COMPANY LAW

INTRODUCTION & INCORPORATION

LECTURE 10

Charles Nicholson
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A.

BUSINESS ORGANIZATIONS

Sole Proprietorship, Partnership and Companies Features of a company and how it differs from a partnership Registration and incorporation of a company

B.

CLASSIFICATION OF COMPANIES

Limited and Unlimited Companies Public and Private Companies Holding and Subsidiary Companies

1. Sole Proprietorship, Partnership and Companies

There are three main forms of business organizations in Malaysia: sole proprietorships, partnerships and companies. 1. A sole proprietorship is one person in business for himself.

2. A partnership is an organization of two or more persons associated together for the purpose of conducting a business. These 2 types of business organisations are referred to as unincorporated associations. They have no separate legal existence apart from the person/s who conducts the business.
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3. In contrast, a company is an incorporated association. It association.

is incorporated by registration with the Registrar of Companies (the CEO of the Companies Commission of Malaysia shall be the Registrar of Companies) s. 7(1) See: s. 16(1) CA 1965 on the registration and incorporation of a co. a co. is a creature of statute.

Once a co. is formally incorporated, it becomes a separate legal person having an existence that is separate and distinct from the persons who formed it.

It may own property in its name; incur debts and liabilities; sue and be sued; enter into contracts; have perpetual existence; have a common seal (See: Article (See: 122(1)); 96 of Table A articles & s. 122(1)); and have a separate legal personality of its own [See also the effect of 16(5)] incorporation under s. 16(5)] The case that established the separate legal personality of a co. is Saloman v. A. Saloman & Co. Ltd [1897] AC 22

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Features of a company and how it differs from a partnership 1. Governing laws A partnership is governed by the Partnership Act 1961, whereas a co. is governed by the Companies Act 1965. 2. Nature of the organization The CA 1965 does not require a co. to be formed for any specific purpose, such as profit making. A partnership on the other hand is defined as the relation which subsists between persons carrying on a business in common with a view of profit s. 3(1) Partnership Act 1961.

3. Separate legal entity Incorporation of a co. creates a separate legal person distinct from its members. Saloman v. A. Saloman & Co. Ltd A partnership on the other hand is not a legal entity separate from its members, the partners. Lee v. Lees Air Farming Ltd. [1961] AC 12. Ltd. 12. This was a decision of the Privy Council, which originated on appeal from the New Zealand Court of Appeal. Geoffrey Lee, the appellants late husband, formed the respondent co. in August 1954 for the purpose of carrying on the business of spreading fertilisers on farm lands from the air (aerial toptopdressing), which was in Broxbane. The nominal capital of the co. was 3000 which was divided into 3000 1.00 shares. Lee took 2999 of these shares and his
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solicitor took the other remaining share simply to comply with the 2-member requirement. Lee was appointed 2governing director. He was also appointed by the co. under a contract of employment as its chief pilot and was paid a salary. He was in overall control of the co. Lee was killed in an air crash in March 1956 while piloting the cos aircraft during the course of aerial top-dressing. He topleft behind a widow, Catherine Lee, and 4 infant children. Under the Workers Compensation Act 1922 of New Zealand, if an employee was killed or injured during the course of his employment then the employer was liable to pay compensation. The worker has to be someone who worked under a contract of service for the purpose of the Act. The appellant, Lees widow, claimed compensation from Lees Air Farming Ltd. claiming that Lee was a worker at the time he was killed and she was therefore entitled to compensation under the Act.
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The NZ Court of Appeal held that it was not possible for Lee to be governing director of the co. and its servant at the same time. The widow took the case to the Privy Council, which allowed her appeal. The Privy Council held that Lee was a worker for the purposes of the Act and that the co. was a separate legal entity from Lee himself. So it was possible for Lee, as governing director of the co., to employ himself as its chief pilot. Lee had a contract with the co., that is, Lee, one legal person was willing to work for and to make a contract with the co., another legal entity. He was the sole governing director of the co. vested with full government and control of the co. He acted as the agent of the co. in its negotiations with himself in respect of his employment. This dual capacity was highly possible.
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4.

Ability to own property

A sole-proprietors business assets are his own in the soleeyes of the law and not those of the business. The partners own the assets of the partnership collectively. A co. may own property. The members do not ipso facto have an interest in the cos property. The members do not legally own the assets. Even if a person owns all the shares in the co. (for example through nominee shareholding) he does not own the cos property, nor does he have any legal or equitable interest therein. He does not even have an interest in the cos property that can be insured.

