Cases

A Aspatra Sdn Bhd v Bank Bumiputera Malaysia Bhd & Anor [1988] 1 MLJ 97 . B Bumiputra Bank Malaysia Bhd v Lorrain Osman [1987] 2 MLJ 236. E Eng Iron Works Ltd v Ting Ling Kiew & Anor [1990] 2 MLJ 440 ................ G Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 . H Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Worker [1980] 1 MLJ 109 .. I In the Application for Re Yee Yut Ee [1978] 2 MLJ 142 L Lee v. Lee's Air Farming Ltd [1961] A.C. 12 (New Zealand P.C.) .. Lim Kar Bee v Duofortis Properties (M) Sdn Bhd [1992] 2 MLJ 281 .... Lim Sung Huak v Syarikat Pemaju Tahan Tikam Batu Sdn Bhd [1994] 1 CLJ 264 M Macaura v Northern Assurance Co Ltd [1925] AC 619 ... S Solomon v Solomon [1897] A.C. 22 (H.L.) . Sunrise Sdn Bhd v First Profine (M) Sdn Bhd [1996] 3 MLJ 533 ...

T
1

Tui Shi Kian v Red Rose Restaurant [1984] 2 MLJ 313... W Wong Kim Fatt v Leong & Co Sdn. Bhd. & Anor [1976] 1 MLJ 140 ............. Y Yap Sing Hock v Public Prosecutor [1992] 2 MLJ 714....................

Table of Contents
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Topics
Introduction The case of Solomon v Solomon a) High Court level b) Court of Appeal c) House of Lords Article of Professor Otto Kahn in Some Reflections on Company Law Reform The Importance of Solomon v Solomon a) In terms of separate legal entity b) In terms of Limited Liability The development of Solomon v Solomon principle in Malaysian cases The problems with the principle from Solomon v Solomon Our view on the Article Conclusion Bibliography

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4-6

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9-12

13-16 17-19 20-21 22 23

Introduction

The case of Solomon v Solomon1 Aron Salomon was an effective leather merchant who generalized in manufacturing leather boots. For many years he ran his business as a sole proprietor. By 1892, his sons had become interested in taking part in the business. Salomon decided to incorporate his business as a Limited company, Salomon & Co. Ltd. At the time the legal requirement for incorporation was that at least seven persons subscribe as members of a company i.e. as shareholders. Mr. Salomon
1

[1897] A.C. 22 (H.L.)

himself was managing director. Mr. Salomon owned 20,001 of the company's 20,007 shares - the remaining six were shared individually between the other six shareholders (wife, daughter and four sons). Mr. Salomon sold his business to the new corporation for almost 39,000, of which 10,000 was a debt to him. He was thus simultaneously the company's principal shareholder and its principal creditor. He asked the company to issue a debenture of 10,000 to him. However, a sudden down fall in business occurred and the company could no longer pay interests to Salomon. Even the wife puts money, but the company still cannot pay. Finally, Salomon transfers the debenture to one B, but still the company could not pay. B is here a secured creditor, in relation to the company, as he holds in respect of his a security over property of the company in term of the debenture. B called for a receiver and therefore, sold the easiest part of the company, i.e., the factory to cover his debts. That led to the end of the business. This left the debts of the general creditors, for instance, the general suppliers to be covered. The company had to be hence liquidated and the assets were to be sold to pay them. When the winding up order was made the official receiver became liquidator unless and until an insolvency practitioner was appointed in his place. As a liquidator of a company, the official receiver's general functions were to investigate any wrong doing in the company, to secure the assets, realize them and distribute the proceeds to the company's creditors, and, if there is a surplus, to the persons entitled to it. When the company went into liquidation, the liquidator argued that the debentures used by Mr. Salomon as security for the debt were invalid, on the grounds of fraud; Salomon was not a genuine incorporator.

