Salomon transferred his business of boot making, initially run as a sole proprietorship, to a

company (Salomon Ltd.), incorporated with members comprising of himself and his
family. Soon after Mr Salomon incorporated his business there was a decline in boot sales. The
company failed, defaulting on its interest payments on its debentures. The case concerned
claims of certain unsecured creditors in the liquidation process of Salomon Ltd., a company
in which Salomon was the majority shareholder, and Salomon was sought to be made
personally liable for the company’s debt.

Hence, the issue was whether, regardless of the separate legal identity of a company, a
shareholder could be held liable for its debt, over and above the capital contribution, so as
to expose such member to unlimited personal liability.

The Court of Appeal declared Salomon responsible for the debt incurred in the course of
such agency.

The House of Lords, however, upon appeal, reversed the above ruling, and unanimously held
that, as the company was duly incorporated, it is an independent person with its rights and
liabilities appropriate to itself, and that “the motives of those who took part in the promotion
of the company are absolutely irrelevant in discussing what those rights and liabilities are”. 3 

Thus, the legal fiction of “corporate veil” between the company and its owners was firmly
created by the Salomon case.

When a company is incorporated, a separate legal entity emerged, and it brings several effects to
the company. S.20 of the Companies Act 2016 also provides that after a company is incorporated, it
shall have a distinct legal entity from its members. 
The first effect is the separation of the members’ liability. In the landmark case of Salamon v
Salamon, Lord Halsbury then held that once the company is incorporated it should be treated as an
independent person. Even though the company might seem to be operated as a sole proprietorship,
yet since it is incorporated according to the legislation and every member of the company knows the
true state of the facts, the company’s debt is not the debt of the owner. 
Therefore, from the above case, it is clear that once a company is incorporated, it shall
automatically be a new legal entity which is separated from its managers. 
Hence, after a company is incorporated, it protects its members from being personally liable to the
company’s debts. With that being said, under this principle, the company has to bear its own
liabilities.
In PEOPLE' S INSURANCE CO (M) SDN BHD v PEOPLE' S INSURANCE CO LTD & ORS [1986] 1 MLJ 68,
the plaintiff was a subsidiary of the defendant which is a registered company incorporated in
Singapore. Four directors of the subsidiary were members of the holding company. A claim for
policies were issued but there were insufficient funds. The four directors of the claimed that the
shortfall would be guaranteed by the holding company but the holding company denied the liability.
The court held that the plaintiff although is a subsidiary to the holding, but it is separated from the
holding company. The four directors were present in the meeting as a member of the daughter
company not as representative of the holding company.
Hence from this case, it could be seen that every company is a separate legal entity and bears its
own liabilities even there is a relationship between each company i.e., holding and subsidiary
companies. 
Another effect of this principle is that the company could enter the contract by its own name. In
Lee v Lee's Air Farming Ltd [1960] 3 All ER 420, the appellant’s husband is the shareholder of the
respondent company who a master and servant relationship with the respondent, and took out a
worker’s insurance. Upon the death of her husband in an aircraft accident, the appellant claimed
indemnity. However, the respondent denied her claim as her husband was the controlling
shareholder and governing director. The Privy Council recognized the deceased as a director and a
worker, and admitted that there could be a contractual relationship between the company and its’
director who is willing to serve the company. 
Furthermore, the principle of separate legal entity allows the corporate having the right to sue and
be sued which also known as the “Foss v Harbottle rule”. 
This effect is illustrated in the landmark case Foss v. Harbottle (1843) 2 Hare 461 where the
shareholders of the company sued the directors of the company for misusing the company’s
property. Nevertheless, the court held that the injury is suffered by the company instead of an
individual which allows the company to sue against the wrongdoers. In other words, no individual
could sue a on behalf of the company instead, the company itself could exercise its rights to sue on
behalf of itself as it is a different legal personality. 
In AIC DOTCOM SDN BHD v MTEX  CORP SDN BHD [2003] 4 MLJ 324, the plaintiff (i.e., the appellant)
sued the defendants for an injury suffered by the company. The plaintiff claimed that due to her
breach of fiduciary duty, the defendant used the company’s confidential agreement to develop the
competitor’s business. The court used the Foss v Harbottle rule stating that when it comes to the
company’s injury, the action should be brought by the company and not members of the company. 
Apart from that, a company would have a perpetual succession after being incorporated. With that,
a company is “immortal” as being a separate legal entity, it’s existence would not be affected by its
director’s death or resignation. 
In Re Noel Tedman Pty Ltd, the company’s sole owners and directors were involved in an accident
leaving their infant child. The court held that the death of the company’s directors would not affect
the company’s existence and the immediate representation has the authority new directors of the
company. 
This could be seen in the case of Tan Lai v Mohamed bin Mahmud [1982] 1 MLJ 338, where the
plaintiff who previously had full control over the said corporation sold his shares under an
agreement to the first defendant but it was contended by other defendants that the agreement was
illegal. The court held that the agreement was not illegal as the transfer of shares would not change
the company’s legal entity and since the incorporation of the company was lawful (i.e., having the
license to incorporate such business) the agreement was not illegal. 
Last but not least, by having a separate legal entity, the company is given the right to own
properties with their own name. Therefore, any property belonged to the company has not relations
with it’s members as the company is a separate legal entity after its incorporation. 
This could be seen in the case of Macaura v Northern Assurance Co Ltd (MNA) where the plaintiff
sold his plantations to a company he incorporated where he is the sole owner of the company. A fire
broke out and the plaintiff sought indemnity from the defendants. The court held that the plaintiff
could not seek any compensation as the plantation had belonged to the company and added that
even he owned full shares to the company, the plantation does not belong to him. 
Hence from the above case, it is clear that a company being a separate legal entity is allow to own
property and the members of the company could not claim their ownership of the property. 
In conclusion, the principle of separate legal entity allows the company to be separated from it’s
members. Therefore, under this principle, the company has to bear its own liability, enters a
contract with as a legal personality, has the right to sue or be sued, has perpetual secession and has
the right to own properties. With that being said, the principle of separate legal entity entitles the
company to be separated from its members and stand alone as an individual. 
Classification of Company
A company is defined under S.2 of the Companies Act 2016 (hereinafter referred as CA2016) where it
any incorporated under this act or any previous written act (i.e., Companies Act 1965). The
requirement of a company is listed under S.9 of CA 2016 which are, a company name, consisting one
or more members having limited or unlimited responsibilities and shares to the company, and having
one or more directors. Malaysian companies are regulated by SSM (Suruhanjaya Syarikat Malaysia),
SC (Securities Commission), and Bursa Malaysia. 

