The effect of incorporation of the company is laid down under the Section 16(5) of

the Companies Act 1965. Whereby under this provision it was stated that the company shall
be a body corporate by the name contained in the memorandum capable forthwith exercising
all the function of an incorporate company. By means that the company is a legal person that
is a separate entity from its members. This has certainly shows in the leading case of
Solomon v Solomon. Where in this case, the company was incorporated by Salomon and his
family as the shareholders. The case came into dispute when the business went into
liquidation. Salomon cannot pay the debt as the asset of the company was insufficient.
Therefore, the liquidator sued Salomon. The House of Lord held that even though Salomon
having control over the company, he is not an agent or trustee of the company. Hence,
members were not liable in respect of the companys liabilities that concludes company is
liable for the debt. Salomon later appeal the case and the appeal court followed the decision
of the previous judgement.
This is shown that, once the company is became incorporated a company is regarded
as an articial person, who has the rights and responsibilities similar to a living person, has
been widely accepted and applied in the world of business, trade and industry. Once it is
incorporated by complying with the prescribed procedure, it comes into being and is a
separate legal entity from its members and officers. Malaysian case has followed the decision
of Salomons in the case of Re Application by Yee Yut Ee 1, which in this case the High Court
held that the director is not liable for the companys debt.
Where is the case of Fairview Schools Bhd v Indrani Rajaratnem 2, the judge held that limited
companies are formed so that its shareholders are not showing to unlimited liability for the
companys debt. Thus, share capital is forced into the company which thus became obtainable
to the companys creditors.3
However, the incorporation company can be abused by lifting the corporate veil.
Notwithstanding that company is a separate legal entity and distinct from its membership,
corporate veil can be lifted by the court by some reason. This will make an officer to be

1 (978)2 MLJ 142

2 (No.2) [1998] 1 MLJ 110 CA
3 http://www.lawteacher.net

responsible to the company by the fiduciaries duties that he owes not to others members but
to the company itself.4
Certainly stated under Section 36 of the Companies Act that if at any time the number
of member is reduced to two person more than six months but the business is still ongoing,
they are liable for all the companys debt. It is also supported by the provision of Section 67
(3), that if a company had breached the prohibition against providing financial assistance for
the purchase of its own shares, the court may order to lift the company veil and makes the
officers in default and liable and guilty for an offence. The court may also lift the veil of
company accordance to Section 121 (2) if the officer of the company who acted as on behalf
of the company is not properly written the companys name will be held liable of an offence
and court may ordered the officer to be liable for the due amount by lifting the corporate veil.
An officer will also be held liable when contracting debt without credible of repayment debt
as laid down under Section 303 (3) which must have to be read together with Section 304 (2).
Under these provisions it was stated that, when the officer have the knowledge that the
contract will hold debt and not able to pay the debt will be found guilty and the court may lift
the company veil. Another provision that governs the exception of separate entity is provides
under the Section 365 (2) (b) which every director or manager of the company shall be liable
for the debts of the company which the dividends paid have exceed the profits that the
amount may be recovered by the creditors. The court will lift the company veil so that the
director will be personally liable. It was strongly shown in the case of Re William C Leith
Bros Ltd.5, which the principle of this case was a fraudulent trading. The directors is still
carrying the business and purchased goods by credit which was at that time the company was
insolvent. The court held to lift the veil of the company.6

4 lawteacher.net /free-law-essays/company-law/a-company-is-a-legal-entitycompany-law-essay.php
5 [1932] 2 Ch 71
6 Malaysian Company Law, Chan & Koh, 2006, 2nd Edn, Sweet & Maxwell