COMPANY LAW NORATHIRAH NORHADI . NORANI ZAH JOHARI . SAMAT SAION A STUDENT'S HANDOUT 2ND EDITION (BASED ON THE COMPANIES ACT 2016)
COMPANY LAW – A STUDENTS’ HANDOUT ( BASED ON THE COMPANIES ACT 2016) NORATHIRAH BINTI NORHADI NORANIZAH BINTI JOHARI SAMAT BIN SOION @ SAIUN
POLITEKNIK KOTA KINABALU HTTP://WWW.POLIKK.EDU.MY EDITORS NORATHIRAH BINTI NORHADI NORANIZAH BINTI JOHARI SAMAT BIN SOION @ SAIUN COMPANY LAW – A STUDENTS’ HANDOUT ( BASED ON THE COMPANIES ACT 2016) ©ALL RIGHTS RESERVED NO PART OF THIS BOOK MAY BE REPRODUCED, STORED IN A RETRIEVAL SYSTEM, OR TANSMITTED IN ANY FORM OR BY ANY MEANS, ELECTRONIC, MECHANICAL, PHOTOCOPY, RECORDING OR OTHER METHODS, WITHOUT THE PRIOR PERMISSION OF THE AUTHORS.
P R E F A C E A COMPANY LAW – A Student’s Handout 2nd Edition provides the knowledge on the principles of law that need to be adhered to according to the Companies Act 2016 and relevant case law. This students’ handout emphasizes towards the incorporation of a company, the management and administration of a company, the company’s financial aspects and winding up of a company. This students’ handout aims to give a comprehensive knowledge on the importance of the provision under the Company Act 2016 for students. If any misstatement on issues or cases, may refer to the original Company Act 2016. Thank you, Norathirah Binti Norhadi Noranizah binti Johari Samat bin Soion
CHAPTER 1 : INTRODUCTION TO COMPANY LAW CHAPTER 2 : INCORPORATION OF A COMPANY CHAPTER 3 : SHARES, DEBENTURES AND CHARGES CHAPTER 4 : COMPANY’S DIRECTOR AND SECRETARY CHAPTER 5 : COMPANY MEETING CHAPTER 6 : ACCOUNTS, REPORTS AND AUDIT CHAPTER 7 : WINDING UP 1 15 34 43 53 61 66
A. LEGAL SOURCES OF COMPANY LAW IN MALAYSIA I.COMPANIES ACT 2016 • Came into force on 31st January 2017. • Replaces the Companies Act 1965 (Act 125). • It acts as the principal source of legislation pertaining to company matters. • Total number of sections: 620, Total number of schedules: 13. • Amendments of the Act benefits SMEs greatly. • Simplify the administration requirements of a company. II.COMPANIES REGULATIONS 2017 • Came into operation on 31st January 2017. • The Companies Regulations 2017 came into existence pursuant to the provision under Section 613 of the Companies Act 2016. • The Minister charged with the responsibility for companies (currently, it is the Minister of Domestic Trade, Co-operatives and Consumerism) are empowered to make regulations to give effect to the Act. • Total number of items: 12, Total number of schedules: 1. • Acts as a complementary legislation to the Companies Act 2016. • Deals with online matters and procedures such as registrations, e-filling systems, fees and annulments. 1
Definition: Also known as individual entrepreneurship or Owner(s) of the business: Belongs to the sole Entity Name appearance: Acts, rules & Regulations: Registration of Businesses Act 1956 (ROBA 1956) and Registration of Businesses Rules 1957. Capital contributions: Contribute by the business owner. Legal status: Not a separate legal entity. Liabilities: Sole proprietor has unlimited liability towards the business that may extend to the personal assets of the owner. Management: Sole proprietor. No. of Shareholders/partners/owner: Belongs to the sole proprietor alone. Annual compliance: Business renewal. Dissolution: The business shall within 30 days of the termination notify the Registrar in the prescribed form (Form C) of such termination. In the event of death of sole proprietorship, the next of kin must file a notice of termination in Form C within 4 months. Business license cannot be renewed after more than one (1) year from business expiry date sole trader is a type of an unincorporated entity that is owned by one individual only. proprietor alone. a- Personal Name (Name as per identity card)- E.g.: Asila Binti Ali. b- Trade Name- E.g.: Happy Enterprise/ Happy Trading/ Happy Services. 2 B. TYPES OF BUSINESS ORGANISATION THAT CAN BE FOUND IN MALAYSIA Sole proprietorship. Partnership. Limited liability Partnership. Company. 1. 2. 3. 4. 1) SOLE PROPRIETORSHIP
Definition: Section 3. ( 1) Partnership Act 1961 - Owner(s) of the business: Belongs to the partners. Entity Name appearance: Acts, rules & Regulations: Registration of Businesses Act 1956 (ROBA 1956) and Registration of Businesses Rules 1957. Capital contributions: All partners. Legal status: Not a separate legal entity. Liabilities: All partners are liable to the debts of the partnership business. In terms of personal liability. There are unlimited liability (Jointly and severally liable with the partnership) which can extend to personal assets of the partners. Management: All partners are responsible to manage the business. No. of Shareholders/partners: Minimum 2 partners, maximum 20 partners for ordinary business, unlimited number of partners for professional business. Annual compliance: Business renewal. Dissolution: The business shall within 30 days of the termination notify the Registrar in the prescribed form (Form C) of such termination. In the event of death of partner, existing partner are given two (2) options whether: (i) to file a notice of termination in Form C within 30 days; or (ii)submit business ownership changes application to remove the deceased partner from partnership. Existing partner is allowed to continue with business operation. Business license cannot be renewed after more than one (1) year. Partnership is the relation which subsists between persons carrying on business in common with a view of profit. 3 2) PARTNERSHIP
Definition: Section 2 (d) Limited Liability Owner(s) of the business: Belongs to the LLP (Partners have share/s in the capital and profits of the LLP). Entity Name appearance: Entity’s name end with the word "PLT" (Perkongsian Liabiliti Terhad) or LLP (Limite Liability Partnership). Acts, rules & Regulations: Limited Liability Partnerships Act 2012 (LLPA 2012) and Limited Liability Partnerships Regulations 2012. Capital contributions: Contribution of capitals from the partners. Legal status: Separate legal entity. Liabilities: The LLP will be held liable for the debts of the business but there are no personal liability of partner, except for own wrongful act or omission or without authority. The liabilities borne by the partners are jointly and severally with the LLP to the extent of amount of contribution only. Management: Partners are responsible to manage the business. No. of Shareholders/partners: Minimum two (2) and without maximum limit. Annual compliance: Annual Declaration (AD). Dissolution: There are two modes of closing/cessation: Partnership Act 2012- means a limited liability partnership registered under section 11 or a foreign limited liability partnership registered under section 45. a) Winding Up : Voluntarily by partners; or Compulsorily by the High Court. b) Striking off: By application of partner; or Registrar’s initiative. 4 3) LIMITED LIABILITY PARTNERSHIP
