Company Law: Types and Formation

BT20403/Company Law Business Entities: Company Law Topics covered: Types of Company Formation of a company;
• Promoters Pre-Incorporation Contract
• Memorandum and Articles of Association Inconsistency between the object and the company’s activities Upon incorporation:
• Company is an artificial legal person
• Separate legal entity Lifting the corporate veil scs&ismk/company law CONT. 2 The Effect of Incorporation
• Memorandum of Association & Articles of Directors’ duties and liabilities association
• Common law & statutory
• Termination
• Limited Liability Winding up Doctrine of Ultra Vires Pre-Incorporation Contract

Directors’ duties and liabilities scs&ismk/company law 3 In Malaysia, the law relating to companies are governed by the Companies Act 1965 (CA 1965).

scs&ismk/company law 4 The word company or corporation is defined under s. 4(1) CA: Besides the CA 1965, other relevant legislations are the Capital Markets Act 2007, the Securities Commission Act 1993 and the Companies Commission of Malaysia Act 2001. “company” means a company incorporated pursuant to this Act or pursuant to any corresponding previous enactment; Although company law in Malaysia is based mainly on CA 1965, there are key areas of company law hich are based on judicial precedents.

“corporation” means any body corporate formed or incorporated or existing within Malaysia or outside Malaysia. A company or corporation is a legal association of people who combine to finance a business. scs&ismk/company law 5 scs&ismk/company law 6 1 BT20403/Company Law A company with share capital is a private company if its M&A provides: s. 15(1) S. 14(2) S. 14(2) CA 1965 provides the classification of companies:
• restricts the right to transfer shares;
• Limits the number of members to not more than 50;
• Prohibits any invitation to public to subscribe any of Type of companies he company’s shares or debentures;
• Prohibits any invitation to public to deposit money Limited by shares Limited by guarantee with the company Unlimited liability A public company is a company other than a private company refer s.

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4(1) for definition Limited by both shares and guarantee scs&ismk/company law …cont 7 Obtain approval for the proposed name; Lodge certain documents with SSM (Suruhanjaya Syarikat Malaysia/ Companies Commission Malaysia (CCM) ) including: – Defines the essential company’s structure
• •
• • Memorandum and Articles of Association; Statutory declaration by promoters and directors;

Particulars of directors and registered office; Declaration of compliance; Statement of the allotment of shares of the Name of the company Company’s equity Company’s liability Object of the company scs&ismk/company law 9 10 Each company must have its object. Alteration of the general provisions of the Memorandum of Association to the extent and manner provided by the CA – s. 21. The objects are stated in the Memorandum of Association. The company may, by special resolution, alter the memorandum by altering or by deleting, the provision, unless the memorandum itself prohibits the alteration or deletion of that rovision – s. 21A. scs&ismk/company law components 8 3rd party who deals with the company may refer to the company’s M&A which is deposited with CCM. Pay the registration fees scs&ismk/company law scs&ismk/company law The purpose:
• To define and limit the activities of the company.
• If there is discrepancy between the object and its activities, thus such transaction is ultra vires and void. 11 scs&ismk/company law 12 2 BT20403/Company Law By virtue of s. 28(1) CA, the company may alter the provision of its memorandum with respect to the objects of the company. If company’s activities inconsistent with the object, Refer to Ashbury Railway Carriage & Iron Ltd v Riche (1875) Common law position – such ultra activities are ultra vires hence void and unenforceable. It cannot be ratified. Alteration can only be done by special resolution at the General Meeting. Statutory provision s. 20 Companies Act 1965 – such transactions are valid. scs&ismk/company law 13 scs&ismk/company law 14 Alteration of the general provisions of the Articles of Association by special resolution s. 31 CA A set of regulations for internal management of the company. Option: The company may: – adopts Table A, Fourth Schedule of the CA 1965 – (s. 30); excludes Table A, Fourth Schedule of the CA 1965; – creates its own AA, yet does not exclude the application of Table A, Fourth Schedule of the CA 1965, thus Table A will be applicable in the event of any lacunae. scs&ismk/company law 15 scs&ismk/company law It is a binding contract between the company and its members; – Hickman v Kent Sheep Breeders Assoc (1876) – Eley v Positive Government Security Life Assurance Co (1875) Before a company can be formed, there must be some persons who have an intention to form a company and who take the necessary steps to carry that intention into operation. (Setting up the company)