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Macaura v. Northern Assurance Co. Ltd [1925] AC 619 M who owned the Killymoon estate in Ireland sold the whole of the timber on the estate to a co. called Irish Canadian Sawmills Ltd. M in return received 42,000 fully paid 1.00 shares and the only other shares of the co. was held by Ms nominees. He was also an unsecured creditor of the co. for an amount of 19,000. Subsequent to the sale M insured the timber against fire with the respondent co. but the insurance policies were taken out in his own name. 2 weeks after effecting the insurance, almost all the timber was destroyed in a fire. A claim was brought by M on the policies but the insurance co. refused to pay out on the ground that M had no insurable interest in the timber.
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He had no interest in the timber once he had transferred it to the co. Therefore, the insurance was void for want of insurable interest and the insurance co. was not obliged to pay. Lord Sumner said: It is clear that the appellant had no insurable interest in the timber described. It was not his. It belonged to the Irish Canadian Sawmills Ltd., of Skibbereen, county Cork.He owned almost all the shares in the co., and the co. owed him a good deal of money, but neither as creditor nor as shareholder, could he insure the co.s assets. He stood in no legal or equitable relation to the timber at all. He had no concern in the subject insured. His relation was to the co., not to its goods, and after the fire he was directly prejudiced by the paucity of the co.s assets, not by the fire.
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A shareholder has no right to any item of property owned by the co. for he has no legal or equitable interest therein. He is entitled to a share in the profits while the co. carries on business and a share in the distribution of the surplus assets when the co. is wound-up. woundSo M held most of the shares of the co. but that did not make the co.s property his property anymore than Saloman could say that the boot business was his business after he sold that to the co.

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When the shares in a co. are transferred, there is no transfer of ownership of property. Abdul Aziz bin Atan & 87 Ors v. Ladang Rengo Malay Estate Sdn Bhd. [1985] 2 MLJ 165; [1986] 2 MLJ 98. Ladang Rengo Malay Estate Sdn Bhd, the respondent co., as on 10 March 1981 had an issued capital of 5,000,020 fully paid ordinary shares of $1.00 each which were registered in the names of 25 owners. All the shareholders of the co. by a written agreement sold and transferred their entire shares to a certain buyer, Gemas Bahru Estate Sdn Bhd, in 1981 for $15,000,060. The main asset of the co. consisted of 1,948 acres of land on which the co. carried on the business of a rubber estate and oil palm estate. In Nov. 1982, a claim was initiated by Abdul Aziz bin Atan and 87 other employees of the estate
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under S.69 of the Employment Act 1955 for termination benefits under Regulation 8 of the Employment (Termination & Lay-Off Benefits) Regulations 1980. The Layissue was whether the estate was sold and if so, whether a change of employer took place. The Court, in dismissing the applicants appeal, held that an incorporated co. is a legal person separate and distinct from the shareholders of the co. In the present case there was no change whatsoever in the constitution of the respondent co. The co. 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 purpose of which the applicants were employed.
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5. Members liability for debts

The liability of members to pay the debts of the co. is limited to the unpaid amount, if any, on the shares that they have undertaken. The debts are those of the co. and not of the members or those engaged in running the co. The liability of the co. to pay its debts is unlimited. In the case of a partnership, each partner will be jointly liable for the debts incurred by the firm while he was a partner if the firms assets are insufficient to discharge the debts. The liability of a partner to pay the firms debts is unlimited.
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6. Enforcement of legal rights As a general rule, the rights of a co. can only be enforced by the co. itself. A co. must sue in its own name to enforce rights it has and duties that are owed to it. The members have no right to maintain an action on the co.s behalf. If a director has breached his duties, it is for the co. to enforce its corporate rights. A member has no locus standi and therefore no cause of action since the injury or harm complained of has been suffered by the co. The co. is therefore the proper plaintiff to commence an action. This is known as the proper plaintiff rule or the Rule in Foss v. Harbottle. Harbottle. 18

In Foss v. Harbottle (1843) 2 Hare 461, 2 shareholders in the Victoria Park Co. brought an action against the Cos directors and some persons. They alleged that the property of the co. has been misapplied or improperly used. The Court held that the injury complained of was an injury to the co. In law, the co. and its members are not the same. Therefore, the members could not maintain such a suit. It was for the co. to sue.

