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Jamie Foo

on 10 July 2014

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Transcript of THE LAW

SLE vulnerable to abuse...
Sec 16(5): Body Corporate
RM 1.50
Thursday, July 10, 2014
LAW 5201, GROUP 2
SLE is significant!
What can be done to strengthen SLE?
- to amount of shares & guarantee
Salomon's case
Legal Person
- confirmed doctrine of SLE
- adopted as the law of most countries
The benefits of Separate Legal Entity from 3 point of views:
Government's point of view:
-Can charge tax on company level & individual level
Shareholder's point of view:

Trevor Ivory Ltd v. Anderson*9 the New Zealand Court of Appeal
Limited Liability
Transferable of share
can have dual capacities
Issue: The issue was whether the owner of the company or company was personally liable in contract and tort.

The Court held not. Although it was his expertise as an agricultural consultant that had led the plaintiff to contract with his company, he had made it clear, by forming the company and trading as the company, that the business was being carried on with limited liability. He had assumed no extra personal duty.

In company, share is transferable easily; unlike p’ship/sole proprietor, generally share is not transferable.

- s/h can be other person, i.e.: Salomon's case
@ Date of Incorporation
@ Constitutional Docs
@ Persons, i.e. subscribers/members
Company's point of view:
Artificial Legal Entity
Salomon case recognized corporation as a “legal person” that empowered its own right ,duties and obligation

Capability to sue and can be sued
Power to acquire, dispose and hold property
Company may enter contract with its shareholders
Secretary of State for Trade and Industry v. Bottrill [1999]

Naga Brahma Trust vs Translanka Air Travels P.Ltd. (1995)

Parent and Subsidiary is SLE

Metropolitan Saloon Omnibus Co. Ltd. v. Hawkins (1859)
Issue: Plaintiff take a legal proceeding in respect of a libel imputing to it insolvency, mismanagement and dishonest carrying on of its affairs.

Rajendra Nath Dutta v. Shibendra Nath Mukherjee 
Issue: In this case, a lease deed had been executed by the Directors of a company but without its seal. Later, other Directors filed a suit on the grounds that the defendants had fraudulently added certain terms to the lease deed.

Decision: Calcutta High Court held that if the company contends that a wrong has been committed against it, legal proceedings for redressing the same should be instituted by the company in its own name.

Good Profit Development Ltd v Leung Hoi (1992)

Issue:Hoi claimed that land sale to him with two defendants
(director and shareholder) was enforceable because he claimed that
GDP Ltd was alter ego of the directors, land was in trust for them.
Thus was bound by their action

Mere fact that the two shareholder defendants totally controlled
GPD Ltd, and it had no other business but to hold the land, does
not justify departing from Salomon.
Nicoll v. New York & Erie R. R. Co
Defendant company had taken title to a land and the court was asked to declare the deed void because the company's existence was for a limited term only, and the contention was that it was unable to acquire a title in perpetuity.

Mr Bottrill claimed redundancy money when the company went insolvency. The claim was turned down on the grounds that he was not an employee.

However, in the Court of Appeal held that Mr Bottrill had a genuine contractual relationship with his company where he was an employee of his limited company despite the fact that he was the Managing Director and a sole shareholder at the material time.

Plaintiff were in an ongoing dispute with freehold owner, Belhaven Pubs Ltd for misrepresentation about level profitability of the pub. However, defendant has ceased
Trading and no asset left. They requested their parent company to enforce judgment.

The Court of Appeal rejected that a group of companies could be regarded as a single entity except in very limited circumstances where the company was a façade concealing true facts.

Company Never Dies;
It Lives Forever......

Due to the attribute of perpetual succession, company shall continue to exist unaffected by the change in composition of its members
Perpetual Succession
Company as a whole
Limited Liability
Allow Dual Capacities
What Should be Done?
Parent and Subsidiary are SLE
Shareholder put himself as employee of the company so that he will get paid when the company is insolvent / wound up
Shareholders escape serious risk of the company by arranging himself to become a secured creditor
Pepper v Litton (1939)
The plaintiff sued the defendant after he was unable to claim his royalties due under a lease from Dixie Splint Coal Company. Because the defendant claimed back his salary from the company and file for a voluntary wound up.

