COMPANY LAW

LAW 3212

SECTION 1

Individual Assignment

SYED AZRUL HADIF BIN SYED GHAZI

1424901
MDM. SITI AWANIS BINTI OTHMAN

Due date: 14th November 2017

Law assignment individual

1) BYA failed to supply the canned fruits to MINI Sdn. Bhd. in September. MINI wanted to
sue for breach of contract. However, BYA claimed that the agreement is not binding
because the company was not incorporated yet at the time the agreement was signed.
Advice MINI

Answer

First of all, we need to understand how the case started. Ben, Yati and Ali were partners and they
decided to incorporate supplying canned fruits company. The certificate of incorporation was
issued to them on 1st June 2017 and on their first meeting, they agreed upon to adopt any contracts
entered on behalf of the company prior to its incorporation. In May 2017, which the date
incorporation, Ali, the representative of BYA had entered a contract with MINI Sdn Bhd to supply
500 tin of canned fruits. However, on September, BYA corporation failed to supply the respective
items to MINI. So, MINI wanted to sue the company for breach of the contract.

Basically BYAs case is dependent on whether there is a contract binding between the two
representatives. From MINI perspective, they said that both of them had entered the contract to
supply the canned fruits. However, from BYA perspective, they said that the contract is invalid
since they had not yet incorporated during the agreement being made. The question raised whether
MINI Sdn. Bhd can sue BYA Sdn. Bhd for breach of contract or not.

To begin, lets identify a few important legal principles happened in this case. First, let us analyze
Alis job as the representative of BYA during the contract being signed. Ali is known as the
promoter of BYA. According to the case Twycross v Grant (1877)1, promoter can be defined as
the one who undertakes to form a company with reference to a given project, and to set it going
and who takes the necessary steps to accomplish that purpose. From this definition, we noticed
that Ali is the person who enter into contracts on behalf of a company before the company has
received its certificate of incorporation. So, by right, there is a contract binding between the two
representatives. However, we need to look at based on two different perspectives which were
common law and Companies Act 1965

1
Twycross v Grant (1877)

1
To the common law, before the company has the title of incorporation, the company does not exist
as a legal entity. Thus, the company cannot enter into any binding contract nor can appoint any
person to enter into contracts on behalf. According to a case of Kelner v Baxter (1866)2, where the
representative of Baxter failed to pay Kelner. The judges held that, the principle of promoter cannot
be in existence before its incorporation. Company cannot take the liability of pre-incorporation
contract through adoption or ratification because it was not in existence at the time of formation
of contract. Company cannot be sued or sue anyone prior to its incorporation3. So, the promoters
are personally liable for the pre-incorporation contract because they are the consenting party to the
contract. So, based on this case Ali supposedly be the one who need to take liable with the
engagement contract with MINI.

However, based on Companies Act 1965, there is certain adaption of the contract. According to
the Section 35(1) Companies act 1965, 4any contract or other transaction purporting to be
entered into by a company prior to its formation or by any person on behalf of a company prior to
its formation may be ratified by the company after its formation and thereupon the company shall
become bound by and entitled to the benefit thereof as if it had been in existence at the date of the
contract or other transaction and had been a party thereto. Based on this act, its clearly stated
that any contract that enter before its incorporation, although is not legal, but it can be ratified.
Based on the case The Golf Cheque Book Sdn Bhd v Nilai Springs Bhd (2005)5, the payment made
by Golf Cheque Book amounted to RM 80,000 to Nilai Springs Berhad prior to its incorporation
is the evidence that the company status is not legal but it is ratified after the payment been made.
So, in the appellant court, the judge held that the payment made is accepted.

In the case of MINI wanted to sue BYA, it is clear that BYA already agreed to adopt all contracts
entered on behalf of the company prior to its incorporation, and it lead to the ratification of the
company. Thus, it would lead that the pre incorporation contract between BYA and MINI is valid.
MINI Sdn Bhd can take action to BYA Sdn Bhd for the act of breach of contract. As the company
is a separate legal entity, the company is liable to the breach of contract, not Ali, the promoter of
the company.

2
Kelner v Baxter (1866),
3
Pre incorporation contract-Common law
4
Companies Act 1965
5
The Golf Cheque Book Sdn Bhd v Nilai Springs Bhd (2005)

2
 2) Zaki, Alis friend lent him RM 5,000 in 2016. Zaki discovered that Ali is now the director
of BYA. Zaki decided to sue BYA for the RM 5,000 loan.

