LAW 299 UITM

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BUSINESS LAW (LAW 299)
GROUP ASSIGNMENT
PREPARED BY:
SHADINA SHAH
Group:
PREPARED TO:
DATE SUBMITS:
17TH MARCH 2017

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QUESTION
Salomon v Salomon Co. Ltd. (1897) AC 22 is a landmark case for the principle of the veil of
incorporation. Explain the principle and discuss when the veil of incorporation may be lifted.
(25 marks)
ANSWER
According to Section 4 of a Companies Act 1965 says that a company means a company
incorporated pursuant to this act or pursuant to any corresponding previous enactment. As a legal
entity which has its own name, a perpetual life with its own seal. Once it is formally incorporated,
it becomes a separate legal person. It has existence apart from the persons who formed it. Section
361 Companies Act says that a company is incorporated when it receives its certificate of
incorporation. Co. is born or its life starts from the date stated on the certificates.
The rule in section 4 of a Companies Act was applied in the case of Solomon v Solomon Co. Ltd.
Solomon run a business which decided to incorporate. He formed a registered company under
name Solomon Co. Ltd. Members of the co. were Solomon, his wife and his five children.
Solomon got many shares, each members own one share and mostly the shares owned by Mr.
Solomon. Mr. Solomon was a secured creditor and other creditors opposed payment to him as he
and co. are the same and should be liable for co.’s debts. From Solomon case, it can be
concluded that by forming a company the members have established a body recognized under the
laws as having a legal personality. Even though, the company was managed by Solomon
personally, under the law he was a separate person from the company.
Incorporation protects members from liability of the co. but in some situation the veil
incorporation can be lifted to make the members personally liable. The veil of incorporation can
be lifted to make the member personally liable.
1. When the numbers of members below 2:
 One member remains 6 months to find new members. After 6 months if he still
carries on business alone, he will personally liable.
 In Solomon V Solomon Co. Ltd case, the number of shareholders in co. was 7
members which fulfilled the condition. Hence, the veil cannot be lift.

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2. When there is fraudulent trading
 Company has been carried on with intent to defraud creditor – they will
personally liable.
 In Re William C. Leitch Brs. Ltd case, the company was insolvent but its
directors continued to carry on its business and purchase further goods on credit.
The court held that the directors were personally liable for the purchase.
3. Failure to use Co.’s name
 According to section 121(2)(c),
Co.’s name does not appear on instrument issued on behalf of the co.
 Anyone who signs bills of exchange, promissory notes, cheques, negotiable
instrument, endorsements and orders- name of co. is not stated properly, that
person is liable for the amount due unless co. pays.
4. Debts contracted at the time the co. has no ability to pay.
 An officer contracted debts on behalf of co. when he knows that co. unable to pay
debt; he is guilty of offence and shall be personally liable for the payment.
5. Use of company to evade legal obligations.
 In the case Gilford Motor Co v Horne, Horne was formally the managing director
of the plaintiff’s company. He signed an agreement that he would not solicit
customer of the company after the termination of his employment. But when he
left the company, he set up another company through which he solicited
plaintiff’s customers. The court lifted the veil of incorporation and granted
injunction against make both Horne and his company.
6. Group of companies.
 In certain situation, a group of companies may be treated as a single corporate
entity although the general rule is that each co within a group is a distinct and
separate legal entity.
 In the case of Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant
Worker, Jaya Puri Chinese Garden Restaurant was carried on in premises
belonging to the hotel. Workers were retrenched because business was closed due
to losses. Hotel was still in business. Workers claim compensation as they said

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hotel is also their employer. Court lifted the veil of incorporation to make hotel
liable.
7. Company as agent or alter ego of its controllers.
 In the case of Aspatra Sdn Bhd v Bank Bumiputra Msia Bhd, the court lifted the
veil of incorporation to make Lorraine Osman, a director of Aspatra, personally
liable for fraud committed and secret profit made.
8. When dividends are paid out of capital when there is no profits. Director or manager is
personally liable for allowing dividend to be paid out.
As a conclusion, it can be said that the principle of lifting the veil of incorporation plays a very
crucial role in forming a company which is enforceable under the law as spelt out under section 4
of a Companies Act 1965.This will protects members from liability of the co.