The Doctrine of Separate Legal Personality
The English case of Salomon v Salomon[1] is the locus classicus on the doctrine of separate legal personality. In Company Law, the doctrine of separate legal personality simply means that a company is a separate entity from its members, i.e. there is a ‘veil’ that separates the company and its members in terms of liability, property, capacity and in relation to acts done of acquisition of rights.[2]
In Malaysia, this principle has been codified in section 20 of the Companies Act 2016, which provides:
A company incorporated under this Act is a body corporate and shall:
(a) have legal personality separate from that of its members; and
(b) continue in existence until it is removed from the register.
The doctrine of separate legal personality was founded to enable businesses to be conducted. It is in essence to protect directors, controllers and/or shareholders of the company from being personally liable in respect of the future conduct of the company’s affairs.[3]
However, this doctrine has been abused to allow the individuals i.e. the directors, controllers and/or shareholders to hide behind the corporate veil to avoid any legal obligations. In these instances, the corporate veil could therefore be lifted.
Note: The doctrine of separate legal personality does not apply to the following types of business structures:[4]
1. Sole proprietorship
2. Partnership
Lifting the Corporate Veil
Fraud / Sham
In cases where the company is used for fraudulent purposes, the corporate veil will be lifted.[5] There must be evidence of actual fraud or some conduct amounting to fraud in equity to justify the lifting of the corporate veil.[6]
In such instance, the Court will disregard the doctrine of separate legal personality if “there are signs of separate personalities of companies being used to enable persons to evade their contractual obligations or duties”.[7]
The statutory provision of section 540(1) of the Companies Act 2016 (formerly known as section 304(1) of the Companies Act 1965) is often being relied upon to have the corporate veil lifted to allow the Court to pierce or lift the corporate veil of a company when it appears that the business of the company has been carried on with intent to defraud its creditors, so as to have the individuals responsible for fraudulent trading to be personally liable.[8]
“Sham” means something that is intended to deceive.
Another example is that a company being used as a sham device as can be seen in the English case of Gilford Motor Company v Horne,[9] where a former employee who was bound by his employment contract to not solicit clients from his former employers once he leaves the company, instead went on to establish a competing company to solicit clients from his former employer. He is one of the shareholders in the competing company. The Court held that the corporate veil could be pierced (or lifted) as the company was a sham device or an instrument of fraud which was set up by the former employee to evade his contractual obligations.[10]
Cases where the Corporate Veil May Not Be Lifted
(1) The relief sought does not require the veil to be lifted.[11]
In Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor, the Court held that it was not necessary to invoke the doctrine of 'lifting the corporate veil' as it was an undisputed fact that the subsidiary was wholly-owned by the holding company, and it had not been challenged that the holding company, by proxy – through its nominees – managed the subsidiary, and hence the composition, type, shareholding and control of the subsidiary stood in front of the veil. Therefore, there was no need to lift the veil to unveil them.[12]
(2) The passing of time.[13]
In Lim Sung Huak & Ors v Sykt Pemaju Tanah Tikam Batu Sdn Bhd, the Court held that the corporate veil could not be lifted as a long time of 16 years had passed, and the founding subscribers of the defendant company, who had signed the relevant contract on behalf of the defendant company, no longer appeared in control of the defendant company.[14]
Conclusion
This doctrine of separate legal personality essentially exists to protect directors, controllers and/or shareholders of the company from being personally liable for the obligations and/or liabilities of the company. However, legal safeguards are crucial in lifting the corporate veil in order to prevent the potential wrongdoers from misusing it as well as to ensure that the rights of the fraud victims are protected.
Sources: [1] Salomon v Salomon [1879] AC 22 [2] Ong Leong Chiou & Anor v Keller (M) Sdn Bhd & Ors [2021] 3 MLJ 622, [1] [3] [2021] 3 MLJ 622, [99] [4] https://www.ssm.com.my/Pages/Publication/Booklet/document/LLP_bkengLS_update.PDF accessed on 20/5/2021 [5] [1879] AC 22; [2021] 3 MLJ 622 [6] Law Kam Loy and Anor v Boltex Sdn Bhd and Others [2005] 3 CLJ 355 [7] Ibid [8] China Idea Development Ltd v Ooi Kee Liang & Ors and Another Case [2020] 8 MLJ 527 [9] Gilford Motor Company v Horne [1993] Ch 935 [10] Ibid [11] Berna Collier, ‘The Application of the Rule in Salomon v Salomon in Malaysian Company Law’ [1998] 2 MLJ Ixv [12] Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1996] 3 MLJ 533 [13] Berna Collier, ‘The Application of the Rule in Salomon v Salomon in Malaysian Company Law’ [1998] 2 MLJ Ixv [14] Lim Sung Huak & Ors v Sykt Pemaju Tanah Tikam Batu Sdn Bhd [1993] 3 MLJ 527
Authored by Nicholas Teh & Aaron Thye
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