Veil Of Incorporation Essay Example

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 liquidation, 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 offense by neglecting the separate legal personality of a company and lift the veil of incorporation.

The veil of incorporation can be lifted by 2 ways, one by Statute (Statutory exception), another is by Case Law (Judicial exceptions). Lifting the veil by Statute Companies Act 1965 required that at least 2 members are required in order to operate a company. Section 36 of the Companies Act 1965 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 persons for a period of more than six months, the court has the right to lift the veil of incorporation. It means that the only person who is a member of the

company during that time and is still carried on the business after those six months and with fewer than two members will be liable for the all the obligations including debts of the company contracted during the periods after those six months.

Furthermore, the member may be sued by others. Therefore, companies cannot 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. The 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—  is a director of the company b) is a director or as having agreed to become a director and who named in the prospectus; is a promoter of the company; or  issue and/or authorized the company’s prospectus. According to the Section 67 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 ringgit 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 RM1,000. Companies Act 1965 section 121(2) requires the company in its correct form to display 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, cheque or other negotiable instrument or any endorsement, orders, receipts or letters 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.

Section 169 of the Companies Act 1965 required that for a group of companies that have a holding and subsidiaries relationship, the directors of the holding company must prepared and filed 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 company 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 the 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 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 (Judicial 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. Gilford Motor Co Ltd v Horne (1933) is describing the situation stated above. Horne (the first defendant in this case) who was employed as the managing director by the Gilford Motor Co Ltd (the plaintiff in this case).

When Horne was employed, he was required to sign a contract of employment. According to the contract that had signed by Horne was included a commitment which he cannot seek the business from the plaintiff’s customers once he resigned from the company and involved in the same industry with the company. After three years, Horne resigned and forms his own company, called JM Horne & Co. Ltd. , the second defendant, in competition with existing company. Horne, his wife and an employee was the shareholders and directors of the JM Horne &Co. JM Horne & Co.

Ltd. then began to steal the customers of the Gilford Motor Co Ltd. by sending out circulars to someone who was at the crucial time customers of the Gilford Motor Co Ltd. Then, the Gilford Motor Co Ltd tries to stop Horne and his company from stealing its customers. In order to avoid Horne and his company from stealing their customers, an injunction was granted for both Horne & his company by the plaintiff. The court held that the company was a mere cloak or sham for the purpose is to enable Horne committed a violation of his agreement.

Thus, the veil of incorporation is lifted and causes Horne and his company becomes one person and Horne will be liable. Another case related to this situation

is in the case of Jones v Lipman. Mr. Lipman entered into a contract for the sale of land to Mr. James. However, Mr. Lipman subsequently changed his mind and he does not want to complete the sale anymore. Mr. Lipman 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. Lipman as one person. Thus the court lift the veil of incorporation and Mr. Lipman must transfer the land to Mr. Jones. Furthermore, the veil of the company can be lifted by the court when the controller was 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 this case. The holding company was the principal while the subsidiary company was 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 a situation can be found in the case of Re FG (Films)

Ltd. (1953). An American company attempt to be a British company to enjoy subsidy given to the British company. 90% 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 its 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. FG Films, the applicant company was seeking for the 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 will be treated as one economic unit.

This will allow the court to lift the cooperate veil of the company. DHN 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 DHN Food Distributors Ltd itself is asking for the veil to be lifted in this case. DHN was the holding company and it controls three companies (included its two subsidiaries) at the same time.

The wholesale cash-and-carry grocery 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 a 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 compensation for the value of the land because the land was owned by it.

However, the business of Bronze Investment Ltd was run by DHN Food Distributors Ltd and Bronze Investment

Ltd does not involve in any business activities since it was commenced. Therefore, DHN 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 DHN 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 DHN 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 DHN Food Distributors Ltd were the same as those of the Bronze Investment Ltd. Therefore, the compensation for the disturbance to the land was not able claimed by the DHN 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 a justice of the case requires it, the court was allowed to lift the veil of incorporation. Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Workers & Anor was describing this situation. This case is related to a restaurant and the workers of the restaurant. Jaya Puri Chinese Garden Restaurant was the subsidiary restaurant owned by the Hotel Jaya Puri Bhd. The restaurant was bankrupt and the some of the workers retrenched by the restaurant (contract of the workers’ were terminated).