Introduction of separate legal entity
A legal entity, typically a business, that is defined as detached from another business or
individual with respect to accountability. A separate legal entity may be set up in the case of a
corporation or a limited liability company, to separate the actions of the entity from those of
the individual or other company. Besides, the example of a corporation or a limited liability
company is found in a separate legal body. This is because the corporation tend to separate
the actions of the entity from those of the individual or other company. Sole proprietorship
and partnership are exposed to unlimited liabilities.
Principle of Separate Legal Entity
At the date a company is incorporated by the members, the company itself gains a separate legal identity from its member of the company. The company itself becomes a legal person that can enter contracts, purchase land, own property, sue or be-sued, take legal action, and conduct other business activities. This also means that members are shielded from legal actions that can affect them severely in terms of financial security if the member are not in a incorporation. The owner of the business is liable for full responsibility whereas in incorporation , the company itself is liable.
According to the principle of limited liability, it says that creditors of the company only allows them to seek recovery from the assets of the company. Shareholders of the company are protected from the creditors. Shareholders are only entitled to pay up part of the assets according to the amount shares that they own (section 16(5) of the Companies Act 1965).
We can see the principle take place in the case of Salomon V. Salomon & Co Ltd (1897)
In the case, Mr Salomon had incorporated a company whereby he and his family are shareholders of that company. The business had wound up since it failed and now the value of assets of the company are insufficient to pay the creditors and Mr Salomon. He had made a loan with a debenture to the company. The creditors raised an issue if Mr Salomon is entitled to paid on the debenture since he had full control of the management of the company.
The court held that although Mr Salomon had full control of the business, the business is seen as operating on its own right and is a separate legal entity. Therefore, Mr Salomon is entitled to be paid on his loan owed by the company even though by paying him , there would not be enough sufficient assets to pay off all the creditors.
From what we have learn that there are advantages and disadvantages to the principle of legal entity. As we have seen in the case above and also as the case in Macaura V Northern Assurance Co Ltd (1925).
Corporate Veil
The term ‘piercing the corporate veil’ refers to a state where courts that put aside limited liability and owns a corporation’s shareholders or directors are directly liable for corporation’s acts or debts. The human enterprise however began by using the veil of corporate personality undisguised as a cloak for fraud and improper conduct where it became obligatory for the Courts to pierce through or lift the corporate veil and peer behind the corporation who are the real beneficiaries of the corporate fable. Hence, where a fraudulent and dishonest action is made of said legal entity, the individuals concerned and connected will not be authorised or granted to take shelter behind the corporate personality.
A few advantages to forming a corporation is the limited liability for corporation owners as they are not liable for their business debts which would mean that if and only if that the corporation were to run out of money, creditors are not allowed to hound you for your personal assets in order to repay the business debts. Likewise, you could not be personally and directly sued for what other individuals or employees do in the name of the company. There are however a few exception to certain situations when the veil of incarnation is lifted.
The first is that the corporation does not and could not exist separately from its shareholders or its parents corporation, case in point D.H.N Food Distributors Ltd V Tower Hamlets London Borough Council where D.H.N is the parent company in a group of three other companies which consists of two subsidiaries. One subsidiary posses a plot of land used by D.H.N while the other owned vehicles. The land was subjected to a compulsory purchase in addition to D.H.N seek compensation for disturbance of its business. The Court of Appeal, Lord Denning MR have claimed that the subsidiaries are bound hand and foot to the holding company and must do whatever the holding company demands of them and that the group is verging on the same as a partnership in which all the three companies are in fact partners. He added that they should not be managed separately so as to be defeated on a technical point. Thus, D.H.N was entitled to claim and that the separate corporate personality doctrine was in fact overrule.
The second is that there must be two or less members and lastly, the corporation is being managed and regulated as a mere sham or acts as an alter ego of a controlling shareholder for any illegal and with criminal intent, case in point Aspatra Sdn Bhd V Bank Bumiputra Malaysia Bhd Anor. The director and chairman of the company, Lorrain Osman had orchestrated a range of secret profits and was the alter ego of Aspatra and according to the Supreme Court, the fraud that had been committed by the director and chairman which would mean that the corporate veil could be lifted and that the former director is personally and directly liable for the losses.
Roles of various Stakeholders
A Stakeholder is someone who is interested in a business and contributes something to its development and profits from it. However, there are many types of stakeholders that people often confuse.
Board of Directors (BOD)
Directors are delegated by shareholders to run and manage the company’s business(s) and is responsible for every decision the company makes. Their duties are determined by shareholders at the company’s Annual General Meeting (AGM) where the directors are also required to present the performance of the company as well as its game plans or issues that the company is facing.
