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will be tempted to stake company‟s funds in precarious undertakings which may
generate high returns in order to bring the company back to profitability. 30 If the
gamble pays off, shareholders will gain the most in dividends but if it fails, creditors
may be left without compensation. 31 Directors and shareholders will not be liable to
creditors in respect of debts owed to the company because of the refuge conferred by
the separate legal entity and the limited liability respectively.
The principle is applied throughout common law jurisdictions including Australia,
New Zealand and Malaysia. The courts‟ decisions in these jurisdictions mirror the
English court's propensity in strictly applying the principle. In Malaysia, the
principle is binding by virtue of section 5 of the Civil Law Act 1956; hence it is
woven into the fabric of Malaysian Company Law which courts have continued to
uphold until today. 32 Judges have a penchant for referring to various English
decisions and applying them into their own decisions. Hence, any developments in
the area in the UK, Australia and New Zealand to a certain extent have an impact on
Malaysian law. Decisions from these jurisdictions often find their way into
Malaysian courts, and mostly without any modification, as if these decisions are still
binding on Malaysian courts.
In doing so, judges have not taken into consideration the proviso that the law should
be compatible with local conditions and applied only in the absence of local law. 33 It
has been indoctrinated into judges that English law is applicable to Malaysian cases
which is why, despite its persuasive status, courts have the tendency to refer to
30 Ibid.
31 Ibid, at 523.
32 In Goh Hooi Yin v Lim Teong Ghee &Ors [1977] 2 MLJ 26 at 29 where Arulnandom J held “ the
principle on which our limited liability companies are incorporated are identical and derive from
English law and it is incumbent on our courts to abide by the doctrines laid down by English courts
unless there are compelling reasons not to”; see also Abdul Aziz bin Atan v Ladang Rengo Malay
Estate Sdn Bhd [1985] 1 CLJ 255; Lim Kar Bee v Duofortis Properties(M) Sdn Bhd [1992] 3 CLJ
1667; Hong Kong Vegetable Oil Co Ltd v Malin Srinaga Wicker [1978] 2 MLJ 13.
33 See Goh Hooi Yin v Lim Teong Ghee &Ors [1977] 2 MLJ 26 at 29 This is evident from judgment
where judges did not mention anything on it although there is lacuna in the law.
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