"Court says that you can’t hide behind a one man corporation to avoid being liable to creditors. Therefore, Litton has to pay for Pepper’s royalties."

Pepper v Litton
The doctrine of separate legal entity is still essential in today’s economy because of all the benefits from the three points of view namely government, shareholders and the company
However, the doctrine is still vulnerable to abuses. Other legislation and measures can work as a complement to this doctrine.

a)Control activities of subsidiary and use subsidiary to evade legislation
Re FG Films Ltd [1953]
b)Movement of assets from Subsidiary to Parent
Creasey v Breachwood Motors Ltd (1992)
c)Use subsidiary to evade director’s fiduciary duties
Robinson v Randfontein Estates Gold Mining Co Ltd (1921)
The courts disregarded the separation between an American company and its British subsidiary that it had established in order to claim that a film it had made was British.
The company was incorporated in England with a capital of £100, divided into 100 shares of £1 each. 90 out of 100 shares of the company were held by the American director, who was also the president of the American company, and the remaining ten were held by a British director. The company made a film ‘Monsoon’ but the Board of Trade refused to register it as a British film because the film had in reality been made by a large American Company so the matter come to court.
Re FG Films Ltd [1953]
Mr Creasey sued Breachwood Welwyn Ltd for wrongful dismissal and claim for the compensation. However, before he could claim, Breachwood Welwyn Ltd ceased trading, and all assets were moved to Breachwood Motors Ltd, which continued the business. Other creditors were paid off, but no money was left for Mr Creasey's claim. Mr Creasey applied for enforcement of the judgment against Breachwood Motors Ltd.
The court held that the directors of Breachwood Motors Ltd, who had also been directors of Breachwood Welwyn Ltd, had themselves deliberately ignored the separate legal personality of the companies by transferring assets between the companies without regard to their duties as directors and shareholders.
Creasey v Breachwood Motors Ltd (1992)
A director of the plaintiff company had purchased property in circumstances under which it was his duty to have acquired the property not for himself but for the company, and thereafter re-sold the property to the company.
The court held that ‘where one man stands to another in a position of confidence involving a duty to protect the interests of that other, he is not allowed to make a secret profit at the other’s expense or place himself in a position where his personal interests conflict with his duty'.
The company was held to be entitled to claim from the director the profit he had made out of the transaction.
Robinson v Randfontein Estates Gold Mining Co Ltd (1921)
Claim back the profit he earn
a) Director run illegal business using company
Secretary for Justice v Lee Chau Ping & another [2000]
The director of the company had been knowingly a party to carrying on the business of the company with intent to defraud its creditors.
Company winding up at the end and the matter was brought to court whether he should personally liable for all the company’s debts for the fraudulent trading or not.
The defendant absconded after warrants of arrest were issued alleging that she had committed drug trafficking offences. Court orders were then made against the realizable property of the defendant
i.e. H.K Government will take over the realizable property of the defendant.
The court held that the realizable property of the defendant included not only property held in the name but aso those company controlled. Therefore, the property held in the names of companies controlled by the defendant were realizable property of the defendant and should be taken over by the government.
b) Director take excessive risk leads creditor lack of protection
Re W C Leitch Ltd [1932]
Judge Bromley Q.C. held that Mr Barford was guilty of fraudulent trading. He ordered £156,420 be contributed for the debts and liabilities, containing a compensatory element for the debts that were part of the fraudulent trading and a punitive element of £25,000
The judge also held that there was "real moral blame" in continuing the company's trading when there was no reason to think that the company could pay its debts as they fell due.
WHY SLE does not apply to sole proprietorship?
No existence apart from the owners
Complete control of business and decision
Entitled to all profits and are responsible for all business’s debts, losses and liabilities.
No agreements or articles stipulating how the business must be managed