High Court level At the high court level, the judge, Vaughan Williams J. accepted this argument, ruling that since Mr. Salomon had created the company solely to transfer his business to it. The company and Salomon was one unit and the company was in reality his agent and he as principal was liable for debts to unsecured creditors. On appeal
5

The Court of Appeal to passed judgment against Mr. Salomon, on the reasons that Mr. Salomon had mistreated the rights of incorporation and limited liability, which the Legislature had intended only to confer on independence of the shareholders, who had a mind and will of their own and were not and were not ordered by the director. The lord justices of appeal variously described the company as a myth and a fiction and said that the incorporation of the business by Mr. Salomon had been a mere scheme to enable him to carry on as before but with limited liability. The House of Lords The House of Lords mutually overturned this decision, rejecting the arguments from agency and fraud. They held that there was nothing in the Act about whether the shareholders should be independent of the majority shareholder. The company was duly constituted in law and it was not the function of judges to read into the statute limitations they themselves considered expedient. The 1862 Act created limited responsibility companies as legal persons separate and distinct from the shareholders. Lord Halsbury commented that even if he were to accept the proposal that judges were at liberty to insert words to manifest the intention they wished to impute to the Legislature .He was unable to discover what affirmative proposition the Court of Appeals logic. He considered that identifying such an affirmative proposition represented an insuperable difficulty for anyone putting forward the argument propounded by the lord justices of appeal.

Lord Herschell noted the potentially far reaching implications of the Court of Appeals logic and that in recent years many companies had been set up in which one or more of the seven shareholders were disinterested persons who did not wield any influence over the management of the company. Anyone dealing with such a company was aware of its nature as such, and could by consulting the register of shareholders become aware of the breakdown of share ownership among the shareholders. Lord Macnaghten asked what was wrong with Mr. Salomon taking advantage of the provisions set out in the statute, as he was perfectly legitimately entitled to do. It was not the
6

function of judges to read limitations into a statute on the basis of their own personal view that, if the laws of the land allowed such a thing.

Article of Professor Otto Kahn in Some Reflections on Company Law Reform Professor Otto Kahn Freund in his article titled, Some Reflections on Company Law Reform2 is in opinion that the House of Lord judgment in Salomon v A Salomon & Co Ltd 3was a calamitous decision. According to the article, the author founds that as the consequences of that decision, the concept of corporate entity has been abused since its recognition by the common law.

2 3

[1944] 7 MLR 54 [1897] AC 22

The author also stated that a single trader or groups of trader are tempted by the law to conduct their business in the form of limited company though no apparent risk involved and also in the case where no capital from the outside source is required, therefore limited partnership was more appropriate type of business in his opinion. The author argued that the court failed to protect the interest of creditors since the liabilities of promoters and directors are govern under fiduciary relationship which seems to provides protection only to the shareholders. He is in opinion that the court through agency law has failed to mitigate the rigidities of corporate entity in which not in favor of creditor's interest. Also, the concept of corporate entity has been use as a way to avoid liabilities by those irresponsible individual(s). The court was firm in lifting the corporate veil when it comes to situation where the concept was use as a cloak for tax avoidance or evasion. Though there are cases which the court regarded the subsidiary company as a trading agency of its parent company or the shareholders, the court are limited in its application by the Salomon decision which upholds the doctrine of separate legal entity. As for all, the distinct separation between a man in his individual capacity and his capacity as a one-man-company raise the possibilities that the creditors are prone to fraudulent transaction since the lack of protection provided to this exposed group. The author also clarify that the concept of corporate entity works like a double-edge sword which if used improperly could backfire the individual who wields it in the first place.

It was suggested that in order to compensate the lacking of corporate entity the statute should impose more requirement to make the formation of a company a little more difficult to achieve. The government maybe can impose higher fees to setting up a company and therefore preventing the establishment of a small company. By doing this, the small time proprietor may have no other choice but to opt for partnership rather than the company which imposed strict requirement. In addition to that, the law should impose requirement where the company can only be establish with the certain minimum initial issued capital. The author also suggested that the private company should be subjected to disclosure of financial status and this information should be available for public inspection as for to protect the interest of outsider dealing with the company.

