Company Law

LAW 3212

Individual Assignment

Section: 1

Name : Mohamad Wafiy Bin Mohd Wary

Matric No : 1422033
Lecturer’s Name : Mdm. Siti Awanis Binti Othman
Question 1 (35 marks)

BYA failed to supply the canned fruits to MINI Sdn. Bhd. in September. MINI wanted to sue
for breach of contract. However, BYA claimed that the agreement is not binding because the
company was not incorporated yet at the time the agreement was signed. Advice MINI.

Firstly, we need to understand the flow of this case. BYA Sdn. Bhd is a company which
was incorporated on June 1st 2017. The company was originally a partnership consisting of
three partners; Ben, Yati and Ali. Their business involves in the activity of supplying canned
fruits to their customers. In May 2017, Ali who is one of the directors of BYA Sdn. Bhd.
entered into an agreement with MINI Sdn. Bhd. on behalf of BYA Sdn. Bhd. where the
agreement stipulates that BYA Sdn. Bhd. is required to supply 500 units of canned fruits to
MINI Sdn. Bhd. However, in September 2017 BYA Sdn. Bhd. failed to do so and therefore
MINI Sdn. Bhd. wishes to sue BYA for breach of agreement.

The question is whether MINI Sdn. Bhd. can sue BYA Sdn. Bhd. for breach of contract
or not since BYA Sdn. Bhd claimed that the agreement between them is not binding since the
company was not incorporated yet at the time of the agreement was signed and if so, who
should be the liable party for this case? Before we dwell on this matter further, we need to
identify few important legal principles in order to come out with logical and law-binding
resolutions.

To start, we will first look at the claim made by BYA Sdn. Bhd. regarding the validity
of the contract entered between them. The fact to be established is that the contract was indeed
entered between BYA Sdn. Bhd. and MINI Sdn. Bhd. in May 2017 which happens to be one
month before the date of incorporation. Therefore, they claim that the entered contract was not
valid since company was yet in existence. In light of this case, we will look at this matter from
two different perspectives which are from the point of view of the Common Law as well as
point of view of the Companies Act 1965.

According to the Common Law, a company does not exist as a legal entity before its
incorporation1. The result of this proposition is that a company cannot enter into a binding
contract unless it is registered with the Registrar of Companies. Thus, an individual is not
allowed to enter into a contract under the name of of company whose existence is yet to exist
i.e. incorporated, therefore any contract entered before the incorporation is illegal and not
binding. Referring to the precedent case Newborne v Sensolid (Great Britain) Ltd [1954]
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whereby a company is also not bound by a pre-incorporation contract made on its behalf by a
person who purported to act as its agent. The rationale is the purported principal of the agent
is yet to exist i.e. has not been incorporated yet therefore, by right it cannot appoint the
purported agent which would result in any acts done by the purported agent to be unbind.

1 Pre-incoporation contracts, Common Law Position. pg 157

2 Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45

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 However, this proposition of the common law has caused some difficulties with regards
to the pre-incorporation contracts. Therefore, Section 35 (1) of the Companies Act 1965 has
overcome this issue. Under the Section 35 (1) of the Companies Act 1965 which reads "Any
contract or other transaction purporting to be entered into by a company prior to its formation
or by any person on behalf of a company prior to its formation may be ratified by the company
after its formation and thereupon the company shall become bound by and entitled to the benefit
thereof as if it had been in existence at the date of the contract or other transaction and had
been a party thereto."

The key or the essence of the S35(1) ruling emphasizes on the phrase “ratification of
the contract after its incorporation”. S 35(1) alters the common law position where the pre-
incorporation contract cannot be ratified as mentioned in the case Kelner v Baxter3. Although
the term ratification was not explicitly defined in the Act, it should however mean that a
company has adopted or confirmed the pre-incorporated contract. The term has been lucidly
illustrated in the case of The Golf Cheque Book Sdn Bhd V Niai Springs Bhd (2005)4 where the
sum of RM 80,000 paid to Nilai Springs Berhad after the Golf Cheque Book Sdn Bhd’s
incorporation is evidence of conduct amounting to ratification.

