Professional Documents
Culture Documents
Company’s Liability
Company’s property
Consequences Contractual capacity
Crime
Perpetual succession
borrowing
a) Company is liable for its own debts
Shareholders not liable for debts and liabilities of
company.
Shareholder can be a debtor or creditor of the
company can sue or be sued by the company.
Lee v Lee’s Air Farming Ltd
L Formed a company, L holds 2999 shares and his wife hold 1
share. L was employed as chief pilot in aerial crop
spraying. L killed in a crash while flying. Wife sued the
company for compensation.
Held: the contract of employment was valid. His widow could
recover compensation from the company
b) Company’s liability
Companies liability is always unlimited. Members liability is
limited. Members liability is to the Company not the
creditors.
c) Company’s property
Company owns it own property. Shareholders has no direct
right over company’s property.
Macaura v Nothern Assurance Co Ltd [1925]
Timber merchant converted his business into a company. Property of
company destroyed by fire. M brought an action against the
insurance company.
Held: Altough property has been insured it was under M’s name. M
no longer owned the property to which he claim and as such
insurance company was held not be liable to meet claim.
d) Contractual capacity
Has full contractual capacity, can enforce its contracts
May also be liable for negligence, shareholder cannot be
held liable unless he is personally negligent.
e) Crimes
Company can be convicted of a crime, regardless of its
directors are also convicted.
Limitation: crimes which requires physical act of driving
vehicle.
courts may regard the mens rea of those individuals who
control the company to be the mens rea of the company.
Crime against the company
Company can be victim of a crime.
f) Perpetual succession
Existence of the company does not depend on existence
of members.
the company continues in existence until wound up.
g) Borrowing
A company can borrow money and grant a security for a
debt.
Only a company can create a floating charge.
LIFTING THE VEIL OF
INCORPORATION
Separate legal personality of company operates as a shield.
The screen separating the company from its individual
shareholders and directors is commonly referred to as "the
veil of incorporation".
Sometimes the law is prepared to examine the reality
which lies behind the company façade
Common law
Judiciary universally accepts the principle of a company as a
separate legal entity. In exceptional instances court dislodges
the corporate veil .
It is difficult to classify the justification which merit the
exercise of courts power.
Court will seek to remove the corporate veil in pursuit of
application of equitable principles.
In Malaysia, “doing justice” appears to be the sole criterion that
motivates the courts to exercise their inherent jurisdiction and
this has been the case ever since the decision of Hotel Jaya Puri
Sdn. Bhd. v National Union Bar & Restaurant Workers & Anor
[1980].
Instances court might allow to lift corporate
veil
i. Company Identity Used to Evade Obligations (Fraud or
Facade Cases)
Underlying motive for the incorporation of a company is
to enable its membership to impugn an existing binding
obligation with a third party or instigate some other
form of fraud.
In such a case court may dislodge the corporate veil to
prevent those involved in the fraudulent act from
escaping a liability.
ii. Agency
company is merely carrying on business as the agent of
another - so that transactions entered into by the
subsidiary can be regarded as transactions of the
holding company:
iii. Group entity
Group of companies act as a single economic unit
Later cases has doubted this principle
"If ..the directors have powers and authority to bind the company, but certain
preliminaries are required to be gone through on the part of the company before
that power can be duly exercise, then the person contracting with the directors is
not bound to see that all these preliminaries have been observed.” Indoor
management Rule
Fountaine v Carmarthen Railway Co (1868) LR 5Eq 316
When there are persons conducting the affairs of the company
in a manner which appears to be perfectly consonant with the
articles of association, then those dealing with them,
externally, are not be affected by any irregularities which may
take place in the internal management of the company.
If agent exceeds authority
P/company can ratify contract by ordinary resolution, or
Agent incurs liability vis-à-vis P and vis-à-vis third party.
Exceptions to Turquand’s case rule:
Actual knowledge of the fact that transaction is outside the
authority. Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors
[1998]
Third party is an insider in th organisation (officer of company).
Morris v Kansen [1946]
Suspicious circumstance surrounding the authorisation of a
transaction an third party should reasonable have been aware of such
circumstances. Underwood v Bank of Liverpool & Martins Ltd
[1924]
Authorisation was forgery. Ruben v Great Fingall consolidated
[1906]
Transaction requires special resolution, third party is deemed to have
notice of the outcome. Irvine v Union Bank of Australia (1877)
Doctrine of ostensible authority
Always come when actual authority was absent.
Freeman & Lockyer v Buckhurst Park Properties (Mangel) Ltd [1964]
“A principal is bound, not only by such acts of the agent as are
within the scope of the agent’s actual authority, but by such act as
are within the larger margin of an apparent or ostensible
authority derived from the representations, acts, or default of the
principal.”
Conditions to be fulfilled
I. Representation that agent has authority.
II. Such representation was made by a person who has actual
authority to manage the business.
III. Third party (contractor) actually relied on the representation
IV. That under its memorandum or articles of association the
company was not deprived of the capacity either to enter into a
contract of the kind
a) Representation
Board of directors who has actual authority under MOA
to manage the business permit the agent to act in the
management, thereby represent to all person dealing
with such agent that he has the authority
b) Representation by someone with actual authority.
First Energy Ltd. v Hungarian International Bank Ltd
[1993]
c) Notice
there is no liability on the basis of ostensible authority if
the third party on notice or put on inquiry as to extent of
the person's authority.
If third party was on notice of agent’s limited authority
and ignored than company will not be liable.