The Importance of Solomon v Solomon in terms of Separate Legal Entity One of the cases referred to was Lee v. Lee's Air Farming Ltd4. In this case the appellant's husband formed the respondent company for the purpose of carrying on the business of aerial top dressing. The minimal capital of the company was $ 3000 distributed into 3000 shares of $ 1 each. Mr. Lee held 2999 shares, the final share being held by a legal representative. Mr Lee was the sole governing director for life. He was the vast majority shareholder, he was the sole governing director for life and he was an employee of the company pursuant at a salary arranged by him. Article 33 also provided that in respect of such employment the relationship of master and servant should exist between him and the company. The husband was killed while piloting the company's aircraft in the course of aerial top dressing. His widow, the appellant, claimed compensation under the New Zealand Workmen's Compensation Act, 1922. On a case stated for its opinion on a question of law, the New Zealand Court of Appeal held that since the deceased was the governing director to who was vested the full government and control of the company, he could not also be a servant of the company. The widow appealed. It was held that the substantial question which arises is, as their Lordships think, whether the deceased was a worker within the meaning of the Workers' Compensation Act, 1922, and its amendments. Was he a person who had entered into or worked under a contract of service with an employer? The company and Mr. Lee were distinct legal entities and therefore capable of entering into legal relations with one another. As such they had entered into a contractual relationship for him to be employed as the chief pilot of the company. They found that he could in his role of governing director give himself orders as chief pilot. It was therefore a master and servant relationship and as such he fitted the definition of worker under the Act. The circumstance that in his capacity as a shareholder he could control the course of events would not in itself affect the validity of his contractual relationship with the company. Just as the company and the deceased were separate legal entities so as to permit of contractual relations being established between them, so also were they separate legal entities so as to enable the company to give an order to the decease.

[1961] A.C. 12 (New Zealand P.C.)

10

In their Lordships' view it is a logical consequence of the decision in Salomon's case that one person may function in dual capacities. The appeal was allowed and the widow was therefore entitled to compensation. In another case, Macaura v. Northern Assurance Co Ltd5, the property of a company belongs to it and not to its members. Neither a shareholder nor a creditor of a company has an insurable interest in the assets of the company. Mr. Macaura was the owner of the Killymoon estate in county Tyrone. In December 1919 he agreed to sell to the Irish Canadian Saw Mills Ltd, all the timber, both felled and standing, on the estate in return for the entire issued share capital of the company, to be held by himself and his nominees. By August 1921, the company had cut down the remaining trees and passed the timber through the mill. The timber which represented almost the entire assets of the company, was then stored on the estate. On 6 February 1922 a policy insuring the timber was taken out in the name of Mr. Macaura. On 22 February a fire destroyed the timber on the estate. Mr. Macaura then sought to claim under the policy he had taken out. The Insurance Company contended that he had no insurable interest in the timber as the timber belonged to the company and not to Mr. Macaura. The House of Lords agreeing with the Insurance Company, found that the timber belonged to the company and that Mr. Macaura even though he owned all the shares in the company had no insurable interest in the property of the company. Lord Wrenbury stated that a member and even if he holds all the shares is not the corporation and neither he nor any creditor of the company has any property legal or equitable in the assets of the corporation.

The Importance of Solomon v Solomon in terms of Limited Liability

5

[1925] AC 619

11

The primary concept of the legal personality of a company is separate from that of its members. It is aimed at giving stockholders least insurance in their business over their own private lives. Thus, at most also a stockholder of a company could lose is the amount that he had paid for the shares, in other words its basically the investment is what they would lose. Thus, creditors who have claims against the company may look only to the corporate assets for the satisfaction of their claims as creditors and generally cannot proceed against the personal or separate assets of the members. This has the potential effect of capping the investors' risk whilst, consequently, their potential for gain is unlimited. In fact, the concept of separate legal personality goes hand in hand with the doctrine of limited liability 6. The main importance of the limited liability concept is that it protects the company and its members, as well as to facilitate commercial ventures in which the company may be interested. The principle further act to attract and encourage corporate investment, much needed in any society to speed up development. It is believed to be the springboard to raise managerial standards in a corporate organization. It goes without saying that it facilitates better investment strategies by the company question. The Salomon case is both the foundational case and precedence for the doctrine of corporate personality and the judicial guide to lifting the corporate veil. The House of Lords in the Salomon case affirmed the legal principle that, upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders. The court did this in relation to what was essentially a one person Company, which is Mr. Salomon. The rule in the Salomon case that upon incorporation, a company is generally considered to be a new legal entity separate from its shareholders has continued till these days to be the law in Anglo-Saxon courts, or common law jurisdictions. The case is of particular significance in company law. Firstly, it established that when a company acts, it does so in its own name and right, and not merely as an alias or agent of its owners.

