LAW OF ASSOCIATION I
NAME : AHMAD FAROUQ BIN AMIR
STUDENT ID : 2010313869
GROUP : LWB05R
NAME OF LECTURER : PUAN NURUL HUDA BT AHMAD
A company is a group of persons associated together for the attainment of a common
end, social or economic. It has no strictly technical or legal meaning. Section 4 of Companies
Act 1965 states that a company means a company formed and registered under the Companies
Act or any of the preceding Acts. Thus, a Company comes into existence only by registration
under the Act, which can be termed as incorporation.
In contrast with partnership, company is a corporate body or a corporation. It is an
artificial legal person, separate form, and independent of the person who took steps to form the
company and who are seen as members of that company. This is stated under section 16(5)
where it tell us that members of the company shall be a body corporate by the name set out in the
memorandum. In other words, the issue of a certificate of incorporation from the Registrar of
Companies brings into existence a new legal entity, separate from its members. This is referred
to as ‘separate legal entity’.
As a separate legal entity, the incorporation of companies provides few advantages.
According to section 16(5) once a company had been incorporated, it is recognized as a body
corporate and along with that several advantages are available for them. Which means that, it can
exercise its function and right as a body corporate. A body corporate is an artificial person that is
created and given recognition by the law as expressed by Salleh Abbas F.J in Tan Lai v
Mohamed bin Mahmud.
By registration under Companies Act, a company becomes vested with corporate
personality, which is independent of, and distinct from its members. A company is a legal
person. By virtue of Salomon v. Salomon & Co. Ltd. (1897), unsecured creditors argued that
although the company was incorporated, it never had an independent existence. It was Salomon
himself trading under another name, but the House of Lords held Salomon & Co. Ltd. must be
regarded as a separate person from Salomon. This is due to the fact that the company was not an
agent or trustee for the member. Thus although Salomon beneficially owned all the issued shares
of the company, he and the others are mere subscribers of the company. Therefore, Salomon
could be a secured creditor with enforceable rights against the company.
Besides that a company also has the ability to sue and be sued in its own name, either to
get rights that it has or if it has liabilities, third parties may sue against it. It must be noted only
the company can initiate legal action to enforce its right. This is called proper plaintiff rule and
it was established in the case of Foss v Harbottle where action brought by the members of the
company had failed as the injury complained of was the injury towards the company. Therefore
the member could not take action on behalf of the company.
A company also enjoys perpetual succession. Members may come and go, but the
company will go on forever. After a company is incorporated, it continues until it is dissolved
according to the law or it is struck off the register. This can be seen in the case of Re Noel
Tedman Holdings Pty Ltd where the court allowed the personal representative of the deceased
(the only shareholder of the company) to appoint the directors of the co so that these directors
could allow the transfer of the shares to child. This showed that the company is still existing and
continuing although the shareholders had died in an accident.
Apart from that, a company is given power to own property on its own name. By virtue
of section 16(5) a company is given a power to hold land and at the same time it can also own
other types of property too. No members, not even all the members, can claim ownership of any
asset of company’s assets. The property belongs to the company, and the member no longer has
any right or interest. In Macaura v Northern Assuarance Co. Ltd, it was held that Macaura had
no right to claim, because when he sold the timber to the company, he had given up his interest
in it. The timber was the property of the company and Macaura no longer had insurable interest
As a corporate body, liability of the members in a company is limited. Since a company
is a separate legal entity and leads its own business life, the members are not liable for its debts.
The liability of members is limited by shares; each member is bound to pay the nominal value of
shares held by them and his liability ends there. Thus, creditors for the company cannot take any
action against the member, because the members are separated from the company. In Re Ye Yut
Een 1978, the director of the company is not liable for the company’s debt. It is the company
who had not complied with the procedures related to the retrenchment benefits.
Apart from having several advantages, incorporation of a company also has its defects.
Therefore, the court comes with the approach of lifting the veil of incorporation. The veil of
incorporation is a fictional curtain separating the company from its members. Generally, once a
company is incorporated, as a legal personality, the court would normally not look behind the
corporate veil to see who is behind the company and why the company was established.
However, due to certain circumstances, the court do think that it is necessary to look at the
persons behind the corporate veil.
The corporate veil is lifted under situations provided by statute and according to judicial
decision under the common law. For instance, section 304(2) of CA 1965 allows the court to
declare persons who carried on the company’s business with the intention to defraud creditors,
be personally liable to the creditors of the company on winding up. Besides that section 303(3)
of the same Act provided that an officer of a company can be made personally liable for the
company’s debt if he enters into a contract knowing that there is no probable or reasonable
expectation of the debt being paid. Based on section 365(2)(b) Director of a company can also be
made personally liable towards the creditors of the company if they paid dividends to the
shareholders when there are no profits available. Section 36 CA 1965 states that when a
membership of a company falls below the minimum of two, any person who knowingly carries
on business for more than twelve months will be personally liable for all the debts of the
company incurred after the sixth month.
At common law there are circumstances where the court held that it is appropriate to lift
the veil. The situation that permits lifting the veil of incorporation is where the company is
formed to evade legal duty or used as a vehicle fraud. In Jones v Lipman 1962 in order to avoid a
contract having to transfer the house to Jones, Lipman set up a company and transferred the
house to it. The court held that the company was a device and a sham, a mask which he holds
before his face in an attempt to avoid the eye of equity. Hence, the court ordered Lipman and the
company to specifically perform the contract to sell the house. The court also lifts the corporate
veil in order to determine physical character or identity of a company. For instance, it requires
the court to look at the controllers of the company. In time of war, the nationality of the
controllers would determine the nationality of the company.
In addition, veil of corporation will be lifted where company is used as an agent. It should
be noted that a company has a capacity to act as an agent. Possibility of the members or
controllers to use the company as such is not excluded by the court. Hence the principles would
be liable for the acts the company has entered to. In Smith, Stone, & Knight Ltd v Birmingham
Corporation, SSK was a company that carried on its business through a subsidiary, Birmingham
Waste Corp (BWC). The local authority compulsorily acquired land owned by SSK which was
occupied by BWC that was operating a business on it. Owner-occupier was entitled to
compensation on the basis of disturbance of business. SSK claimed compensation. The local
authority refused to pay as BWC being the occupier was a separate entity from SSK. SSK
claimed that although BWC had in fact conducted the business, the business in every aspect was
owned and controlled by SSK. The court held that the subsidiary company was an agent of the
parent company and so the occupation by the subsidiary amounted to occupation by the parent
Last but not least, incorporating a company requires formality and expense. For instance,
incorporation is a very expensive affair. It requires a number of formalities to be complied with
both as to the formation and administration of affairs. Furthermore, a company is not considered
a citizen as explained in State Trading Corporation of India v. CTO, the SC held that a company
though a legal person, it is not a citizen neither under the provisions of the Constitution nor under
the Citizenship Act.
As a conclusion, it can be said that the doctrine of legal entity works as a double-edged
swords. Even though it has many advantages it also has several disadvantages towards the
company itself and in certain situation, the creditors. However, the approach of lifting the
corporate veil by the court may reduce the defects of incorporation.