Veil of Incorporation

Introduction The term “registered company” means a company starts its operation or formed by registration under Companies Acts 1 965(1). A registered company Is explained by the law as a person, a human being. This artificial person can own land and other property, enter into contracts, sue and be sued, have a bank account in its own name, owe money to others and be a creditor of other people and other companies, and employ people to work for it (2).

Section 16(5) of the Companies Act 1965 states that on and from the date of incorporation specified in the certificate of incorporation the bickerers to the memorandum together with such other persons. (Anon. , 1973) This Is because It may become members of the company and It shall be a body corporate by the name contained in the memorandum. Company should have the ability to practicing all the functions of an incorporated company.

For example a company can sue and being sued under the company name. Besides, company can have eternal lifespan and also a common mark with power to hold land. This act also stated when a company being wound up the part of the members has to responsible by contributing the assets to the company. In Salomon case, Salomon starts his business as sole trader. HIS son Inherent his business and decided to start as a limited company, called a Salomon and Co Ltd. Mr..

Salomon sold his business to the new corporation for almost в?39,000, of which EIA,OHO was a debt to him. He asked the company to issue a debenture of EIA,OHO to him. (Eng, 2011) When the sudden decline in the business and unable to pay interests to Salomon he decided to transfer the debenture to B. B Is here a secured creditor. When the company went Into ululation, the liquidator argued that the debentures used by Mr.. Salomon as security for the debt were Invalid.

They argued that the floating charge should not be valid, and Salomon should liable for the company’s debts. The general rule is that there is a veil between the company and its members to separate them. Generally, any mistakes of the company will not liable by the members of the company however in certain situations, the court would look at the controllers and the members of the company to see would Is liable for the offence by neglect the separate legal personality of a company and lift the veil of Incorporation.

The veil of Incorporation an be lifted by 2 ways, one by Statute (Statutory exception), another is by Case Law Duodecimal exceptions). Lifting the veil by Statute Companies Act 1 965 required that at least 2 members are required in order to operate a company. Section 36 of the Companies Act 1 965 saying that if at any time, the number of the shareholders or members of a company (except for a subsidiary company) Is less than two persons and the business is still operating, It cannot goes beyond SIX months.

If the company breaches this rule and carries the business with less than two;o persons for a period of more than six months, the court has the right to fit the veil of incorporation. It means that the only person who is the member of the company during that time and is still carries on the business after those six months and with fewer than two members will be liable for the all the obligation including debts of the company contracted during the periods after those six months. Operate or carry on business with less than the minimum number of members. Companies must issue its prospectus under Companies Act to the public as finance reference. Prospectus is a formal legal document, which is required by and filed with the Securities and Exchange Commission. It should provide details about an investment offering for sale to the public. It helps the investors to make their decision either to invest into the company or not.

Section 46 under the Companies Act 1965 states that if the company have any misstatement in the prospectus, Companies should undertake to pay compensation to people who ask for or purchase any shares or debentures of the faith of a prospectus for any loss or damage of any untrue statement of reasons, or intentionally fails to disclose anything, it was his knowledge and knew the material, that everyone who-? (a) is a director of the company b) is a director or as having agreed to become a director and who named in the prospectus; (c) is a promoter of the company; or (d) issue and/or authorized the company’s prospectus.

According to the Section 67(3) of the Companies Act 1965, a company cannot give loan or provide financial assistance whether direct or indirect to anyone which is not from the company (outsiders) to buy the its own shares. If the company breaches this general rule, the court will lift the veil of incorporation and find out who is liable for the offence. It will make the related officers of the company guilty on this incidence.

If there is any comparison in this section, the Company is exposed to the Companies Act 1965, under section 369, not guilty of an offence but every officer who is in default shall be guilty of an offence against this Act. The fines and penalty that decided by the court to this section is either a fine of one hundred thousand ringing or imprisonment for five years or both.

Section 119 of the Companies Act 1965 states that a company must register its office from the day it begins the business or within 14 days after its incorporation, depends on whichever is the earlier. It means if a company incorporate, it must register its office within 14 days even it is not commencing the business yet. In addition, the company must registered all communications and notices, it should be open and accessible to the public during the business operating hours for at least 3 hours on each day.

