract that has been entered by the company.
Salomon v Salomon

In Malaysia, Sunrise S/b v First Profile (M) S/B [1996] 3 MLJ 533
Chong Siew Fai CJ,
“We are in complete agreement with the basic principle of the fundamental attribute of
corporate personality,i.e. that the corpotration is a legal entity distinct from its member, be
they individuals or corporate bodies a principle firmly established since Aron Salamon v
Salomon & Co. Ltd [1987] AC 22”
 THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
c. Right to Sue and Be Sued
-Being separate legal entity, a company may sue others (including its own members) to enforce its rights.
Conversely, it may incur liabilities (such as debts, enter into contracts) and be sued by others and also it
members.
-The rule in Foss v. Harbottle (1843) 2 Hare 461 require the company itself to enforce its right not
through its members.
-The decision to sue or not to sue can be made by the directors or by the members of the company in
general meeting.
Foss v Harbottle (FvH)
In this case two shareholders brought an action against the company’s directors. They alleged that the
property of the company has been misused. Held: The injury complained was an injury to the company.
In law, the company and its members were not the same. Therefore the members cannot maintain such
suit. It was for the company to sue and not the members.
-In other words, the company is the proper plaintiff to initiate actions in respect of wrongs done to it.
Thus, the proper organ to commence the action on behalf of the company is BOD. A single director or
officer of the company cannot sue on the company’s behalf unless specifically authorized to do so.
 THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
d. Having Perpetual Succession
- Unlike natural person, a company is immortal.
-It does not die and continue to exist as long as it has not been deregistered (wound up, dissolved or struck
off the register).
Tan Lai v Mohamed bin Mahmud [1982] 1 MLH 338
- The death of all company’s members will not affect the existence of the company.
- Even if all company’s shareholders have sold their shares to others and new shareholders come in will not
change its legal personality.
Re Noel Tedman Pty Ltd
The company had a husband and a wife as its only shareholders. They were also the company’s directors. They
died in an accident, leaving behind an infant child. After their death the company still existed. The problem
that arose was, as the shareholders and directors had died, the shares could not be transferred as according
to the will of the deceased to the infant child.
The court thus allowed the personal representative of the deceased to appoint directors of the company, so
that these directors could allow the transfer of the shares to the child.
 THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
e. Power to Own Property
-Even though in S.16(5) the word used is specific i.e. power to hold land, but being a separate legal entity
a company may also own any other types of property.
- Members do not have a proprietary interest in the property of the company.
- They only own shares in the company.
• Macaura v Northern Assurance Co. Ltd [1925] AC 619
• Law Kam Loy v Boltex S/B [2005] 3 CLJ 355

Macaura v Northern Assurance Co Ltd (MNA)

