Briefly explain the meaning of the following legal phrase:

1) Veil of incorporation

It has been established that a company is an artificial person. Once it is incorporated, it is a

separate legal entity from its members and officers which means that the company is capable in
suing and being sue just like a normal human who has their own rights. This can be more
explained in Section 19(2) which stated that a member shall not be liable for an obligation of a
company by reason of being a member of the company. It also carries the concept of limited
liability. A member’s liability in the company is only limited to the number of shares they
contributed to the company. Under section 20, it stated the principle of separate legal entity.

The most monument case that explains the concept of separate legal entity or veil of
incorporation is in the case of Salomon vs Salomon & Co Ltd (1897). In this case, Mr Salomon
was a sole-proprietor, manufacturing boots. The business was successful. Mr Salomon
incorporated a company and sold his business to the company in consideration for 20,000 shares
and debentures of ₤10,000 issued in favour of Mr Salomon. Mr Salomon ended up holding
20,001 of the 20,007 shares issued. The other six shares were held by his wife and five children
as nominees of Mr Salomon. Unfortunately, the company experienced financial difficulty and
eventually the company become insolvent and was wound up. An action was brought against
Mr Salomon for a court order to postpone his priority under the debentures to rank after the
company’s unsecured creditors and also to indemnify the company for all the debts due to its
unsecured creditors. If it had been approved by the court, Mr Salomon would also have been
liable to the company’s creditors.

It was held that a company upon its incorporation, is a separate legal entity from its members. It
is immaterial that the company bought over the business from its subscribers, and operated it as
before; that third parties dealt with the same personnel; and that the same persons received the
profits generated by the business, previously as the partners and now as members of the
company running the business. Mr Salomon is not liable to the company’s creditor as he is only a
member of the company.

In the case of Re Application of Yee Yut Ee (1978), Mr Yee was a director of a company. The
company retrenched its staff and the Industrial Court awarded the retrenched staff
retrenchment benefits. As the company failed to comply, the Industrial Court made an order
that Mr Yee was liable to pay the benefits. Mr Yee appealed. It was held that Mr Yee was not
liable. A director of a company is not liable for the debts of the company unless fraud is proven,
or the director has committed breach of warranty of authority or under exceptional
circumstances.

However, there are also some exceptions to the law regarding the veil of incorporation which
allows it to be pierced if there are specific circumstances that involves fraud and dishonesty.
Furthermore, a situation of fraud that hides behind the veil of incorporation.

In conclusion, the concept of veil of incorporation means that the company should be a separate
legal entity from its members and directors.