Definition: SECTION 2 (1) Companies Act 2016-" Owner(s) of the business: Company Entity Name appearance: Sendirian Berhad, Sdn. Bhd, Berhad or Bhd. Acts, rules & Regulations: Companies Act 2016 (Companies Act 2016) and Companies Regulations 2017. Capital contributions: Share capital. Legal status: Separate legal entity. Liabilities: The company will be responsible for the debts of the business of the company. No personal liability of individual director or shareholder; Liabilities borne by the shareholders are to the extent of unpaid shares only. Management: Board of Directors. No. of Shareholders/partners: Minimum one (1) For a private company, - maximum fifty (50) - no maximum number for a public company. Annual compliance: Annual Return (AR), Audited / Unaudited Financial Statement and reports (FS). Dissolution: Company means a company incorporated under this act or under any corresponding previous written law. (Members/shareholders own shares in the company that gives them certain rights in the company). a) Winding Up. b) Striking off. 5 4) COMPANY
6 TYPES OF COMPANIES Section 11 Companies Act 2016 (1) A company limited by shares shall either be a private company or a public company. (2) A company limited by guarantee shall be a public company. (3) An unlimited company shall either be a private company or a public company. A) DEFINITION OF PRIVATE COMPANY. Section 2 (1) Companies Act 2016 Private company means: (a) Any company which immediately prior to the commencement of this Act was a private company under any corresponding previous written law (b) Any company incorporated as a private company under this Act, or (c) Any company converted into a private company under section 41, Being accompany which has not ceased to be a private company under section 42. Only a company with a share capital, whether limited or unlimited, may be incorporated as a private company and its constitution must contain the following conditions: 1. Section 42 (1): limit the number of shareholders to not more than 50. 2. Section 42 (2): restricts the right to transfer shares. 3. Section 43(1)(a): prohibits offer to the public to subscribe any shares or debentures of the company, and 4. Section 43(1)(c): prohibits inviting the public to deposit money with the company. B) DEFINITION OF PUBLIC COMPANY. Section 2 (1) Companies Act 2016 Public company means a company other than a private company.
CRITERIA PRIVATE COMPANY PUBLIC COMPANY End of the company’s name Sendirian Berhad or Sdn. Bhd Berhad or Bhd Minimum number of resident director 1 2 Requirement to hold annual general meeting No longer mandatory Mandatory to hold AGM Commencement of business The company are issued with the notice of registration The company are issued with the Notice that the company is entitled to commence business and exercise borrowing power Allotment of shares Forbidden from inviting the public (Section 43) Allowed to invite the public Restriction on transfer of shares The company are restricted to transfer shares. The company are allowed to transfer shares to the public. Prohibited from inviting the public to deposit money The company are restricted to invite to the public to deposit money (Section 43) The company are allowed to invite to the public to deposit money (Section 43) Maximum number of shareholders 50 Unlimited Annual general meeting (AGM) No longer mandatory for a private company to hold AGM AGM is required and must be held within 6 months from the financial year-end of the company and not more than 15 months after the last preceding AGM 7 DIFFERENCES OF CHARACTERISTICS BETWEEN PRIVATE AND PUBLIC COMPANY.
8 TYPES OF COMPANIES BASED ON LIABILITIES: A. COMPANY LIMITED BY SHARES Section 10(2) Companies Act 2016 : In a company limited by shares, its member has either fully paid up on his shares or otherwise. Where a member of a limited company has fully paid up on his shares, the general principle is that he will not be liable for the debts of the company. Even in the event the company is wound up, and the assets of the company are insufficient to meet its liabilities towards its creditors, a member who has fully paid up on his shares will not be called upon to contribute. He can be made liable if and only if the veil of incorporation is lifted. Where a member of a limited company has not fully paid up on his shares, he may be called upon at any time by the company to pay the unpaid portion. In the event the company is wound up, and the assets of the company are insufficient to meet its liabilities towards its creditors, a member who has not fully paid up on his shares will be called upon to contribute. However, unless the corporate veil is lifted, the amount required from him cannot exceed the amount unpaid on his shares. Section 435(2)(b) ensures this. “a company is limited by shares if the liability of its members is limited to the amount, if any, unpaid on shares held by the members”.
9 B. COMPANY LIMITED BY GUARANTEE In a company limited by guarantee, a member’s liability is limited to the amount he agrees to contribute in the event the company is wound up. This is prescribed in section 10(3) and further reinforced by sections 192(2)(b) and 435(2)(c). Section 31(1) requires a company limited by guarantee to have a constitution which shall contain matters prescribed in section 38(3), namely: The company is a company limited by guarantee; The objects of the company; The capacity, rights, powers and privileges of the company; The number of members with which the company proposes to be incorporated; Other matters required by the Companies Act 2016 ; and Any other matter as the company so wishes. 1. 2. 3. 4. 5. 6. As the members do not give upfront financial contributions to kick start the operation of the company, usually a company limited by guarantee is formed not to carry on a business but rather to provide recreation or amusement or promote commerce, or any object useful for the community. Section 45(1) requires that only a company limited by guarantee may be formed to provide recreation or amusement or promote commerce, industry, art, science, religion, charity, pension or superannuation scheme or any object useful for the community or country. Thus, a company limited by shares or an unlimited company cannot be formed to carry out any of the above objects.
