The Principle of Corporate Personality

INTRODUCTION

Generally, the aim of a company in Malaysia is to make profits. A company by law is a different person from its subscribers to the memorandum. It involves the principles of corporate personality which include perpetual succession, proprietary interest, debts and the process of suing and being sued (Foss v Harbottle). It is concluded with the main instances of lifting the veil of corporation, such as number of membership, fraudulent trading, evasion of legal obligations, holding and subsidiary company, and publication of name.

PRINCIPLES OF CORPORATE PERSONALITY

Corporate personality is the fact stated by the law that a company is recognized as a legal entity distinct from its members. A company with such personality is an independent legal existence separate from its shareholders, directors, officers and creators. This is famously known as the veil of incorporation.

As a result of corporate personality, a company has perpetual succession. It simply means the company is everlasting and will continue to do business until it is properly wound up. As a separate legal person, a company will not be affected by changes such as death, transfer of shares or resignation of any members but will continue to exist despite the number of times the changes of membership occur. Even if all the members die, it will not influence the privileges, immunities, estates and possessions of a company. The principle of perpetual succession is clearly illustrated in the case of Re Noel Tedman Holdings Pty Ltd (1967).

Proprietary interest is another principle of corporate personality. Proprietary interest refers to the ability of a company to own property like a land or building. A company as a body corporate has every right to acquire, hold and dispose of as well as transfer property in its own name. Since a company gain full ownership of property, any changes among individual membership would not affect the title. According to the case of Macaura v. Northern Assurance Co. (1925), the property of a company is not the property of the shareholders; it is the property of the company. Each shareholder has no legal rights on the capital and assets held by the company (Lee, 2005).

Debt is also the principle in corporate personality. A company being a legal person has an unlimited amount of debts. The company is fully responsible for the debts that will be incurred during the course of business. However, this principle does not apply to its members with a limited liability. In case the company is insolvent, members are not required to pay more than the initial amount invested on their shares or guarantee. Their liability is limited to the amount of shares they subscribe or any unpaid value on such shares. Therefore, creditors of the company cannot take any action against the members if the company went into liquidation as established in Salomon v. Salomon Co Ltd (1897) (Lee, 2005).

The other principle of corporate personality is demonstrated in the case of Foss v. Harbottle (1843). A company may sue or be sued in its own name. The company must take the initiative to sue the other party by using its own name or handle any possibilities of criminal complaint that might be filed against it. For instance, John as a director cannot take an action against one of his employee for money laundering. It is the company’s position to sue the employee for the wrongdoing.

MAIN INSTANCES OF LIFTING THE VEIL OF CORPORATION

Although the company and its members were protected by the veil of incorporation, it has its limitations too. It means that, the veil of incorporation sometimes can lead to injustice where the principle is misused. In order to prevent injustice, the court decided to lift the corporate veil. Below are main instances of lifting the corporate veil.

The first main instance of lifting the veil is number of members below two. When the company membership is less than two, the sole member left in the company is assumed to be a sole owner. By right, the single member can only operate the business in sole proprietorships. He or she can still continue to operate their business within six months period. After the said six months period, the member would be personally liable for any debts incurred from that point onward. If the company still continues to operate after six months, the corporate veil will be lifted and the company and members would be guilty under Section 36 of Companies Act 1965 (Lee, 2005).

The second is doing fraudulent trading. The court may be willing to pierce the corporate veil if it is found that the owners are plotting fraudulent scheme behind the veil of incorporation. By carrying on a business with the intention to cheat others, the company are said to be doing fraud where the veil will be lifted. When this happens, all members of the company with knowledge of this action are guilty of the crime and may be put responsible for the debts and other liabilities of the company without any limitation. By referring to the case of Re William C. Leitch Brs Ltd, the company was insolvent but one of its director still run the business normally by purchasing goods from its suppliers on credit. Since there is element of fraud existed, the court disclosed that particular director to be personally liable for the debts (McGee, 1992).

The third is evasion of legal obligations. The court will not hesitate to lift the corporate veil if its members used the veil as a way to avoid an existing legal obligation. These normally occur when individuals used the doctrine of separate legal entity to do some forbidden act. In law, an individual is not permitted to use the company’s name with the power in his hand to do something that is prohibited from doing as illustrated in Jones v Lipman. In this case, the defendant entered into a contract to sell land to the plaintiff but he transferred the land to a company under his control. The court ordered the corporate veil to be lifted as the defendant used the company as a device to avoid his contractual obligations (Sulaiman et al, 2008).

The fourth is holding and subsidiary company. A holding company dominates other companies by owning some or all of their shares. Those other companies were known as subsidiary companies. According to Lee 2005, a holding company and its subsidiary companies are generally two separate legal entities. In other words, each of them had their own corporate veil. The corporate veil will usually be lifted when a holding company produces group accounts known as consolidated financial statement together with all its subsidiaries. In the event that something happens to the subsidiary company, the holding company would be responsible for it and can be sued as if they were a single entity. This is shown in the case of Hotel Jaya Puri Bhd. v National Union of Hotel, Bar & Restaurant Workers & Anor (1980) where the court held that the hotel and its restaurant are one group enterprise (Thavarajah & Low, 2009).

The last is publication of name. The use of company’s seal or write out of any business letter, statement of account, invoice, official notice, bill of exchange, cheques, negotiable instruments and other documents requires the company’s name to be stated. On the seal and all other publications, it must have the name of the company with readable letters and company’s number. The veil will be lifted and an officer will be guilty of an offence under Section 121 (2) Companies Act 1965 if he or she omitted the company’s name in respect of business documents signed on behalf of the company. For example, if Darren signs a contractual agreement with other company without his company’s official name, the contract will be treated as illegal and he may be put behind bars (Lee, 2005).

CONCLUSION

A company in law is a separate person from its subscribers to the memorandum of association. In the principle of corporate personality, a company is classified as a separate person from its member. Therefore, company as a separate legal entity should have perpetual succession, proprietary interest, debts, limited liability and may sue and be sued in its own name. On the other hand, we also note that the main instances of lifting the veil of incorporation are the number of company members, fraudulent trading, evasion of legal obligations, holding and subsidiary company and publication of names. All in all, we can define that the effect of incorporation of a company means it has a separate existence.