For instance, in the case of Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners7, Lord Sumner said the that in between investor, who participates as a shareholder, and the undertaking carried on, the law interposes another person, real though
6 7

Gower and Davies Principles of Modern Company Law (7Ed) London Sweet and Maxwell (2003) at 176 (1923) AC 723

12

artificial, the company itself, and the business carried on is the business of that company, and the capital employed is its capital and not in either case the business or the capital of the shareholders. Secondly, it established the important doctrine that shareholders under common law are not liable the company's debts beyond their initial capital investment, and have no proprietary interest in the property of the company.

The development of Solomon v Solomon principle in Malaysian cases At it most general level, the decision of the House of Lords in Solomon v Solomon & co Ltd8 was a good decision. Salomons case universally recognized as authority for the principle
8

[1897] A.C. 22 (H.L.)

13

that a corporation is a separate legal entity. The case firmly established that upon incorporation, a new and separate artificial entity comes into existing. At law, a corporation is a distinct person with its own personality separate from and independent of the persons who formed it, who invest money in it, and who direct and manage its operation. It follows that the right and duties of a corporation are not the right and duties of its director or members who are, most of the time, obscured by a corporate veil surrounding the company. The recognition that a corporation is a separate legal entity in its own rights is the foundation of modern corporate law. Indeed every system of law that has attained certain degree of maturity seems compelled by the ever increasing complexity of human affairs to create person who are not men. In line with the decision in Solomons case, a registered company is capable of performing all the function of a body, in other words, the corporation is a legal entity distinct from its member. In equivalent to courts in other jurisdictions, the court in Malaysia and Singapore are prepared to lift the corporate veil in a general range of circumstances, without adhering to strict guidelines in doing so. The difficulty arises in determining whether the fact of an individual case justify the recognition of the controllers of the company, where the liability of the company itself is question. The learned judge Zakaria OCJ in the case of Bumiputra Bank Malaysia Bhd v Lorrain Osman9, noted that the views of professor Gower appeared consistent with decision in that country, manly that the most that can be said is that the courts policy is to lift veil if they think that justice demands it and they are not constrained by contract binding authority.

In the case of Sunrise Sdn Bhd v First Profine (M) Sdn Bhd 10, the fact is as follow. The first profine entered into an agreement with sunrise to sell all of the shares in Saga Prestige Sdn Bhd, a wholly owned subsidiary of first profile. The underlying purpose of sale was the acquisition by sunrise for four parcels of land owned by saga. First profine purported to
9 10

[1987]2 MLJ 236 [1996] 3 MLJ 533

14

terminate the agreement due to settlement and sunrise sough an injunction to restrain first profile from disposing the shares in saga, and an interlocutory injunction to restrain first profine from disposing of the land registered in the name of saga. Sunrise did not seek similar injunction in respect saga. The judge at the first instance refuse to grant the interlocutory injunction, on the grounds that, inter alia, the holding company and the injunction even if granted would not prevent the subsidiary from selling of the land. The court observed that, court in Malaysia are in complete agreement with the basic of the fundamental attribute of corporate personality, in example that the corporation is a legal entity distinct from its member , be they individuals or corporate body, a principle firmly establish Solomons case. In the case of Lim Sung Huak v Syarikat Pemaju Tahan Tikam Batu Sdn Bhd 11, sixteen years had passed since the events occurred for which the plaintiff sought the corporate veil lifted. The high court of Malaysia held that it was not appropriate to lift the corporate veil of defendants company, as the founding subscriber, who had signed the relevant contract on behalf of the company, no longer appeared in control. In the case of Yap Sing Hock v Public Prosecutor, director of a company were prosecuted under the Malaysian Companies Act 1965 section 67(3) in relation to breach of the financial assistance provision of that legislation and criminal breach of the company, and one of the accused was the beneficial owner of all the shares in the company. The accused were convicted, and appealed on the ground that inter alia, a person who is the sole beneficial shareholder could not be liable for breach of trust. In the case of Tui Shi Kian v Red Rose Restaurant 12, the plaintiff operated a nightclub and restaurant in hotel Shangrila. The defendant was the owner of red rose restaurant and also controller of the Hotel Berjaya Sdn Bhd, which owned the hotel of Shangrila. The parties make an agreement that plaintiffs were continued to reside the premises, however three days later the plaintif then were locked out of the premises. The plaintiff acquire an in term injunction restraining the defendants from further action which relied on their agreement, however the defendant still locked the plaintiff out of the premises. It was disputed that the company locked up the restaurant is Hotel Berjaya not Red
11 12

