Concept of separate legal entity
One of the denouement of forming and incorporating a company under the concept of separate legal entity is that the members and officers create a body which is recognized as having an independent legal personality. Separate Legal Entity treats company as an artificial person which means that once the company has incorporated, it automatically separates from all of its members and officers. Section 20 of the company’s act clearly states that every company that has incorporated under company’s act shall have the legal personality separate from that of its members and has to continue in existence until it is removed from the register. This basically means that a company is separated from all of its members and a company that was once created by the law can only be discontinue by the process of law. The logic behind the creation of this separate legal entity is that, a separate legal personality will be capable potentially of suing and being sued in its own name, of holding property on its own name and of making profits and losses that are its own and not those of its members which are also known as shareholders. However, under this concept, the company is managed in its own capacity. In addition, it has to be reminded that a company cannot operate or run by its own because it is neither a human nor a machine, it does not have ears or hands. Thus, the company must have a group of people that manage the company on behalf. These people are mostly known as the directors of the company.
Salomon v Salomon & Co (1897)
The concept of separate legal entity can be best explained in the case Salomon v Salomon& Co (1897). In this case, Mr. Salomon who carried out a shoe-making business and operated as a sole trader, was convinced by his family to sell off his sole trader business and set up a company under the Companies Act. In 1892, he formed the company Salomon& Co Ltd; Mr. Salomon, his wife and five of his children hold each share in the company because the minimum requirement to set up a company at that time was 7 shareholders holding at least 1 share each. After incorporation, Salomon & Co Ltd became a separate legal personality and Mr. Salomon became the managing director of that company. Mr. Salomon then sold his personal shoe business to the company for $39000 with the consent of its shareholders. The price was paid in $10000 worth of debentures, $20000 shares worth $1 each and the remaining $9000 was paid to Mr. Salomon in cash. Unfortunately, things did not go well with the company and Mr. Salomon had to sell off his debentures to save the business. Nonetheless, this did not stop the company from facing more financial problems and the business eventually went into insolvent liquidation. The liquidator of Salomon and Co Ltd then alleged that Mr. Salomon was personally liable for the debts of the company because he was the largest shareholder of the company (holding 20001 shares in the company) and he was also a director of the company, so the company actually belonged to Mr. Salomon and he should settle all the debts of the company. In this case, the House of Lords rejected the arguments as fraud and claimed that;
I. The company and Salomon are two legal persons in law and it cannot be said that Mr. Salomon owned the company as they had separate legal personality.
II. Company is responsible for all the incurred debts of the company and not its members.
III. The company has entered into contract so the creditors can only sue the company not its shareholders.
As a conclusion for the case, a company is regarded as separate legal entity, thus, it is reliable for its own debts. Therefore, creditors of the company are not allowed to claim their rights or money from the company’s shareholders.
Macaura v Northern Assurance Co Ltd (1925)
In this case, Mr. Macaura who is an appellant previously owned a timber estate in Northern Ireland. He later sold the timber to a company and in return agreed to accept payment in the shares of the company. He then became the largest shareholder of that company. The timber which has represented the entire assets of the company was stored on the estate. Mr. Macaura took out an insurance policy on the timber in his own name, and shortly afterwards, a damage was caused by fire. He then sought to claim under the policy he had taken out but the insurance company refused to pay as the company claimed that the timber belonged to the company, and the fact that the company is a separate legal entity. Even though Mr. Macaura owned all the shares in the company but he has no rights in the company’s property and company’s assets belong to the corporation and not the members or shareholders.
Lifting the veil
Lifting the veil refers to a situation where the legislature has determined that the separation of the personality of the company and the members is not to be maintained. There is a fictional veil between the company and its members and the company can be said to have a corporate personality which separates it from its members. This veil is an imaginary line that the court lifts in order to know who is the culprit behind a wrongful act which basically means the corporate veil is lifted in order to reach the person behind the veil or to reveal the true form of that culprit. The reason behind this is that the law does not want the company’s name to be misused or abused by anyone so the Court will lift the veil if it feels that the company’s name is being misused by a culprit which is said to be a member. There are two types of provisions for the lifting of the corporate veil, which are; Judicial provisions and Statutory Provisions. Judicial Provisions include Fraud or improper conduct, Benefits of Revenue or when the company is a sham, etc and Statutory Provisions include reduction of members, Inaccuracy of the company, failure to refund application money, etc.
