Topic 1. Bahaya Mata

8/13/2019 Topic 1. Bahaya Mata

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Topic 1. Introduction to Company Law.

INTRODUCTION.

The first topic of this module introduces you to Company Law. You will begin bylooking at the scope and development of Modern Company Law. It is important to

identify the main sources of company and the introduction to the Companies Act!"#. The decision in dealing with the most appropriate form of businessassociation is most important. The area of discussion will be on types of businessentities and distinctions between the forms of organisations.

The registration of different types of companies and the changing of status isallowed by the Companies Act. The legal characteristic of a company allows it toundertake activities in its own right and to sue and be sued in its own name. Theseparate legal personality characteristic and their implications will be discussed.

Although a company is regarded as a person$ unfortunately unlike humans$ itcannot operate itself as it acts only through agents$ either by e%pressed or implied.

The agency principles must be used whenever we wish to attribute responsibility fora contract. The motive behind the formation of a company is relevant. This isbecause of the way the law treats certain activities carried out in the company. Themotive of the person&persons behind the formation of a company is important.

Development of Modern Company Law.

Company Law in Malaysia has evolved from the 'nglish principles of company law.Most of its fundamental principles are of 'nglish origin. In order to appreciate thefundamental principles governing Malaysian Company law$ one must understandhow company law was first developed in the (nited )ingdom and how theseprinciples became the core principles of Modern Company Law.

The concept of registered company was born during the mid*nineteenth centuryand as such$ company law is a comparatively modern legal phenomenon.+evertheless$ prior to the mid*nineteenth century$ business associations e%isted insuch a form as to warrant them being properly described as ancestors of andnecessary catalysts to our present system of company law. ,igure . illustrates thedevelopment of modern Company Law.


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Figure 1.1: Development of Modern Company Law

The Chartered Company.

Chartered joint stoc companies were developed in the seventeenth century! largely as a result of thee"pansion in the world shipping trade. # joint stoc company was an association of mem$ers where$yeach mem$er contri$uted capital towards specific trade ventures.

%he joint company was a sophisticated form of partnership concern! created $y royal charter. %he charteroften provided the association with monopolistic rights in specific trades. %he company was also deemedto have a separate legal entity! although unless specifically provided for in the charter! the mem$ershipsof such companies were devoid of any form of limited lia$ility.

# mem$er of a company would tae shares in the company in proportion to his initial contri$utiontowards the company&s stoc. %he growth in joint stoc companies mirrored an e"pansion in the num$er

of share dealings. In 1'11! (outh (ea Company was founded) the o$jective was to o$tain a monopoly oftrade with the colonies in (outh #merica. %he surge of confidence in the (outh (ea shares resulted in ageneral that increased in share dealings and speculative $oom in the general value of share prices of othercompanies.

*nfortunately! many companies with du$ious corporate o$jectives! many of which had $een formed $ypurchasing chatterers of long e"tinct companies! thrived as a result of the general acceptance $y naiveinvestors that a company share could do nothing $ut escalate in value.

# collapse in the marets was inevita$le! fraudulently conceived companies were prosecuted! mem$ers ofthe government who has $een involved in the share dealings fell from grace and +arliament! in an attemptto cur$ the improper use of the corporate form! passed the so,called -u$$le #ct 1'/.

%he o$jective was to prohi$it the promotion and operation of 0dangerous and mischievous undertaingsand projects! wherein the undertaers and su$scri$ers have presumed to act as if they were corporate$odies&. %he south sea $u$$le episode was the first speculative $oom and crash in -ritish historyalthough it was certainly not to $e the last.

Unincorporated Aociation.


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%he nineteenth century witnessed an increase in the num$er of companies created $y individual #cts of+arliament. (uch companies were $asically large trading concerns) the e"pense of incorporating $y thismethod was e"tremely prohi$itive of smaller $usiness ventures.

%he principal disadvantage of the unincorporated association was that the mem$ers of these $usinessesdid not have limited lia$ility. In addition! the legality of the right of mem$ers to transfer shares freely in

the associations remained undou$tedly uestiona$le under the provisions of the -u$$le #ct! an #ct thatwas not repealed until 123.

The !oint "toc# Companie Act 1$%%.

The -oint tock Companies Act /00 gave birth to the first form of registeredcompany. This allowed a company to be incorporated by a registration procedure asopposed to incorporation by royal charter or by an individual Act of 1arliament. ThisAct also created the 2egistrar of Companies with whom particulars of registeredcompanies had to be lodged. 3espite the creation of the registered company$ the/00 Act did not confer limited liability on the membership of these companies.