10 Section 45(2) Companies Act 2016 does not allow the company to distribute its profits as dividends and its assets to its members on its winding up. Instead, the company is to apply its profits and income to achieve or promote its objects, and in the event of winding up, transfer its assets to another body with similar objects or for the promotion of charity. According to section 11(2) Companies Act 2016, a company limited by guarantee shall be a public company. Following section 25(1)(a), the name of such company should end with the word “Berhad” or its abbreviation “Bhd.”. However, section 45(3) provides that a company limited by guarantee may apply to the Minister to omit the said word or its abbreviation from its name. Example: CyberSecurity Malaysia. C. UNLIMITED COMPANY Section 10(4) of the Companies Act 2016 defines an unlimited company as where “there is no limit on the liability of its members”. An unlimited company may either be a private company or a public company (section 11(3) Companies Act 2016). To distinguish a limited company from an unlimited company, section 25(1)(c) of the Companies Act 2016 provides that the name of the unlimited company shall end with the word “Sendirian” or the abbreviation “Sdn.”. First, section 11(3) provides that an unlimited company shall either be a private company or a public company. If the unlimited company is a public company, it is an offence for it to have the word “Sendirian” or “Sdn.” in its name, for section 597(2) provides that “a company shall not use the word “Sendirian” or “Sdn.” as part of its name if the company does not fulfil the requirements required by this Act to be fulfilled by private companies”. Secondly, section 42(1) provides that a private company is a company limited by shares. In other words, a private company has to be a limited company. A private company cannot be an unlimited company. This inconsistency arises because the definition for “private company” in the CA 2016 is different from that prescribed in the CA 1965.
11 Under section 15(1) of the CA 1965, a private company is “a company having a share capital”. However, under section 42(1) of the new Act, the term “private company” was rephrased to mean “a company limited by shares”. The phrase “a company limited by shares” is further defined in section 10(2) to mean “the liability of its members is limited to the amount, if any, unpaid on shares held by the members”. Thus, effectively making all private companies limited companies. Thus, it is debatable whether an unlimited company can use the word “Sendirian” or its abbreviation as part of its name. Members of an unlimited company are liable for all the debts of the company. And in this respect, there is no difference between members of an unlimited company and partners of a partnership. The benefits of an unlimited company over that of a partnership are an unlimited company enjoys separate legal entity from its members and thus, has perpetual succession. Despite the benefits accorded to an unlimited company, not many entrepreneurs incorporate this type of company as a vehicle to carry on their businesses as companies are more regulated. They have to comply with strict regulations in the Companies Act 2016 , particularly with the requirements for the company’s accounts and meetings. Many would rather form a partnership which is less restrictive and prohibitive.
12 HOLDING AND SUBSIDIARY COMPANY Definition of “subsidiary and holding company” Section 4 (1) Subject to subsection (3), a corporation shall be deemed to be a subsidiary of another corporation, but only if— (a) the other corporation— i.controls the composition of the board of directors of the corporation; ii.controls more than half of the voting power of the corporation; or iii.holds more than half of the issued share capital of the corporation, excluding any part of the share capital which consists of preference shares; or iv. the corporation is a subsidiary of any corporation which is that other corporation’s subsidiary. The liability of members or subscribers of a limited company are limited to what they have invested or guaranteed to the company. Limited companies may be limited by shares or by guarantee. Companies limited by shares may be divided into public and private companies while a company limited by shares must be a public company. An unlimited company refers to a company that places no limit on the liability of its members. Any liability that occurs are liable to the members for all the company’s debts. A member of a limited company on the other hand is not liable for the company’s debts. LIMITED AND UNLIMITED COMPANIES
13 a company, corporation, society, association or other body incorporated outside Malaysia; or an unincorporated society association, or other body which under the law of its place of origin may sue or be sued, or hold property in the name of the secretary or other officer of the body or association duly appointed for that purpose and which does not have its head office or principal place of business in Malaysia. FOREIGN COMPANIES According to section 2 of the Companies Act 2016, a foreign company refers to: List FOUR (4) types of business entities that can be registered in Malaysia. Compare FIVE (5) differences of private and public company according to the Companies Act 2016. QUESTION EXCERCISES: 1. 2. ANSWER: QUESTION 1: i. Sole proprietorship ii. Partnership iii. Company iv.Limited liability partnership
14 QUESTION 2 Private company: i.The end of the company name shall end with Sendirian/Sdn . ii.Commencement of business will be issued with the notice of registration. iii.Forbidden from inviting shares the public. iv.Restricted on transfer of shares. v.Restricted from inviting the public to deposit money. vi.Maximum number of members shall not be more than 50. vii.Not required to conduct annual general meeting under the Act. Public company: i.The end of the company name shall end with Berhad/Bhd. ii.Commencement of business will be issued with the notice that the company is entitled to commence business and exercise borrowing powers. iii.Inviting shares the public are allowed. iv.Transfer of shares are allowed. v.Inviting the public to deposit money are allowed. vi.No limit as to the maximum number of members. vii.Required to conduct annual general meeting under the Act.
15 Anyone that wishes to make an application of incorporation under section 14 shall include a statement by every person who desires to form the company regarding the following particulars which includes: The name of the proposed company. The status whether the company is private or public. The nature of business of the proposed company. The proposed address of the registered office. The name, identification. Nationality and the ordinary place of the residence of every person who is to be a member of the company, and where any of these person is a body corporate, the corporate name, place of incorporation , registration number and the registered office of the body corporate. The name ,identification, nationality and the ordinary place of the residence of any person who is to be a director. The name, identification , nationality and the ordinary place of the residence of the secretary. In the case of a company limited by shares , the detail of class, number of shares to be taken by the members. In the case of a company limited by the guarantee , the amount up to which the member undertakes to contribute to the asset of the company in the events of its being wound up. Any other information that the Register of The Company may require. DOCUMENTS REQUIRED IN THE FORMATION OF THE COMPANY 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.
