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Companies in Malaysia are governed by the Companies Act 1965. It provides the
formation of companies in Malaysia and registration of foreign companies in Malaysia.
The Malaysian company act is strongly influenced by English and Australian company
law. UK follows the Companies Act 2006. Therefore, many of the provisions of the
company Act are the same to those two countries. Malaysia also practices common law
system in which the judgment made is based on case law as binding statement. The
English common law can be used where there is a lacuna or dispute in the provision of
local law (Pheng & Detta, 2009).
The company act 1965 also includes partnership and sole proprietor. A
professional partnership is subject to a maximum of fifty members. The most common
type of companies in Malaysia is private and public company. A public limited company
has an ending of Berhad while private limited company has the words Sendirian
Berhad in Malaysia. A limited company can be either public or private however an
unlimited company is only applicable for private company. A public company can issue
shares to the public in order to raise capital while a private company can only issue to
family members (Pheng & Detta, 2009).
A government-linked company (GLC) has a basic commercial objective and
controlled by government. This type of company is neither public nor private and it
exists only in Malaysia. The organizational structure of GLC is like public company but
benefits are like private company (Khazanah, 2014). The government has the power to
select board members and senior management. They also can make major decisions
and ask for financial records at any time as they are considered as the shareholder and
government. Example of GLC is Sime Darby and Khazanah Nasional Berhad.
Incorporation refers to the process of declaring a corporate entity as a separate
from its owners (Investopedia, 2014). Unlike sole proprietor and partnership, companies
are treated as a legal person. In Malaysia, a company can become incorporated by
registering with the Registrar of Companies (ROC). According to the Companies Act
1965 Section 16(5) upon incorporation, the company and its members are two separate
bodies. The act basically explains the separation of ownership between the owners and
the company. The company acts as a juristic person which can own a property, sue and
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be sued. Other advantages include having perpetual succession which will ensure
business is not going to cease when the owner dies and limited liability among the
members (Pheng & Detta, 2009).
The summation of the Salomon case is as follows. Salomon started his business
as a sole trader manufacturing leather boots. Over the years, he decided to incorporate
his business as a limited liability company as his son showed an interest in taking part in
the business. At the time, the legal requirement to set incorporation is to have a
minimum of seven shareholders. Salomon has five children and his family makes up of
seven people. He issues shares to each of the family members including him. The
business was then transferred to the company and debentures were issued to Salomon.
Retaining control over the business operations, he holds almost all of the shares making
him the principal shareholder and its principal creditor in the company and appointed
himself and his two sons as directors. However, the business floundered and it can no
longer pay interest to Salomon. He transferred the debentures to another secured
creditor, Broderip. Failing to cover its liabilities, the company was put into liquidation.
The assets were enough to pay off the secured creditors including Salomon who is the
debenture holder. The unsecured creditors are left with nothing as it is used to pay the
debentures. The other secured creditors, Broderip claims that it not fair for Salomon to
receive the money whiles the unsecured did not receive anything. Feeling cheated, they
take the case to the court claiming that the companys business was in reality still
Salomons as he has control over the company operations. Salomon was sued in the
Court of Appeal and he is liable to compensate the company against the losses. He
then appealed in the House of Lords which reversed the decisions made in the Court of
Appeal. Salomon is not liable for the debts of the company as the company under the
eyes of law is separate persons and members are not liable of the companys
obligations. In this case, Salomon Co. Ltd is incorporation with limited liabilities. This
means that the shareholder has a limited liability as they are subject to the amount the
invested only. There are some highlights to be made in the case. Mr. Salomon should
not appoint himself as the director due to conflict of interest as he has the authority to
make decisions (Pheng & Detta, 2009).
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Salomon v Salomon Co. has created a concept known as veil of incorporation which
means it establishes the essential distinction between a company and its members.
Macaura v Northern Assurance Co. and Lee v Lees Air Farming are other examples of
separate legal entity cases. However, the case has promoted frauds and evasion of
legal obligations. Therefore, there is an exception regarding to the rule of Salomon
cannot be applied if it leads to injustice. The court will lift the corporate veil and
disregard separate entity principle which made the company, directors or managers
liable for the debts and obligations when they feel that the corporate form is being
misused (Thompson, 1999).
Following are the example of cases that have made court lifted the veil of incorporation
using the case law. Daimler Co. Ltd. v Continental Tyre and Rubber Co 1916 is an
example of public interest case. Continental Tyre is incorporated in England but, all of
its shareholders and directors were resident in Germany except one who is the
secretary who resides in England. The issue is whether the Continental Tyre is able to
sue and recover its debt in an English court as the debt is incurred during World War 1
when England was at war with Germany. The defendants (Daimler) were concerned
that it might contravene a common law offence of trading with enemy act 1914. The
court held that Continental is a German company therefore Daimler is successful in it
defense (swarb, 2013).