However, this do not applied on Saturdays, Sunday, and public holidays. In short, if the company failed to follows this rule, the court will lift the veil and any officer found to be guilty of committing this offence, the officer will be liable to a fine of RMI ,OHO. Companies Act 1965 section 121(2) requires the company in its correct form displays its name. If an officer on behalf of their company or any person or authorize the use of any mark appears to be where on its name does not feel so.

Issue or authorize the issue of any business letter, statements of accounts, invoices, official notice or publishing company did not mention its name and previous names, or signs issues or authorized representative signed or issued any bill of exchange, promissory notes, cheese or other negotiable instrument or any endorsement, orders, receipts or deters of credit in their name and the name is not previously mentioned, the court may lift the veil. Signed by the officer or the persons, and to authorize the company’s name is not correct, it will assume responsibility. Which have a holding and subsidiaries relationship, the directors of the holding company must prepared and filed a consolidated accounts that including the financial statements of both the holding company and its subsidiaries to the registrar (Companies Commission of Malaysia). The reason behind is that the holding and subsidiaries companies are regarded as one economic unit. Therefore if the holding many fails to prepare consolidated accounts, the court may lift the veil of incorporation and the controller or the director will be liable.

Section 304(1) of the Companies Act 1965 states that if in the course of the winding up of a company has been carried on with intention to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, then the court will lift the veil of incorporation and any person who carried out those fraudulent shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the Court directs. Section 303(3) of the Companies Act 1965 deals with the liability where proper accounts not kept.

A company should not contracting debts without expectation of payment.. It means that a company should not take any loan if they are uncertain how to repay the loan. Section 304(2) of the Companies Act 1965 provide that where a person has been declare guilty of an offence concerning to contracting of such a debt under subsection 303(3) of the Companies Act 1965, the responsibility will be personally liable by the person who took the loan. The veil will be lifted to find out the person behind this unlawful purpose.

It is unfair to make the company liable because the particular person is the one who took the loan and have intention to cheat. Section 365(2) of the Companies Act 1965 states that the dividends distribute to its members or shareholders can only from the profit that company earned. It mean not from the profits of any dividend paid is prohibited. The court will lift the veil of incorporation and the person who makes the decision will be liable for the offence if the company distributes dividends to its shareholders or members which is not from the profit it earned. Lifting the Veil by Case Law Duodecimal exceptions)

The court can lift the veil of incorporation if a company committed fraudulent behavior or fraudulent intention on the part of the cooperators in forming the company. These frauds refer to unfair and inequitable action; including the cases where the cooperator is try to find the way to escape from a contractual liability. Guilford Motor Co Ltd v Horns (1933) is describing the situation stated above. Horns (the first defendant in this case) who was employed as the managing director by the Guilford Motor Co Ltd (the plaintiff in this case). When Horns was employed, he was required to sign a contract of employment.

According to the contract that had signed by Horns was included a commitment which he cannot seek the business from the plaintiffs customers once he resigned from the company and involved in the same industry with the company. After three years, Horns resigned and forms his own company, called JAM Horns ; Co. Ltd. , the second defendant, in competition with directors of the JAM Horns ;Co. JAM Horns ; Co. Ltd. Then began to steal the customers of the Guilford Motor Co Ltd. By sending out circulars to someone who was at the crucial time customers of the Guilford Motor Co Ltd.

Then, the Guilford Motor Co Ltd tries to stop Horns and his company from stealing its customers. In order to avoid Horns and his company from stealing their customers, an injunction was granted for both Horns ; his company by the plaintiff. The court held that the company was a mere cloak or sham for the purpose is to enable Horns committed a violation of his agreement. Thus, the veil of incorporation is lifted and causes Horns and his company becomes one person and Horns will be liable. Another case related to this situation is in the case of Jones v Lineman. Mr..

Lineman entered into a contract for the sale of land to Mr.. James. However, Mr.. Lineman subsequently changed his mind and he does not want to complete the sale anymore. Mr.. Lineman then formed a company to avoid the transaction and conveyed the land to the company. He then claimed that he is no longer owned the land and could not comply with the contract. The court held that the company is used to evade a legal obligation and will treat the company and Mr.. Lineman as one person. Thus the court lift the veil of incorporation and Mr.. Lineman must transfer the land to Mr.. Jones.

