Principle of Separate Legal Entity
The principle of separate legal entity under the law is a company, upon incorporation, will becomes a body corporate that exists separately with its owner and distinct from its individual members and directors. This fundamental principle of company law was first established in the landmark case of Salomon v Salomon & Co Ltd (1897), and formed the foundation of company law in Malaysia. Besides, this principle distinguishes a company from a partnership. In relation to the principle of separate legal entity, it is also enshrined in Section 16(5) of the Companies Act 1965, the effect of incorporation which reads: “On and from the date of incorporation specified in the certificate of incorporation but subject to this Act the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an incorporated company and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up as is provided by this Act.” Case: Salomon V Salomon
In the case, Mr Salomon was a sole-proprietor of a manufacturing leather boots. The business was successfully operates. Later, Mr Salomon incorporated a company and sold his business to the company in consideration for 20,000 shares and issued £10,000 of debentures in favour of Mr Salomon. Mr Salomon ended up holding 20,001 of the total 20,007 shares issued. The remaining six shares were held by his wife and his five children as nominees for Mr Salomon. Unfortunately, the company experienced financial difficulty and despite efforts by Mr Salomon, the company become insolvent and was compulsorily required to wound up. An action was brought against Mr Salomon for a court order to postpone his priority under the debentures to rank after the company’s unsecured creditors and also to indemnify the company for all the debts due to its unsecured creditors. If approved by the court, not only the company’s unsecured creditors would have priority over the debentures issued in favour of Mr Salomon but Mr Salomon himself would also be liable to the company’s creditors. Fortunately, for Mr Salomon, Lord Macnaghten on behalf of the House of Lords held that: “The company is at law a different person altogether from the subscribers to the memorandum; and though it may be that after incorporation the business is precisely the same as it was before, …the company is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable…except in the manner provided by the Act.” The decision confirms that a company upon its incorporation is a separate legal entity from its members. It is immaterial that the company bought over the business from its subscribers, and operated it as before; that third parties dealt with the same personnel; and that the same persons received the profits generated by the business, previously as the partners and now as members of the company running the business. Since the debts were incurred by the company, the creditors can ask for payment only from the company, and not the members. It follows the doctrine of separate legal entity together with doctrine of privity where only the parties to the contract can sue and be sued. In summary, the case of Salomon V Salomon had brought to a view on how the company is treated separately from its members. In these circumstances, the court lifts the corporate veil making the company liable for the payments.
Concept of Agency
Under Section 7 of the Partnership Act, it provides that every partner is an agent for the firm and his other partners for the purpose of the partnership business....