A partner is able to bring an action to enforce rights of the partnership in the name of the firm. A suit by a partnership is in substance a suit by the members collectively and a suit against the firm is a suit against the partners.
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7. Duration of existence

A partnership automatically dissolves on the retirement, death or bankruptcy of a partner or it may be dissolved by agreement amongst the partners. Once a co. is incorporated, it may not be dissolved save in accordance with the due process of the law as set out in the CA 1965 when it is properly wound-up or struck woundoff the register. A co. has potential for unlimited life or perpetual succession. The death or bankruptcy of a shareholder has no effect on the co. All that happens is that the ownership of shares will be changed. Its identity persists independently of any change in the shareholding of the co.
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Where the shares in a co. are transferred, there is no transfer of ownership of property. The co. does not change its identity or personality. See: Abdul Aziz bin Atan & Ors v. Ladang Rengo Malay Estates Sdn Bhd; Re Noel Tedman Holdings Pte Ltd [1967] QdR 561 (Supreme Court, Queensland). 8. Transfer of interest Shares, which a shareholder has bought in the co., can be freely transferred without the consent of the other shareholders. However, in the case of private ltd. cos., a co. may impose restrictions on the free transferability of its shares. Where there is no restriction contained in the articles of association, the shares are freely transferable. A share in a ltd. co, is an item of property, which can be bought and sold.
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In a partnership, a partner can assign his share in the partnership but generally the consent of all other partners is necessary. The assignee or transferee does not become a partner. He simply has an interest in the assets of the partnership. 9. Formalities and expense

Incorporating a co. requires following many procedures and expenses. Also during the life of a co. there are certain formalities related to keeping of accounts, registers and minutes that must be complied with. A partnership does not require any formality in its formation.
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10. Disclosure of accounts

The Co. Act requires a co. to file copies of its balance sheet and profit and loss account with the Registrar. This information is then available for inspection by anyone paying the appropriate search fee. A partnership need not publish or disclose any financial records 11. Audit

All companies are required to appoint an independent auditor. A partnership generally does not need to appoint an auditor.
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12. Management and ownership The policy of the Act is to separate management and ownership. A co. must appoint directors, whose task is to manage the co. Ownership of the co. vests in its members. Partnership law presumes that all partners take part in management of the partnership business. 13. Number of members A partnership will have between 2 and 20 members and if more than 20 members, it must be registered as a co. s. 14(3)(b). Exception: professional firms are not limited to Exception: 20 partners s. 14(3)(a) CA & s. 47(2) PA 1961 A co. must have a minimum of two members - s. 14(1) and s. 36 makes it an offence for a co. to carry on business for more than 6 months after the membership 24

has fallen below 2 in which event the individual member becomes liable for all debts. This is also a ground for a petition to be presented to the Court for the co. to be wound-up under s. 218(1)(d). woundThere is no maximum number of members except in relation to private cos. which is limited to a maximum of 50 members - s. 15(1)(b). 14. Raising of Capital Certain securities can only be created by a co. which a partnership cannot create. For example, the floating charge, charge, a charge that floats over the assets of a co. until the happening of a certain event which is said to crystallize the charge. Until then the co. can freely use its assets under the charge. Public cos. can raise capital by offering their shares to the public.
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CLASSIFICATION OF COMPANIES

S. 14(2) provides for the classification of cos. A co may be: a) limited by shares; b) limited by guarantee; c) limited by both shares and guarantee (no longer possible - S. 14A); d) An unlimited co.

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COMPANY LIMITED BY SHARES

Where a co. is limited by shares, a member cannot be shares, asked to pay more than the amount (if any) unpaid on his shares when the co. is wound up. His liability is limited to the unpaid amount on the shares held by him. If he has paid in full for his shares, he cannot be asked for any further contribution s. 4(1); s. 214(1)(d) Co formed with share capital. Co cannot return capital to SH. SH may pay in full or in part for the shares. SH need not pay more than the amount unpaid on the shares partly paid shares. SH have to pay when the co. makes a call. Cannot ask for further contribution from fully paid SH.
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COMPANY LIMITED BY GUARANTEE

Where a co. is limited by guarantee, the liability of its guarantee, members is limited by the MA to such amount that the members guarantee or undertake to contribute to the assets of the co. in the event the co. is being wound-up wounds. 4(1); s. 214(1)(e) Members must pay the amount as stipulated in the MA, but only when the co. is being wound up. It has no share capital. It cannot request for any contributions or donations or make any collection of money from the public without the prior approval of the Minister. Only a public co. can be a co. ltd. by guarantee.

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The co. must use its profits and other income for its purposes s. 24(1) & (2) It is prohibited from paying dividends to its members. It is a co. which is incorporated usually for the purposes of providing activities of recreation or amusement; or which encourages trade/commerce, research, art, science, religion, education or other purposes beneficial to society. Co. an apply to CCM to omit the word Berhad from its name s. 24. It must get prior approval from the Minister to acquire and hold lands s. 19(2).