Furthermore, the veil of the company can be lifted by the court when the controller as employed a company as an agent or when an agency relationship appear between a company and its controller. This situation was being described in the case of Smith, Stone ; Knight Ltd v Birmingham Corp. (1939). A piece of land own by the holding company but the business on the land is operated by subsidiary company. The 497 shares out of 502 of Birmingham Waste Co Ltd (a subsidiary company of the holding company) were held by a holding company. The directors of the holding company were holding the remaining 5 shares of Birmingham Waste Co Ltd.

They were also the directors of the subsidiary. The holding company was normally and constantly under the control of the subsidiary. One day, the government was interested to buy the piece of land which owned by the holding company. However, the government stated their condition which only the owner can claim for the compensation for the business loss. Holding company wants to claim for the compensation because of the removal and disturbance to the business. However, the defendant stated that the holding company was not qualified to claim for the compensation for this disturbance. The proper claimant should be the subsidiary company.

Therefore the government does not give the compensations to the holding company because the business is belongs to the subsidiary company. The Judge agreed that a man owns all the shares in a company do not mean that the business is carried by the company is his business. It also does not mean that the company acts as his agent carrying on his business. However, in this case, the Judge had no difficulty in deciding that the business of the subsidiary company was the business of the holding company and the subsidiary was the only business of the holding company and the subsidiary was only its employee, tool, or agent.

The agency relationship between the holding company and subsidiary company was shown in the agent who controls the business of the holding company. As the end, the veil of the holding company and subsidiary company was lifted by the court and they were served as one party. As a conclusion, the compensation for the business loss was claimed by the holding company. The court is allowed to lift the cooperate veil if a finding of agency was detected. Such situation can be found in the case of Re FIG (Films) Ltd. (1953). An American company attempt to be a British company to enjoy subsidy given to the British company. % capital of the company was held by the actors which are from America, and the remaining 10% capital was held by a British director. The third director was not given right to hold any shares in the company. The Company may only run their business at its registered office without employ any staff. Companies seeking films under the 1938-1948, the film provides a certain limit, unless they are from the British or the company is registered as a British film with movies and Trade Commission on the ground, the film is in reality refused the application by American companies.

FIG Films, the applicant company was seeking for he meaning of the behavior of the “maker” of the film from the declaration of the court. The court held that this film was not been made by a British company because this is an American film. All film financing from American companies, which it believed the British company involved in the participation of the film has been so little to almost negligible, so far as it to take action on this issue, it acts only as a nominee or agent of the American companies, Film Group Incorporated. Court lifts the veil and this company cannot get subsidy.

If there is group of companies which consist by the company and its subsidiary, they ill be treated as one economic unit. This will allow the court to lift the cooperate veil of the company. DON Food Distributors Ltd v Tower Hamlets London Borough Council (1976) was describing this situation. This fact in this case was almost similar to the facts in Smith, Stone ; Knight which involves compulsory purchase. Under the Compulsory Purchase Act, the DON Food Distributors Ltd itself is asking for the veil to be lifted in this case. DON was the holding company and it controls three companies (included its two subsidiaries) at the same time.

The wholesale cash-and-carry rockery business from premises was run by one of its wholly owned subsidiaries which called Bronze Investments Ltd. In 1970, one land which owned by the Bronze Investment Ltd was involved in the compulsorily purchase case which conducted by the Borough Council of Tower Hamlets. According to the Act, The Borough Council of Tower Hamlets was needed to pay the compensation for the value of the land and the compensation for the disturbance to the land owner which involved in the compulsorily purchase case.

Whoever is interested to claim one of the compensation or both of it, they must own an interest in the land which is much greater than that of bare licensee. For example, they must be a yearly tenant if they want to claim one of the compensation or both of it. If the one who interested to claim the compensation had met this condition then it will be has no any problem in order to claim the compensation for the value of the land. Bronze Investment Ltd was entitled to claim the compensation for the value of the land because the land was owned by it.