Shareholders
A shareholder is the owner of a business that legally owns one or more shares of a company that they have made a financial investment in. Shareholders are also empowered to choose the Board of Directors for a company at its Annual General Meeting under the Articles of Association (AOA). They are also required to point out what the Board of Directors are to do but under special circumstances, the BOD are allow to follow or ignore the request of a shareholder as long as its for the own good of the company. Shareholders hold the rights to to replace the directors if they are not happy with the way the current one is handling the business. If a company is going through a difficult financial period, shareholders may shut down the company if they wish to do so but may only able to do so by going through a peculiar resolution.
Company Secretary
When a company needs a piece of advice, the company secretary is the person to look for. They are under the managerial board of the company hired to guide and lead any matters related to one’s company. Company secretary is also responsible for any governance frameworks and should be well aware of the rules, regulation and laws related to the company. Their duties are also under the procedure and regulation of a company’s Memorandum of Association and Articles of Association under Companies Act 1965. The directors may decide the path of the company provided that it has been run through the company secretary first, for advice and approvals. It is also a part of their job to set the dates of any meetings or appointments for the company.
Receiver
Receivers are appointed to take charge or selling and liquidating assets and receives normal pay and expenditures coverage.
Receiver Manager
Usually chosen by a bankruptcy court or secured creditor to look after a company’s transactions for a period of time. A receiver manager’s job is as simple as liquidating every assets that the company owns and to pay of any amount owed to creditors or entities. The term ‘in receivership’ is another way of saying bankruptcy and a second option for a company to deal with the decline of their financial status.
Liquidator
When a company decided to bring the business to an end or in some cases going through bankruptcy, the company will distribute the assets to claimants, the process of these action can be referred as Liquidation. A Liquidator is a term called when the company assign a officer which can be referred as a trustee to oversee and collecting all the assets of the company and settling all claims against the company. A liquidator can be appointed by the shareholders, unsecured creditors or on court order. After being appointed as a liquidator, the liquidator will take control of the business, make settlements of the assets, paying of debts to creditors, proceed to investigate the relative financial affairs of the company and if there’s any money left will be distributed to the company’s shareholders. When the process of liquidation is completed, the liquidator will proceed to deregister the company.
Registrar of Companies (ROC)
Malaysian ROC formed by the Act of Parliament. Every company needs to be legally registered with ROC and all the business process and foundation are regulated by the ROC. ROC was formed to keep an eye and make sure all the companies are obeying the law and they will be evaluating all the steps taken by stakeholders.
Conclusion
After we have conclude our assessment, we are able to understand and learn more about the relative terms. Through our research, we conclude that when a company decided to bring an end to the company, it will be regarded as winding-up of a company. Liquidator will handle and oversee the process of selling the company’s assets, investigate on the relative financial affairs of the company, distribute the remaining surplus sum of money to the shareholders and lastly deregister the company after everything have been completed. But in a situation where the company’s asset are not able to cover the debts for the collectors, the separated entity law forbids the collector to claim the debts from the shareholders.
Bibliography
1. Roles and responsibilities of directors and boards. Brefi Group. Retrieved on 10/12/2017 from: http://www.brefigroup.co.uk/directors/directors_roles_and_responsibilities.ht ml
This website provide an insight on a more detailed information regarding on roles and responsibilities of directors and the board. The site also elaborate on the different roles for the board of directors, the various responsibilities that the directors hold, meetings and non-executive directors.
2. Receiver and manager. Thomson Reuters Practical Law. Retrieved on 10/12/2017 from: https://uk.practicallaw.thomsonreuters.com/9-107-7112?transitionType=Defaul t&contextData= (sc.Default)&firstPage=true&bhcp=1
This glossary in the website provides an explanation on the meaning of what receiver and manager does under the context of law. It is explained in a simpler message to allow us to understand the context better.
3. Lecture 3 Separate legal personality and corporate veil, slide 4-5 (2017). Shaan Ong. Retrieved on 9/12/2017.
The slides provided by the lecturer gives us an understanding on the separate legal personality which is applied to when the director decided to change the company into a private limited company. Within the slides also includes the explanation on the definition and the application of corporate veil in a case.
Liquidation. Investopedia. Retrieved on 11/11/2017 from: https://www.investopedia.com/terms/l/liquidation.asp
This website gives a detailed explanation on the meaning of liquidation and how it affects the company that is going through the process of liquidation and what the company decided to do when facing with such situation.
Brankruptcy. Investopedia. Retrieved on 11/11/2017 from: https://www.investopedia.com/terms/b/bankruptcy.asp
This article allow us to understand the legal action taken by the company when going through the unfortunate event of bankruptcy. It also briefly explain the relative terms such as liquidity which may relatively affects along the company when the company is going through the process.
6. Liquidator. Business Dictionary. Retrieved on 11/11/2017 from: http://www.businessdictionary.com/definition/liquidator.html
The website gives an explanation on the definition of liquidator and the roles and duties of a liquidator in a company.