Table Of Contents

Question 1

1.1 Facts and Issue…………………………………………………………………2

1.2 Law and Rules……………………………………………………………….2-3

1.3 Application

1.3.1 Beli……………………………………………………………………..3

1.3.2 Click……………………………………………………………………4

1.3.3 Dong……………………………………………………………………4

1.4 Conclusion……………………………………………………………………..4

Question 2

2.1 The Corporate Principle of “Separate Legal Personality”……………………5

2.1.1 The Concept of Incorporation –Salomon V. Salomon & Co……….5-6

2.1.2 The Concept of Incorporation – Effects of Incorporation………….6-8

2.1.3 The Concept of Incorporation – Veil of Incorporation……………..8-9

Question 3

3.1 Answer (a)………………………………………………………………….9-11

3.2 Answer (b)……………………………………………………………………11

Biobliography………………………………………………………………………………...12

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Question 1

1.1 Facts and Issue

Alaam, the antique dealer who put a clock in the window of his shop with a sign
which stated “a rare timepiece – on offer for RM 10,000” has made an invitation to treat.
There are three customer, Beli, Click and Dong.

Beli was interested in buying the antique clock at RM 10,000 and he posted a letter to
Alaam agreeing that he wanted to buy the clock. Click, the second customer was also
interested in buying the antique clock, but only offer RM 9,000, Alaam refuse to sell the
antique clock to Click at that price and tells Click that he can only sell the clock to Click if he
can pay RM 9,500. Thus, Click insists on offering only RM 9,000. The transaction was not
made, but then Click posted a letter to Alaam agreeing to purchase the antique clock at RM
10,000 after realising the clock was worth the price Alaam offer.

The third customer, Dong, later went into the shop and offered Alaam RM 9,000 in
order to purchase the antique clock. The transaction was made as Alaam agreed to sell the
clock to Dong at RM 9,000.

1.2 Law and Rules

An offer is an expression of willingness to contract made with the intention that it

shall become binding on the offeror as soon as it is accepted by the offeree (Sec 2(a)
Contract Act 1950) and a bilateral contract is an agreement in which both parties make a
promise of promises to the other party. The display of goods with a price ticket attached in a
shop window or on a supermarket shelf is not an offer to sell but an invitation for customers
to make an offer to buy. In Fisher v Bell (1960) case, it says that the Restriction of Offensive
Weapons Act 1959 creates a criminal offence of ‘offering for sale’ certain offensive weapons.
A shopkeeper was prosecuted under this statute for displaying a flick knife in his shop
window. Thus, a window display was not an offer for sale but only an invitation to treat.
Therefore, the display did not infringe the law.

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 An acceptance is a final and unqualified acceptance of the terms of an offer (Sec 2(b)
Contract Act 1950). To make a binding contract, the acceptance must exactly match the offer.
The offeree must accept all the terms of the offer. In case above, there is also counter offer
made by Click to Alaam for the price of the antique clock. In counter offers, the rules stated
that if in his reply to an offer, the offeree introduces a new term or varies the terms of the
offer, then that reply cannot amount to an acceptance. Instead, the reply is treated as a
“counter offer”, which the original offeror is free to accept or reject. A counter offer also
amounts to a rejection of the original offer which cannot then be subsequently accepted.
Refering to Hyde v Wrench (1840) case, on 6th June Wrench offered to sell his estate to Hyde
for £1000; Hyde offered £950. Then, on 27th June, Wrench rejected Hyde offer. On 29th June,
Hyde again offered £1,000 but Wrench refused to sell and Hyde sued fr breach of contract.
The court held that if the defendant’s offer to sell for £1,000 had been unconditionally
accepted, there would have been a binding contract; instead the plaintiff made an offer of his
own of £950, and thereby rejected the offer previously made by the defendant. It was not
afterwards competent for the plaintiff to revive the proposal of the defendant, by tendering an
acceptance of it; and that, therefore, there existed no obligation of any sort between the
parties. The postal rule does not apply to the situations where Beli and Click sent letter to
Alaam because the postal rule does not apply to letter of offers where there is no acceptance.

1.3 Application

Beli

In the case above, Beli is one of the customers to sent the letter to Alaam at 10.00am
to offer to buy the antique clock for RM 10,000. Thus, as mentioned above, the postal rule
does not apply because there is no acceptance from Alaam. The postal rule only applies to
acceptance. Therefore, there is no contract between Alaam and Beli.