[1994] 1 CLJ 264 [1984] 2 MLJ 313

15

Rose Restaurant. The learned judge determines that the two entities function as one single entity, the reason is the structure of the two companies which provide an evidence of breaching the separate corporation existence principle, so the court not withstanding the technical separateness of the companies and assigned responsibility upon the Hotel Shangrila for the Red Rose Restaurant act. In the other case of Lim Kar Bee V Duofortis Properties (M) Sdn Bhd 13, Lim was a wealthy landowner who incorporated a company, Duofortis bought the relevant land so as to avoid payment of estate duty in respect of the land in the even of his death. The consideration fee which was basically is the shares in the company. The director and shareholders of the company were the wife and children of Lim Kar Bee. When Duofortis was required putting in force the contract for the purchase of the land against Lim, he claimed that the consideration for the transfer was illegal. The court lifted the corporate veil of Duofortis in order to recognize that the controller of the company were the wife and children of Lim, who would otherwise have to pay estate duty on the land in the event of his death, held that the agreement for the sale and purchase of the land related documentation were unenforceable. This is because Lim intended to form the company to escape the children payment of estate duty. Therefore, Lim abused the corporate privilege for illegal purpose. As a result, the court lifted the corporate veil of companies with a view to do justice particularly when an element of fraud was involved. In the case of Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Worker 14, Jaya Puri Chinese Garden Restaurant Sdn Bhd was closed down and workers were cut down. This company was wholly owned subsidiary of Hotel Jaya Puri Bhd whose premises the restaurant was located. The Union claimed that the actual employer was the hotel and the hotel was still in business. Therefore the workers had been fired rather than retrenched on the closure of a business. In reality, the companies shared the same functions in an integral whole, officers and have unity management. Hence, in fact the workers were employees of the hotel. As such, the restaurant and the Hotel should be treated as one single entity. However, the court refused to lift the corporate veil because the workers had worked for less than 3 years.

13 14

[1992] 2 MLJ 281 [1980] 1 MLJ 109

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In the case of Aspatra Sdn Bhd v Bank Bumiputera Malaysia Bhd & Anor 15, The defendants sued against Lorrain Esme Osman, who was at all times a director of the first defendant and chairman of the second defendant, for the secret profits made by Lorrain without their knowledge and approval, arising from transactions. The defendants also applied for a Mareva injunction to prevent Lorrain from removing his assets out of jurisdiction and for an order of find out value, nature of all his assets. The trial judge Zakaria J had granted the Mareva injunction against Lorrain in the light that the assets of Aspatra Sdn Bhd were the assets of Lorrain. The defendants appealed to the Supreme Court. The Supreme Court of Malaysia stated that the sole purpose of disregard the corporate veil is to decide whether the assets of the appellant companies could be held or deemed to be the assets of Lorrain. The Court held that the trial judge had been correct to lift the corporate veil between the companies and Lorrain. The fact that Lorrain had hidden funds fraudulently attained in corporate entities was enough to pierce the corporate veil. In addition, the almost complete control he kept over the companies in question provided further evidence that he was mere instrumentality of Aspatra and Bank Bumiputra, Lorrain and the two companies concerned are a single entity. Thus, the assets of the appellant companies are also Lorrains assets.

The problems with the principle from Solomon v Solomon The general principle in the case of Salomon v Salomon & Co. Ltd. 16 is well accepted in Malaysian company law, where a corporation is an independent person separate from their individual members or another corporation. In other words, the individual members, e.g. shareholders, officers, director or any of the corporate acts or obligations of its corporation or
15 16

