Johan owned and ran a radio repair
business. it was quite successful but johan was worried about the long-term
prospect because of the far-reaching changes being made in radio technology.
Johan foresaw the eventual decline of his types of business and decided that
while it was still relatively prospects, he would transfer it to a company
(specially incorporated for the purpose). 999 RM 1 share of the nominal capital
of RM 1,000 were issued to johan and one to his wife. Johan and his wife became
the director of the company and employed three mechanics. Although the business
was worth approximately RM50,000 the company agreed to buy it from Johan for
RM80,000. In exchange for the business, the company issued a debenture for
RM80,000 to Johan secured by a fixed charge on the company’s fixed assets and a
floating charge on all its other assets.
In January 1996, a fire in the workshop
caused extensive damage to the premises (which were at all material times owned
by Johan and which the company was licensed to use for the purpose of its
business). The business had to cease operation for 4 weeks resulting in a loss
of some RM10,000, and physical damage to the premises amounted to RM15,000.
Johan had effected against such risks, both to the premises and to the
business. However, when the business was sold to the company, nor did the
company effect its own insurance against such risks. The insurance company is
now refusing to pay out in respect of the loss suffered by the company from the
interruption to the business.
In January 1997, the local council
gave notice of its intention to exercise its compulsory purchase power to
expropriate the premises but offered compensation which took account only of the
fact that Johan owned the premises and refused to consider compensation for the
loss of the right to use the premises for business purposes which would result
from the expropriation.
From January to April 1997, the
business continued to decline and despite advise to the contrary of his
accountant and workforce, Johan continued to trade through the company in the
hope that it would return to solvency.
In May 1997, Johan entered into a
contract one behalf of the company, with ABC Health Products Sdn Bhd to
purchase on credit, RM100,000 worth of herbal food supplements, with a view to
reselling them at double the purchase prise. However, due to severe market
competition this venture failed.
In August 1997, the company went into
a creditor’s voluntary winding up with debts exceeding assets by close to RM1
million.
a) A
claim by the liquidator against the insurance company in the respect of the
loss arising out of the interruption of the business owing to fire.
b) A
claim by Johan against the local council for compensation in respect of the
loss of business use arising out of the expropriation of the premises.
c) A
claim by the liquidator against Johan in respect of the company’s debts.
ANSWER (QUESTION A)
Issue :
-
Whether the liquidator have the rights to claim against the insurance
company in respect of the loss arising out
of the interruption of the business owing to fire.
Rules :
- In separate legal entity
doctrine, the company and Johan has two different entities as decided in the case of Salomon Vs A.Salomon & Co.Ltd (1897).
-
However, in certain
circumstances, a court may ignore the separate legal entity of a company
(lifting the corporate veil) and look at the members of the company and make
them liable.
-
The relevant rule here is the rights,
liabilities, assets and properties belongs to the company and not to the
officers, members or the persons who form the company, as a similar case as in Macaura Vs Northern Assurance Co.Ltd.
(1925)
Application :
-
Insurance is obliged to
compensate for Johan because he is owning an Insurance which covered his
losses. However, when the business was sold to the company, there were no assignment
of benefits on the insurance policy to the company.
-
As a general rule, Johan and
the company are entitled to the separate legal entity.
-
Therefore, by transferring his
business to the company, the business is belonged to the company not to Johan
and the relationships are between Johan and the company not to Johan.
Conclusion :
-
The Insurance company will not
be responsible and the liquidator cannot claim against the Insurance company as
well.
ANSWER (QUESTION B)
Issue :
-
Whether Johan has the rights to
claim against the local council for compensation in respect of the loss of
business use arising out of the expropriation of the premises.
Rules :
-
In separate legal entity, the
company and Johan are two different entity as decided in the case of Salomon Vs. A.Salomon & Co.Ltd. (1897)
Application :
-
As a general rules, Johan can
claim against the local council because Johan and the company are the separate
legal entities.
-
The law recognizes that a
company is a separate legal entity distinct from its directors, but the
premises belongs to the company and Johan is the director of the company.
-
The court will look behind the
veil of incorporation to inquire who really controls the company.
Conclusion :
-
Thus, Johan cannot claim
against the local council.
ANSWER (QUESTION C)
Issue :
-Whether the liquidator have the rights to claim against Johan in
respect of the company debts.
Rules :
-In separate legal entity, the company and Johan are two
different entities as decided in the case of Salomon vs A.Salomon & Co Ltd (1897)
-As in case, Daimler
Co Ltd Vs Continental Tyre and Rubber Co (Great Britain) Ltd (1916) the court lifted the veil of
incorporation to look at the nationality of the persons in effective control of the
company.
- Relevant rule here is, if the court found that a
particular legal rule should be interpreted as requires them to lift the veil of
incorporation.
Application :
-As a general rule, the liquidator cannot claim
against Johan and the company because Johan and the company are separate legal
entity.
-However, there are a number of circumstances
where the courts are prepared to depart from this principle. This is referred
to as lifting the veil of incorporation, such lifting of the veil of
incorporation may occur either by virtue of statutory provision.
-Even though the company is a separate legal
entity distinct from its directors, but the premises belongs to the company and
Johan is the director of the company. The court will inquire who really
controls the company.
Conclusion :- The liquidator can claim against Johan
and Johan will be responsible for the company debts.
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