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Click

As mentioned in the case, Click went into Alaam shop and offered RM 9,000 for the
clock, thus, the offer is rejected by Alaam and Alaam offered to Click that he would sell the
antique clock to Click for RM 9,500. Click counter offer to Alaam the amount of RM 9,000
for the antique clock. Thus, a counter offer is not an acceptance. However after realising that
the antique clock worth the price of RM10,000, Click posted a letter of offer to Alaam at
11.00pm by offering RM10,000 for the antique clock. Hence, again, as mentioned in Beli's
situation, the postal rule only apply to acceptance of Alaam and not the letter of offer.
Therefore, there is no contract between Alaam and Click.

Dong

There is contract between Dong and Alaam. Dong offered RM 9,000 for the antique
clock and Alaam had agreed to sell the clock to him at the price he offered. Although Dong
requested to pay on next day and the letters of offer of Beli and Dong reached Alaam before
Dong pay, thus, there is already contract between Dong and Alaam at the point where Dong
offered and Alaam agreed. Dong could sue Alaam for breach of contract if Alaam ignore the
contract and accept either Beli's or Click offer.

1.4 Conclusion

There is no contract between Beli and Click with Alaam. The contract is existed only
between Alaam and Dong.

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Question 2

2.1 The Corporate Principle of “Separate Legal Personality”

A singular feature of companies is that from the date of the Certificate of

Incorporation, a company becomes a body corporate and assumes a legal personality of its
own, distinct from its members. It is a separate legal entity, an artificial legal person, unlike a
partnership that has no separate legal entity status. After early challenges to the concept of
separate legal personality, it was finally established in 1897 by the House of Lords in the
celebrated case of Salomon v Salomon & Co. Ltd. (1897) AC 22.

2.1.1 The Concept of Incorporation –Salomon V. Salomon & Co. Ltd.

Salomon V. Salomon & Co. Ltd. (1897)

Facts: Mr. Salomon carried on a business as a leather merchant. In 1982, he formed the
company Salomon & Co. Ltd. Mr. Salomon, his wife and five of his children held one share
each in the company. The members of the family held the shares for Mr. Salomon because the
Companies Acts required at that time that there be seven shareholders. Mr. Salomon was also
the managing director of the company. The newly incorporated company purchased the sole
trading leather business. The leather business was valued by Mr. Salomon at £39,000. This
was not an attempt at a fair valuation; rather it represented Mr. Salomon’s confidence in the
continued success of the business. The price was paid in £10,000 worth of debenture (a
written acknowledgement of debt) giving a charge over all the company’s assets which means
the debt is secured over the company’s assets and Mr. Salomon could, if he is not repaid his
debt, take the company’s assets and sell them to get his money back, plus £20,000 in £1
shares and £9,000 cash. Mr. Salomon also at this point paid off all the sole trading business
creditors in full. Mr. Salomon thus held 20,001 shares in the company, with his family
holding the six remaining shares. He was also, because of the debenture, a secure creditor.

However, things did not go well for the leather business and within a year, Mr. Salomon had
to sell his debenture to save the business. This did not have the desired effect and the
company was placed in insolvent liquidation where it had too little money to pay its debt and
a liquidator (a court-appointed official who sells off the remaining assets and distributes the

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proceeds to those who are owed money by the company) was appointed. The liquidator
alleged that the company was but a sham and a mere alias or agent for Mr. Salomon and that
Mr. Salomon was therefore personally liable for the debts of the company. The Court of
Appeal agreed, finding that the shareholders has to be a bona fide association who intended to
go into business and not just hold shares to comply with the Companies Acts.

Held: The House of Lords disagreed and found that, the fact that some of the shareholders
were only holding shares as a technically was irrelevant, the registration procedure could be
used by an individual to carry on what was in effect a one-man business. A company formed
in compliance with regulations of the Companies Acts is a separate person and not the agent
or trustee of its controller. As a result, the debts of the company were its own and not those of
the members. The member’s liability was limited to the amount prescribed in the Companies
Act. Therefore, it was held that (a) the business was owned by and its debts were liabilities of
the company, not of Salomon personally; and (b) although Salomon owned beneficially all
the issued shares of the company he could also be a secured creditor with enforceable rights
against the company in that capacity.

2.1.2 Veil of Incorporation – Effects of Incorporation

Separate legal entity

The principle of separate legal entity expounded in Salomon has since applied in various
contexts, as illustrated by the following cases.