16 MAIN DOCUMENTATIONS REQUIRED TO INCORPORATE A COMPANY: i. Super form. ii. Declaration from the Directors and Promoter (s). iii. Constitution of the company (Optional). APPLICATION OF COMPANY’S NAME: According to Section 26(1) of the Companies Act 2016, a company’s name is only available if it is nota) undesirable or unacceptable; b) identical to an existing company, corporation or business; c) identical to a name being reserved; and d) any other name directed by the Minister not to be accepted for registration. Once incorporated, the most prominent characteristic of a company is that it become a body corporate in which it may stand on its own. In the eye of law the company is described as an artificial person. or legal person which having its own legal capacity to enjoy rights, assumes obligations, incurs liabilities and perform duties independently. A company after incorporation is having its own legal entity distinct THE EFFECTS OF INCORPORATION OF A COMPANY SEPARATE LEGAL ENTITY from the person comprises it.
17 THE LEADING CASE OF THE CONCEPT OF SEPARATE LEGAL ENTITY OF A COMPANY: SOLOMON VS SOLOMON CO LTD. FACTS: Solomon who ran the business of boot and shoes manufacturing as a sole trader. He then converted his business to limited company. The members were himself, his Wife and his children. The company purchased the business for £39 000 which was an excessive price. As a result Solomon held 20 000 shares, his wife and his children hold one share each. Unfortunately, the company went into liquidation. The assets were insufficient to discharge the debt that the company owed to the unsecured creditors The liquidator sued Solomon contended that the company was a sham and that the company was in fact only Solomon himself under another name. JUDGEMENT: The court held that Solomon and the company has distinct entity in which the Company has a legal existence on his own. Solomon was entitled for the money that he credit to the company as he and his company are two separate entities. As a body corporate, a company shall have the several consequences that comes with it. According to Section 21: (1) “A company shall be capable of exercising all the functions of a body corporate and have the full capacity to carry on or undertake any business activity including: (a) to sue and be sued; (b) to acquire, own, hold, develop or dispose of any property; and (c) to do any act which it may do or to enter into transactions. (2) A company shall have the full rights, powers and privileges for the purposes mentioned in subsection (1).”
18 A company is capable to hold property in its own name. The property belongs to the company itself and not to the individual shareholders. The shareholders have no direct proprietary right to the corporate. ABILITY TO HOLD PROPERTY CASE : MACURRA VS NORTHERN ASSSURANCE CO LTD. FACTS: Macurra sold his land and timber to a company received all the fully paid shares of the company as a consideration of it. Earlier , Macurra insured the timber against loss by the fire in his own name. When he sold the timber , he did not transfer the insurance policy to the company. The timber unfortunately destroyed by in a fire and Macurra put in a claim. The insurance company refused to pay arguing that Macurra had no insurable interest in the timber. JUDGEMENT: The court agreed with the insurance company , he has not just sold the timber , but any interest attached to the timber and this including the insurance policy. This, the timber and the insurance policy became the property of the company. Company is entitled to sue and being sued in its own name. Only a company can maintain an action to enforce its legal right and the members has no right to do it in the company’s behalf. RIGHT OF SUING AND BEING SUED CASE : FOSS VS HARBOTTLE FACTS: Any action brought by the shareholders against the directors of the company alleging them on misappropriated the company’s property. The action was dismissed by the court due to wrong plaintiff. As a legal person the right of suing is given to the company only through its proper organization and not the other person.
19 Any debts incurred will be the responsibility of the company to discharge it and the members of the company are not such liable for debts. Members’ liability to discharge the debt is limited either by shares or by guarantee. The contribution to settle the debts only exist when the company is in the event of winding up. LIABILITY OF THE MEMBERS CASE: RE APPLICATION BY YEE YUT EE JUDGEMENT: The High Court quashed the award made by the Industrial Arbitration Court that declared Lee to be personally liable to pay the retrenchment benefits. The court held that it was erroneous in law to order Yee , the director to be liable for the debts of a company as the law treated the controllers and the company as separate person and hence should not be liable for the debts incurred for the company. The company upon incorporation is everlasting and immoral. It may last until it is properly wound up by the process of law. The companies survive though there is no longer human being in it or no business to run. PERPETUAL SUCCESSION CASE : RE NOEL TEDMAN HOLDING PTY LTD FACTS: The company still survived although all shareholders and directors died. The change of hand of shareholdings does not change the identity of the company due to having perpetual succession.
20 CONTRACTUAL CAPACITY AND BORROWING Section 21 (1) (c) – A company has the capacity to act and make transactions. EXCEPTIONS OF SEPARATE LEGAL ENTITY The concept of separate legal entity is the separation of rights and liabilities between the business and its owners. A company is a recognition of the existence of a business as an artificial person recognized under the law. The members of the company will not be liable for any matters of the company due to the existence of corporate veil that protects the members for any liabilities. The main provision regarding separate legal entity: Section 20 of the Companies Act 2016 provides that a company shall have a separate legal entity and unlimited capacity. It reads as follows: A company incorporated under this Act is a body corporate and shall– (a) have legal personality separate from that of its members; and (b) continue in existence until it is removed from the register. In lifting the veil of incorporation , the law can go behind the corporate veil based upon two exceptional ground. Lifting the veil by statutory exception. Lifting the veil by the court. 1. 2.
21 LIFTING THE VEIL BY STATUTORY EXCEPTION • Distribution of Dividends Out of Company’s Profit: Section 131(1). • Liability for Debts: Section 540(2) Read Together with Section 539(3). • Fraudulent Trading: Section 540(1). • Default in Contribution: Section 46 Employees Provident Act 1991. • Default in Contribution: Section 108A Employees Social Security Act 1969. LIFTING THE VEIL BY COURT 1. WHERE THE COMPANY IS SHAM OR MERE FACADE CASE : GILFORD MOTOR CO LTD VS HORNE JUDGEMENT: The court ignored the separateness of the company’s entity by extending the injunction to the company and asked the company as well as the controller to abide with the court order. This is because the defendant setting a business which was merely a cloak sham or device for enabling him to continue to commit breach of agreement with the plaintiff. FACTS: The ex director breached the agreement he made with the plaintiff when he set up a rival business through a company which he controlled. The plaintiff sought for the injunction against the company as well as against the controller.