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UNLIMITED COMPANY

Defined in S. 4(1). Liability of members to contribute to the cos assets is not limited. Cos name must end with the words ..Sdn. Cannot use the word Bhd. It must be a private co. and not a public co.. Co. can return capital to members.

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PRIVATE COMPANY

Defined in S. 4(1) Cos name must have the word Sdn as part of its name - S. 22(4) The M/A must contain the following - S. 15(1) (a) Restriction on SH to transfer shares unless approved by BOD. (b) Members not more than 50. (c) Co. cannot offer shares to the public. (d) Public cannot deposit money in such a co.
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EXEMPT PRIVATE COMPANY

Defined - s. 4(1). Maximum number of members 20. None of the members can be a corporation. Need not lodge financial statements with CCM. But must provide to SH. Co. can give loans to directors s. 133(1) Co. can give loans to connected persons s. 133A(1)

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PUBLIC COMPANY

Defined - s. 4(1). Any co. which is not a private co. is a public co. A public co. is subject to more regulations compared to private co. Public cos. are larger than private cos. and they usually invite the public to invest money in them. They are also frequently listed on Bursa Malaysia, the securities exchange market in Malaysia. Two types - listed co. and unlisted co. Listing means that securities issued by the co. can be bought and sold by investors through a public, organised, listed market. Some public cos. are not listed. Public cos. have to comply not only with the Co. Act but also with the Listing Requirements of Bursa Malaysia Securities Berhad.
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Differences Between Public Co. & Pte. Co. Public Limited Co Function to run large operations No maximum number of members Name must have the word Bhd No such restrictions Ds maximum age, 70 s. 129 Private Limited Co Function to run SMI, family business operations Maximum number of members 50 Name must have the words Sdn Bhd Must have restrictions stated in s. 15 No maximum age
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Public Limited Co. Single resolution to appoint each director s. 126 Only SH can remove D s. 128

Private Limited Co. No such restriction BOD can remove D if A/A gives them the powers. No such restriction. Not allowed. No such requirement. No such requirement.
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D cannot assign their office Can issue shares to the public Must publish prospectus before offering shares Must hold statutory meeting

HOLDING & SUBSIDIARY CO. Ss. 5(1)(2)

Co. A is Holding Co. of Co. B if: a. Co. A controls the composition of the BOD of Co. B; b. Co. A has more than half of the voting power of Co. B; or c. Co. A has more than half of the issued share capital of Co. B; or Co. B is a subsidiary of any co. which is Co. As subsidiary.

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ULTIMATE HOLDING CO. & WHOLLY-OWNED SUBSIDIARY

UHC - defined in s. 5A UHC is not a subsidiary of any co. WOS - defined in s. 5B All the shares in a WOS is held by a H Co.

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RELATED CORPORATIONS s. 6

S. 6 provides when a co. is deemed to be related to another. Where the co.: is the holding co. of another co. is a subsidiary of another co.; or is a subsidiary of the holding co. of another co.

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INCORPORATION AND ITS CONSEQUENCES Companies Name Before a co. can be registered, the applicant shall apply to the Registrar for a search as to the availability of the proposed name of the intended co. and for reservation of the proposed name s. 22(6). 22(6). The Registrar will not register a co. if, in his opinion, its name contravenes one of the prohibitions in s. 22(1) e.g. a name that is undesirable; or unacceptable and e.g. directed by the Minister not to register undesirable or unacceptable names would include:- Royal, King, include:Federal, National, Trust, ASEAN, UNESCO, University, Chartered etc.
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A co. may change its name by passing a special resolution - s. 23(1) but this shall not affect the identity of the co. or any rights or obligations of the co.co.- s. 23(6)

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Registration of a Company

Any person may incorporate a co. During the period of reservation of the proposed companies name (3 months from the date of lodging the application s. 22(7)) the incorporators of the 22(7)) Intended Company must lodge a number of documents with the CCM. On lodgment of the requisite documents and on payment of the appropriate fees, the Registrar shall register the co. The most important documents that must be lodged are the memorandum of association and articles of
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Upon the registration of the memorandum and other documents and payment of the prescribed fee, the Registrar will issue a certificate of incorporation certifying that the co. is incorporated on and from the date specified in the certificate of incorporation s. 16(4) incorporation The certificate of incorporation is conclusive evidence that the requirements of the Act in respect of registration have been complied with, and that the co. is duly incorporated. The certificate of incorporation is the co's birth certificate. See: S. 16(5) on the effect of incorporation. The members of the co. shall be entered as members in the co.s register of members s. 16(6). 16(6).