A company has 4 classification which are by liabilities, by status, by relationship and by place. 

Under S.10 of CA 2016, the classification of liabilities could be sub-categories into limited liabilities
and unlimited labilities. Furthermore, S.10 of CA 2016 sub-divides limited liabilities company into
limited by shares which is provided in S.10(1)(a) of CA 2016 and limited by guarantee which is
provided in S.10(1)(b) CA 2016.

S.10(2) of CA 2016 defines a company which is limited by shares as a company where upon winding
up, the shareholder’s liabilities are only bound to their unpaid shares. This could also be seen in
S.435(2)(b) of CA 2016 where it expressly states that the members of a company which is
incorporated under limited by shares shall only be liable for their unpaid shares. 

On the other hand, S.10(3) of CA 2016 defines a limited by guarantee company as a company where
its member’s liability is bound to the amount in their memorandum. S.435(2)(c) clearly states
that none of the members of a company limited by guarantee shall make additional contribution
which exceeds his obligation stated in the memorandum upon the company’s winding up process. A
limited by guarantee company is prohibited from establishing with a shared capital pursuant to
S.12 of CA 2016 and prohibited to pay dividend to its members pursuant to S.45(2)(b) of CA
2016. 

Furthermore, a company which is limited by guarantee has the privilege to establish a business which
provides recreation or amusement, promotes art, science, religion, charity, and other business which is
useful for the community or the state provided under S.45(1) of CA 2016. The profits gain by
companies under this category shall be used only on their business as stated under S.45(2)(a) of CA
2016. S.45(5) prohibits this kind of company to own any land unless upon the approval of the
Minister. 

Lastly, a company of unlimited liabilities is defined under S.10(4) of CA 2016 where the members
bear with unlimited liabilities when the company is in the event of the winding up process. This
company shall have the name of “Sdn” or “Sendirian” at the end of their company name as required
under S.25(1)(c) of CA 2016. An unlimited liability company is a rare type of company, examples of
it could be the C. Hoare & Co which is U.K’s oldest privately owned bank and American Express
Company where it is public unlimited company until 1965.

