(a) The courts usually do not look behind ‘the veil’ to inquire why the company was formed or who really controls it. However, in some situations the veil is pierced so as to render officers criminally liable for their company’s breaches of the Act. Explain clearly statutory exceptions where the court would lift the veil of incorporation.
The required characteristic of a company is that it exists as a separate legal entity from its members of the company. The separate legal entity was authoritatively established by the House of Lord (HOL) in the case of Salomon v Salomon (1897). The distinction between a company and its members as different legal person sometimes called veil of incorporation.
Sometimes, Salomon principal maybe unfair, then the courts need to review the principal and make different decision based on the various grounds. The purposes of Legislation/statute lifting the veil is usually for enforce the company law. The corporate veil can be lifted by specific provision in Legislation/statute or by discretion of the courts.
The main reasons why lift the veil of corporate:-
* To expose shareholders who misuse the corporate veil to hide or avoid their own wrong doings. * To enforce the provisions of company law.
* To avoid fraud.
* To deal with a group of companies.
Lifting the veil of corporate by statute/Legislation:-
* Section 36 Companies Act 1965
If the number of members of a company is reduced below two and the company carries on business for more than six months. The person who is the remaining member that carries on the business for those six months is aware that is the only member, then he will be personally liable for the debts of the company. The liability applies to debts incurred after the six months have expired. It is an offence for the company and the sole member to continue to operate after six months. Therefore, the sole member maybe sued after the six months.
* Section 304 Companies Act 1965
When a company is wound up, the court may decide that the persons (usually the directors) who is guilty of ‘wrongful trading’ (trading when he should have realized that his insolvent business could not recover), or a person involved in ‘fraudulent trading’, it shall be personally liable for the debts and other liabilities of the company.
* Section 303 Companies Act 1965
Liability for incurring debts where there is no reasonable ground for repayment. If it appears that an officer of the company who was knowingly contracts a debt with no reasonable or probable ground of expectation of the company being able to pay the debt is guilty of an offence under S303(3) Companies Act 1965, and a conviction may be the basis for a court to declare that the officer concerned shall be personally liable to pay that debt.
* Section 121 Companies Act 1965
Under S121, an officer of a company who signs or authorizes to be signed on the company’s behalf any bill of exchange, cheque or promissory note where the company’s name is not properly or legibly written thereon, will be personally liable for the amount if unpaid by the company. Case: Lindholst & Co A/S v Fowler.
* Section 119 Companies Act 1965
A company should register their office from the day when it begins to carry on business or 14 days after its incorporation. It must be located within Malaysia and be accessible to public during ordinary business hours. Failing to do so, the court will lift the veil and if any officer is found guilty of committing this offence, the officer will be liable to default penalty of one thousand ringgit.
* Section 46 Companies Act 1965
S46 is about civil liability for misstatement in prospectus. When a company issues its prospectus and the information in it is untrue, the users of the prospectus who relied on the information in the prospectus can sue the company for the misleading information and for causing loss. The court will lift the corporate veil to...
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