UNIT 4: SEPARATE LEGAL ENTITY

INTRODUCTION

 A company is an artificial person, and this is in opposition to a natural person i.e. an

individual. Once it is incorporated by complying with the prescribed procedure, it
comes into being and is a separate legal entity from its members and officers.
 One of the underlying principles of an incorporated company is it is a separate legal
entity from its members and officers. This principle distinguishes a company from a
partnership and a sole-proprietorship.
 The importance of the principle of separate legal entity was established in the
landmark case of Salomon v Salomon & Co Ltd (1897). In Malaysia, the courts have
also applied this principle.
 In Sunrise Sdn Bhd v First Profile (M) Sdn Bhd (1996), the Federal Court held that:
We are in complete agreement with the basic principle of the fundamental attribute
of corporate personality, i.e. that the corporation is a legal entity distinct from its
members, be they individuals or corporate bodies under a principle firmly
established since Salomon v Salomon & Co Ltd.
 The principle of separate legal entity is enshrined in section 20 of the Companies Act
2016 (“the CA 2016”) which reads: A company incorporated under this Act is a body
corporate and shall have legal personality separate from that of its members; and
continue in existence until it is removed from the register.
 In addition, section 192(1) also expressly provides that “a member shall not be liable
for an obligation of a company by reason only of being a member of the company”.
Solomon v Solomon & Co (1987)
In this case, Solomon who owned a shoe making business and operated as a sole trader was
convinced by his family to set up a company. Under the Companies Act at that time, the
minimum requirement to set up a company was 7 shareholders holding at least 1 share
each. As such, Solomon followed the required procedure in setting up a company, took 1
share for himself and give one share each to his wife and five children. The company,
Solomon & Co Ltd, become a separate legal personality on receiving its certificate of
incorporation. Solomon then agreed to sell his shoe business to the company for $39,000.
The shareholders of the company agreed to the price asked. Solomon was paid $10,000 in
cash, was given 20,000 shares worth $1 each and a debenture for the remaining $9000
owed him by the company. Solomon then ran the company as its director. As the time went
by, the company faced difficulty and in order to raise capital for the company, Solomon sold
his debenture to Benedict.
The cash raised was used for the business but did not manage to stop the company from
facing more problems. Finally, a liquidator was appointed by the creditors to realize the
assets of Solomon & Co Ltd and settle the debts owed to the creditors. However, when all
the assets of the company realized, the total amounted to around $6000. The creditor were
horrified to find out that the money was used to pay off the debenture as the creditor
holding it was considered as a secured creditor.
Held:
High court:
The court held that the creditor could not recover their debts as their contracts were with
the company, and not with the Solomon.
Court of Appeal:
It was held that since Solomon was the majority shareholder (20,001 shares as compared
with negligible remaining 6 shares) and he was also a director of the company, that the
company therefore belonged to Solomon and that he should be liable to settle all the debts
owing to the creditors of the company.
House of Lords:
It was held that as Solomon & Co Ltd is a company, and therefore has separate legal
personality, it could not be said that Solomon owned the company. The company and
Solomon are two legal persons in law. It is the company which has the power to enter into
contracts.
Principles laid down in Solomon v Solomon
The House of Lords lay down the following basic principles of a company.
Artificial person
The company is a juristic person; however, it does not possess the body of a natural being. It
exists only in contemplation of law. Being an artificial person, it has to depends upon natural
persons, namely, the directors, officers, shareholders and corporate manager & etc, for its
management and day to day running. However, these individuals only represent the
company and accordingly whatever they do within the scope of the authority conferred
upon them and in the name and on behalf of the company, they bind the company and not
themselves.
Limited liability.
One of the principles advantages of trading through the medium of a limited company is
that the members of the company are only limited to contribute towards the payments of
its debts to a limited extent. If the company is limited by shares, the shareholders liability to
contribute is measured by the nominal value of the shares he or she holds. In other words,
once he or she or someone who held the shares previously was paid that nominal value plus
only premium agreed on when the shares were issued, he is no longer liable to contribute
anything further.
However, the companies may be formed with unlimited liability of members, or members
may guarantee a particular amount. In such cases, liability of the members shall not be
limited to the nominal or face value of the shares and the premium, if any unpaid thereon.
In the case of unlimited liability companies, members shall continue to be liable till the
whole amount has been paid off. If a company is unable to pay its debts, its creditors may
petition the court to wind it up.
Conclusion
Therefore, debts of the company are the responsibility of the company and not its
members; it is the company which entered contracts with the creditors and the creditors
can only sue the company and not its shareholders. Solomon liability as a shareholder is
limited. A company may contract with its shareholder if the need arises; the company can
employ people to run the business and Solomon was entitled to be considered an employee
of the company in his capacity as director of the company.
Company must sue in its name for any wrong committed against company; and the any
wrong has been committed against the company; it is the company who can sue to recover
its losses.
Company can own assets and shareholders have no proprietary interest in those assets. The
shoe business belonged to the company and not to Solomon once the contracts were
entered into between Solomon and the company.
From this case the fundamental concept that a company has a legal personality or identity
separate from its members. A company is thus a legal ‘person’.
Judicial exceptions
The case where the court have lifted the veil of incorporation can be categorised as follow:
LIFTING THE CORPORATE VEIL

 Fraud or improper purpose

The court will not assist fraud. Thus, if a company is used a mask to commit a fraud,
the court may pierce its veil of incorporation. In Lam Kar Bee v Duofortis Properties
(M) Sdn Bhd (1992), the Malaysian Supreme Court held, “it is well settled that the
courts have discretion to lift the veil of incorporation for the purpose of discovering
any illegal or improper purpose”