Lee v Lee’s Air Farming Ltd (1961) AC 12

Facts: Lee was in the business of aerial top-dressing. He formed a limited company to carry
on the business. Of the 3,000 £1 shares issued, he took 2,999. The remaining share was
allotted to his solicitor as his nominee. Lee was the governing director. He continued to work
as a pilot for the company. The company took out workers’ compensation insurance, naming
Lee as the employee. Lee was subsequently killed when his plane crashed while top-dressing.
His widow made a claim for compensation under the Workers’ Compensation Act 1922. The

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claim was rejected by the lower courts on the ground that Lee, having the full control of the
company, could not have been its employee within the meaning of the Act which required a
‘contract of service…with an employer’. The widow appeal to the Privy Council.

Held: The appellant succeeded. Although Lee was the majority shareholder, and sole working
director of the company, he and the company were separate legal persons and therefore he
could also be an employee of it with rights against it when killed in an accident in the course
of his employment.

Company can sue or be sued in its own name

The contracts are entered into in the company’s name and it is liable on any such contracts.
The extent of the company’s liability, as opposed to the member’s liability, is unlimited and
all its assets may be used to pay off debts.

The board of directors are the agents of the company. Members as such are not agents of the
company; they have no right to be involved in the day-to-day operation of the business and
they cannot bind the company in any way.

Company can own property in its own name

A company may own property distinct from the property of its members. The members only
own shares in the company but do not have a proprietary interest in the property of the
company. In Macaura v Northern Assurance Co. Ltd. (1925) AC 619, the court held that the
appellant, the owner of Killymoon estate in Northern Ireland had no insurable interest in the
timber. The House of Lords held that the appellant had not insurable interest either as a
reditor or shareholder in the timber . Therefore, a change in membership of a company will
have no effect on the ownership of the company's assets.

Limited liability

No one is responsible for anyone else’s debts unless they agree to accept such responsibility.
In the case of a company limited by shares the level of liability is the amount which is paid

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on the nominal value of the shares held. In the case of a company limited by guarantee it is
the amount that shareholders have agreed to pay on the event of the company being wound
up.

Perpetual Succession

As the company exists in its own right changes in its membership have no effect on its status
or existence. Members may die, be declared bankrupt or insane, or transfer their shares
without any effect on the company. As an abstract legal person the company cannot die,
although its existence can be brought to an end through the winding-up procedure.

Separation of ownership and management

Where a company suffers an injury, it is for the company, acting through the majority of the
members, to take the appropriate remedial action. An individual cannot raise an action in
response to a wrong suffered by the company.

2.1.3 Lifting the Veil of Incorporation

The courts have not always applied the principal laid down in Salomon v. Salomon
Co. In a number of circumstances, the court will pierce the corporate veil or will ignore the
corporate veil to reach the person behind the veil or reveal the true form and character of the
concerned company. The rationale behind this is probably that the law will not all the
corporate form to be misused or for the purposes which is set out in the statute. In those
circumstances in which the court feels that the corporate form is being misused it will rip
through the corporate veil and expose its true character and nature disregarding the Salomon
principal as laid down by the House of Lords.

Exceptions implemented by the courts：

In cases of fraud or sham. These occur where individuals have used the separate legal

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entity to do something they are personally forbidden from doing.
Gilford Motor Co. Ltd. v Horne(1933)
Horne(H) was a car salesman and left Gilford Motor Co. Ltd(G). His contract stated
that he wasn’t allowed to sell to G’s customers for a period after leaving. H set up a
company which then approached his former customer; H argued that firstly his
company was approaching the customers, not him; and secondly, if there was
wrongdoing, his company was liable and not him. The courts held that the company
was sham, and granted an injunction against his company as well as him.

When the entities are considered to be a single economic unit.

Adams v Cape Industries plc and Another (1991)
A worked for a US subsidiary of CI, which marketed asbestos in the US. The US
subsidiary of had no assets. A suffered injuries through exposure to asbestos dust and
wanted to sue. If he had sued the US subsidiary, he would have received no
compensation since there was no money to pay out. He therefore sued CI in the UK
and claimed that the company was a single economic unit. The courts held that, even
though they recognised that the corporate structure was designed to minimise liability
and taxation, it was not illegal and should not be considered a single economic unit.

Question 3

3.1 Answer (a)

Facts and issue

Sita acting on behalf of Beta Sdn. Bhd have entered into a contract with Tiga Sdn
Bhd. Beta Sdn. Bhd. has not obtained its certificate of incorporate the moment they enter the
contract with Tiga Sdn Bhd. In the contract, Tiga Sdn Bhd had promised to supply materials
of worth RM35,000 to Beta Sdn. Bhd. Thus, upon Beta Sdn. Bhd. starts to incorporated in the
month of November 2010, they refused to fullfill its contractual obligations.