Statutory exceptions
The statutory exceptions or provisions for lifting the veil are designed to recognize that group structures need to be treated differently for disclosure of information that is required to be kept as a secret.
The first statutory exception is Fraudulent Trading. The companies act has recognized that the corporate form could be used for fraudulent purposes that is why this exemption is created. Under Section 540(1) of the Companies Act 2016, if in the course of winding up of a company, it appears that that any business has been carried on with the intent to defraud the creditors of the company or any other person or for any other fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible without any limitation of liability for all or any of the debts or liabilities of the company as the court may direct. That person can be liable to imprisonment or fine or both.
The second statutory exception would be reduction of number of members. This exception takes place when the number of members of a company are reduced till 7 for public companies and below 2 for private companies. Hence, the company still carries on its business for more than 6 months even after the numbers are reduced, so every person who is a member of such company that knows this is severally liable for the debts of the company engaged during that time. It is also said that members who have engaged in this can only be sued after six months.
The third statutory exception is in failure to refund application money. If a company fails to refund the application money of those applicants who have not been allotted shares within 130 days from the date of issue of the prospectus, the directors of that company will be severally liable to repay the application money with certain amount of interest. This exception is created to protect the applicant’s rights.
The next statutory exception is Misrepresentation in prospectus. Under section 159(2) of the companies act 2016, every director or promoter must satisfy with this section and if that person fails to do so, that person has committed an offence under the law. The penalty for this is that person may be liable to imprisonment for a term not exceeding five years or to a fine not exceeding 1 million ringgit, or both.
The following exception is about the holding subsidiary companies. A holding company is required to disclose all the relevant and personal information about the company’s accounts of the subsidiaries to its members. It amounts to lifting of the corporate veil because a subsidiary company is known to be a separate legal entity in the eyes of the law and through this contrivance the identity of the subsidiary company is known. However, at the end of its financial year, the organization has subsidiaries which means that every holding company is allowed to attach to its balance sheet, copies of the balance sheet, profit and loss account, directors report and auditors’ report of the company along with the statement of the holding company’s interest in the subsidiary.
Conclusion
As a conclusion, it is clear that a company is liable of its own debts and the creditors cannot claim their rights from the shareholders of the company. The
shareholders especially of a limited company are highly protected by the law and they do not bear much risk of the company. The act of lifting the corporate veil is said to be the most controversial topic in company law because the court has struggled for years to develop the analysis of these claims. There are so many classifications such as fraud, agency, sham or facade, unfairness and group enterprises, which are believed to be the most unfamiliar basis under which the Courts would lift the corporate veil. But these categories are just guidelines and it does not mean that is is fully comprehensive.
Concept of separate legal entity
One of the denouement of forming and incorporating a company under the concept of separate legal entity is that the members and officers create a body which is recognized as having an independent legal personality. Separate Legal Entity treats company as an artificial person which means that once the company has incorporated, it automatically separates from all of its members and officers. Section 20 of the company’s act clearly states that every company that has incorporated under company’s act shall have the legal personality separate from that of its members and has to continue in existence until it is removed from the register. This basically means that a company is separated from all of its members and a company that was once created by the law can only be discontinue by the process of law. The logic behind the creation of this separate legal entity is that, a separate legal personality will be capable potentially of suing and being sued in its own name, of holding property on its own name and of making profits and losses that are its own and not those of its members which are also known as shareholders. However, under this concept, the company is managed in its own capacity. In addition, it has to be reminded that a company cannot operate or run by its own because it is neither a human nor a machine, it does not have ears or hands. Thus, the company must have a group of people that manage the company on behalf. These people are mostly known as the directors of the company.