However, the business of Bronze Investment Ltd was run by DON Food Distributors commenced. Therefore, DON Food Distributors Ltd owned the licensee and it should be qualified to claim the compensation for the disturbance to the land. However, the Borough Council stated that DON Food Distributors Ltd was not qualified to claim the compensation for the disturbance to the land due to the interest in the land owned by the DON Food Distributors Ltd was less than the yearly tenant. When they reached to the court, the Court of Appeal lifts the veil in this case and it treated the holding company and the subsidiary as single economic entity.

This is because the directors and the shareholders of DON Food Distributors Ltd were the same as those of the Bronze Investment Ltd. Therefore, the compensation for the disturbance to the land as not able claimed by the DON Food Distributors Ltd but claimed by the yearly tenant. The court is allowed to lift the veil of incorporation if their decision was based upon treating the group of companies as one economic unit rather than by using the agency principles. If Justice of the case requires it, the court was allowed to lift the veil of incorporation.

Hotel Jay Purr Sad Bad v National Union Bar ; Restaurant Workers ; Nor was describing this situation. This case is related to a restaurant and the workers of the restaurant. Jay Purr Chinese Garden Restaurant was the subsidiary restaurant owned by the Hotel Jay Purr Bad. The restaurant was bankrupt and the some of the workers retrenched by the restaurant (contract of the workers’ were terminated). The workers of the restaurant want to sue the hotel instead of the restaurant which had bankrupt and claim for compensation.

Due to the management team (managing director, secretary and personnel manager) of the Hotel Jay Purr Bad and Jay Purr Chinese Garden Restaurant are the same, the court decided to lift the veil of both of them by using the principle of Justice. Both of them are then treated as one economic unit. At the end, court lifts the veil and the worker an get compensation. Scenario Crazy Memories Bad is a company which form and own by two people, Michael and Jordan. From the day the company starts to operate the business, it had register its office at Wants Major.

However, one of the company’s directors (Michael) was dead due to an accident after the business commencing for 1 month. Therefore, the company is now operating by one person only. Few months after that, the company decided to offer share to the public to raise capital. In order to seek public funding, the company registers a prospectus which contains some information that will assist he prospective investor in making an informed decision as to whether to invest in the company shares or not.

However, the director is not sure whether the prospectus contains any misstatement and he wanted to know the consequences of contains misstatement in prospectus. Besides that, the company had shown its name in short form (CM) in some documents and reports. After five years from the company incorporate, it become stable and has many shareholders. Although the company had made a profit for years, but its current ratio is below 1, which means the company had a cash flow problem. The company then makes a lot of credit researches from its suppliers, they are lack of cash and do not know whether they can settle the debts within the due date.

Apart from that, the company intends to whether they can pay dividend to its shareholders in the year they making losses. Another five years later, Crazy memories Bad is doing very well and has 3 subsidiaries, the director of the holding company do not prepare a consolidated accounts and files to the registrar. In the scenario above, Crazy memories Bad is required to find at least one person to be the members of the company within 6 months after Michael was dead. Otherwise, the court may lift the veil of incorporation and Jordan will be liable for any liabilities or an offence (Section 36 of Companies Act 1965).

Besides, the prospectus prepared by the Jordan cannot contain any misstatement. If any misstatements were found in the prospectus, Jordan will be the one who liable and can be sued for compensation from the investors (Section 46 of the Companies Act 1965). Besides that, Crazy memories Bad cannot show its name in any others form other than full name, short form is not allowed because the Section 121(2) of the Companies Act make it compulsory for a company to show its name in erect form.

Therefore if the company failed to do so, the court may lift the veil of incorporation and any offence will be liable for the controller or members. Under Section 303(3) and Section 304(2) of the Companies Act 1965 stated that the company cannot contracting with its creditors without expectation of payment. Thus, Crazy memories Bad will be liable on this section due to it had make a losses and didn’t sure that they can settle the debt borrowed. Crazy memories Bad cannot distribute dividend to the shareholders this year because they are making losses.

The payment of dividends which are not from the profit for year of the company is prohibited by Company Act. This is stated in Section 365(2) of the Companies Act. Section 169(5) of the Companies Act stated that for group of companies which having holding and subsidiaries relationship, the directors of a holding company must prepare and filed a consolidated account to CM without contains any error and fraud. Crazy memories Bad and its subsidiaries will be liable due to its director of the holding company did not prepare consolidated account of the company to the registrar.