Separate Legal Entities

Topics: Corporation, Legal entities, Limited liability Pages: 14 (5145 words) Published: October 23, 2010
Separate legal entity is principle law today, but in several cases, the principle is ignore and in justice is serve. The courts are willing asked to “lift the corporate veil” and ignore this principle when fairness and justice demand so. A “company” is an organization that is registered under the companies Act 1965. The incorporation of a company is an artificial entity recognized by the law as a legal person that exists independently with rights and liability. This means that a company is treated as a separate person from its participants. The fact that a company was a legal entity separate from its participants was established in Salomon V Salomon & Co Ltd (1897) AC 22. However, members and the directors and others who manage a company can produce unsatisfactory result in certain circumstance. Thus some exceptions to this principle have evolved. Courts are sometimes seems quite willing to lift ‘the veil of incorporation’ and when the justice of the case so demands. Separate Legal Entity of a Company

The rule in Salomon v Salomon & Co Ltd (1897) AC 22 is that a company upon incorporation becomes a separate legal entity distinct from its members. This is so, even if the company is absolutely under the control of one/more person. The effect of incorporate is set out in Section 16 (5) of the Companies Act 1965. A company’s obligation and liabilities are its own, and not those of its participants. Creditors of the company cannot ask the member of the company to pay the debt because a company is separate entities. In Fair Schools Bhd. v Indrani Rajaratnam & Ors (1998) 1 CLJ 285, shareholders of the limited companies are not exposed to unlimited liability for the company’s debt. A company can sue and be sued in its own name. It may enforce rights by suing or incur liabilities and be sued by other parties. This means the liabilities of the company is not the liabilities of its members, creditors can sue the company but not the members if the company unpaid the debt. In Foss v Harbottle (1843) 2 Hare 461, a company must enforce its rights by itself in its own name. A company has perpetual succession. This means the company is continues in existence, unchanged, even if its members die, sell their shares to others or resign. In Abdul Aziz bin Atan & Ors v Ladang Rengo Malay Estates Sdn Bhd, all the shareholders of the respondent company sold and transferred their entire shareholdings to a certain buyer, the company is still continues to carrying on the business. A company’s property is not the property of its participants. Members in the company have no rights in the company’s property. This was established in Macaura v Northern Assurance Co Ltd (1925) AC 619. A company also can contract with its controlling participants. This means a company can enter contract with its members. This was established in Lee v Lee’s Air Farming Ltd (1961) AC 12. The Federal Court of Malaysia observed that they are in complete agreement with the basic principle of the fundamental attribute of corporate personality established in Salomon v Salomon & Co. Ltd. (1897) AC 22, that is, the corporation is separate from its members.

1.0Lifting the Veil of Incorporation
The primary principle established in Salomon’s case is that a company is an artificial person separate from its members is called ‘the veil of incorporation’ was recognized as 1996 by the Federal Court of Malaysia in Sunrise Sdn BHD v First Profile (M) Sdn Bhd. (By Berna Collier, 1998) However in several cases, the courts have been prepared to lift the corporate veil and treat the company and its members as one person. The court will ignored the corporate veil to reach the person behind the veil to liable. In exceptional circumstances, in which the courts feel that the company is being misused, courts may lift the corporate veil and disregard the Solomon principal. This may occur: * Under statute namely under sec 36, sec 46, sec 119, sec 121(2), sec...
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