Separate Legal Personality: A Non-Human Person?

If a Company is liable for legal action, do the shareholders and directors automatically become liable as well? How can a Company be liable when it is not actually a person?

A) Separate Legal Personality

A company in law is equal to a natural person and has a legal entity of its own and that such entity is entirely independent from its shareholders. In the case of Salomon v Salomon & Co Ltd [18971] AC 22 HL, which concerns the legitimacy of limited liability within a single beneficially owned company, the court held that It is a fundamental feature of company law that a company is a separate entity, distinct from its shareholders. The court then continued,

“From a legal sense, a company must be treated like any other independent person, with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what those rights and liabilities are.”

Such principle has been codified in Malaysian statutes. This can be seen 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.

Consequently, the course of action for the company’s creditors is limited only to the company itself, and not its shareholders or even directors. A related doctrine is the doctrine of limited liability.

B) Piercing the corporate veil

Notwithstanding our earlier discussion, courts may disregard the doctrine of separate legal personality and limited liability. This is commonly referred to as lifting or piercing of the veil of incorporation. Although there are no specific provisions governing this exception, cases throughout have been reluctant to maintain a company’s legal personality when there is fraud, deception or attempts to avoid a legal duty by the shareholders or directors, to the detriment of present or future creditors of the company.

In Re Darby [1911] 1KB 95, the court found that the promoter had committed fraud which sufficient to lift the veil of incorporation. This is contrary to a situation where there is in an absence of fraud. In those circumstances, the court would adhere to the separate legal personality doctrine.

In Jones v Lipman [1962] 1 All ER 442, the first defendant after agreeing to sell his property to the plaintiff, transferred it to a company of which he and his solicitors’ clerk were shareholders and directors for £3,000. Here, the defendant’s company was deemed a creature of the defendant or rather a mask which he holds before his face in an attempt to avoid recognition by the eye of equity. As a result, the plaintiffs obtained a decree of specific performance against the company.

Additionally, a Malaysian case by the name of Law Kam Loy v Boltex Sdn Bhd [2005] 3 CLJ 355, held,

“That in light of the more recent authorities such as Adams v Cape Industries Plc, it is not open to the courts to disregard the corporate veil purely on the ground that it is in the interests of justice to do so. The special circumstances including cases where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting to fraud in equity must be present.”

Apart from fraud, the courts have also lifted the veil of incorporation in cases where the veil was used in an attempt to evade legal obligations. The case of Gilford Motor Company v Home [1933] Ch 935 involved an ex-employee who incorporated a company to avoid his obligation under a contract with his former employer. Here, it is implicit in these cases that there were attempts by the courts to ignore the separate legal personality doctrine and to lift the corporate veil.

Furthermore, the interests of the creditors, should also be considered in ordering that the veil of incorporation to be lifted for the purpose of achieving justice. In Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd [1988] 1 MLJ 97, where the Supreme Court decided that it was proper to lift the corporate veil due to the fact that the majority shareholder held almost all shares in several companies and was regarded to be the alter ego of the companies.

A similar decision arose in Hotel Jaya Puri Bhd v National Union of Hotel, Bar and Restaurant Workers [1980] 1 MLJ 109. In this particular case, the Federal Court summarised the legal position on departing from the doctrine of Separate Legal Personality.

“It is true that while the principle that a company is an entity separate from its shareholders and that a subsidiary and its parent or holding company are separate entities having separate existence is well established in company law, in recent years the court has, in a number of cases, by-passed this principle if not made an inroad into it. The court seems quite willing to lift “the veil of incorporation” (so the expression goes) when the justice of the case so demands. Thus the facts of the case may well justify the court to hold that despite separate existence a subsidiary company is an agent of the parent company or vice versa as was decided in Smith, Stone and Knight v Birmingham Corporation [1938] 4 All ER 116”

This is aligned with the case of Gurbachan Singh Bagawan Singh & Ors v Vellasamy Pennusamy & Other Appeals [2015] 1 CLJ which stressed that disregarding the corporate veil should be applied in order to prevent the abuse of corporate personality.