22 WHERE THE COMPANY IS EFFECTIVELY JUST THE AGENT OR ALTER EGO OF ITS MEMBERS OR CONTROLLER CASE : HOTEL JAYPURI BHD VS NATIONAL UNION OF HOTEL , BAR & RESTAURANT WORKERS FACTS: The workers of the restaurant asked for compensation from the hotel when the restaurant closed down claiming that they were also the employees of the hotel. The bar was wholly owned subsidiary of Hotel on whose premise of the restaurant was situated. JUDGEMENT: The court found that although technically the the restaurant and the hotel were separate entities but in reality the two companies were functioning as one as such the employee of the hotel. WHERE THE COMPANY IS ENGAGED IN FRAUD TRADING OR OTHER CRIMINAL WRONGDOING CASE : RE DARBY JUDGEMENT: The court lifted the corporate veil where the company was used as a vehicle or mechanism for commiting fraud. In this case a few undischarged bankrupt incorporated a company in the Channel islands called ‘City’ . They later promoted another company in England known as ‘Quarries’. City sold a quarrying license to Quarry at higher price. When Quarries went into liquidation , the liquidator sought to make Darby liable to account for the profit. Darby argued that in law , he and the company were different persons. The court refused to accept the defense because the company set up by him just a ‘ dummy company ‘for the purpose of enabling him to perpetrate a fraud.
23 WHERE PERMITTED BY STATUTE ( E.G. AS BEEN FOUND IN ACT ) CASE : TESCO SUPERMARKET VS NATRASS FACTS: The company which owned a chain supermarket has displayed a large advertisement stating a certain particular item was on sale at a reduced price. After the discount selling item have been sold , a shop assistant displayed the same item but with no discount price. The manger did not know about this and still remained the advertisement of the discount selling items. The company was later charged for making a false or misleading statement relating to the price of goods under the Trade Description Act 1968.To see the mind and will of the company , the court has to lift up the veil by looking at the mind and will of the manager which was considered as the directing mind of the company. JUDGEMENT: The court found the manager could not be identified as the directing mind and will of the company because he did not have the necessary responsibility or controls of the company’s operations. The one commiting the offense is the employee. Entrepreneur may come together to form a company to carry on their business. They may take or instruct the others to take the steps required by law to incorporate a company. They are known as the promoters of the company. According to Cockburn CJ in Twycross V Grant (1877) 2 CPD 469, a promoter is a person who undertakes to form a company with reference to a given object and set it going and takes the necessary steps to accomplish the purpose. A promoter may be a natural person for example when the sole proprietor or partners promote a company to take over his / their business. A promoter may also be a company, for example where a company is incorporating a wholly-owned subsidiary. PROMOTER
24 FIDUCIARY DUTIES OF A PROMOTER 1.Must not make A Secret Profit. A promoter stands fiduciary relationship towards the company and therefore he must not make any secret profits out of promotion. This commonly occurs when the promoter had sold something to the company. When the company ratifies it sales , the promoter must disclose his interest to the company. They must disclose any benefit or profit that they made in promotion of the company. This is due to the primary duty of is not to make profit out of the promotion without adequate disclosure. Otherwise , the promoter would be liable for breach of his fiduciary duty in making a secret profit .Refer to the Case Erlanger vs New Sombrero Phosphate Co. 2. To Act Bona Fide . The fiduciary relationship which exist between the promoter and the company requires the former act in good faith and loyalty. The promoters must act solely in the interest of the company and must not allow his own self interest to dictate his self behavior in any way that might conflict with the company’s best interest. Promoter are required to make full disclosure to the company of all material facts that may affect the company. Any commission or payment received upon transfer of a property to a company must be disclosed.. Refer to the case of Whaley Bridge Calico printing co vs Green & Smith. If a promoter has a contract with the company either as a vendor or a purchaser , it must be disclosed. Refer to the case of Habib Abdul Rahman vs Abdul Gader. Disclosure must be full and frank. A promoter who had made a full disclosure of everything material in relation to the dealing of transactions in which he acts is entitled to keep his profits. Disclosure must be made to the Board of Directors (BOD). The BOD must be independent and able to to form impartial or independent judgement of the merit of the judgment. Refer to the case of Erlanger vs New Sombreno Posphate co .
25 PRE – INCORPORATION CONTRACT UNDER COMMON LAW Company will not be liable toward all and not qualify to be engaged in any pre-incorporation contracts before its incorporation as there is no entity that exist. CASE 1 : NEWBOURNE VS SENSOLID (GREAT BRITAIN) LTD (1954) In the case of Newbourne vs Sensolid , the plaintiff had an agreement to sell 200 cans of meat to the defendant made on behalf of another company (Leopold Newbourn ( London Ltd )which is yet to be incorporated. Due to declining market , conditon for canned meat , the defendant cancelled their purchases . The plaintiff took legal action. However the court ruled out that the sales agreement is invalid as it was made before the company is incorporated. The parties involved are not liable to the pre-incorporation contracts. CASE 2 : BLACK VS SMALLWOOD (1966) 117 CLR 52 In Black vs Smallwood , the plaintiff entered a contract to sell a piece of land to Western Suburbs Holding Pty Ltd. The company was not incorporated when the agreement was signed. The defendant who was the director of the company and another director refused to continue with the purchase. The plaintiff took legal action , however the Australian High Court ruled out that companies which are not yet to be incorporated is not qualify to appoint agents to act on it behalf. Thus neither the company nor the signors will be liable to pre- incorporation contract.
26 S 65 ( 1 ) - All pre – incorporation contract made on behalf of the company by any person/ officer / agent of the company who is the signor will be liable personally to the contract. S 65 ( 2 ) – However the parties involved have the right to authorizes any/ all pre- incorporation contracts after the incorporation with three conditions: Ratification can be done through : PRE-INCORPORATION CONTRACT UNDER COMPANIES ACT 2016 i. Pre incorporation contract must be entered for the company ii. The date of authorization must be backdated to the date of agreement. iii. Pre incorporation contract must be ratified / sanctioned by the parties involved. -Writing , printed seal , signature. -Action or Execution. CASE : COSMIC INSURANCE CORPORATION LTD V. KHOO CHIANG POH [1981] 1 MLJ 61 Before the incorporation of the plaintiff , the defendant was appointed as whole life director of the plaintiff Company. After the incorporation of the plaintiff company. A resolution was issued which approved his appointment as whole life director . Later on, due to certain misunderstandings the company fired him from his position. The defendant made legal claim to court. Singaporean Privy Committee ruled that the first appointment was a pre-Incorporation contract and the resolution issued after the incorporation was a ratification of the contract.