Salomon v Salomon & Co (1897)
The concept of separate legal entity can be best explained in the case Salomon v Salomon& Co (1897). In this case, Mr. Salomon who carried out a shoe-making business and operated as a sole trader, was convinced by his family to sell off his sole trader business and set up a company under the Companies Act. In 1892, he formed the company Salomon& Co Ltd; Mr. Salomon, his wife and five of his children hold each share in the company because the minimum requirement to set up a company at that time was 7 shareholders holding at least 1 share each. After incorporation, Salomon & Co Ltd became a separate legal personality and Mr. Salomon became the managing director of that company. Mr. Salomon then sold his personal shoe business to the company for $39000 with the consent of its shareholders. The price was paid in $10000 worth of debentures, $20000 shares worth $1 each and the remaining $9000 was paid to Mr. Salomon in cash. Unfortunately, things did not go well with the company and Mr. Salomon had to sell off his debentures to save the business. Nonetheless, this did not stop the company from facing more financial problems and the business eventually went into insolvent liquidation. The liquidator of Salomon and Co Ltd then alleged that Mr. Salomon was personally liable for the debts of the company because he was the largest shareholder of the company (holding 20001 shares in the company) and he was also a director of the company, so the company actually belonged to Mr. Salomon and he should settle all the debts of the company. In this case, the House of Lords rejected the arguments as fraud and claimed that;
I. The company and Salomon are two legal persons in law and it cannot be said that Mr. Salomon owned the company as they had separate legal personality.
II. Company is responsible for all the incurred debts of the company and not its members.
III. The company has entered into contract so the creditors can only sue the company not its shareholders.
As a conclusion for the case, a company is regarded as separate legal entity, thus, it is reliable for its own debts. Therefore, creditors of the company are not allowed to claim their rights or money from the company’s shareholders.
Macaura v Northern Assurance Co Ltd (1925)
In this case, Mr. Macaura who is an appellant previously owned a timber estate in Northern Ireland. He later sold the timber to a company and in return agreed to accept payment in the shares of the company. He then became the largest shareholder of that company. The timber which has represented the entire assets of the company was stored on the estate. Mr. Macaura took out an insurance policy on the timber in his own name, and shortly afterwards, a damage was caused by fire. He then sought to claim under the policy he had taken out but the insurance company refused to pay as the company claimed that the timber belonged to the company, and the fact that the company is a separate legal entity. Even though Mr. Macaura owned all the shares in the company but he has no rights in the company’s property and company’s assets belong to the corporation and not the members or shareholders.
Lifting the veil
Lifting the veil refers to a situation where the legislature has determined that the separation of the personality of the company and the members is not to be maintained. There is a fictional veil between the company and its members and the company can be said to have a corporate personality which separates it from its members. This veil is an imaginary line that the court lifts in order to know who is the culprit behind a wrongful act which basically means the corporate veil is lifted in order to reach the person behind the veil or to reveal the true form of that culprit. The reason behind this is that the law does not want the company’s name to be misused or abused by anyone so the Court will lift the veil if it feels that the company’s name is being misused by a culprit which is said to be a member. There are two types of provisions for the lifting of the corporate veil, which are; Judicial provisions and Statutory Provisions. Judicial Provisions include Fraud or improper conduct, Benefits of Revenue or when the company is a sham, etc and Statutory Provisions include reduction of members, Inaccuracy of the company, failure to refund application money, etc.
Statutory exceptions
The statutory exceptions or provisions for lifting the veil are designed to recognize that group structures need to be treated differently for disclosure of information that is required to be kept as a secret.
The first statutory exception is Fraudulent Trading. The companies act has recognized that the corporate form could be used for fraudulent purposes that is why this exemption is created. Under Section 540(1) of the Companies Act 2016, if in the course of winding up of a company, it appears that that any business has been carried on with the intent to defraud the creditors of the company or any other person or for any other fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible without any limitation of liability for all or any of the debts or liabilities of the company as the court may direct. That person can be liable to imprisonment or fine or both.
The second statutory exception would be reduction of number of members. This exception takes place when the number of members of a company are reduced till 7 for public companies and below 2 for private companies. Hence, the company still carries on its business for more than 6 months even after the numbers are reduced, so every person who is a member of such company that knows this is severally liable for the debts of the company engaged during that time. It is also said that members who have engaged in this can only be sued after six months.
The third statutory exception is in failure to refund application money. If a company fails to refund the application money of those applicants who have not been allotted shares within 130 days from the date of issue of the prospectus, the directors of that company will be severally liable to repay the application money with certain amount of interest. This exception is created to protect the applicant’s rights.