In this case, it is crystal clear that during the first meeting of the BYA Sdn. Bhd, the
directors have agreed to adopt all contracts entered on behalf of the company prior to its
incorporation therefore, it is tantamount to the act of ratification which would lead to pre-
incorporated contract to be valid and binding. Thus, it can be concluded that MINI Sdn Bhd
can take action against BYA Sdn. Bhd. for the act of breach of contract since the contract
entered by them is binding and under the virtue of S 16(5) of the Companies Act 1965 which
explicitly mentions that a fully incorporated company is capable of suing or being sued. The
company is now a separate legal entity and will be held liable for the act of breach of contract
not the promoter i.e. Ali who entered into the agreement on behalf of the company.

3 Kelver v Baxter (1866) LR 2 CP 1974

4 The Golf Cheque Book Sdn Bhd and Anor V NIlai Springs Berhad (2005) MLJU 472

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 Question 2 (35 marks)

Zaki, Ali’s friend lent him RM 5,000 in 2016. Zaki discovered that Ali is now the director of
BYA. Zaki decided to sue BYA for the RM 5,000 loan.

For this question the issue is whether Zaki could sue BYA for the RM 5,000 or not
since Ali is now one of the directors of BYA Sdn Bhd. Before we come out with the conclusion,
we need to first understand the event in chronological order. The first fact that needs to be
established is the loan worth RM 5,000 was given out to Ali by Zaki in 2016 which is one year
before the incorporation of the company i.e. the incorporation of BYA Sdn Bhd. It is imperative
to note that in the year 2016, Ali has yet to become the director of BYA Sdn Bhd. In fact, he
was just one of the partners of the partnership that consisted of three partners; Ben, Yati and
Ali. Upon his discovery that his friend Ali is now the director of BYA Sdn Bhd, Zaki then
decides to sue BYA for the RM 5,000 loan.

To address the issue whether BYA is liable or not towards the loan undertaken by Ali
in 2016, we need to scrutinize the issue with careful consideration. BYA by right possesses the
status of one legitimate legal entity after its incorporation on June 1st 2017. Under the virtue of
Section 16 (5) of the Companies Act 1965 5 , “..members of the company shall be body
corporate by the name contained in the memorandum capable forthwith of exercising all the
functions of an incorporated company and of suing and being sued…” which would mean BYA
by essence is considered as a legal person whom can sue or be sued under its own name.

Now back to the main issue whether the company can be sued or not by Zaki, it is
evident that the person who borrowed the money was Ali. It is also important to note that both
Ali and BYA Sdn Bhd are two different persons and the current position of Ali as the director
of BYA does not make the BYA to be liable for Ali’s act. BYA is by law, a separate legal
entity and it does not represent Ali nor it acts on Ali’s behalf. To further understand the concept
of separate legal entity, we need to refer to the famous case Salomon v Salomon & Co Ltd6
where the concept of separate legal entity was first recognized which after the entity comes
into existence, the company is therefore a separate and distinct from its director and
shareholders. The significance of this case where it is firmly rooted within the jurisprudent of
Malaysia where the company must sue in its name for any wrong that is committed against it.

Since BYA is a separate legal entity under the virtue of Salomon v Salomon & Co Ltd. ,
therefore there was no agreement between BYA and Zaki ab initio and it is irrelevant for Zaki
to take action against BYA. Thus, Zaki is not supposed to sue BYA for any breach of contract,
instead it should sue Ali for his failure to meet his obligation. Considering the fact that Ali was
a partner of the partnership between him and the other two i.e. Ben and Yati. Should the loan
undertaken by Ali on behalf of the partnership, Zaki may take action against the partnership
for its failure to settle the loan. However, the question is silence with regards to this matter thus
it is safe to make assumption that Ali took the loan for his personal use and therefore he should
be the person liable for his own wrongdoing.

5 Companies Act 1965 (later revised to 1973)

6 Salomon V Salomon & Co Ltd [1897] AC 22

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Question 3 (30 marks)

Discuss THREE (3) circumstances where the courts may lift the corporate veil of a company

According to Rachagan et al (2002), corporate veil is a type of recognition that a

corporation is a separate legal entity and it is distinct from its stockholders.7 The veil serves as
a means to protect the shareholders of the company from being liable to the creditors in the
event the company needs to be wound up and is unable to pay the company’s obligations as
being clearly illustrated in the case of Salomon v Salomon. This law however is a double-edged
sword. It is recognized that there will be cases where this principle of separate legal entity will
be abused by the fraudster who will hide behind the veil of incorporation (Chan, 2014)8.

