GUDGEON

QUESTION 1

1. Issue

The issues to be determined are:

• Whether LH Sdn Bhd is solely liable to repay the RM100,000 loan to Yayasan Usaha Peniaga (Yayasan).
• Whether Laila and Hisham (as directors and shareholders) can be held personally liable for the outstanding debt of LH Sdn Bhd.
• Whether there are any grounds to "lift the corporate veil" to impose personal liability on the directors.

2. Law

Under Malaysian company law, the effects of incorporation are governed by the Companies Act 2016 (CA 2016) and established common law principles:

• The Separate Legal Entity Principle: Section 20 of the CA 2016 explicitly states that once a company is incorporated, it is a body corporate and has a legal personality separate from that of its members. This is known as the "corporate veil."

• This principle was firmly established in the landmark case of Salomon v Salomon & Co Ltd, which held that a company is a separate entity from its shareholders, and the debts of the company are its own liabilities, not those of its members personally.
• In Malaysia, this principle was adopted by the Federal Court in cases such as Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor.

• Limited Liability of Shareholders:
  Section 192(1) of the CA 2016 provides that a member (shareholder) shall not be liable for any obligation of the company by reason only of being a member.
• Personal Liability of Directors:
  As a general rule, directors are not personally liable for the contracts or debts of the company.

• In Re Application by Yee Yut Ee, the court held that except in cases of fraud, breach of warranty, or authority, a director is not personally liable for the debts of the company.
• Similarly, in Double Acres Sdn Bhd v Tiarasetia Sdn Bhd, the court held that directors cannot be held personally liable for breaches of contract committed by the company.

• Lifting the Corporate Veil (Exceptions):
  The corporate veil may only be lifted under specific statutory exceptions or judicial exceptions (such as fraud, evasion of legal obligations, or sham transactions):

• Section 539(3) read with Section 540(2) of the CA 2016 allows the court to impose personal liability if a director knowingly contracts a debt on behalf of the company when there is no reasonable or probable ground of expectation of the company being able to pay.
• Section 540(1) of the CA 2016 allows personal liability to be imposed on any person who was knowingly a party to the carrying on of the business with intent to defraud creditors or for any fraudulent purpose (as illustrated in Chin Chee v Toling Corporation).

3. Application

• Entity Liability: The loan agreement for RM100,000 was entered into directly between the lender, Yayasan, and the borrower, LH Sdn Bhd in 2022. Applying Section 20 of the CA 2016 and the principle in Salomon v Salomon, LH Sdn Bhd has its own legal personality and is the actual contracting party. Thus, the debt belongs solely to LH Sdn Bhd.
• Liability of Laila and Hisham as Shareholders: Pursuant to Section 192(1) of the CA 2016, Laila and Hisham are protected by the veil of incorporation. They cannot be sued for the company's loan default merely because they hold shares in LH Sdn Bhd.
• Liability of Laila and Hisham as Directors: Applying the rules in Re Application by Yee Yut Ee and Double Acres Sdn Bhd, Laila and Hisham are not personally responsible for the contractual debts of LH Sdn Bhd. Yayasan cannot sue them simply because the company defaulted on its loan repayments.
• Lifting the Corporate Veil: There are no facts in the scenario suggesting that Laila and Hisham acted fraudulently or knew in 2022 that the company would have no ability to repay the loan (which would otherwise trigger statutory liability under Sections 539(3) or 540(1) of the CA 2016). The mere failure to repay a loan after 3 years due to normal business or financial difficulties does not automatically constitute fraudulent trading or warrant the lifting of the corporate veil.

4. Conclusion

• LH Sdn Bhd is solely liable for the outstanding RM100,000 loan.
• Laila and Hisham are protected by the separate legal entity principle and are not personally liable to repay the loan. Therefore, Yayasan cannot successfully sue them personally for the repayment of LH Sdn Bhd's debt.

QUESTION 2

1. Issue

The issue is whether Jenny, acting as a promoter, is personally liable under the Companies Act 2016 for a pre-incorporation contract signed with Slowmo Sdn Bhd on May 5, 2025, to purchase ten amplifiers, given that the company's directors subsequently refused to ratify/accept the contract.

2. Law

A pre-incorporation contract is a contract or transaction purported to be made by or on behalf of a company before the company has been officially incorporated.

• The Common Law Position:
  At common law, a non-existent company has no contractual capacity. Therefore, in cases like Kelner v Baxter and Newborne v Sensolid (Great Britain) Ltd, the court held that a company cannot be bound by pre-incorporation contracts, nor can it subsequently ratify them because a principal must exist at the time the contract is made.
• The Statutory Position in Malaysia (Section 65 of the CA 2016):
  In Malaysia, the common law position has been altered by statute. Pre-incorporation contracts are governed by Section 65 of the CA 2016:

• Section 65(1): "A contract or transaction that purports to be made by or on behalf of a company at a time when the company has not been formed has the effect as a contract or transaction made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract or transaction accordingly."
• Section 65(2): "Notwithstanding subsection (1), a contract or transaction... may be ratified by the company after its incorporation and the company shall be bound by the contract or transaction as if the company had been in existence at the date of the contract..."

• Requirements for a Pre-Incorporation Contract to Bind a Company:
  Based on Section 65 and the Privy Council case of Cosmic Insurance Corporation Ltd v Khoo Chiang Poh (1981), for a company to be bound by a pre-incorporation contract, two conditions must be satisfied:

1. The contract must have been made on behalf of or in the name of the unformed company.
2. The contract must be ratified by the company after its incorporation. Ratification can be made expressly (e.g., by passing a board/members' resolution) or impliedly (by conduct showing unequivocal adoption of the contract).

If the company does not ratify the contract, the promoter remains personally liable under Section 65(1).

3. Application

• Nature of the Contract: The contract signed by Jenny on May 5, 2025, to purchase ten amplifiers from Slowmo Sdn Bhd was executed before Finger Five Sdn Bhd was officially incorporated. Hence, this is a pre-incorporation contract falling under Section 65 of the CA 2016.
• Initial Liability: Under Section 65(1) of the CA 2016, Jenny, as the promoter signing the contract, is prima facie personally liable on the transaction with Slowmo Sdn Bhd.
• Absence of Ratification: For Finger Five Sdn Bhd to take over this liability from Jenny, the company must ratify the contract after its incorporation under Section 65(2).

• There is no express ratification because the directors explicitly refused to accept the contract, claiming it was too expensive.
• Regarding implied ratification, the facts state that the amplifiers were used in a company meeting. While using the goods of a contract can sometimes suggest implied ratification by conduct, the explicit, active rejection of the contract by the board of directors overrides any claim of implied ratification. Implied ratification requires a clear, unambiguous intention to adopt the contract; here, the directors' final decision is an unequivocal refusal to accept it.

• Consequence of Non-Ratification: Since the contract was not ratified by Finger Five Sdn Bhd, the exception in Section 65(2) does not apply. The default statutory rule under Section 65(1) remains active.

4. Conclusion

• Yes, Jenny will be held personally liable to Slowmo Sdn Bhd for the contract under Section 65(1) of the Companies Act 2016. Because Finger Five Sdn Bhd's directors refused to ratify the contract after its incorporation, the liability remains solely with Jenny as the promoter.