Law346 - Company Law

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

1

CHAPTER 3: COMPANY LAW Introduction  A

"company"

is

a

business

organisation

that

is

registered

(or

"incorporated") under the Companies Act, 1965 or its predecessor legislation. Operationally, a small company may be run in exactly the same fashion as partnership.  The incorporation of a company has two legal effects: 

Firstly, it creates a legal person.



Secondly, that legal person has "perpetual succession", i.e., it lasts until liquidated by an order of court.

 Unlike a partnership, a company is recognised as a person in law. In the case of a company, the lease can be registered in the name of a company.  The law treats the persons who own and control the company as separate from the company itself. For instance A, B and C set up ABC Sdn Bhd, the law considers ABC Sdn Bhd to be separate person altogether.

Nature of Companies  A company is a corporate body of a corporation. A corporation is an artificial legal person. The law sees it as separate and independent of the persons who are members of that corporate body.  The legal recognition given to the company is provided by Section 16(5) of the Companies Act, 1965. it says:

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

2

“On and from the date of corporation specified in the of incorporation…the subscribers to the memorandum together with such other person as from time to time become members of the company shall be a body corporate by the name set out in the memorandum…”

 In

other words, after fulfilling

all

the

requirement of

the

Act

incorporate the company, and the Companies Commission of Malaysia (CCM) issues a certificate of incorporation, a new legal entity comes into existence.  The company, an artificial person, is „born‟ out of the process of law.  This new entity is separate from its members. Like a natural person it has its own name and can own property.  This means that the company can use own name to enter into transactions and need not go through its members, and that the company‟s assets do not belong to the members.  The

reason

for

creating

the

legal

fiction

of

the

separate

legal

personality has been said to be a matter of convenience.  The separate legal personality concept is useful in large companies where there are many shareholders, and these shareholders are frequently changing.  If the company does not have a separate legal personality, it would mean that a change among the shareholders would require a transfer of the company‟s assets.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

3

Formation of Companies  A company can be formed by the following basic procedures: 1. Obtaining approval for the proposed company name; 2. Lodging with the Registrar of Companied certain documents, including: a) The Memorandum and Articles of Association b) Statutory declarations by promoters and directors [Form 48A] c) Particulars of directors and registered office [Forms 44, 45 AND 49] d) Declaration of compliance [Form 6]; and e) A statement of the allotment of shares to the subscribers to the Memorandum [Form 24] 3. Payment of registration fees.  On

receiving

the

above

documents,

the

Registrar

examines

the

documents, and if the requirements of the Companies Act 1965 have been complied with, the Memorandum and Articles of Association do not infringe the Act, the objects are lawful, and the name of the company is not contrary to the Companies Act 1965, the Registrar then issues a certificate of incorporation which is conclusive evidence that the Companies Act 1965 has been complied with and the company is either a private or public company as stated in the certificate.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

4

Types of Companies  Section 14(1) of the Companies Act 1965 provides that any two or more persons associated for any lawful purpose may, by subscribing their names to a memorandum and complying with the requirements as to registration, form an incorporated company.  Companies in Malaysia are classified according to (i) liability, (ii) private or public status.  Section 14(2) of the CA 1965 provides the classifications of companies under the CA 1965. It reads: A company may be a) A company limited by shares, b) A company limited by guarantee, c) A company limited both by shares and guarantee, or d) An unlimited company.

 A company can be a company with limited liability or unlimited liability. A company with limited liability means that the liability of the members is limited by shares or by guarantee with or without a share capital. Unlimited companies may be with or without liability. Limited companies may be either public or private. However, an unlimited company must be private.  Companies classified according to liability. 

Company limited by shares



Company limited by guarantee



Company limited by share and guarantee



Unlimited company

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

5

A. Companies Limited By Shares  S.4 of the CA 1965 defines „company limited by shares‟ as a

company formed on the principle of having the liability of its members limited by the memorandum to the amount (if any) unpaid on the shares respectively held by them.  This is the most common form of company.  The liability of a member of this company will depend on whether his shares are fully paid or not. 

If he holds fully paid shares, he has no further liability to the company.



If the company becomes insolvent he cannot be made to contribute to the assets of the company.



Only if his shares are partly paid, he will be liable to contribute to the company‟s assets, up to the amount still unpaid on his shares.