The next statutory exception is Misrepresentation in prospectus. Under section 159(2) of the companies act 2016, every director or promoter must satisfy with this section and if that person fails to do so, that person has committed an offence under the law. The penalty for this is that person may be liable to imprisonment for a term not exceeding five years or to a fine not exceeding 1 million ringgit, or both.
The following exception is about the holding subsidiary companies. A holding company is required to disclose all the relevant and personal information about the company’s accounts of the subsidiaries to its members. It amounts to lifting of the corporate veil because a subsidiary company is known to be a separate legal entity in the eyes of the law and through this contrivance the identity of the subsidiary company is known. However, at the end of its financial year, the organization has subsidiaries which means that every holding company is allowed to attach to its balance sheet, copies of the balance sheet, profit and loss account, directors report and auditors’ report of the company along with the statement of the holding company’s interest in the subsidiary.
Conclusion
As a conclusion, it is clear that a company is liable of its own debts and the creditors cannot claim their rights from the shareholders of the company. The
shareholders especially of a limited company are highly protected by the law and they do not bear much risk of the company. The act of lifting the corporate veil is said to be the most controversial topic in company law because the court has struggled for years to develop the analysis of these claims. There are so many classifications such as fraud, agency, sham or facade, unfairness and group enterprises, which are believed to be the most unfamiliar basis under which the Courts would lift the corporate veil. But these categories are just guidelines and it does not mean that is is fully comprehensive.
Concept of separate legal entity
One of the denouement of forming and incorporating a company under the concept of separate legal entity is that the members and officers create a body which is recognized as having an independent legal personality. Separate Legal Entity treats company as an artificial person which means that once the company has incorporated, it automatically separates from all of its members and officers. Section 20 of the company’s act clearly states that every company that has incorporated under company’s act shall have the legal personality separate from that of its members and has to continue in existence until it is removed from the register. This basically means that a company is separated from all of its members and a company that was once created by the law can only be discontinue by the process of law. The logic behind the creation of this separate legal entity is that, a separate legal personality will be capable potentially of suing and being sued in its own name, of holding property on its own name and of making profits and losses that are its own and not those of its members which are also known as shareholders. However, under this concept, the company is managed in its own capacity. In addition, it has to be reminded that a company cannot operate or run by its own because it is neither a human nor a machine, it does not have ears or hands. Thus, the company must have a group of people that manage the company on behalf. These people are mostly known as the directors of the company.
Salomon v Salomon & Co (1897)
The concept of separate legal entity can be best explained in the case Salomon v Salomon& Co (1897). In this case, Mr. Salomon who carried out a shoe-making business and operated as a sole trader, was convinced by his family to sell off his sole trader business and set up a company under the Companies Act. In 1892, he formed the company Salomon& Co Ltd; Mr. Salomon, his wife and five of his children hold each share in the company because the minimum requirement to set up a company at that time was 7 shareholders holding at least 1 share each. After incorporation, Salomon & Co Ltd became a separate legal personality and Mr. Salomon became the managing director of that company. Mr. Salomon then sold his personal shoe business to the company for $39000 with the consent of its shareholders. The price was paid in $10000 worth of debentures, $20000 shares worth $1 each and the remaining $9000 was paid to Mr. Salomon in cash. Unfortunately, things did not go well with the company and Mr. Salomon had to sell off his debentures to save the business. Nonetheless, this did not stop the company from facing more financial problems and the business eventually went into insolvent liquidation. The liquidator of Salomon and Co Ltd then alleged that Mr. Salomon was personally liable for the debts of the company because he was the largest shareholder of the company (holding 20001 shares in the company) and he was also a director of the company, so the company actually belonged to Mr. Salomon and he should settle all the debts of the company. In this case, the House of Lords rejected the arguments as fraud and claimed that;
I. The company and Salomon are two legal persons in law and it cannot be said that Mr. Salomon owned the company as they had separate legal personality.
II. Company is responsible for all the incurred debts of the company and not its members.
III. The company has entered into contract so the creditors can only sue the company not its shareholders.
As a conclusion for the case, a company is regarded as separate legal entity, thus, it is reliable for its own debts. Therefore, creditors of the company are not allowed to claim their rights or money from the company’s shareholders.