It is also a contract between individual members in their capacity as members. – Wong Kim Fatt v Leong & Co Sdn Bhd (1976) – Rayfield v Hands (1958) 16 Per Cockburn, C. J in Twycross v Grant (1877), a promoter is described as “one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary steps to accomplish that purpose. ” scs&ismk/company law 17 scs&ismk/company law 18 3 BT20403/Company Law Promoter owes fiduciary duties towards the company: Promoters owe fiduciary duties towards the company, not to the individual members of the company.
• To act in good faith To ensure that there is no conflict of interest If the promoter is in breach of his fiduciary duties, it is the company who may take legal action against the promoter. Refer to cases: – Erlanger v New Sombrero Phosphate Co (1878) – Gluckstein v Barnes (1900) scs&ismk/company law 19 scs&ismk/company law 20 Failure to disclose, company has options: A promoter has to disclose any transaction entered, either by,
• Company may rescind the contract (Erlanger v
• disclosing in M&A;
• by communicating to an independent Board of New Sombrero Phosphate), and Directors;
• By communicating to the existing and intended embers of the company.
• in certain circumstances, company may be able to claim the secret profit obtained by the promoter (Gluckstein v Barnes),
• Company may file suit for damages for the breach of fiduciary duties (Re Leeds & Hanley Theater), scs&ismk/company law 21 If the company elects to affirm the contract, company may have a cause of action against promoters for: 22 At times, promoters will have to enter a contract with a third party though the company has yet to be registered. We have to analyse above situation from both position i. e. Common Law and Statutory
• deceit,
• fraud
• negligent misrepresentation cs&ismk/company law scs&ismk/company law 23 scs&ismk/company law 24 4 BT20403/Company Law Pre-incorporation contract is a contract entered by any person on behalf of a company prior to its incorporation: Once such contract is ratified by the company then it will be of retrospective effect, s. 35(1).
• Common law: Failure to ratify will render the person who enters the contract to be personally bound by the contract, unless there is an express agreement to the contrary, s. 35(2). Company is not bound by a pre-incorporation contract as the principles of agency cannot be invoked (Kelner v Baxter, Newborne v

Sensolid, Phonogram, Rover Industrial etc).
• Statute: If company ratifies the pre-incorporation contract, the company will be bound by and entitled to the benefit of the contract as if it had been in existence at the date of the contract, s. 35 CA 1965 (Cosmic Insurance Corporation Ltd v Khoo Chiang Poh (1981) scs&ismk/company law Common Law the pre-incorporation contract is unenforceable on the grounds that: the company is not in existence yet, thus law of agency is inapplicable. the company cannot ratify such transaction as there is no principal-agent relationship involves. 25 Statutory 26 Company XYZ was set up on 1 March 2011;

Ms Kyra (promoter), on behalf of Co. XYZ, entered a transaction with ABC on 15 Feb 2011; Co XYZ’s first meeting was on 10 March 2011, whereby Ms Kyra disclosed the pre-incorporation contract to Co. XYZ. s. 35(1) of CA 1965 allows the company to ratify such transaction, it will bind the company with retrospective effect Cosmic Insurance Corporation Ltd v Khoo Chiang Poh
• If XYZ has agreed to ratify the contract, thus XYZ is bound by the transaction with ABC with retrospective effect from the date of transaction (i. e. 15 Feb 2011).
• If XYZ refuses to affirm, promoter will be personally liable, s. 35(2). (1981) Newborne v Sensolid GB) Ltd (1945), Kelner v Baxter, Phonogram, Rover Industrial etc). scs&ismk/company law scs&ismk/company law 27 scs&ismk/company law 28 Upon incorporation, a company is considered as an artificial legal person, i. e a person created by statute. S. 16(5) CA 1965 provides that “ on and from the date of incorporation specified in the certificate of incorporation but subject to the Act the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum capable forthwith of exercising all the functions of an ncorporated company and suing and being sued and having perpetual succession and a common seal with a power to hold land but with such liability on the part of the members to S. 16(5): As a ‘body corporate’, 1. a company’s obligations and liabilities are its own, and not those of its participants; 2. a company can sue and be sued in its own name; 3. a company has perpetual succession; 4. a company’s property is not the property of its participants; 5. a company can contract with its controlling participants contribute to the assets of the company in the event of its being wound up as is provided by this Act. ” cs&ismk/company law 29 scs&ismk/company law 30 5 BT20403/Company Law a. k. a corporate veil The company is a legal person separate from its participants. The law treats a company as being a separate person from its members and those who manage its operation. In the event of winding up, members are liable up to their unpaid shares only. They are not liable to contribute if they have had paid up their shares. This means that: Case Salomon v Salomon & Co Significance of the case
• its obligations and property are its own and not
• ‘Separate legal entity between members and those of its participants; and company’. its existence continues unchanged even if the identity of the participants changes scs&ismk/company law cash, debenture Pty Ltd company 20,001 shares Family 32 Facts: The company was put into liquidation; The assets were realised to pay off the secured creditors:
• Salomon was the debenture holder for Salomon & Co, hence was given priority The unsecured creditors were left empty handed Liquidator sued Salomon shoe business Salomon scs&ismk/company law 31 6 shares scs&ismk/company law 34 Lee v Lee’s Air Farming (1961) AC 12 Court of Appeal:
• Salomon was liable to indemnify the company against the losses.

