Question

Section 20 of the companies act 2016 states that a company incorporated under this act is a body corporate.

explain using the case of solomon v solomon (1896)

Answer 1

Section 20 of the companies act 2016 states that a company incorporated under this act is a body corporate.

Definition of "Company"?

A company is a legal entity formed by a group of individuals to engage in and operate a business—commercial or industrial—enterprise. A company may be organized in various ways for tax and financial liability purposes depending on the corporate law of its jurisdiction.

The line of business the company is in will generally determine which business structure it chooses such as a partnership, proprietorship, or corporation. These structures also denote the ownership structure of the company.

They can also be distinguished between private and public companies. Both have different ownership structures, regulations, and financial reporting requirements.

Definition of "Corporation"

Any reference to "corporation" in this Act means any body corporate formed or incorporated or existing in Malaysia or outside Malaysia and includes any foreign company, limited liability partnership and foreign limited liability partnership but does not include --

(a) any body corporate that is incorporated in Malaysia and is by notice of the Minister published in the Gazette, declared to be a public authority or an instrumentality or agency of the Government of Malaysia or of any State or to be a body corporate which is not incorporated for commercial purposes;

(b) any corporation sole;

(c) any society registered under any written law relating to co-operative societies; or

(d) any trade union registered under any written law as a trade union.

Definition of "Body Corporation"

Body corporate broadly means a corporate entity which has a legal existence.

A company is a separate legal entity as distinct from its members, therefore it is separate at law from its shareholders , directors , promoters etc and as such is conferred with rights and is subject to certain duties and obligations.

These central principles of company law were first laid down in very clear terms by the House of Lords in the case Salomon v Salomon & Company Ltd [1897] AC 2 .

The ruling outlined in part in the quoted text of the assignment from Lord Macnaghten’s ruling has several important consequences, not least that where the liability of the members is limited, they cannot, only in exceptional circumstances be held liable for the companies debts.

Under the concept of Limited liability the owners of the company under normal circumstances, are not answerable or responsible for the obligations of the company therefore making the owners/ shareholders liable only for the amount of their unpaid shares and not the obligations of the company.

The principle from the Salamons case firmly established that a company has a separate legal identity to that of its shareholders and has been applied over a wide range of cases.

Mr. Avon Solomon was an owner of a boot and shoe manufacturing business and later converted his business into a limited liability Company under the companies Act 1862. The memorandum of Association contained the names of subscribers- Solomon the appellant, his wife, a daughter and four sons, each of them subscribing one share. The company named Avon Solomon and Co. was incorporated on July 20 1892. Then the appellant sold his business to the company with fir a $10,000 in debentures and $20,000 in full paid up shares. Solomon was appointed the managing director of the company. Because of the depression in the show market, Solomon borrowed money on the security of the debentures and lent it to the company. Thereafter, the company was wound up by the court and the assets of the company were not enough to pay back the debentures in full leaving nothing for the unsecured creditors. The Liquidator of the company claimed that the company was entitled to be indemnified by Solomon against the company’s unsecured liabilities on the ground that the company was “mere nominee and agents” of Solomon. The trial judge made the declaration in favor of the company. Solomon then filed an appeal at the Court of Appeal. The court of Appeal agreed with the Trial judges and dismissed the appeal. Solomon appealed to the house of lord and then the order was ultimately reversed in order of Solomon. The point of consideration by the House of Lords in a very technical word was that –

“ When the memorandum is duly signed and registered, though there be only seven shares taken, the subscriber are a body corporate capable forthwith of exercising all the functions of an incorporated company……… The company is at law a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not in law their agent or trustee. There is nothing in the act requiring that the subscribers to the memorandum should be independent or unconnected, or that they should have one mind or will of their own, or that there should be anything like a balance of power in the constitutions of the company”

The principles stated in the above cases is that, as mentioned earlier, the company is at law different person and is not an agent of the subscribers or trustees and also, the company’s motives and artificial existence is quite apart from the interest and motives and conducts of the subscribers. The main point of emphasize is that after a company is incorporated it is a different person and must be treated like any other independent person, with its liabilities, rights appropriate to itself. Here, the motives of those who took part in the promotion of the company are absolutely irrelevant in discussing what the rights of the company and its liabilities are. This can satisfactorily fulfill the fact that a company gains a separate personality after its incorporation.