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Separate Legal

Tutorial Ques 4
Prepared by :
Chris Lim Sor Yeung

The problem :

Issues in the problem

1. Whether there exists a separate legal
personality between Woody and the
company he incorporated?
2. If there exists a separate legal
personality, whether the veil of
incorporation can be lifted in this
circumstance to make Woody
personally liable for the debts?

Issue 1 :
Whether there exists a separate legal personality between Woody and the company he incorporated?

Statutes :
Companies Act 1965
- Section 14(1)
- Section 16(5)
Case laws :
-Salomon v Salomon & Co Ltd
-Lee v Lees Air Farming Ltd
-Macaura v Northern Assurance Co.
-Abdul Aziz bin Atan v Ladang
Rengo Malay Estate Sdn Bhd

Section 14(1) Formation of

The Law :
This section provides that 2 or more persons may be
subscribing their names to a memorandum and complying
with the requirements as to registration, to form an
incorporated company.
Application :
Woody took 10,000 shares and his father in law took 1 share.
Therefore, there were 2 shareholders at the time the
company was incorporated as provided in s14(1).
Thus, the company was legally established.

Section 16(5) Effect of Incorporation

According to this section, upon incorporation,

these will take effect to a company :
is capable forthwith of performing all the
functions of an incorporated company
is capable of suing and being sued
has perpetual succession
have a common seal
has power to acquire, hold and dispose of

Application :
The company incorporated by Woody, in itself is
capable of being sued. Therefore, the company
should be sued for the inability to pay off the
debts instead of Woody.

Salomon v Salomon

-Decided to form a limited company to purchase his bus

Mr Aron
merchant and

Trial Judge, Vaughan Williams J

Salomon v Salomon
Decision of HoL:
Incorporation of the company created a separate
person, even though the business of the company was the
same and the same persons managed the business and the
same hands received the profits, the company was not an
agent or trustee for the members. The members were
not liable in respect of the companys obligations.
Application :
A corporation or body corporate is a legal person created
and recognised by the law. In this sense it is an artificial
legal person as opposed to individuals who are known as
natural persons. Thus, after the incorporation of the
company, a separate legal personality had been
established and Woody as a member of the company need
not be liable for the companys obligations.

Lee v Lees Air Farming Ltd

Mr Lee
- principal shareholder and sole working director of a
company engaged in the business of aerial crop spraying
- Was killed in an accident while piloting the aircraft in the
course of employment
The issues :
Can a principal shareholder also be a worker of the
company pursuant to the New Zealand Workers
Compensation Act 1922?
Can he be an employer and an employee at the same
Privy Councils decision :
- Lees position as principal shareholder and governing
director did not stop him from making a contract of
employment on behalf of the company between himself
and the company (a separate legal personality).

Application :
Although Woody is the principal
shareholder of the company, the
company and him are still separate
legal personalities.

Macaura v Northern
Assurance Co.

The Appellant owned an estate in Northern Ireland which had a lot of

timber on it. He sold ALL the timber on it to a company called Irish
Canadian Sawmill. In consideration the company allotted him 40000
shares all the shares were held by the A and his nominees. After
the sale, A took out insurance policies from the R covering the
timber in the event of any accident.
One day, the timber caught fire, a great part of the timber were
The insurers (R) refused to pay on the ground that as a shareholder,
A does not have insurable interest in an insurance contract.
The House of Lord held: as a shareholder [individual member of the
company] , you have no rights [legal or equitable] in the assets of
the company even if you own all or substantially all of the companys
shares because you as the shareholder and the company are
separate persons. The person with insurable interest is the company,
not the A.

Application :
Assets of a company belonged to the
company, thus the owner and
shareholders of the company do not
have insurable interests over the
assets but the company itself.

Abdul Aziz v Ladang Rengo

Application :
Even if all the shares in a company were
transferred from the existing member to
another member, the transfer would not
change the company to another entity.
Employment done by the company did
not change as the company still exists.

Issue 2 :
If there exists a separate legal
personality, whether the veil of
incorporation can be lifted in this
circumstance to make Woody
personally liable for the debts?

Lifting of the corporate veil could

only happen under exceptional
circumstances, i.e :

Group Enterprise
Control by Enemy of State
Situations under the Companies Act
- s36 (number of members below two)

S36 Prohibition of carrying on

business with fewer than statutory
minimum of members
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 while the number is so reduced,
a person who is a member of the company during the
time that it so carries on business after those six
months, and is cognizant of the fact that it is carrying
on business with fewer than two members, shall be
liable for the payment of all the debts of the company
contracted during the time it so carries on business
after those six months and may be sued therefor and
guilty of an offence against this Act if the Company so
carries on business after those six months.

Application of s36 :
1. 2nd January 2012 father in law died, Woody became the
sole shareholder, number of members fell below the
statutory minimum.
2. Carried on business up to 1st July 2012 and suffered a loss
of RM16,000. (Loss incurred still within six months period
to be borne by the company)
3. After 1st July 2012 (after six months of which the
members fell below the statutory required number of
members), the company borrowed a sum of RM10,000
from the creditors and suffered further losses Woody as
the sole member of the company who continued to carry
on the business after a period of six months of which the
number of members fell below two, would be the person
liable for the sum of RM10,000 contracted during such


RM16000 loss - incurred during the

operation of the company within six
months of which the number of members
fell below 2 thus company is liable, not

Needs to indemnify the creditors the
sum of RM10,000
Guilty of an offence for operating a
company below the statutory
minimum number for a period of
more than six months
- pay a penalty of RM2000
- default penalty under s370