Abdul Aziz bin Atan & 87 others v Ladang Rengo Malay Estate Sdn. Bhd. [1985] 2 MLJ 165: House of Lords:
• Reversing the Court of Appeal’s decision.
• Salomon and the company were separate persons. scs&ismk/company law scs&ismk/company law 33 35 scs&ismk/company law 36 6 BT20403/Company Law In the Application for Re Yee Yut Ee (1978) 2 MLJ 142 – In a company limited by shares, a member’s liability to contribute to meet the debts of the company is limited to the amount (if any) remaining unpaid on their shares – s. 18(1)(d). The High court held that a director is not liable for the company’s debts.

Allows investors to quarantine the risk of a particular venture from their other assets. In practice, creditors may negotiate personal guarantees from controllers. scs&ismk/company law 38 Once a person has sold or given his property to the company he no longer has any right over it. The property belongs to the company, and the member no longer has any right or interest. S. 19 mentions that a company has the ‘power to hold land’. This can be taken to mean that a company can own other types of property too. The property of a company is its own, and not that of its members. Macaura v Northern Assurance Co.

Ltd. (1925)AC619 . Even if a member holds almost all the shares of a company, he does not have any proprietary interest in the company’s property. scs&ismk/company law scs&ismk/company law 37 39 scs&ismk/company law 40 The corporate veil will be lifted in these situations derived from
• Common law
• Statutory There are certain circumstances whereby the Court are asked to lift the corporate veil and ignore the separate legal entity of the company If the court lift up the corporate veil thus it will be able to discover the identity of the participants of the company and impose liability upon them.

Thus, the separation between the company and its participants (members and officers) does not exist anymore. scs&ismk/company law 41 scs&ismk/company law 42 7 BT20403/Company Law Common Law In the event of evasion of contractual obligations – Gilford Motor Co v Horne -Jones v Lipman Sham purposes: Re FG Films Fraudulent: Re Darby The company is an agent or partner of the controller Taxation and nationality rules: Daimler Co Ltd v Continental Tyre & Rubber; scs&ismk/company law …common law(cont) Public interests (when it is just and equittable) – Aspatra Sdn Bhd & 21 Ors v Bank Bumiputera Malaysia

Bhd & Anor …. statutory (cont) …common law (cont) holding – subsidiary: s. 5(1) Holding – Subsidiary
• S. 169 financial Companies: statement – Tiu Shiu Kian v Red
• Where the company is in Rose Restaurant Sdn the relationship of holding Bhd; and subsidiary, SLE is – Hotel Jaya Puri Bhd v inapplicable as the Act National Union of requires a consolidated Hotel, Bar and profit and loss account for Restaurant Workers holding and subsidiary company, s. 169 Statutory S. 36- member less than 2; S. 121(1) &(2) – misdescription (unless company is willing to ratify) providing share assistance to purchase own shares, . 67(5) Taxation purposes
• S. 140 Income Tax Act 1967 Payment of dividend from other sources, not from profit
• S. 365(2) DHN Food Distributors Ltd v Tower Hamlets London Borough Council …statutory (cont) issuance of prospectus which is pending approval
• s. 44(2)
• s. 48(4) incapable of paying the company’s debt
• S. 303(3) – no reasonable or probable expectation fraudulent trading – s. 304(1) scs&ismk/company law scs&ismk/company law 43 44 Definition
• S. 4(1): A director is a person occupying the position of director by whatever name called.
• Includes a ‘shadow director’: not an ‘official’ irector, but someone whose directions board ‘accustomed to act’ in accordance with. A director must be a natural person and of full age: s122 (2). The general powers of management rest with the board of directors – Article 73 Table A. 45 scs&ismk/company law 46 Disqualification of Directors
• S. 11 CA – makes it a criminal offence for an undischarged bankrupt to act as a director or shadow director without judicial consent. •. Company Secretary
• Every company must have a company secretary. The secretary may be a director of the company, unless there is only one director, in which case the ecretary must be the second individual. scs&ismk/company law 47 scs&ismk/company law 48 48 8 BT20403/Company Law Common Law Fiduciary duties
• Bona fide
• To act diligently
• To ensure that there is no conflict of interest Duty of care and skills
• Expectation of a reasonable man
• Delegation of authority Retirement Statutory To disclose any interest s. 131 To act in good faith – s. 132 Misuse of the company’s confidentiality- insider trading- s. 132A & s. 132B Unauthorised transactions that might jeopardise the company – s. 132C Interest in another company- s. 134 Secret profit- s. 135 scs&ismk/company law As agreed Resignation
• Tender notice as prescribed by the Articles of Association; Dismissal/Removal
• Without waiting for expiry of the term- could lead to another legal suit taken by the director against the company 49 scs&ismk/company law 50 Registrar’s power under s. 308:
• Defunct companies In approving the scheme of arrangement, the court may order immediately for dissolution of a company – s. 178. Voluntary winding up – s. 254
• The members of the company may pass a resolution to wind up or through winding up by creditors Court’s Order – s. 217
• The grounds as specified in s. 218(1) scs/company law 51 9