WHY SLE does not apply to general partnership?
The business assets and business debts are jointly owned by the partners. 
Each partner is an agent for the partnership with the power to legally bind the partnership
Actually a person can simply set up a company by finding another person who is not familiar to be shareholder.
After that he can generate the profit and leave the liability with limited liability through incorporation.
Therefore, people might be form a company to take excessive risk or trying to commit fraud because of Separate Legal Entity.
Private companies registered with a capital of less than £5000 rose from 20% to 33% from 1897 to 1901 in the England (P L Cottrell, Industrial Finance 1830-1914: The Finance and Organisation of English Manufacturing Industry (Methuen, London 1980), 163).
Supported by the fact:

The Court of the Exchequer held the action to be maintainable.

Pollock CB said: “That a corporation at common law can sue in respect of a libel, there is no doubt. It would be monstrous if a corporation could maintain no action for slander of title through which they lost a great deal of money.

It was held that the company was entitled to retain the land. The Court said: "The power to purchase lands, where it is necessary for the other purposes of the corporation, is a power incident at common law to all corporations, unless they were specially restrained by their charters or by statute…But one of the general powers of any corporation is the holding, purchasing, and conveying of such real estate as the purposes of the corporation require."

By expanding Salomon principle , every company in a group of companies is a separate entity and retain its distinct entity status with separate liabilities and assets.

Emergence of corporate group




The Law Malaysia

The company remains the same entity in spite the total change in memberships. The change in shareholding pattern will not affect the ownership of leasehold right. The transferring or inviting shares from others cannot treat as transferring leasehold right.
Third Party
Sublet to

by transfering shares
The plaintiffs had filed the suit against defendant ,
an injunction restraining the defendant from subletting the desired premises by transferring majority of the shares allowing premise to be occupied by third parties in breach of covenant of lease deed.
Naga, owner
Translanka, tenant
of lease deed
Approaches to Prevent Abuse to SLE Doctrine
Enforce Code of Ethics for Company Directors
Produced by Companies Commission of Malaysia

Many multi-national corporation has their own code of business conduct and ethics

Make the code as one of the statute with specific penalties if non-compliance

Enforce Malaysian Code of Corporate Governance 2012
Issued by Securities Commission Malaysia

Consists of 8 broad principles with a total of 26 recommendations

PLC required to report

Make the code as one of the statute for mandatory compliance by all PLC

Sarbanes-Oxley Act 2002
Transform the
Role and Impact of
Malaysian Institute of Directors
Director of a company is also considered a professional like doctors, accountants and lawyers

Director should also have a body to govern their conduct and professionalism
Special requirements should not be limited only to PLC
Instead, the requirements should be impose on the large private limited companies as well

Currently, they are only forced to comply to some of the requirements because of the request of their creditors or shareholders

Without regulators’ involvement in the process, they can disclose information within their discretion instead of complying to high standards
Roles & Responsibilities of the BOD
Composition of BOD
Independence of BOD
Foster Commitment of BOD
Relationship between Company and Shareholders
Integrity in Financial Reporting
Risk Management and Internal Controls
Timely and Quality Disclosure
"This Act is probably the best law to protect investors today"

Some provisions that enhance corporate governance and corporate accountability can be emulated
Mandatory year end report on internal controls in place and its effectiveness

Appoint a new external auditor every 5 years

Auditor opinion on effectiveness of internal control

CEO and CFO accountable to all financial information published
MID can have regulatory role to ensure credibility of directors and public interest is continuously upheld

They should ensure
directors have high standard of professionalism, integrity, expertise, experience and can add value to the board
Refer to
Singapore Institute of Directors
Institute of Directors in UK

who have significant influence in business community

Published own code of conduct for directors

Has professional qualification programmes and courses

Produce research and policy papers

Financial Reporting
Statutory Audit
M'sian Code of Corporate Governance 2012

Should be comply by both
Public and Private Limited Companies depending on a
threshold of annual gross profit

For the protection of creditors
Full transcript