The law of separate legal persona – who am I?


  • Corporate News
  • Monday, 05 Aug 2019

Jal Othman, a lawyer practising at Messrs Shook Lin & Bok, is a member of the Conveyancing Practice Committee, Bar Council, Malaysia. This column does not constitute legal advice and the views expressed are solely that of the writer.

THE law works in mysterious ways. One of the many areas of mystery is this legal concept known as the legal persona.

The law recognises certain bodies and entities as possessing separate and distinct personalities from the people that have either formed, owned or controlled them.

The natural person

Natural persons are people like you and me, human beings. The law provides certain entitlements to natural persons (for example, the right to vote, employment and to own property). Natural persons have a right to own and to control other entities (but, except in exceptional circumstances, not other natural persons, naturally!). A common method of control is to own shares in companies.

The artificial person

Artificial persons are entities like companies and corporations, co-operative societies, statutory bodies such as the Employees Provident Fund Board and societies.

Artificial persons have perpetual succession. In other words, they will live forever until they are wound up or liquidated. They can sue and they can be sued in their own name. Quite akin to natural persons, they have rights to contract with third parties and rights to own assets.

Lying in between the artificial person and the natural person is the concept of limited liability. The liability of the artificial person (i.e. the corporation) is limited and ring-fenced to the entity itself and is not usually extended to the natural persons (i.e. the shareholders and the directors) behind them.

The legal persona

The principle of the separate legal persona arises when the path of the artificial person and that of the natural person crosses. This crossing of path is best illustrated in the arena of corporations and shareholders and directors.

Companies have an existence independent of their shareholders and directors (Salomon v. Salomon [1896] UKHL 1). As a general principle, acts of the company are not attributable personally to the shareholders and directors. Hence, if you contract with the company, you will sue and claim from the company and not against the shareholders or directors. This is notwithstanding the fact that you deal with the shareholders and directors and you rely upon representations from the shareholders and directors when negotiating and entering into a contract with the company.

Like all well-intended legal principles, it is invariably subject to abuse. The principle of the legal persona has been taken advantage of by unscrupulous corporate players. These wrongdoers have hidden behind the corporate veil and have escaped liability by simply pointing to the company as the entity to be sued. They hide behind the form of the company.

These wrongdoers are the controlling minds behind the corporations’ actions and directing the corporations to carry out wrongful acts. Fairness swiftly swings into action. It begins to either pierce or lift the corporate veil to hold the controlling wrongdoers accountable.

We now examine in more detail some instances.

Sham or facade and the alter ego

Generally, there is little difficulty in lifting the veil when a company is just a “facade” to disguise an impropriety. Fraud occurs where there are signs of separate personalities of companies being used to enable persons to evade their contractual obligations. Courts have viewed the company as the alter ego of the individuals behind it. The corporate veil is pierced and the wrongdoers are made liable.

Single economic unit

Another exception is the single economic unit. A recent application of this is under the Competition Act, 2010. Parent and subsidiary companies shall be regarded as a single enterprise if they form a single economic unit. In these circumstances, subsidiaries would not enjoy real autonomy in determining their own actions. Hence, what would have been two separate legal entities are under certain circumstances being treated as one.

Partnership

Partnership represents a hybrid legal persona. Traditional partnership laws hold each partner accountable for the actions of all partners, irrespective of the innocence of the other partners.

The modern position has moved somewhat away from the traditional position. The limited liability partnership under the Limited Liability Partnerships Act, 2012 illustrates this. Unlike a conventional partnership, a partner would not be personally liable solely because he is a partner; instead, a partner is liable only for his own wrongdoing.

Forward veil-piercing

Forward veil-piercing occurs when the natural persons are held accountable for the actions of the artificial person. The natural persons are usually persons holding high positions in the organisation (for example, directors or chief executive officers). These persons are deemed to have committed the offence that the corporation has committed. The deeming provision is, however, not as dire as it sounds. Natural persons have a defence premised on the absence of knowledge, the requisite state of mind or where sufficient diligence was demonstrated by them. The Capital Market and Services Act, 2007 (which deals with capital market offences) and the Employees Provident Fund Act 1991 (which deals with employers’ obligations to make mandatory contributions for employees) are statutory examples of forward piercing.

Reverse veil-piercing

Conversely, reverse veil-piercing involves a situation where a company is held liable for acts of individuals. This can be seen in the newly introduced Section 17A of the Malaysian Anti-Corruption Commission Act, 2009 wherein the organisation commits an offence if a person associated with the organisation is involved in a corrupt act.

So who am I?

I can be a natural person and I can also be an artificial person. The law recognises me to be separate and distinct if my commercial intentions are bona fide.

However, should I attempt to abuse this privilege, the law will not hesitate to pierce and/or lift the veil that separates us. Consequently, I will be held accountable for my actions and I will not be able to hide behind the facade of a separate legal persona.

This is the law of separate legal persona.

Jal Othman, a lawyer practising at Messrs Shook Lin & Bok, is a member of the Conveyancing Practice Committee, Bar Council, Malaysia. This column does not constitute legal advice and the views expressed are solely that of the writer.


Article type: metered
User Type: anonymous web
User Status:
Campaign ID: 7
Cxense type: free
User access status: 3
   

Across The Star Online


Air Pollutant Index

Highest API Readings

    Select State and Location to view the latest API reading

    Source: Department of Environment, Malaysia