27 The Companies Act 1965 requires the existence of the Memorandum of Association (MOA) and Articles of Association (AOA) for its incorporation. With the coming into force the Companies Act 2016, MOA and AOA are no longer mandatory. For all companies which are incorporated after 31.1.2017, a constitution is no longer mandatory except for a company limited A company may adopt a constitution or not. According to Section 31 (3), if the company chooses not to adopt one, the provisions of the Companies Act 2016 shall be applied. A constitution will be binding on the company, directors and members of the company. The objectives of the company. The capacity, rights , powers or privileges' of the company if the provision restricts such capacity, right , powers or privileges matters contemplated by the 2016 Act to be included in the constitution and any other matters if the company wishes to include in its constitution. CONSTITUTION by guarantee. According to S 31 Companies Act 2016 only a company limited by guarantee are compulsory to have a constitution. CONTENTS OF A CONSTITUTION
28 According to S 21(2) CA 2016 – as company are conferred the full capacity of a natural person. Thus, an object clause will no longer be mandatory for companies limited by shares since a constitution is not mandatory. Nevertheless, an ultra vires act which are also known as an act beyond the objective clause still applicable for companies that adopts a constitution. Ultra Vires is where a company act beyond it prescribed objectives which is stated in its object clause. Doctrine of Ultra Vires protect the interest of the shareholders and creditors from misappropriation of a company’s asset. An ultravires is invalid and will not bind the company. If the company refuses to fulfill its obligation in an ultra vires contract , the other party cannot force the company to do otherwise. DOCTRINE OF ULTRA- VIRES COMMON LAW VIEW ON ULTRA VIRES i. An ultra Vires transaction made or action taken by a company is invalid. Case : Ashbury Railway Carriage & Iron company vs Richie In the case it was clearly stated in the plaintiff company MOA that the objective of the company are to make , see, hiring and renting railway coach and operating mechanical engineering and general contractor business. The directors entered a contract to buy railways making concession on behalf of the company. However the company refuses to fulfill the contract , thus the concession seller took legal action against the company. However the court ruled that railways making does not included in the company’s objectives thus the action was an ultra vires action and therefore invalid and will not bind the company.
29 Section 21(1)(2) Companies Act 2016 Section 21 (1) & (2) Companies Act 2016 ii. A company cannot be charged based on ultra vires contract. CASE : RE JON BEAUFORT A company was set up to run a business of making shirts and producing cloths. The company later decided to venture into veneered panels. Which are outside the company’s objectives.. The company later ordered coal on credit and stated in its order note “veneered panel producer". The supplier was given sufficient notice informing that veneered panel making is not the company’s objectives. When the supplier wanted to claim his debt the court ruled out that he cannot charge the company for the purpose of claiming his debts and that the agreement between the company and the supplier is not valid. A company cannot charge the other party in an ultra vires contract. The third elements complete the basis of the common law view on the doctrine which is a company cannot be charged or charge other charge base on an ultra vires contract. A person who acts sincerely cannot give reason that he did not get any notice on the company’s objectives stated in the MOA. UNDER COMPANY ACT 2016 VIEW Conferring the companies with the full capacity of a natural person. This would confer unlimited capacity to companies which would lead to the abolition of the doctrine of constructive notice. The company should have full capacity to carry out any business and to enter any contract Only applicable for all companies incorporated after 31 January 2017.
30 Section 35 (2) (a) Companies Act 2016 Section 36(1) Companies Act 2016 Section 36 (3) Companies Act 2016 Section 39 Companies Act 2016 If the company stated the objective of the company in the constitution, it must it is prohibited from implementing any other activities. The shareholders, debenture holders and trust holders can take legal action if the company fail to obey the requirement. If the company wish to change its object as stated in the constitution, it can do so by special resolution. However the company is prohibited to change its object if it is stated in the Constitution the company is disallowed to change its object. The company must inform and give a copy to the Registrar on any changes made within 30 days after the special resolution is passed. If the company cannot amend its constitution by the act provided, the directors or the shareholders may request the court order with reasonable terms and conditions. Nobody is assumed having any knowledge on the contents of the Constitution with the reason that it is available in the Registrar Office. This section ignored the constructive notice
31 Section 36 (1) Companies Act 2016 – The alteration shall be by way of a special resolution unless it is stated in the constitution that it is restricted to amend any clause in it. Section 36 (3) Companies Act 2016 - The company must inform the Registrar Company about the amendment by a way of a special resolution which shall be lodged within 30 days after the resolution has been passed. Section 34(4) Companies Act-If a company fail to fulfill the requirement of S 36 (3) it will be compound RM10000 or or RM 500 for every single day of the non compliance. Section 23 Companies Act 2016: company’s name. Section 28 Companies Act 2016: Object clause. Section 64 & 62 Companies Act 2016: Share capital. Section 65 Companies Act 2016: Class rights. THE AMENDMENT OF THE CONSTITUTION What can be amended in the company’s constitution? 1. 2. 3. 4.
32 Discuss FIVE (5) judicial exceptions of lifting the corporate veil. Elaborate the status of pre-incorporation contract according to the Common Law and the Companies Act 2016. QUESTION EXCERCISES: 1. 2. ANSWER: QUESTION 1 i.Prevention of fraud or improper conduct Explanation: The court will pierce the veil of incorporation if the company are used as a mask in defrauding the creditors or others. ii.Avoidance of contractual obligations and sham companies Explanation: The court may disregard separate legal entity if the company was used to enable a person to evade his/her legal obligations. iii.Public policy or enemy character Explanation: Court will examine the character of persons in control of the company and lift the corporate veil if they have an enemy character if the public policy requires it. iv.Agency Explanation: The act of the company can be deemed to be the act of the shareholders or the parent company thus the principal is liable for the company’s act based on the principle of agency. v.Group of companies Explanation: In the case where a group of companies is involved, the court may look the group as a single entity even though the general rule is that each company within a group is a distinct entity.