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Law and Rules

A pre-incorporation contract is one which is purportedly made by or on behalf of a

company at a time when the company has not yet been incorporated. At common law, such
contracts were totally void because until a company was incorporated it has no capacity to
contract. The Malaysian position is governed by section 35(1) and (2) of the Companies Act
1965.

In Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas) the plaintiff and the
defendants were promoters of the Gravesend Royal Alexandra Hotel Company, Limited. The
plaintiff was to be the manager of the hotel under the new company. Before the company was
incorporated the plaintiff offered to sell a stock of wine to be proposed company for £900
which was accepted by the defendants on January 27th, 1866 on behalf of the Gravesend
Royal Alexandra Hotel Company Limited. On February 1st the directors of the Gravesend
Royal Alexandra Hotel Company Limited ratified the agreement. However, the promoters did
not receive a certificate of incorporation for the Gravesend Royal Alexandra Hotel Company
Limited until February 20, 1866. The directors then purported to ratify the agreement again
on April 11, 1866 just days before the company made an assignment in bankruptcy.

The court held that the ratification of February 1st, 1866 was not a valid ratification
because the company was not in existence at the time. The ratification on April 11th was also
held not to be a valid ratification because of the requirement that ratification can only be done
by a principal having capacity to contract at the time the contract was entered into as well as
at the time of the ratification. It was also not valid on the basis that the company was not in
existence at the time of promoters purported to act on its behalf. The court nonetheless still
felt there was clearly an intended contract and the only way in which there could be a valid
contract was if the defendants were the other contracting parties. They thus held that there
was a valid contract in which the plaintiff was one party and the defendants were the other
parties.

Kelner v. Baxter thus confirmed that pre-incorporation contract was not binding on the
company after its formation, and that the promoters or persons acting on behalf of the
company before the formation were personally liable.

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Conclusion

As mentioned above, by virtue of Section 35(1) of Companies Act 1965, any contract
or other transaction purporting to be made by a company prior to its formation may be
ratified by the company after its formation, therefore, the contract between Beta Sdn. Bhd.
and Tiga Sdn. Bhd. is void because until a company was incorporated it has no capacity to
contract.

Therefore, Tiga Sdn. Bhd. cannot sue Beta Sdn. Bhd because pre-incorporation
contract was not binding on the company after its formation, but alternatively can enforce the
contract against Sita because he is personally liable to the contract.

3.2 Answer (b)

Yes, it will make a difference to the answer above if the contract contained a clause
stating that Sita did not assume any personal liability in respect of the contract.

As mentioned above, the person, Sita who purport to act on behalf of the company
will incur personal liability if Tiga Sdn. Bhd. enforce the contract against him. Thus, in
Section 35(2) of the Companies Act 1965, it is stated that the promoter or person acting on
behalf of the company would be personally liable or entitled to its benefit unless he has
expressly excluded personal liability.

Therefore, Sita could escape personal liability if the contract contained a clause that
stating Sita did not assume any personal liability in respect of the contract.

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Bibliography

Online Sources

• S. Anusuya . Lifting The Corporate Veil.

http://www.legalserviceindia.com.articles/corporate.htm (Accessed 27.12.2010)
• Ben C.Ball, Jr., Matthew S. Miller & Christine S. Nelson. The Corporate Veil.
http://www.cornerstone.com/pdf/practice_other_publications_tab/corporate veil.pdf
(Accessed 10.1.2011)
• G. Amin. The Veil Doctrine in Company Law. http://www.llrx.com/authors/1124.
(Accessed 5.1.2011)
• M. Tim. Business Law-Lifting the Veil of Incorporation. http://www.economic-
truth.co.uk (Accessed 10.1.2011)

Table of Statutes
• Companies Act 1965
• Contract Act 1950

Table of Cases
• Fisher v Bell (1960)
• Hyde v Wrench (1840)
• Salomon v A Salomon and Co Ltd (1897)
• Lee v Lee’s Air Farming Ltd (1961) AC 12

• Macaura v Northern Assurance Co. Ltd. (1925) AC 619

• Gilford Motor Co. Ltd. v Horne(1933)

• Adams v Cape Industries plc and Another (1991)
• Kelner v. Baxter (1866), L.R. 2 C.P. 174 (Common Pleas)

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