[1988] 1 MLJ 97 [1897] AC 22

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subsidiary cannot be personally liable for the companys debts and obligation, even if they are consider illegal. Once a company is incorporated, the shareholders of a company can enjoy broad protection, which is the court would not look beyond to see who is behind the company and why the company was established. However, this principle is still open to abuse and used as a means to circumvent the law, which may produce exceptionally inequitable or unjust results in certain circumstances. The major problem with the application of the separate legal personality is that the shareholders and management bear no personal risk of loss if the company fails because the company and its members are separate. The shareholders may simply use the company as a shield for any criminal activity or any deliberate attempt to defraud third parties as they do not face the risk of loss of their personal property. Those from outside who dealing with the company will suffer losses as they have only got the companys own assets available to them if the company goes into insolvency. In addition, the shareholders are also not liable beyond the amount they have contributed in full for their shares. In this situation, the creditors will suffer if the company incurs debts which it is unable to pay and they cannot take any legal action against the members because the members are separate from the company. In the case of In the Application for Re Yee Yut Ee 17, the High Court held that a director is nor liable for the companys debts. In this case, the company had retrenched their staff and dispute arose as to the retrenchment benefits. The matter was brought to the Industrial Arbitration Court where an award was made in the companys absence. As the company did not comply with the award, the Arbitration Court ordered that Yee be personally liable as he had been appointed director by then. Besides that, the principle also caused hardship to the owner who owned almost all the shares of the company, who cannot claim for insurance taken under his own name. In Macaura v Northen Assurance Co. Ltd, the House of Lords agreed that Macaura had no right to claim because the timber was the property of the company and Macuara no longer had insurable interest in it as he has sold the timber to the company18.
17 18

[1978] 2 MLJ 142 [1925] AC 619

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In order to avoid the doctrine from abuse and lead to harsh injustice results, the legislature and the courts have came to conclusion and introduce the process known as lifting the veil of incorporation. This process involve to drawn aside the corporate veil by pull aside the persona and look to see who is behind. Therefore, those who are responsible may be held personally liable for acts of the company. By this process, a person may not use the principle of independent legal personality as a shield to protect themselves in order to commit criminal activity and to defraud third parties. This has been held in the case of Yap Sing Hock & Anor v PP that the categories of purposes of which the court will lift the corporate veil are never closed19. One of the situation where the corporate veil may be lifted is by virtue of section 36 of the Company Act which provide that member of a company may be liable for the payment of the debts of the company if at any time the number of members of a company is reduced below two and it carries on business for more than six months and he may be sued for it 20. This included resignation or loss of right to remain as a member 21. However, section 36 does not apply to a company issued by shares of which are held by a holding company.

In order to avoid fraudulent trading, the court may apply section 304(1) of the Company Act which provide that the court may hold any person who were knowingly parties to the fraud personally responsible for all or any of the debts or other liabilities of the company. Those person who intentionally carrying on the business for any fraudulent purposes may be held liable and the privilege of independent legal entity is loss in any proceeding against company, even prior to the winding-up of a company22. In addition, the director who still continues to contract debts when he knew that there is no reasonable expectations of the debts being paid will be guilty of wrongful trading and liable to personally pay the debts to creditors by virtue to section 303(3) and 304(2) of the Company Act 1965.

19 20

[1992] 2 MLJ 714 Section 36 of the Companies Act 1965 21 Wong Kim Fatt v Leong & Co Sdn. Bhd. & Anor [1976] 1 MLJ 140 22 Eng Iron Works Ltd v Ting Ling Kiew & Anor [1990] 2 MLJ 440

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From the discussion above, the Salomon principle is open to abuse and can in certain situations lead to harsh injustice. Therefore, the court will lift the corporate veil in order of discovering any illegal purpose and not merely an abuse of the statutory principle of the companies being separate legal entities. In Aspatra Sdn Bhd & 21 Ors v Bank Bumiputra Malaysia Bhd & Anor23, the court lifts the corporate veil in order to do justice particularly when an element of fraud was involved. In this case, the respondents brought an action against defendant who was the director of the defendant for the secret profits made without their knowledge and approval. The defendants also applied for a Mareva injunction to prevent the defendant from removing his assets out of jurisdiction. For the conclusion, one of the biggest advantages in Salomon principle is that a corporation is an independent person separate from their members and corporation, which means that shareholders can enjoy broad protection. However, the privilege of this principle may be loss in certain situations as provide in Companies Act 1965. The court will lifted the veil and held them liable for the misconduct, where justice is so demands.