Therefore, the need to lift the veil of corporation is needed under specified occasions
of course to ensure that members of the company or any officers who committed the wrongful
actions be liable. The need to lift the veil of corporation has also been lucidly illustrated in the
case of Sunrise v First Profile (M)9 . The case was heard at the Federal Court where Chong
Siew Fai J explained that “That the corporation is a legal entity distinct from its members be
they individuals or corporate bodies – a principle firmly established since Aron Salomon v
Aron Salomon & Co Ltd [1987] AC 22. However, since then, the development of the law has
been numerous deviations from the strict rule of the separate legal entity of the company
through cases where the court, on the particular facts and circumstances of those cases, found
appropriate and necessary to depart”.

Even though the court would not lift the veil in order to find out who is actually liable
on the company’s debt, they will however pierce the veil in three circumstances in order to find
the person or persons who is or are liable for the company’s debt. The first circumstance is
under the exception of the statutory. Section 36 of the Companies Act 1965 has spelled out a
company other than a wholly owned subsidiary is required to have a minimum of two members.
Should the number of members reduced below two and the business is carried out for a period
of more than six months, the sole member shall be responsible or liable for the company’s debt
incurred after that period. According to the case Macaura v Northern Assurance Co Ltd
[1925]10 the sole member may transfer one share to his nominee for it is immaterial that all the
shares in the company belongs to the only beneficial owner.

Next, under the judicial exception where a company is incorporated so that a person
can avoid paying his contractual obligations. Following the case Jones V Lipman [1962]11
where Mr. Lipman entered into an agreement to sell his house to Mr Jones. He then changed
his mind and refused to sell the house. To avoid the contract, he incorporated a company A Ltd
and transferred the house to A Ltd. The judge Russell J held that “ the company was a creature
of Lipman and it is device and a sham, a mask which he holds before his face in an attempt to
avoid recognition by the eye of equity”.

7 Principles of Company Law in Malaysia, page 36, Malaysan Law Journal

8 Company Law in Malaysia, 2nd Edition, Cengage Learning
9 Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1996] 3 MLJ 533
10 Macaura v Northern Assurance Co Ltd [1925] AC 619
11 Jones v Lipman [1962] 1 WLR 832

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 The third circumstance will be looked from the perspective of a Malaysian case where
the court decided to pierce the corporate veil. As in the case of Hotel Jaya Puri Bhd. v National
Union of Hotel, Bar & Restaurant Workers [1980]12 where it involves group of companies. In
this case, the hotel company had a wholly-owned subsidiary to carry out its restaurant business
in the hotel. Unfortunately, the restaurant had to be shut down due to huge losses and they had
to retrench the workers. The court pierced the veil to look for who is responsible for damages
than to other subsidiaries and in this case specifically, the court ordered the hotel company to
pay termination compensation to the employees on the basis that the hotel company and the
restaurant company were in fact one group enterprise thus, the workers were basically working
for one entity. Therefore, the hotel company was held liable to the restaurant’s employees.

12 Hotel Jaya Puri Bhd V National Union of Hotel,Bar & Restaurant Workers [1980] 1 MLJ 109

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 Reference(s)
Cases:
Newborne v Sensolid (Great Britain) Ltd [1954] 1 QB 45

Kelver v Baxter (1866) LR 2 CP 1974

The Golf Cheque Book Sdn Bhd and Anor V NIlai Springs Berhad (2005) MLJU 472

Salomon V Salomon & Co Ltd [1897] AC 22

Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1996] 3 MLJ 533

Macaura v Northern Assurance Co Ltd [1925] AC 619

Jones v Lipman [1962] 1 WLR 832

Hotel Jaya Puri Bhd V National Union of Hotel, Bar & Restaurant Workers [1980] 1 MLJ 109

Statutes:
Companies Act 1965

S 16 (5) Companies Act 1965

S 35 (1) Companies Act 1965

Common Law

Pre-Incorporation Company

Book(s):
Chan, W. M. (2014). Company law in Malaysia. Singapore: Cengage Learning Asia.

Rachagan, S., Pascoe, J., & Joshi, A. (2002). Principles of company law in Malaysia. Kuala
Lumpur: Malayan Law Journal. Page 36,157