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INCORPORATION AND ITS EFFECTS - Coggle Diagram
INCORPORATION AND ITS EFFECTS
REGISTRATION FOR INCORPORATION
-Section 15 of Companies Act 2016
The Registrar will issue notice of registration in the form and manner as the Registrar may determine.
-Section 19 of Companies Act 2016
Notice of registration serve as conclusive evidence that a company has been duly registered and all requirements of the Act have been complied with.
-Section 17 of Companies Act 2016
Upon an application by a company and on payment of a prescribed fee, the Registrar may issue a certificate of incorporation in a manner as the Registrar will determine.
PRINCIPLE OF SEPARATE LEGAL PERSONALITY SALOMON V SALOMON & CO (1897)
Once the company has been incorporated, the courts do not look behind the veil to find out why the company was formed or who really controls it.
This principle is also known as the veil of incorporation.
This case established the principle that a company is a separate legal person from its members/ shareholders.
Mr. Aron Salomon was a leather merchant and a boot manufacturer. He incorporated a registered company. He himself held 20,001 shares and each of 6 members of his family held 1 share. He then sold his business to the company. All the shareholders knew of and approved the arrangement.
The House of Lords held that the company was a different legal person from Mr. Salomon and the creditors could not sue Mr. Salomon.
Later, the company went into liquidation. The creditors, whose claims could not be paid in full, tried to press their claims against Mr. Salomon on the basis that he and the company was actually the same one entity.
APPLICATIONS OF THE PRINCIPLE OF SEPARATE LEGAL PERSONALITY
A company can enter into a contract with a shareholder
A company must sue in its own name, and not in the names of its members, for any wrong committed against it
A company can own assets and the shareholders have no share (proprietary interest) in those assets
The debts of a company are the responsibility of the company and not its shareholders/members
EFFECTS OF INCORPORATION
-Section 18 of Companies Act
On the date of incorporation as in notice of registration – there shall be company by the name and registration number as stated and will be kept by the Registrar.
Every person whose name stated as a member in the application of incorporation shall become members in the company.
If the company has share capital, every person whose name is stated in the application become the shareholder of that company.
The person named as a director or secretary in the statement shall be deemed to be appointed in that company.
In summary, section 20 and section 21 of CA 2016 provides the effects of incorporation to the company is that:
Have legal personality separate from its members
Continue in existence until it is removed (perpetual succession)
A body corporate
Capable of exercising all functions as an incorporated company
Capable of suing and be sued
Has power to acquire, own, hold, develop or dispose of property
Has power to enter into transaction
LIFTING THE CORPORATE VEIL
Exceptions to the principle in Salomon v Salomon
The corporate veil may be lifted in certain circumstances.
-Judicial exceptions
-Court or judges are prepared to lift the corporate veil based on justice
-Statutory exceptions
-Provisions in Companies Act
STATUTORY EXCEPTIONS
Offence relating to financial assistance to purchase shares
Section 132 of Companies Act 2016
A Company shall not give any financial assistance for the purchase of its own shares to its own officers of the company.
If convicted, will be liable for a fine or imprisonment or both.
Offence relating to distribution out of profit
Section 131 of Company Act 2016
If not comply with this, the company or officer will be liable for imprisonment (not exceeding 5 years) or a fine (not exceeding 3 million ringgit) or both.
A company may only distribute to the shareholders out of profits of the company if the company is solvent.
Offence relating to unauthorized distribution
Section 132 of Companies Act 2016
The directors may authorize the distribution if it is satisfied the company will be solvent immediately after the distribution is made. (solvent- able to pay its debt within 12 months)
Any director or officer who authorized improper distribution will be liable to for a fine or imprisonment or both.
Before a distribution is made by a company to any shareholder, such distribution shall be authorized by the directors of the company.
JUDICIAL EXCEPTIONS
The court will lift the corporate veil when justice of the case so requires
Perpetration of Fraud
Case: Aspatra Sdn Bhd & 21 Ors v Bank Bumiputra Malaysia Bhd & Anor (1988)
The corporate veil may be lifted if the company is used to perpetrate fraud
Evasion of Legal Obligation
Case: Gilford Motor Co. Ltd v Horne (1933)
The court will not allow the doctrine of independent legal entity to be used by a contracting party to circumvent his contractual obligations lawfully owed to the other party to the contract
Enemy in Times of War
-In time of war, a company is not permitted to trade with ‘enemy aliens’
-A contract entered into with an enemy alien is at common law void for illegality as it is against public policy
-The court is willing to lift the veil of incorporation in wartime to investigate if the shareholders in control and management of a company are enemy aliens or not
-Case: Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd (1916)
Holding and Subsidiary Companies - A group of companies may be treated as a single corporate entity.
Case: Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers & Anor (1980)
A holding company and any of subsidiary companies are two separate legal entities, but there are instances where these two are not really treated as separate.
Tax Avoidance
The court may lift the veil of incorporation, where it is being used to conceal the nationality of the company with the intention of evading taxes
Case: Unit Construction Co Ltd v Bullock (1960)