B. Company Limited By Guarantee  A company limited by guarantee id defined by section 4 as

„a company in the principle of having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up‟.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

6

 This type of company does not have a share capital and so does not require the members is specified in the memorandum of association.  If the company is wound up, then a person who has been its member may be required to contribute up to his amount of guarantee towards payment of debts incurred by the company while he was a member.  This liability extends to those who have left the company but was a member within a year before the company wound up.  Although this type of company does not have a share capital, it is a separate legal entity.  It is not normally used for trading, but is often formed to run clubs and other organizations that are maintained by subscription, social activities and donations.  Classification as Private or Public Companies.  Classification according to status. Private Company 

According to S.15(1) of the CA 1965, a company having a share capital may be incorporated as a private company if its Memorandum or Articles: i.

Restricts the right to transfer its shares

ii.

Limits the number of members to not more than fifty

iii.

Prohibits

any

invitation

debentures to public

or

offer

of

shares

or

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

iv.

7

prohibit invitation or offer public to deposit money with company



A

private

limited

company

has

the

words

„Sendirian

Berhad‟ (Sdn. Bhd.) as part of or at the end of its name.



A private unlimited company has the word „Sendirian‟ (Sdn) at the end of its name.



An exempt private company is a private company in the shares of which no beneficial interest is held directly or indirectly by any corporation and which has not more than twenty members none of whom is a corporation.  This sort of company suits a business organization which usually consists of family members but wishes to avoid the consequences of being a partnership.  It also has certain privileges under the CA 1965 and is

sometimes

referred

to

as

an

„incorporates

partnershi‟. Public Company 

Section 4(1) of the CA 1965 defines a public company as a company other than a private company.



In Malaysia, a public limited company has „Berhad‟ (Bhd.) as part or at the end of its name.

Foreign Company 

Is a company incorporated outside Malaysia, which has a place of business or is carrying on business within Malaysia.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346



8

Section 330 (1) of the CA 1965 provides that the phrase „carrying on business‟ includes establishing or using a share transfer

or

share

registration

office

or

administering,

managing or otherwise dealing with property situated in Malaysia as an agent, legal personal representative, or trustee whether by servants or agents or otherwise.



Every foreign company desiring to establish a place of business or to carry on business within Malaysia must lodge the following documents with the Registrar of Companies for registration: a) A certified copy of certificate of its incorporation, or registration in its place of incorporation or origin, or a document of similar effect; b) A

certified

copy

of

its

charter,

statute

or

memorandum and articles or other instrument constituting or defining its constitution; c) A list of its directors containing similar particulars to those required by Section 141 of the CA 1965. d) Where

the

list

includes

directors

resident

in

Malaysia who are members of the local board of directors, a memorandum duly executed by or on behalf of the foreign company stating the powers of the local directors; e) A

memorandum

of

appointment

or

power

of

attorney under the seal of the foreign company or

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

9

executed on its behalf in such verified in the prescribed manner, stating the name and address of one or more persons resident in Malaysia, not including a foreign company, authorized to accept on its behalf service of process and any notices required to be served on the company; and f) A statutory declaration in the prescribed form made by the agent of the company.



Upon payment of the appropriate fees, the Registrar will register the documents and then issue a certificate of registration – Section 332 (1) and (1A) of the CA 1965.



Section 333 (1) of the CA 1965 – a foreign company shall have registered office within Malaysia to which all communications and notices may be addressed.



Section 340 (1) of the CA 1965 – if a foreign company ceases to have a place of business or to carry on business in Malaysia, it shall within seven days after so ceasing lodge with the Registrar notice of that fact.

Investments company 

Is a public company declared by proclamation of the Minister published I the Government Gazette to be an investment company.



Section 319 of the CA 1965 – companies engaged primarily in the making of investments in marketable securities for the purpose of revenue and for profit and not for the

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

purpose

of

exercising

control

may

be

proclaimed

10

as

investment companies.



The restrictions imposed by the Companies Act 1965 on Investment companies are as follows: 1. An investment company is prohibited from having outstanding borrowings in excess of twice its bet tangible assets – Section 320 CA 1965. 2. An investment company cannot invest an amount more than 10 per cent of its net tangible assets in one corporation, and the amount invested in the ordinary shares of one corporation cannot be more than 10 per cent of the subscribed ordinary share capital of the corporation – Section 321 (1)(2) of the CA 1965. 3. An investment company cannot underwrite any issue of authorised or non-authorised securities to an amount exceeding 40 per cent or 20 per cent respectively of its net tangible assets – section 322 (2)(2) of the CA 1965. 4. An

investment

company

cannot

issue

a

prospectus or permit a prospectus to be issued on its behalf unless the prospectus specifies the type of security in which it is among the objects of

the

company

to

invest;

moreover,

the

prospectus must specify whether it is among the objects of the company to invest within Malaysia

