CHAPTER 2

INCORPORATION OF A COMPANY
 EFFECTS OF A COMPANY’S INCORPORATION
• Once a company is incorporated, the company exists as a legal personality
separated from its members. In reality, the company will have its own
entity. The principle is called Principle of Separate Legal Personality/Entity.
• A company shall have its own entity under the law. This means that the
company’s rights and responsibilities are separated from its members.
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Case: Salomon v Salomon & Co Ltd (1897) AC 22
Facts of case:
Initially, Salomon was a sole proprietor selling boots. The business was successful. Later,
he formed a company Salomon & Co. Ltd and sold his business to the company in
consideration for 20,000 shares and debentures of £10,000 issued in favour of Mr
Salomon. He was the biggest shareholder and the rest owned by his wife and his children
as nominees. He was also one of the company’s creditors. Unfortunately, the company
experienced financial difficulties, incurred losses and was dissolved. Salomon joined the
list of other creditors to claim the company’s debts. However, his claim was rejected on
the ground that Salomon and the company are the same person.
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Issue:
Whether Salomon was liable personally for the company’s debts? If not, was he
qualified to claim the debts from his own company?
Decision of Court (House of Lords):
The incorporation of a company will create a separate legal entity between the
company and its members. In this case, even though Salomon and Salomon &
Co. Ltd are the same person, Salomon was qualified to claim the debts as a
creditor. Salomon was not personally liable for the company’s debts.
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Characteristics of a Company
• A company is an artificial person. Once incorporated according to the
prescribed procedures, it comes into being as a separate legal entity from
its directors, officers, members, and employees.
• The concept of corporate personality constitutes the foundation principle
upon which a company is regarded as an entity distinct from the
shareholders constituting it. When a company is incorporated, it is treated
as a separate legal entity distinct from its promoters, directors, members,
and employees.
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Characteristics of a Company
• According to section 20:
“A company incorporated under this Act is a body corporate and
shall:
(a) have a legal personality separate from that of its members; and
(b) continue in existence until it is removed from the register.”
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Characteristics of a Company
 Consequently, under Section 21:
(1) “A company shall be capable of exercising all the functions of a body corporate and
have the full capacity to carry on or undertake any
business activity including:
(a) to sue and be sued;
(b) to acquire, own, hold, develop or dispose of any property; and
(c) to do any act which it may do or to enter into transactions.
(2) A company shall have the full rights, powers and privileges for the
purposes mentioned in subsection (1).”
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
 Hence, once a company is incorporated, it has the following characteristics:
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Characteristics of a Company
• S20 – once a company is incorporated, it has the following characteristics:

i. Body corporate
A company shall exist as a corporation with own authority, rights and responsibilities under the law. It will be a
legal entity similar as individual (legal person).

ii. The company can sue and be sued (Company is liable for its own debts)
• Companies can claim for criminal liability, torts, and various other problems but not robbery and similar
offenses.
• The Company as a legal person can take action to implement its rights in law and prosecuted in its own name
for breach of duties (Foss v Harbottle)
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
iii. Right to own or dispose of any property/asset
• The property is vested with the company in its own name, as it is a body corporate.
• Company’s assets are separate from member’s assets. (Macaura v Northern Assurance Co.)

iv. Perpetual Succession (continuity of life/existence)

• Death of the members is not the death of the company until it is wound up.
• Company continues to exist despite death/ termination/ resignation of directors or members
(Re Noel Tedman)

v. Contractual capacity
• ability to do any act or enter into transactions
Q&A Bumble, Bee and Optimus agreed to form Megatron Sdn Bhd to produce health products. Later,
they applied for a loan amounting to RM200, 000 from Decepticon Bank to purchase a van and
equipment for company use. However, after operating for 5 years, the company suffered losses
and had to be wound up for failing to settle the loan amount with Decepticon Bank. Decepticon
Bank made a claim against Optimus since he has a personal asset totalling RM1 million.
Based on your analysis of the above situation/case:

i) Write the issue relevant to the above case.