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Aron Salomon v. A. Salomon & Co. Ltd. [1897] AC 22 Aron Salomon had been carrying on his business as a boot and shoe manufacturer for many years as a sole-trader under the name A Salomon & Co. in High Street, Whitechapel, where he had extensive warehouses and a large establishment. He was a wealthy man. He had been in the trade over 30 years. Beginning with little or no capital, he had gradually built up a thriving business, and he was undoubtedly in good credit and repute. S had a wife, 5 sons and a daughter. 4 of the sons were working with the father but they were not partners. In 1892, S decided to transfer his business to a limited liability co. which was formed to run the business. He was going to incorporate his business. A price of 39,000 was fixed which the new co. was to pay for the business. In 1892, a co. had to have at least 7 members. The co. which S formed had himself, his wife and 5 sons as members. His children were all of full age. So S complied with the requirements of the Co. Act 1862. Each of the 7 members initially took one share each. S sold his business to the co. and because the co. could not afford to pay in cash, it gave him in return 20,000 1.00 shares and debentures of 10,000. The debentures had the effect of making S a secured 43 creditor of the co. 1000 was paid in cash and 8000 went in

discharge of the debts of the business. S was appointed managing director and one of his sons as co. secretary. The business was then carried out largely as before. The co. soon failed despite Ss attempt to salvage it by putting more of his own money into it. The co. failed due to a depression in the boot and shoe industry at that time. S mortgaged his debentures to someone called Edmund Broderip. B lent S 5,000 on the security of the debentures. Once he received this 5,000, he put that into the co. But nothing could save the co. and a liquidator (L) was appointed to wind up the co. The assets of the co. which the liquidator found in the winding-up was sufficient to pay B and partly to repay S. But there was nothing left for the unsecured trade creditors. They were owed about 11,000. S brought an action against the co. on behalf of the debenture holders to reclaim their money but L counter-claimed. L wanted to set aside the debentures on the grounds of fraud and claimed rescission of the agreement for the transfer of the business to the co., cancellation of the debentures and repayment by S of the balance of the purchase money.
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Alternatively, L claimed that S should be made to indemnify the co. for its business debts. This last point was taken up by Vaughan Williams J. at the Court of First Instance and he made an order that S should indemnify the co. for its debts. He held that this was because the co. was an agent of S. He said that the relationship of principal and agent existed between S and his co. and therefore under the general law of agency, the principal, S, should indemnify the agent, the co. He also said that it was an exorbitant price and therefore it amounted to a fraud on the co. S appealed to the Court of Appeal. They unanimously dismissed his appeal. The Court held, among other things, that S was a trustee for the co. They said that they could not find fault with the way and form in which the co. was incorporated. They held that it was against the intention of the Act and was an abuse of the Act for one trader and six dummies to form a co. and then to let the trader to carry on the business in exactly the same way as it was carried on before.
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S appealed to the House of Lords and the House of Lords reversed the decisions of both Williams J. and the Court of Appeal and in doing so upheld the principle of separate legal personality for the first time in this sort of situation. Lord Macnaghten said this:The co. is at law a different person altogether from the subscribers to the memorandum; and though, it may be that after the incorporation the business is precisely the same as it was before, and the same persons are managers, and the same hands receive the profits, the co. is not in law the agent of the subscribers or trustee for them. Nor are the subscribers as members liable, in any shape or form, except to the extent and in the manner provided by the Act. That is, I think, the declared intention of the enactment.
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So S could not be made liable to indemnify the co. The debts were those of the co. and the co. was a separate person. No agency could be inferred merely from the fact that S held nearly all the shares. Macnaghten had sympathy with the trade creditors but said that they only had themselves to be blamed. They should have realized that they were dealing with a limited co. and should have known of the provisions of the Memorandum and Articles of Association. As regards the overvaluation point, Macnaghten said that the price on paper was extravagant - a sum which represented the sanguine expectations of a fond owner rather than anything that can be called a business like or reasonable estimate of value. There could not have been any fraud because all the shareholders knew at the time exactly what was going on. The position might have been different if S had concealed some secret profit he was making from the other shareholders. 47

The basis of the decision was that a co. is a creature of statute, and what was done by S was within the intention of the legislature as manifested by the statute. Lord Halsbury said:I am simply here dealing with the provisions of the statute, and it seems to me to be essential to the artificial creation that the law should recognize only that artificial existence . that once the co. is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself, and that the motives of those who took part in the promotion of the co. are absolutely irrelevant in discussing what those rights and liabilities are.

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