Our view on the Article The decision of House of Lord in the case of Salomon v A Salomon & Co Ltd 24is one of the fortunate decisions made by the court as opposed to Professor Otto Kahn Freund views that the decision is a calamitous one in his article titled Some Reflections on Company Law Reform.25Without the concept of corporate entity, the proprietor would be discouraged to expand their business because of the risk of personal liability. The concept recognises that the company is distinct from its members and directors, therefore the liability of the company is held by the company itself. This concept has been used throughout the world since the day it was recognize by common law and particularly in Malaysia under s.16(5) of the Companies Act, 1965.
23 24

[1988] 1 MLJ 97, SC [1897] AC 22 25 [1944] 7 MLR 54

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The author was in opinion that the sole traders would be tempted by the law to conduct their business as limited company and not as limited partnership or other types of business which is in fact available. This however didnt have any negative impact whatsoever since the proprietor are free to choose any types of business available since there is an option. The concept of corporate personality does posed some hindrance as mentioned by the author such as unfairness to the creditors and others in some sense, however there is a barrier created to protect the interest of these group by the power of court to lift the corporate veil. For instance, under s.304(1) of the Act, where any business of the company has been carried out with intent to defraud creditors of the company, the party who was knowingly a party to the transaction be personally liable for the debts or liabilities of the company. By the virtue of this section, any officers of the company would not escape from liability if there is intent to commit fraud upon creditors. In Siow Yoon Keong v. H. Rosen Engineering BV 26the directors made payment to himself and not to creditors was held as an intent to defraud the creditors and personally liable for such debts under s.304(1)27 read conjunctively with s.304(5). Similarly in Kawin Industrial Sdn Bhd (in liquidation) v. Tay Tiong Soong to defraud creditors. Therefore, even though the doctrine of separate legal entity may gave rise to the possibility of fraud, the statute does provide some level of protection upon creditors against the perpetrator of credit fraud who hiding behind the corporate veil. As per Professor Otto Kahn Freund's statement that the judgment of House of Lord in Salomon v A Salomon & Co Ltd are a "calamitous" decision, we are in opinion that such statement is not entirely true because the doctrine of separate legal entity does encourage the proprietor to expand their business and flourish the economic state of the world by limiting the liability of the shareholders. Although there is a possibility that the doctrine would be abuse by an irresponsible entity, the law does provide for some exception on to what extent does the doctrine could be use as a shield.
26 27

28

the court was in the same

opinion that the officer are personally liable for any debt raise from the transaction with an intent

[1997] 1 CLJ 137 Companies Act 1965 [Act 125] 28 [2009]1 MLJ 723

21

Conclusion

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Bibliography 1. Legislation a) Section 36 of the Companies Act 1965 2. Cases law a) Aspatra Sdn Bhd v Bank Bumiputera Malaysia Bhd & Anor [1988] 1 MLJ 97 b) Bumiputra Bank Malaysia Bhd v Lorrain Osman [1987] 2 MLJ 236 c) Eng Iron Works Ltd v Ting Ling Kiew & Anor [1990] 2 MLJ 440

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d) Gas Lighting Improvement Co Ltd v Inland Revenue Commissioners (1923) AC 723 e) Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Worker [1980] 1 MLJ 109 f) In the Application for Re Yee Yut Ee [1978] 2 MLJ 142 g) Lee v. Lee's Air Farming Ltd [1961] A.C. 12 (New Zealand P.C.) h) Lim Kar Bee v Duofortis Properties (M) Sdn Bhd Sdn Bhd [1992] 2 MLJ 281 i) Lim Sung Huak v Syarikat Pemaju Tahan Tikam Batu Sdn Bhd [1994] 1 CLJ 264 j) Macaura v Northern Assurance Co Ltd [1925] AC 619 k) Solomon v Solomon [1897] A.C. 22 (H.L.) l) Sunrise Sdn Bhd v First Profine (M) Sdn Bhd [1996] 3 MLJ 533 m) Tui Shi Kian v Red Rose Restaurant n) Wong Kim Fatt v Leong & Co Sdn. Bhd. & Anor [1976] 1 MLJ 140 o) Yap Sing Hock v Public Prosecutor [1992] 2 MLJ 714 3. Articles
a) Gower and Davies, Principles of Modern Company Law (7Ed) London Sweet and Maxwell (2003) at 176

24