ii) State the principle applicable to the situation and explain briefly FIVE (5) effects of the
principle.
iii) Write ONE (1) name of a case which explains the above principle.
iv) Conclude whether Optimus is liable to pay for the loan amount to Decepticon Bank?
Why? State your reasons.
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Exceptions to the Veil of Corporation
• As the company is a separate legal entity, it has been provided with a veil, compared to
that of individuals who are managing the company. The company veil is one of the main
advantages of establishing a company, as it will provide a liability protection against
lawsuits and creditors.
• However, there are times if the court feels that such veil has been used for any
wrongful purpose, the court lifts the corporate veil and makes the individuals
(shareholders or directors) personally liable for the corporation’s actions or debts which
they have done or are doing in the company’s name.
 EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Exceptions to the Veil of Corporation
• The corporate veil can be lifted either under the:
i. statutory exceptions; or
ii. judicial exceptions.
• The statutory provisions are provided under the Companies Act 2016. The
other circumstances are decided through judicial interpretations, which are
based on the facts of each case as per the decisions of the court.
EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Exceptions to the Veil of Corporation
Statutory Exceptions

 Distribution of Dividends Out of Company’s Profit: Section 131(1)

 Liability for Debts: Section 540(2) Read Together with Section 539(3)

 Fraudulent Trading: Section 540(1)

 Default in Contribution: Section 46 Employees Provident Act 1991

 Default in Contribution: Section 108A Employees Social Security Act 1969

EFFECTS OF A COMPANY’S INCORPORATION (CONT.)
Exceptions to the Veil of Corporation
Judicial Exceptions

 Prevention of Fraud or Improper Conduct

 Avoidance of Contractual Obligations and Sham

Companies
 Public Policy or Enemy Character
 Agency
 Group of Companies
Statutory provisions
• S121: Misdescription of companies name- While signing documents
/cheques/contract, if the company’s name is not properly described, any
officer or director or company secretary who signed them can be made
personally liable.

• S304(1): Fraudulent Conduct/Trading- In the process of winding up of a

company and the company’s business continued and incur debts with
intent to defraud the creditors, company’s director or any officers involved
may be held personally liable.
Statutory provisions

• S304(2) and S303(3): If during company’s winding-up, a company’s

director was found to make a contract of loan on company’s behalf,
knowing that the company will not be able to pay the loan, the director
will be held personally liable for the loan.
• S169: Holding and subsidiary companies- Director to prepare a
consolidated account for both holding and subsidiary companies.
• Other provisions: S365 CA, S140(1) Taxation Act 1967
Judicial interpretations
• Generally courts will only do so if there has been serious misconduct like
abuse of the corporate form (e.g. intermingling of personal and corporate
assets) or undercapitalization at the time of incorporation
• Protection of Revenue- Whenever a company uses its name for the
purpose of tax evasion or to circumvent tax obligations (Sir Dinshaw Maneckjee,
Re / Commissioner of Income Tax v. Meenakshi Mills Ltd)
•
 Judicial interpretations
• Prevention of fraud or Improper conduct- The incorporation has been used for
fraudulent purpose, like defrauding the creditors, defeating the purpose of law
etc..(Gilford Motor Co v. Horne)

• Determination of the character of the company- Enemy company or all the

members being the citizens of the enemy country. (Daimler Co. Ltd V. Continental Tyre &
Rubber Co. Ltd)
Judicial interpretations
• Where a company is used to avoid welfare legislation- If a company is
formed in order to avoid the benefits to the workers like bonus, or other
statutory benefits..

• For determining the technical competence of the company- To look into

the competency of the company or the shareholders or promoters
(New Horizon’s Ltd and Another V. Union of India (1994)

• Misrepresentation in the prospectus- (Derry Vs Peek) In case of

misrepresentation, the promoters, directors and every other person
responsible in this matter can be held liable.
Q&A
1. The corporate veil can be lifted either under the
Statutory provisions or Judicial interpretations. List

out the circumstances where the corporate veil can

be lifted based on the above exceptions.