33 QUESTION 2: Common law view: i.A has no right to enter a contact before its incorporation as it does not exist. ii.A company is not bound to a pre-incorporated contract. iii.A company/agent cannot enter a contract before its incorporation. iv.A company cannot ratify and adopt such contract. v.A pre-incorporation contract is not a valid contract. vi.Newborne v Sensolid (Great Britain) Ltd (1954). Companies Act 2016 view: i.Section 65 (1) Companies Act 2016 Allows a company to ratify or accept any pre-incorporated contract. ii.Once the company ratifies, the company is fully liable. iii.The company will be liable from the date the contract was entered into, not from the date of ratification. iv.The contract should purportedly have been entered into by the company or by any person acting on behalf of the company before its incorporation. v.The company must ratify the whole pre-incorporation contract after its incorporation. vi.If the company does not ratify, the person who made the contract will be personally liable on the contract unless there is an express term to the contrary. vii.Cosmic Insurance Corp Ltd v Khoo Chiang Poh (1981).
34 Represent the interest of the shareholders in the company’s assets which can be valued by a sum of money. A portion of it’s capital to enable the shareholders for a sharing profit An interest / right and obligations which determined by board of directors. Subject to the company constitution shares may: Be issued in different classes. Be redeemable in accordance with S 72 CA 2016. Confer preferential rights to distribution of capital or income. Confer special, limited or conditional voting rights or Not confer voting rights. S 71 (a) CA 2016- Rights and powers attached to shares of an ordinary shares ae as follows : The right to attend, participate and to speak at the meeting The right to vote on a show of hands on any resolution of the company. The right to one vote for each share on a poll or any resolution of the company The right to an equal share in the distribution of the surplus assets of the company or The right to an equal shares in dividend authorized by the Board of Directors. DEFINITION OF SHARES Section 2 (1) Companies Act 2016 Issued share capital of a corporation and includes stock except where a distinction between stock and shares is expressed or implied. 1. 2. 3. 4. 5. TYPES OF SHARES i. ORDINARY SHARES 1. 2. 3. 4. 5. 6.
Characteristic Ordinary Share Preference share Dividend rate Flexible rate, based on the profit earned Flat rate dividend, stated in an agreement Payment of Dividend Dividend will be paid after the dividend payable to holders of preference shares Priority as to payment of dividends Voting rights Full voting right Ordinary shareholder are the owner of the company and have right to control the policy of the company Limited voting right Preference shareholder are not the owner of the company have no right to control the policy of the company Surplus assets during winding up of a company Ordinary shareholders are the last to receive the repayment of capital during liquidation of a company Priority the repayment of capital during liquidation of a company 35 ii. PREFERENCE SHARES Section 2 (1) Companies Act 2016 A share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to participate beyond a specified amount in any distribution whether by way of dividend, or on redemption, in a winding up, or otherwise. Section 71 (1) Companies Act 2016 The constitution shall set out the right of the preference shareholders with respect to repayment of capital, participation in surplus assets and profits, cumulative and noncumulative dividend, voting and priority of payment of capital and dividend in relation to other classes of preference shares.
36 The Company Act 2016 has now replaced the term ‘dividend” with “distribution”. Section 131(1) provides that a company can only distribute dividends to the shareholders out of profits of the company if the company is solvent. A solvent company refers to the ability of the company to pay its debts when it is due within 12 months after the dividends are distributed. Forms of Dividend payment: Interim Dividend Declared and paid during the financial year when the board of directors feels confident with the company financial position. Interim dividend is not a debt thus it can be cancelled anytime. Declared at the end of the company financial year when the company’s profit become certain. Declared final year dividend is a debt and therefore payable. Dividend which can be carried forward to the subsequent financial year. Total dividend for one year profit only. Dividend which cannot be carried forward to the subsequent financial year. DIVIDEND i. Cash. ii. Shares. TYPES OF DIVIDEND 1. 2. Final dividend 3.Cumulative Dividend 4. Non Cumulative dividend
37 Dividend cannot be paid if the company does not have any profit when the declaration is made. Company’s profit must be there when declaration is made but not necessary when the payment is made. PRINCIPLES OF DIVIDEND PAYMENT Case : Mara Development Ltd Vs BVV Rofe Pty Ltd The BOD of Mara declared the final dividend when the company’s account show profit. However as at the date of payment the profit had been erased by impairment of the value of the company assets. The court decided that the profit may only need to be there when the declaration of dividend is made not when it is paid. Dividend must be paid based on the company’s profit and not from others. A holding company cannot declared dividend based on the profit from it’s subsidiary. This is based on the separate legal entity principles. Case : Industrial Equity Ltd vs Blackburn The plaintiff proposed to pay dividend amounting to RM 900 000 through cash and shares from Minerve Center Ltd ( subsidiary of the plaintiff). However the proposal was rejected by the court as the plaintiff made the proposal based on the profit of the group. Dividend can be declared from profit generated from disposal of fixed assets
38 Case: Lubbox vs british bank of south america and the case of australian Oil Exploration ltd vs lachberg In the first case , the court allowed company to pay dividend using the surplus of paid capital and expenditure. In the second case the court allowed the company to pay dividend using the profit generated from the disposal of the company valuable assets. However in this principle before the declaration is made , the BOD must consider the total net assets of the company. It is also advisable to revalue the company’s asset by a professional / expert before such declaration is made. Dividend need not be declared if it will disable the company to pay debt on the date the payment of dividend should be made. Case: Hilton International Ltd vs Hilton The court decided that the dividend cannot be paid if at the date of the declaration, the company was insolvent. Even if the company was solvent , dividend may not be paid if BOD satisfied that the payment will effect the insolvency of the company. Directors who proposed dividend to be declared in the absent of proper set of account is acting against his responsibility to prudence in the performing his duties. Dividend can be declared from the current year profit even if the company had experience losses in previous years operations Case : Amonia Soda Co. Ltd vs Chamberlain The court decided that the claims as payment of dividends can only be made by the shareholders and that it was declared based on the company profit and not the capital. Dividend can be declared from increment in net working capital without the need to replace the fixed / initial capital
Sole Debenture Serial Debenture It is a document that ensure loan which were made between bank or financial institution with the company That loan usually guaranteed with fixed charge or float charge on company’s asset Condition on loan payment should be made through an agreement that agreed by both parties Usually repayment may be requested Automatically in the event of dissolution of a company or other events which caused company fail to explain company debt. Is debenture published to public. According to S 171 CA 2016 ,company that invite public to buy debenture or accept money deposit or loan from money accession date from the public S 177 CA 2016 –the document could be stated as debenture if company prospectus includes statement that company loan repayment guaranteed with charge on company assets If company issue to the public , company compelled appoint trustee to the debenture holder. 39 Sole Debenture Serial Debenture DEBENTURES The definition of debenture under section 2(1) includes debenture stock, bonds, sukuk, notes and any other securities of a corporation whether constituting a charge on the assets of the corporation or not TYPES OF DEBENTURE 1. 2.