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

11

or outside Malaysia or both – Section 323 CA 1965. 5. An investment company cannot purchase any other investment company or any corporation overseas

which

is

a

proclaimed

investment

company, and if it holds such investments at the time

of

its

being

proclaimed

an

investment

company, it has a three-year grace period to comply – Section 324 of the CA 1965. 6. As a general rule, an investment company cannot buy or sell or deal in any raw materials or manufactured goods for the purpose of profit – Section 325 of the CA 1965.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

12

Legal Personality  A company is an "artificial person", as opposed to a human who is a "natural person". Most of the advantages of companies stem from their separate legal personality.  The word „company‟ means a company incorporated pursuant to the Companies

Act

1965

or

pursuant

to

any

corresponding

previous

enactment.  The resultants effects of incorporation are also stated in Section 16(5) of the CA 1965. The company: 

is capable forthwith of performing all the functions of an incorporated company



is capable of suing and being sued



has perpetual succession



have a common seal



has power to acquire, hold and dispose of property

 BODY CORPORATE 

A corporation or body corporate is a legal person created and recognised by the law. In this sense it is an artificial legal person as opposed to individuals who are known as natural persons. As a person, a company has: a) the rights to take legal action b) the rights to hold property c) with

powers

and

liabilities

as

an

individual

but

is

distinguished from the members it may have from time to time: SALOMON v SALOMON & Co Ltd (1897) AC 22.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346 

13

The Company As A Separate Legal Entity: A company has a dual nature, as an association of its members but also as a person separate from its members. As soon as necessary formalities of incorporation are satisfied, a new entity comes into existence which is separate and distinct from its directors and shareholders.

SALOMON v SALOMON & CO Facts of the case:

 Salomon had incorporated his boot and shoe repair business.  He ran the business as a sole trader under the style of „A.Salomon & Co.‟  Salomon was married and he had five children.  All his children pestered him for a share in the business.  Salomon then decided to incorporate his business as a limited liability company.

 He gave one share each to his wife and his 5 children and he himself took 20 001 shares.

 The business was then transferred to the company and in consideration thereof debentures were issued to Solomon.

 But Salomon continued to run the business as before.  The business floundered.  Salomon was unable to salvage the company and the company was put into liquidation.  The liquidator sued Salomon. Held:  The COA held that he was liable to indemnify the company against the losses.  However the House of Lords reverse this decision and held that incorporation of the company created a separated person.  The HOL held the members were not liable in respect of the company‟s obligations.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

14

The rationale for a company being a separate legal entity can be



said to be that of convenience.

SUING AND BEING SUED Because a company is a separate legal entity it follows that it



may enforce rights by suing and conversely it may incur liabilities and be sued by others. In fact the rule in FOSS v HARBOTTLE (1843) 2 Hare 461; 67



ER 189 requires the company itself to be the person enforcing the rights. Members generally cannot do this on their company‟s behalf although a company may sue and be sued by its own members.  PERPETUAL SUCCESSION A company does not die but continue to exist until its name is



struck off or dissolved through a legal process known as winding up or liquidation even though without any directors, members, employees, business etc.: RE NOEL TEDMAN HOLDINGS PTY LTD (1967) Qd R 561. Its members may come and go but this does not affect the legal



personality of the company: ABDUL AZIZ BIN ATAN & 87 ORS v LADANG RENGO MALAY ESTATE SDN BHD (1985) 2 MLJ 165. Fact of the case:  All

the

shareholders

of

the

respondent

company

by

a

written

agreement sold and transferred their entire shares to a certain buyer in 1981.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

15

 The main asset of the company consisted of land on which the company appeared to have carried of the business of a rubber and oil palm estate.  In November 1982, a claim was initiated for termination benefits under Regulation 8 of the Employment (Termination and Lay-Off Benefits) Regulations 1980.  The point in dispute was whether the estate was sold and if so whether a change of employer took place. Held:  Dismissing the applicants‟ appeal: an incorporated company is a legal person separate and distinct from the shareholders of the company.  In

the

present

case

there

was

no

change

whatsoever

in

the

constitution of the respondent company.  The company did not change its identity or personality.  It continued to own all the assets of the estate which were an integral part of the business for the purposes for which the applicants were employed.  COMMON SEAL 

A company is required to have a common seal: section 16 (5).