Fraud cases also allow the court to lift the corporate veil. In Jones v Lipman 1962,
Lipman has a contract of selling the house with Jones but he changed his mind
afterwards. To avoid being sued by Jones, he transferred the title of the house to a new
company he set Alamed Ltd. claiming that he has sold the house to the company. Mr
Jones then sued Lipman for the breach of contract. The case ended with Mr Lipman
selling the house to Mr Jones as the court claimed that the company is a legal entity set
by him (Mackrell Turner Garrett, 2014).
In Asparta Sdn. Bhd. and 21 Ors. V. Bank Bumiputra Malaysia Bhd & Anor (1988), the
lifting of corporate veil is due to the element of fraud. It is countrys biggest bank
scandals. Lorraine Osman is sued by Bank Bumiputra Malaysia Bhd. and Bumiputra
Malaysia Finance for an account of secret profits made while he was a director and
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chairman in both of the company. Lorraine is alleged for receiving a huge amount of
money without the knowledge and approval of the plaintiffs. He is defeated and
sentenced to imprisonment (The Sun, 2008).
In the case of Gilford Motor v Horne, the Gilford Motor sued Horne due to the breach of
obligations. Horne was an ex-employee of the Gilford Motor Co. He had a contract
signed which mentioned that he will not solicit the company customers upon leaving the
company. After he left Gilford Motor Co., he started his own business under his wifes
name. The company takes action by suing him as he solicited the customers of the
company. Gilford won the case in the court as the court held that the company is a
sham for Horne to breach the contract (Pheng & Detta, 2009).
The case of Smith Stone & Knight Ltd v Birmingham Corporation 1939 is an example of
a subsidiary company who acts as agent to the parent company and vice versa.
Birmingham Waste Co. Ltd. is a subsidiary of Smith Stone & Knight Ltd. However, the
company is treated like one of Smith Stone department as they do not have any staff
and separate book of accounts. Birmingham Co. is forced to acquire premise owned by
Birmingham Waste. The Smith Stone then claimed a compensation for the removal and
disturbance. However, the Birmingham Co. (defendant) appealed that Birmingham
Waste Co. should be claiming the compensation and not the parent company. The court
agrees as parent and subsidiary is a separate corporate entities. Having a share in a
company does not means that the company is his and they cannot make the company
his agent for carrying business (Cassidy, 2006).
However, in Adams v Cape Industries plc the court did not pierce the corporate veil as
the subsidiary company is not acting as an agent to its parent. Cape, a UK company
has subsidiaries in South Africa. The subsidiaries supplied asbestos to a Texas
company, NAAC. The employees in NAAC sued Cape and its subsidiaries as they
become ill due to the asbestosis. However, the court declined the charge as the
subsidiary was carrying the business its own purpose. As a subsidiary to Cape, NAAC
should market the parent goods in the USA and does not have the authority to bind a
contract with the third party. As the subsidiary affected the agency relationship, the
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court decided not to lift the veil as Cape is not attributable to the liability made by NAAC
(Smith, 1999).
In the case of group enterprise, the court will lift the veil in order to look at the economic
realities of the company itself. A holding company and its subsidiaries which produce
consolidated accounts are treated as single enterprise. Example of the case is Hotel
Jaya Puri Bhd. v National Union of Hotel, Bar & Restaurant Workers & Anor (1980). The
workers of Jaya Puri Chinese Garden Restaurant Sdn. Bhd. were sacked as the
business is not doing well. The workers, represented by National Union of Hotel,Bar &
Restaurant Hotel claimed that the hotel is the employer to the workers and not the
restaurant. By looking at the entity of the whole group, the workers are the employees of
the hotel as the hotel and the restaurant were interdependent and they constitutes as
single unit. In addition, the director of the hotel has the authority over the employees in
the restaurant. Taking all this in consideration, the court decided that the hotel is the
employer of the workers (Pheng & Detta, 2009).
Another example is D.H.N In the case of D.H.N Food Products Ltd. v Tower Hamlets
London Borough Council. DHL wholly owned their two subsidiaries. One of the
subsidiary lands was subject to obligatory purchase. DHL claims compensation for the
land. The court approved and DHN was entitled to claim as the three companies are
considered as a group (Goulding, 1999).
The general principle in the Salomon case is that a corporation is an independent
person separate from their members. It gives the shareholders and management
advantages as they are have limited liability which protects their personal belongings
(Farat & Michori , 2014). The company is bound by corporate veil. When the corporate
privilege is used to exploit loopholes in the law to satisfy own interest, the court will use
the lifting of corporate veil method to go after individuals who have caused the mishaps.
Corporate veil lifting does have its pros and cons.
By using the corporate veil lifting, the court will be able to discover the person who
made any fraudulent or dishonest case and he will be liable for their own actions.
Corporate veil lifting protects the members from fraud or improper conduct. The
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disadvantage of corporate veil lifting is time consuming. The court will have to go
through all the meticulous details in the case in order to make the best judgment as
missing out certain information might jeopardize the verdicts made. It also requires the
judge to have a deep knowledge in law principle.
As a conclusion, Salomon v Salomon & Co. is an important case law as the case is
universally recognized for many company law cases since then. The case is accepted
and applied in Malaysian court (Weng, 2013).
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