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Solomon Company Law

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  1. INTRODUCTION

The principle of the legal entity principle assumes that each of a group of companies is treated as a separate legal entity with other companies within the group and is therefore exercising legal authority in that regard. This is confirmed in the case of Salomon v Salomon. This principle is useful for corporate bodies, but has a significant adverse impact on the relevant stakeholders. The limited liability also provides that the shareholders of their corporate debts shall not be held personally liable. The principle of limited liability and separate legal entities are assessed in the context of the use of legal cases by legal persons.

The House of Lords in Salomon v Salomon stated a legal principle that once a company was established, the company was generally considered a new legal entity in addition to its shareholders. The Salomon case firmly established the principle of a separate legal entity, one of which was a "artificial" person different from the corporate legal membership. Therefore, when the company acts, it is their own rights, not just their shareholders ally.

The separate legal entity principle and corporate groups allows each company in the group to be considered as a separate legal entity with other companies within the group. This has a significant impact on the tort cases where the company's tort creditors can only exercise the legal rights of the debtor's company. The debtor's shareholders are not responsible for the debts of the company and its initial capital investment. Thus, the principle of a separate legal entity adversely affects tort creditors exposed to both involuntary and non-compensatory risks. Since an enterprise group can move assets between intra-group, it allows the "group" to evade the claimant's liability, since the creditor may look at the debtor's own assets.

In the case of corporate groups, the strict application of the principle of a separate legal entity can be considered the principle of Salomon itself, since it excludes sufficient reasoning in principle and policy. However, the multiple protection of the principle must be balanced with the commercial reality of legislation that treats a group of companies as a single entity.

Limited liability is one of the advantages of company registration. This means that shareholders are not personally liable for the debts of their companies. The extent of liability depends on the type of company. According to Sec 516, shareholders do not have to contribute more than their investments. However, the privilege of limited liability does not necessarily come from the principle of a separate legal entity. Although all companies are interested in a separate legal entity, an unlimited liability company is not entitled to a limited liability privilege. Thus, the creditor can only act on the assets of the company, rather than on the personal assets of its members in limited liability of the company.

The court recognized that the veil of the company may divest its shareholders, depriving separate legal entities of the principle normally provided by protection. "Lifting the corporate veil" refers to the legal entity through a separate provision of legal principles, exceptions, the court ignored the separation of the law, and shareholders have corporate responsibility, as shareholders of the same behaviour. It is noteworthy that, under common law and statutory, there are exceptions to torts committed by corporations. Major exceptions include agency relationships between subsidiaries and parent companies. In the case of a subsidiary acting as an agent, the parent company can only exercise insufficient control over the subsidiary. At Smith, Stone & Knight Ltd v Brimingham Company cases, the agency relationship has risen, and the parent company has the ability to fully control and control its subsidiaries, which is actually exercising that capability. However, the commercial reality shows that each holding company can have complete control over the subsidiary.


  1. TASK 1

  1. ADVICE FARID AND MALIK AS TO THEIR LIABILITY FOR THE DEBTS OF FAMA SDN BHD.

The issue in this question is whether, regardless of the separate legal identity of a company, a Farid and Malik could be held liable for its debt. In other to answer this question, we need to examine the rules relating to incorporation of the company and separate legal entity in the Company Act 1965.

For the establishment of companies under the Act is provides in Sec. 14 (1). Under the Act, any two or more persons associated with any legitimate purpose may comply with the requirements for incorporation by signing the memorandum. The Company will be incorporated after the filing of the Memorandum and the proposed Articles of Association of the Company and the payment of the prescribed fees to the Registrar of Companies. A certificate of registration shall be issued when the pre-registration procedure complies with section 16 (4). Once a certificate of incorporation has been issued, there is conclusive evidence that all provisions of the Act relating to registration, preconditions and incidental matters have been complied with and that the company to which it refers has been duly incorporated into Act 361 under that Act. In the case of Tan Lai v Mohamed Bin Mahmud & ORS, a sawmill license was awarded to the first defendant and the other to operate sawmill. The license is not transferable. A company was established as a sawmill license with capital of $ 200,000, 75% of which was held by the plaintiff, the remaining 25% held by the first defendant and the other held by the permit. Subsequently, the plaintiff sell its shares to the first defendant. The plaintiff accepted the deferred payment but guaranteed by the other three defendants. The first defendant refused to pay the outstanding balance of $ 43,000.00. The plaintiff sued the defendant for the amount due. The defendant alleges that the sale of the shares and the security agreement were illegal. The court ruled that the plaintiff was unlawful in order to circumvent the non-negotiable terms of the license, but the sale of the shares was uncontaminated. In addition, although the company's sawmill business is illegal because it does not have a sawmill license, the company's own merger is legal.

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