At common law, a company could enter into a contract only if there was a contractual document bearing the impression of the company seal.



Usually, the articles of a company provide that the seal can only be used with the authority of the board of directors: article 96, Table A.



Section 35(4) alters the common law so that a person with the requisite authority can enter into a contract on behalf of a company as if it were a natural person without the company‟s seal.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346



Thus

companies

can

enter

into

oral

contracts

or

16

written

contracts without the common seal where the law of contract and agency allows. 

Some documents such as share certificates and instrument of transfer of land require the seal of the company.

 POWER TO OWN PROPERTY 

A company may own property distinct from the property of its members.



The members only own shares in the company but do not have a proprietary interest in the property of the company: MACAURA v NORTHERN ASSURANCE CO LTD (1925) AC 619. Therefore, a change in membership of a company will have no effect on the ownership of the company‟s assets.

The nature of limited liability  The function of a limited liability company is to provide business owners with protection from personal liability for the activities of a business.  In this way, a limited liability is like a corporation.  For example, if the limited liability company is sued, the party seeking compensation cannot go after the assets of the owners of the business.  The owners of a limited liability company are called members.  Typically, one of the owners is designated to serve as the managing member, overseeing the day-to-day operations of the enterprise.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

17

 The case which first established the essential distinction between a company and its members was SALOMON v SALOMON & CO. LTD [1985-9] ALL E.R. REP.33

The principle established in Salomon‟s case is that a company and its members are separate persons. The principle is known as the veil of incorporation.

The Relationship of Legal Personality to Limited Liability  It has been said that the most popular reason why a company is formed is to take advantages of the limited liability principle.  However, it must be remembered that although a company is a separate legal personality, it can have unlimited liability.  In order words, the shareholders may still be liable for the company‟s debts.  A corporate body with limited liability means the shareholders of a company limited by shares are not liable for more than what they have to contribute for the shares they get.  If the company is limited by guarantee, they are not liable for more than amount they have agreed to contribute to the assets on winding up.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

18

 The limited liability of a company has been said cost involved in the separation of ownership of the shares and control of the company. However, this may be true only for public companies.  This has been said as a company has limited liability, it reduces the need to monitor management and other shareholders.  Limited liability together with free transfer of shares, will also facilitate the market for control.  This is considered as an incentive for the management to perform efficiently.  Apart from that, and other than making the shares marketable, limited liability would increase the volume of transactions that would improve the information fed to the market place.  Limited liability also allows shareholders to diversity their shareholdings. Lastly, limited liability will result in a positive attitude to risk taking and so would facilitate investment decisions.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

19

Lifting of the Veil of Incorporation  The principle that a company is a person separate from its members and also from the directors and others who manage it can produce unsatisfactory results in certain circumstances.  Thus, some exceptions to this principle have evolved.  In these exceptions, the company is treated as in some degree identified with its members or directors or managers.  These

exceptions

are

described

as

cases

of

„lifting

the

veil

of

incorporation‟, and arises in the following instances: i.

Number of members below two.

ii.

Responsibility for fraudulent trading.

iii.

Publication of name.

iv.

Taxation and nationality rules.

v.

Holding and subsidiary companies.

vi.

Evasion of legal obligations or abuse of legal rights.

vii.

Other instances – such as to do justice where there is fraud.

Number of members below two. Section 36 of the CA 1965 If the number of members of a company (other than a company whose issued shares are wholly held by a holding company) is reduced below two and it carries on business for more than six months while the number is so reduced, a person who is a member of the company during the time that it so carries on business after those six months, and is

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

20

aware of it, is personally liable for all the debts of the company contracted after those six months and may be sued therefor. The company and that member shall also be guilty of an offence against the Companies Act.