In this case Macaura owned an estate and then sold all the timber on the estate to a company, he and his
nominees owned all the shares of the company, he insured the timber that he sold to the company under his
own name. The insurance policy was not transferred into the company’s name. The timber destroyed in a
fire, Macaura claimed the insurance but the insurance company refused to pay.
Held: When Macaura sold the timber to the company, he gave up his interest in it and the company had
become owner of it.
THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
f. Control and management
-Members of a company have no right to interfere in the management of the
company.
- Power to control and to manage the company mainly vested on the BOD
- Members only can involve in management only during company’s meeting or if he is
properly appointed as member in the BOD
THE EFFECTS/CONSEQUENCES OF BECOMING A
BODY CORPORATE:
g. Liability of Members
•Members of a limited company enjoy the benefits of limited liability.
•Limited liability means the company's debts are its own and members are protected
from personal liability.
•If Co. Ltd by Guarantee – limited to amount nominated/undertaken
•If Co. Ltd by Share – limited to amount of unpaid share
•If this amount has already been fully paid to the company, then the member need
not contribute any more towards the company’s debts.
•It is only when the company has insufficient assets to pay its debts in a winding up
than the members may be liable to contribute.
LIFTING OF CORPORATE VEIL
CORPORATE VEIL
• Corporate veil is separates the personality of a corporation from the
personalities of its stockholders (shareholders), and protects them from
being personally liable for the firm’s debts and other obligations. This
protection, however, is not ironclad or impenetrable.
• Where a court determines that a firm’s business was not conducted in
accordance with the provisions of corporate-legislation. It may hold the
stockholders personally liable for the firm’s obligations under the legal
concept of lifting the corporate veil.
LIFTING THE CORPORATE VEIL
 LIFTING THE CORPORATE VEIL
• The courts have not always applied the separate legal entity principle as the
Salomon case. In a number of circumstances, the court will pierce the corporate
veil or will ignore the corporate veil to reach the person behind the veil or
reveal the true form and character of the concerned company.
• Another meaning of corporate veil is lift is a legal term where the court allows
a lawsuit or prosecution to proceed against the individual shareholders or
directors of a corporation instead of allowing them to be protected from
individual liability due to their corporate status. This qualification prevents the
possible abuse of the separate entity principle by unscrupulous traders.
Therefore, there are statutory as well as common law exception to the principle
in Salomon’s case.
INSTANCES OF PERMITTED LIFTING
• To do justice especially where fraud is involved. The courts are prepared to lift the corporate
veil where an element of fraud exists or where there is abuse of the separate entity principle.
Aspatra S/B v Bank Bumiputra (M) Bhd. [1988] 1 MLJ 97
 Malaysian Supreme Court by a majority decided that it is proper to lift the corporate veil as
the majority shareholder held almost all shares in several companies and was regarded to be
the alter ego of the companies.

**alter ego
n. a corporation, organization or other entity set up to provide a legal shield for the person actually
controlling the operation. Proving that such an organization is a cover or alter ego for the real
defendant breaks down that protection, but it can be difficult to prove complete control by an
individual. In the case of corporations, proving one is an alter ego is one way of "piercing the
corporate veil."
 INSTANCES OF PERMITTED LIFTING
• Corporate form being used to avoid legal duty/to commit fraud. The companies tend to avoid
contractual obligations. The separate personality of a company has often been used to disguise a
fraud or enable a person to avoid his legal obligations.
Gilford Motors Co. Ltd. v Horne [1933] Ch 935
 Mr Horne had been the managing director of the claimant company and was subject to a non-
compete covenant in his service contract, restraining him from soliciting customers of the claimant
during and after his employment. After leaving his job, Mr Horne set up a new company in his
wife’s name and started to solicit the claimant’s customers.
 The English Court of Appeal held that the company was set up to evade Horne’s contractual
obligations. The Court “pierced the corporate veil” and ordered an injunction against Horne.
Courts can “pierce the corporate veil” if a company is simply a mere device to evade legal
obligations, though this is only in limited and discrete circumstances. The Court granted an
injunction, not only against Mr Horne but also against the new company on the basis that it “was a
mere cloak or sham for the purpose of enabling the defendant to commit a breach of his
covenant against solicitation
INSTANCES OF PERMITTED LIFTING
Jones v Lipman
Mr. Lipman agreed to sell a land to Mr. Jones. But before the sale was
completed, Mr. L
transferred the land to a company owned by him. As a result, Mr. J would
not be able to compel Mr. L to transfer the land as it had been
transferred to the company.
Re Darby, ex p Broughm [1911] 1 KB 95
Tiu Shi Kian v Red Rose Restaurant S/B [1984] 2 MLJ 313 – the veil is a mask to
defeat justice
Hock Hua Bank (Sabah) Bhd v Lam Tat Min & Ors [1995] 1 MLJ 328
INSTANCES OF PERMITTED LIFTING
Where the company is acting as the agent of the controller
Smith, Stone & Knight Ltd v Birmingham Corporation (1939) 4 All ER 116

To give effect to the true intention of the parties to an agreement

Tay Tian Liang v Hong Say Tee [1995] 4 MLJ 529

The director authorized the tortious acts.