Answer

Before we discussed further about the eligible for Zaki to sue BYA for the RM 5000 loan, first we
need to understand the flow of the case. Zaki, who is the friend of Ali has lent Ali RM 5000 back
then when Ali even has its own corporation. Later, Zaki discovered that Ali is now one of the
directors of BYA Sdn Bhd. Due to some circumstances that did not mention, Zaki decided to sue
BYA instead of sue Ali for the RM 5000 loan.

The issue here is whether BYA is liable for the sued that had been done by Ali in 2016. First of
all, BYA Sdn Bhd has become incorporation in June 2017. The effect of incorporation can be seen
under Section 16 (5) of the Companies Act 1965,6 which every each company that has
incorporated is considered as legal entity which means it can sue or be sued under its own name.
This means, by right, if BYA has done any wrongful conduct, it can be sued by any entity as long
as its exist.

Regarding this particular case, we notice that when Zaki wanted to sue BYA corporation instead
of suing Ali which the one that should liable to the loan, it is somehow not the right decision been
done by Zaki as the contract been made was between Zaki and Ali not Zaki and BYA Sdn Bhd. In
this case, we must take notes that separate legal entity is the main features of the incorporation
which means that the owners and the corporate entity are two different entity. We can further
understand the concept of separate legal entity by looking at the case Salomon v Salomon & Co
(1896)7 where case stated that the members were not liable in any respect of the companys
obligation. For this case, Ali and BYA Sdn Bhd both of them is two different entity. So, it is clear
that BYA should not liable by the loan. Zaki must take action towards Ali personally not to the
company as a whole.

6
Companies Act 1965
7
Salomon v Salomon & Co (1896)

3
 3) Discuss THREE (3) circumstances where the courts may lift the corporate veil of a
company.

Answer

Before we further discussed about the circumstances where the courts may lift the corporate veil
of a company, first, we need to understand the meaning of the veil of incorporation of a company.
Veil of an incorporation basically means the legal assumption that the acts of a corporation are not
the actions of its shareholders, directors and managers, so that they are exempt from liability for
the corporation's actions. What essentially the corporate veil does is to shield members from
personal liability for the debts of their company. So, lifting the corporate veil of a company is the
legal terms where the court allows a lawsuit or prosecution to proceed against the individual
shareholders or directors of the corporation instead of allowing them to be protected from
individual liability due to their corporate status. When lifting of the corporate veil is done by the
parliament or legislature, it is called statutory lifting of the corporate veil. Where it is done by the
courts, it is called judicial lifting of the corporate veil

So under what circumstances the courts may lift the corporate veil of a company?

First, the courts may lift the corporate veil of a company when the company is doing improper
conduct or fraud. By referring to the case Cape Pacific Ltd v Lubner Controlling Investment
Property Ltd and others (1995),8 the court held that the fraud and other improper conduct is found
to be present in the case, thus, the need to preserve separate legal entity when this thing happened
is not proper. So the court need to favour of lifting corporate veil. According to section 304(1)
Companies Act 1965, it is clearly stated that those who contributed to the fraudulent within the
company, that particular party should liable personally of his wrongful act.

Next, the corporate veil may be lifted if the company has been used purposely to run from its
liability. This can best be seen in the case of Jones v Lipman (1962)9. In the case of Jones v Lipman,
Mr Lipman had entered into a contract to sell certain land to Mr Jones. After changing his mind,
he transferred the land to a company that he controlled. Later, the court found out that Mr Lipman
did that on his purpose to evade the transaction or legal obligation with Mr Jones.

8
Cape Pacific Ltd v Lubner Controlling Investment Property Ltd and others (1995)
9
Jones v Lipman (1962)

4
Next, corporate veil may be disregarded when the company has been agent or alter ego to its
member. This evidence can be seen by looking at famous Malaysia case which is Aspatra Sdn Bhd
v Bank Bumiputra Malaysia Bhd (1988)10. In this case, the abuse of separate legal entity can be
seen as Lorrain claimed that the company which is Aspatra and him is two different entity when
he is found guilty on transferring the profit to the company. So, the court held that veil of the
company must be lifted to found out who is the one behind this case. Later, it has found out that
Lorrain is the one transferring all the money to Aspatra and he is liable for this case

10
Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988)

5
References

Case referred
1. Twycross v Grant (1877)
2. Kelner v Baxter (1866)
3. The Golf Cheque Book Sdn Bhd v Nilai Springs Bhd (2005)
4. Salomon v Salomon & Co (1896)
5. Cape Pacific Ltd v Lubner Controlling Investment Property Ltd and others
(1995)
6. Jones v Lipman (1962)
7. Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988)

Statutes
1. Companies Act 1965
Section 35(1)
Section 16(5)
Section 304(1)