A company could change from an unlimited liability company to a limited liability company by
passing special resolution and lodging a notice of conversion to the Registrar by virtue of S.40(1) of
CA 2016 provided that the identity and obligations of the company is not affected by the change of
liabilities pursuant to S.40(5)(a) of CA 2016). 
The next classification of company is by its status. The status of a company could be classified into
public company and private company as provided in S.11 of CA 2016. Under this section, a
company could be private or public except for company limited by guarantee where it must be a
public company as stated under S.11(2) of CA 2016.

A public company is required by S.25(1)(a) of CA 216 to have the word “Bhd” or “Berhad” at the end
of the name. This type of company has to have at least 2 directors who is a Malaysian or a
Permanent Resident of Malaysia provided under S.196(1)(b) and S.196(4)(a) of CA 2016. This type
of company could offer its shares to the public and shall have their company listed in Bursa
Malaysia. 

A private company is defined under S.2 of CA 2016 where it is incorporated as a private company
under the Companies Acts of Malaysia, or a converted private company under S.41 of CA 2016.
S.25(1)(b) of CA 2016 requires a private company to have the word “Sdn Bhd” or “Sendirian Berhad”
at the end of the name. This type of company has to have at least 1 director who is a Malaysian or a
Permanent Resident of Malaysia provided under S.196(1)(a) and S.196(4)(a) of CA 2016.

Under S.42(1) of CA 2016, a private company is limited to 50 shareholders and restricted to

A private company is also restricted from offering any shares or debentures to the public by
virtue of S.43(1) CA 2016 unless the company is acting in good faith when the shares and debentures
is offered after the company’s conversion to a public company, when the offer is made in accordance
with the arrangement made by the SC stated under S.43(3) of CA 2016. 

S.41 of CA 2016 allows a public company to convert to a private company and vice versa by
passing a special resolution and lodge a notice to the Registrar with the alteration in name (i.e., the
words at the end of the name) and a declaration for complying with paragraph 190(2)(b). The
conversion shall not change the identity and responsibilities of the company provided under S.41(5)
(a) of CA 2016. 

The next classification is by categorizing the companies by their relationship which are holding
company and subsidiary company. The relationship between a holding and subsidiary company is
classified under S.4 of CA 2016 where when a company controls the composition of the board of
directors, half of the voting power and acquires more than 50% of the shares of another company is a
holding company, whereas the company being acquired for more than 50% of the shares is a
subsidiary company. 

A holding company is defined as an “ultimate holding company” when the corporation is not a
subsidiary itself, and its subsidiary company acquires another subsidiary company by virtue of S.5 of
CA 2016. 

A wholly owned subsidiary is defined under S.6 of CA 2016 as a corporation where its members is
wholly constituted by its parent company or its nominee. 
Lastly, a company is related to each other when it is the holding or subsidiary of another company or
its holding company is a subsidiary to another company. 

An example of corporation to understand how companies are related to each other is by looking at the
Tune Group where it is the ultimate holding company with subsidiaries such as Tune Hotel, Air
Asia, et cetera. Furthermore, AirAsia Berhad is also a holding company to AirAsia X which makes
AirAsia X Berhad a related company to Tune Hotel and Tune Group as stated in S.7 of CA 2016. 

The last classification of company is according to the place of the company. This classification could
be classified into a foreign company and a local company. By virtue of S.2 of CA 2016, a foreign
company is defined as a company incorporated outside Malaysia or an unincorporate association
where its main office is situated outside Malaysia. Part V Division 1 of CA 2016 governs foreign
companies where it provides the requirements and registration of foreign companies to carry their
business in Malaysia. 

All in all, the Companies Act 2016 classifies companies in 4 division which is by their liabilities,
status, relationship, and place. The classification of liabilities could be sub-divided into limited
liabilities by shares or by guarantee and unlimited liabilities. The classification of statues could be
sub-categorizes as public listed company or private listed company. The main classification of
companies by relationship is holding company and subsidiary company. Lastly, companies are
classified by their place where a company which is situated in Malaysia is a local company and a
company where its head office is situated overseas is a foreign company.