Macaura v Northern Assurance Co Ltd (1925)
In this case, Mr. Macaura who is an appellant previously owned a timber estate in Northern Ireland. He later sold the timber to a company and in return agreed to accept payment in the shares of the company. He then became the largest shareholder of that company. The timber which has represented the entire assets of the company was stored on the estate. Mr. Macaura took out an insurance policy on the timber in his own name, and shortly afterwards, a damage was caused by fire. He then sought to claim under the policy he had taken out but the insurance company refused to pay as the company claimed that the timber belonged to the company, and the fact that the company is a separate legal entity. Even though Mr. Macaura owned all the shares in the company but he has no rights in the company’s property and company’s assets belong to the corporation and not the members or shareholders.
Lifting the veil
Lifting the veil refers to a situation where the legislature has determined that the separation of the personality of the company and the members is not to be maintained. There is a fictional veil between the company and its members and the company can be said to have a corporate personality which separates it from its members. This veil is an imaginary line that the court lifts in order to know who is the culprit behind a wrongful act which basically means the corporate veil is lifted in order to reach the person behind the veil or to reveal the true form of that culprit. The reason behind this is that the law does not want the company’s name to be misused or abused by anyone so the Court will lift the veil if it feels that the company’s name is being misused by a culprit which is said to be a member. There are two types of provisions for the lifting of the corporate veil, which are; Judicial provisions and Statutory Provisions. Judicial Provisions include Fraud or improper conduct, Benefits of Revenue or when the company is a sham, etc and Statutory Provisions include reduction of members, Inaccuracy of the company, failure to refund application money, etc.
Statutory exceptions
The statutory exceptions or provisions for lifting the veil are designed to recognize that group structures need to be treated differently for disclosure of information that is required to be kept as a secret.
The first statutory exception is Fraudulent Trading. The companies act has recognized that the corporate form could be used for fraudulent purposes that is why this exemption is created. Under Section 540(1) of the Companies Act 2016, if in the course of winding up of a company, it appears that that any business has been carried on with the intent to defraud the creditors of the company or any other person or for any other fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible without any limitation of liability for all or any of the debts or liabilities of the company as the court may direct. That person can be liable to imprisonment or fine or both.
The second statutory exception would be reduction of number of members. This exception takes place when the number of members of a company are reduced till 7 for public companies and below 2 for private companies. Hence, the company still carries on its business for more than 6 months even after the numbers are reduced, so every person who is a member of such company that knows this is severally liable for the debts of the company engaged during that time. It is also said that members who have engaged in this can only be sued after six months.
The third statutory exception is in failure to refund application money. If a company fails to refund the application money of those applicants who have not been allotted shares within 130 days from the date of issue of the prospectus, the directors of that company will be severally liable to repay the application money with certain amount of interest. This exception is created to protect the applicant’s rights.
The next statutory exception is Misrepresentation in prospectus. Under section 159(2) of the companies act 2016, every director or promoter must satisfy with this section and if that person fails to do so, that person has committed an offence under the law. The penalty for this is that person may be liable to imprisonment for a term not exceeding five years or to a fine not exceeding 1 million ringgit, or both.
The following exception is about the holding subsidiary companies. A holding company is required to disclose all the relevant and personal information about the company’s accounts of the subsidiaries to its members. It amounts to lifting of the corporate veil because a subsidiary company is known to be a separate legal entity in the eyes of the law and through this contrivance the identity of the subsidiary company is known. However, at the end of its financial year, the organization has subsidiaries which means that every holding company is allowed to attach to its balance sheet, copies of the balance sheet, profit and loss account, directors report and auditors’ report of the company along with the statement of the holding company’s interest in the subsidiary.
Conclusion
As a conclusion, it is clear that a company is liable of its own debts and the creditors cannot claim their rights from the shareholders of the company. The
shareholders especially of a limited company are highly protected by the law and they do not bear much risk of the company. The act of lifting the corporate veil is said to be the most controversial topic in company law because the court has struggled for years to develop the analysis of these claims. There are so many classifications such as fraud, agency, sham or facade, unfairness and group enterprises, which are believed to be the most unfamiliar basis under which the Courts would lift the corporate veil. But these categories are just guidelines and it does not mean that is is fully comprehensive.