40 Any asset use to to guarantee issued debenture. Uncalled company shares. Subsidiary company. Statutory Declaration. Landed Property. Debtors. Floating charge on Statutory Declaration or company asset. Uncalled / reserve Capital. Airplane. Goodwill/ patent. Credit balance in any deposit account. Fixed charge. Floating charge. CHARGES Section 2 (1) Companies Act 2016 Charge includes a mortgage or any agreement to give execute a charge or mortgage whether upon demand or otherwise. Mortgage is a legal agreement by which a bank lends money at interest of exchange for taking title of the debtor’s property. Anything which is utilized by a company to secure loan as a form of guarantee. FORM OF CHARGES TYPES OF CHARGES 1. 2.
41 Fixed charge refer to a charge that can be ascertained with specific asset while creating it. The nature of this fixed charge is static. Once a company made fixed charged on company assets , company does not have the power anymore to trade with that asset except get approval from chargers holders / company creditors. The company is volunteer to do the registration of this charge. A legal charge. Normally it is the first preference. The company has no right to deal with the property, but subject to certain exception. Example : land, machine, building. Floating charge refer to a charge that is created on the assets of circulatory nature. The nature of this floating charge is dynamic. The company is compulsory to do the registration for this charge . An equitable charge. It can be second preference. The company can use or deal with assets until crystallization. Example : Trading stock ,shares. 1. FIXED CHARGE 2. FLOATING CHARGE CRYSTALLIZATION OF FLOATING CHARGE The charge in the status of floating charge into fixed charges: a) When the borrower is undergoing the winding up. b) When the borrower fail to pay the loan interest on time. c) When the borrower allowed the company asset value decreased to a minimum level. d) When the borrower lost the authority to manage the charge assets.
42 State FOUR (4) types of dividends of a company. A share is referred to as a unit of ownership which represents an equal proportion of a company’s capital that entitles the shareholders to certain rights. Ascertain TWO (2) types of shares that are available in a company. QUESTION EXCERCISES: 1. 2. ANSWER: QUESTION 1: i.Interim dividend. ii.Final dividend. iii.Cumulative dividend. iv.Non-cumulative dividend. QUESTION 2: Ordinary Shares i.Has the right to attend meeting. ii.Has the right to vote. iii.Rate of dividend are not fixed. iv.Last group to receive dividend payment. v.Last group to receive capital during winding up. vi.Able to participate in surplus assets distribution during winding up. Preference Shares i.Has the right to attend meeting. ii.Has the right to vote. iii.Rate of dividend are not fixed. iv.Last group to receive dividend payment. v.Last group to receive capital during winding up. vi.Able to participate in surplus assets distribution during winding up.
43 04 Private company – one director and Public company two directors Natural Person (Section 196(2) Companies Act 2016). Minimum age of 18 years, no maximum age (Section 196(2) Companies Act 2016). Minimum 1 director for private company (Section 196(1)(a) Companies Act 2016) and 2 director for public company (Section 196(1)(b) Companies Act 2016). Minimum director(s) must ordinarily residing in Malaysia (Section 196(4)(a) Companies Act 2016). Consent is required before appointment. DEFINITION OF DIRECTOR According to Section 2 (1) Companies Act 2016, a director includes any person occupying the position of director of a corporation by whatever name called includes a person in accordance with those directions or instructions the majority director of a corporation are accustomed to act and an alternate or substitute director. MINIMUM NUMBER OF DIRECTORS Section 196 Companies Act 2016 stated the minimum number of director for the private and public company as below: 1. 2. REQUIREMENT TO BE DIRECTORS
44 Shadow director A person in accordance in whose directions or instructions the directors of a corporation are accustomed to act. A director who is appointed by the BOD to act on place of original director. If the original director is out of state for a period of 3 months in which the board meetings are generally held, the board my appoint an alternate director. Designing, developing and implementing strategies plans for their organization ,in a cost effective and time-effective manner. Responsible for the day to day operation of the organization including managing committees and staff and developing business plans in collaboration with the board for the future of the organization. The board grant the executive director the authority to run the organization. Does not form part of the executive management team He is not employee of the company. Non executive director has responsibilities in the following areas: Strategy Performance Risk People Should also provide independent views on Resources Appointments Standards of conduct TYPES OF DIRECTORS 1. 2. Alternate Director 3. Executive 4. Non Executive Director a. b. c. d. e. f. g. h.
45 Also known as Chief Executive Directors/Generals. In-charge with the management of an organization. Report to the Board of Directors. The non executive chairman’s duties are typically limited to matters directly related to the board such as Chairing the meeting of the board. Organizing and coordinating the board’s activities such as by setting its annual agenda. Reviewing and evaluating the performance of CEO and the other board members. First appointment as named in the application for incorporation. Subsequent appointments through ordinary resolutions. Subject to constitution , the Board may appoint additional directors. In the case of the public company, shall hold office until next AGM. In the case of private company, in accordance to terms of appointment. Section 196(3) Companies Act 2016- A director must not resign or vacate office if this will reduce the number of directors to below the required minimum number. Director may resign by delivering notice at the registered office. Date of resignation is when notice is delivered or in accordance to the period stated in the notice. 5. Managing Directors 6. Chairman of directors APPOINTMENT OF A DIRECTOR RESIGNATION OF A DIRECTOR