Victor Cham v Loh Bee Tuan [2006] 5 MLJ 359
 INSTANCES OF PERMITTED LIFTING:
The principle of lifting the corporate veil also extended to related corporation
(holding-subsidiary).
In certain situation, a group of companies may be treated as a single corporate entity,
although the general rule is that each company within a group is distinct entity. This is
due to commercial realities.
• Adams v Cape Industries Plc [1990] Ch 433
• Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers
[1980] 1 MLJ 109
INSTANCES OF PERMITTED LIFTING
Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109
Jaya Puri Chinese Garden Restaurant Sdn Bhd was closed down and workers were
retrenched. This company was wholly owned subsidiary of Hotel Jaya Puri Bhd whose
premises the restaurant was situated. The Union claimed that the actual employer was the
hotel and the hotel was still in business. Therefore the workers could not have been said to
have being retrenched on the closure of a business.The industrial court allowed this and
made order of compensation against the hotel. The hotel appeals to the High Court.
Held: Although technically the restaurant and the hotel were separate legal entities, in
reality, the companies were functionally as one. Technically, a person working for the
restaurant was an employee of the restaurant; the reality was that the workers were
employees of the hotel. The court ignored the separate identities of the restaurant and
the Hotel and treated them as one single entity.
INSTANCES OF REFUSAL
Sunrise S/B v First Profile (M) S/B [1996] 3 MLJ 533 – no dispute as to the identity of
the controller of the company
Lim Sung Huak v Sykt Pemaju Tanah Tikam Batu S/B [1993] 3 MLJ 527 - The
defendant company applied to set aside an injunction restraining the company from selling,
charging or leasing two lots of land, one lot being registered in the name of the company and
the other in the name of an individual as trustee. The plaintiffs based their application for the
injunction on sale and purchase agreements alleged to have been entered into betweenthe
defendant company and the plaintiffs or the original purchasers who assigned their rights to
the plaintiffs. However, all the agreements (except for one) were entered into with a firm and
not the defendant company. Held, setting aside the injunction:The corporate veil could not be
lifted as the founding subscribers of the defendant, who signed on behalf of the defendant, no
longer appeared to control the defendant company.
Development Commercial Bank Bhd v Lam Chuan [1989] 1 MLJ 318 – the alleged
wrongdoer not even a shareholders
JH Rayner (Mincing Lane) Ltd v Manila Sons (M) S/B [1987] 1 MLJ 312 – the
holding company does not own all the shares in the subsidiary. the court will only lift the
corporate veil of a company if the justice of the case so demands. In the instant case there was no
justification for the court to lift the corporate veil of the second defendant.
Yap Sing Hock v PP [1992] 2 MLJ 714- to justify wrongful taking of company’s assets
LIMITED LIABILITY PARTNERSHIP
 LIMITED LIABILITY PARTNERSHIP (LLP)
Limited Liability Partnership (LLP) is an alternative business vehicle regulated under
the Limited Liability Partnerships Act 2012 which combines the characteristics of a
company and a conventional partnership.
 It exhibits elements of partnerships and corporations.
LLP is a partnership in which some or all partners have limited liabilities similar to
that of the shareholders of a corporation.
 Any debts and obligations of the LLP will be borne by the assets of the LLP and not
that of its partners’.
One partner is not responsible or liable for another partner's misconduct or
negligence.
D. LIMITED LIABILITY PARTNERSHIP (LLP)
This is an important difference from the traditional unlimited partnership under the
Partnership Act, in which each partner has joint and several liability.
However, unlike corporate shareholders, the partners have the right to manage the
business directly. In contrast, corporate shareholders have to elect a board of
directors under the laws of various state charters.
The board organizes itself (also under the laws of the various state charters) and
hires corporate officers who then have as "corporate" individuals the legal
responsibility to manage the corporation in the corporation's best interest.
LLP has the legal status of a body corporate which is capable of suing and being
sued in its own name, holding assets and doing such other acts and things in its name
as bodies corporate may lawfully do and suffer.
 LLP also offers flexibility in terms of its formation, maintenance and termination.
 Task!
Please identify differences
between Partnership and Limited
Liability Partnership.