Question

Company Law

Q1.

The doctrine of separate legal personality and limited liability are entrenched company law concepts. However, there were times these concepts were abused. Explain the common law situation where the court is willing to disregard these concepts. Support your answer with decided case law. (20 marks)

Q2.

Bill is a fashion designer who has just returned to Malaysia from Milan, Italy. He decided to set up a fashion house targets at the upper income female office executives. However, since he had left Malaysia for more than 20 years, now he is unfamiliar with the local situation. Bill decided to work together with his childhood friend Tongli. Bill told Tongli about his business plan and Tongli was interested in the plan. Tongli said to Bill, “Don’t worry, Bill. I will take care of purchasing everything necessary for the new company. You can concentrate on the company’s registration and recruiting investors.” Bill agreed to the separation of workload. On 1st December, 2019, Tongli purchased a unit of 4-storey corner shop lot in a strategic location at a value of RM2 million. Tongli further purchased a sewing machine with multiple functions at RM80,000. Bill is very pleased with the shop lot and the sewing machine. By this time, Bill has successfully recruited 30 potential shareholders. Bill named the new company ‘Princess Fashion House Sdn Bhd (PFH)”.

PFH was incorporated on 1st March, 2020. Soon after the incorporation, Bill left for Milan to purchase some latest fashion for the company. On 10th April, 2020, ten (10) shareholders visited PFH. Tongli was at the company and he attended to the shareholders. One of the shareholders, Mr Bernard asked Tongli about the prices of the shop lot and the sewing machine. Tongli informed Mr Bernard that the property costs RM2.5 million, and the sewing machine was at RM90,000. Mr Bernard informed all the shareholders. Several shareholders thought these properties were too expensive. Mr Bernard informed the board of directors and requested the board to investigate the matter. Soon the board of directors found out the real value of the shop lot and the sewing machine, they were very unhappy. They want PFH to bring an action against Bill and Tongli. Advise PFH. (30 marks)

Answer 1

answer-

1-Doctrine of seperate legal identity means that company has its own legal existence seperated from its owner. Company under this doctrine can be sued and fined by court. Owner will not be held liable for the wrongful action of company.

Doctrine of limited liability means shareholder of a company will not be liable more than their investment in the company.

But, Court can disregard these situations by lifting or piercing the corporate veil. In this, court look beyong the company as legal person and put aside limited liability of shareholders by holding them personally liable for the corporation’s actions or debts.

The situations in which court lift or pierce the veil are situation when activities in business are conducted for fraud to decieve investors or creditors then court can lift the veil. The case of Inter Export LLC v Townley [2019] EWCA Civ 2068 where court found that the corporate veil could be pierced so that directors could be personally liable for fraudulent misrepresentation.

Situation where company is acting as an agent of shareholders. Court can apply the principle of vicarious liability and the shareholders will be responsible for the acts of the company. In New York, Walkovsky v. Carlton is a leading case on piercing the corporate veil.

Situation when tax evasion practices are performed. n such cases, the courts lift the veil of the company to find out the real state of affairs of the company. The leading case of Vodafone was an example of the corporate structure formed to evade the taxes.

Situation when company tried to avoid legal obligations then Court can disregard the legal personality and hold the shareholders with unlimited liability.