Responsibility for fraudulent trading. Section 304 (1) of the CA 1965 If in the course of the winding up of a company or in any proceedings against a company it appears to the court when hearing the application of the liquidator or any creditor or contributory of the company that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the court may hold any persons who were knowingly parties to the fraud personally responsible for all or any of the debts or other liabilities of the company as the court directs. RE WILLIAM C. LEITCH BRS.LTD (NO 1) [1932] 2 CH.71  The company was insolvent but its directors continued to carry on its business and purchased further goods on credit.  Maugham J. declared one of the directors personally liable for the price of those goods, citing: … if a company continues to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors even receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

21

Publication of name. Section 121 (2) of the CA 1965 If any officer (eg: a director, secretary or employee) uses the company seal or issues any business letter, statement of account, invoice or official notice or publication of the company wherein its name is not mentioned, or if he issues or signs on behalf of the company any bill of exchange, promissory note, cheque or other negotiable instrument or any indorsement, order, receipt or letter of credit wherein the company‟s name is not mentioned, that person and the company are guilty of an offence against the CA 1965. And where the officer signs issues or authorizes to be signed or issued on behalf of the company any bill of exchange, promissory note or other negotiable instrument or any indorsement thereon or order wherein the company‟s name is not mentioned, he shall in addition be liable to the holder of the instrument or order for the amount due thereon unless it is paid by the company. In addition, section 121 (1A) of the CA 1965 provides that a company which has changed its name is required to state its former name beneath

its

present

name

on

all

documents,

business

letters,

statements of account, invoices, official notes, publications, bills of exchange, promissory notes, indorsement, cheques, orders, receipts and letters of credit of, or purporting to be issued or signed by or on behalf of, the company for a period of not less than twelve months fro the date of the change.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

22

Taxation and nationality rules. The tax residence of a company is determined mainly by reference to the seat of management and control, i.e. the place where the directors actually make their management decisions. In time of war, the foreign nationality of members may affect the national status of a company – DAIMLER CO. LTD. v. CONTINENTAL TYRE & RUBBER CO. (GREAT BRITAIN) LTD [1916-17] ALL E.R.REP 191

Holding and subsidiary companies. A corporation shall be deemed to be a subsidiary of another corporation if:1) That other corporation a) Controls the composition of the board of directors of the first-mentioned corporation; b) Controls more than half of the voting power of the firstmentioned corporation; or c) Holds more than half of the issued share capital of the first-mentioned corporation. 2) The first-mentioned corporation is a subsidiary of any corporation which is that other corporation‟s subsidiary – Section 5 of the CA 1965 A parent (holding) and its subsidiary company are two separate legal entities (PEOPLE‟S INSURANCE CO. (M) SDN. BHD. V PEOPLE‟S INSURANCE CO LTD. & ORS [1986] 1 MLJ 68])

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

23

HOTEL JAYA PURI BHD v NATIONAL UNION OF HOTEL, BAR & RESTAURANT WORKERS & ANOR. [1980] MLJ 109 Fact of the case: 

A number of workers employed by the Jaya Puri Chinese Garden Restaurant Sdn Bhd were retrenched by the company as the business was closed owing to losses.



The restaurant was carried on in premises belonging to the Hotel Jaya Puri Bhd. And both the hotel and the restaurant had the same managing director.



A dispute arose between the National Union of Hotel, Bar and Restaurant Workers representing the workers and the restaurant and the dispute was referred to the Industrial Court.



The Union sought to have the hotel joined as a party alleging that the workers were the employees of the hotel and that they were dismissed and not retrenched as alleged by the restaurant.



The Industrial court in its award found, inter alia, that the workers were employees of the Hotel and not of the restaurant.



The Hotel applied to the High Court to quash the award on the grounds, inter alia, that the Hotel was not the employer of the workers in question and the finding of the learned President of the Industrial Court that the hotel and the restaurant were in reality one enterprise was in no way against the principle of separate entity and was not unreasonable.

Held: Salleh Abas F.J 

The Hotel and the restaurant as being in one group, and so these matters which counsel said should have been taken into consideration, but were not, became no longer important.

FARIHANA BINTI ABDUL RAZAK (2014) LAW 346

24

Evasion of legal obligations or abuse of legal rights. The law will not permit an individual to evade his obligations by using a company which he controls to do what he himself is prevented from doing. GILFORD MOTOR CO. LTD. v HORNE [1933] ALL ER REP 109 Restraint of trade

JONES V LIPMAN [1962] 1 ALL ER 442 Specific Performance

Other instances – such as to do justice where there is fraud. In ASPATRA SDN BHD & 21 ORS v BANK BUMIPUTRA MALAYSIA BHD & ANOR [1988] 1 MLJ 97 the Supreme Court held that the corporate veil was properly lifted when it was proven that fraud was committed by Lorrain Osman when as director and chairman of the two companies concerned, he had made secret profits and was the alter ego of Aspatra. Thus, the court held that it was necessary to identify all assets owned by Lorrain within the jurisdiction as well.