Limited Lia&ility.

%he Limited Lia$ility #ct was passed in 1233. %his #ct allowed companies with at least 3 mem$ers!each holding shares to the minimum value of 41/ with at least one,fifth fully paid up on the share toincorporate with a limited lia$ility status. %he 1233 #ct was incorporated into the 5oint (toc Companies#ct 1236.

%his #ct reuired a company to have and registered constitutional documents 7memorandum and articlesof association8. It removed the restriction relating to the minimum amount of capital to $e contri$uted $ymem$ers of a company and also reduced the minimum num$er of mem$ers reuired for the purpose ofincorporation from 3 to ' mem$ers.

%he companies legislation was consolidated into the Companies #ct of 126. %his act introducedcompanies limited $y guaranteed and unlimited companies. (ince then! 9nglish Company law hasconsistently undergone a series of review and consolidations that ultimately lead to the passing of the9nglish Companies #ct 1;2 and then Companies #ct 123. It has continued to grow since the *nited


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pronouncements on the interpretation of their respective company5s legislation arehighly persuasive in interpreting the e6uivalent Malaysian provisions. The functionof the Act can be seen as an enabling function and regulatory function.

#78 of the Civil Law 9rdinance !#" provides that:In all 6uestions or issues which arise or have to be decided in the tates of ;..with

respection to the law of partnerships$ corporation$ banks and banking ;.. The law tobe administered shall be the same as would be administered in 'ngland in the likecase at the date of the coming into force of this ordinance$ if such 6uestion or issuehad arisen or had to be decided in 'ngland$ unless in any case other provision is orshall be made by any written law.

(ource of company law are e"plained in %a$le 1.1

ources '%planationLegislation C# 163 and its accompanying regulations

7Companies =egulations 1668. In addition to this#ct! the other legislation includes the (ecurities

Commission #ct 1>! the +engurusan Danaharta?ational -erhad #ct 12! (ecurities Industry7Central Depositories8 #ct 11 and the CompaniesCommission of Malaysia #ct //1. %his modulewill $e primarily concerned with the C# 163 7herein after referred to as the @%he #ctA and sectionsreferred to in this module refers to the #ct unlessstated otherwise.

Common Law %he act is not a code and reference are made to thecommon law for guidance. (1>1 728 state that

@this section shall $e in addition to and not in

derogation of the operation of any rule of law.A

(uch sections must $e read in conjunction withcase law! which assists in the interpretation of thelegislation.

ell*2egulation (elf,regulatory principles strictly speaing is notlaw $ut is particularly relevant in the areas ofcompany listing and measures taen to enhancecorporate governance.

Content of the Companie Act.

%he Companies #ct is an e"tremely long and complicated statute with over >'; sections and 1 parts andnine schedules. %he parts are as illustrated in Figure 1.


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Figure 1.: Content of the Companies #ct

*U"IN+"" +NTITI+" IN MALA,"IA.

#ny person who wishes to em$ar on any $usiness venture in Malaysia must register either under the

=egistration of -usiness #ct 136 or the C# 163. %he =egistrar of Companies and =egistrar of -usinessadminister $oth the #cts.

%he types of $usiness structures are as follows:

(ole proprietorship +artnership Limited companies *nincorporated associations

Foreign investors could not register as the sole proprietors and partnership! and therefore! any foreigninvestor coming to Malaysia must mae use of a limited company as his $usiness vehicle.

-UNDAM+NTAL DI"TINCTION" *+T++N T/+ COMMON -ORM" O- OR0ANI"ATION"

"OL+ TRAD+R2 3ARTN+R"/I3 AND COM3AN, 4.

"ole 3roprietorhip.

%he advantage of this form of $usiness is that there are fewer formalities in terms of its formation andregistration. %he sole proprietor is the ta"payer and the $usinessB losses or profits can $e offset against theproprietorBs other income.


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3artnerhip.

. (nless otherwiseprovided in the partnership agreement$ whether specifically or impliedly the1artnership Act !" will apply.

hy i 3artnerhip 3op5lar6

Advantages of the firm as a form of business enterprise.

a8 1artnership can be formed 6uickly and easily without any great legal formalities7created by contract8.

b8 Larger amounts of capital available than would be the case with the soleproprietor.c8 'ach partner can have a say in management of business and can share profits.

7+ote many inventors worried about losing control of business if it becomes acompany8. 'ach partner may specialise in particular aspects of the businessaccording to his abilities and preferences.

d8 ?urden of management can be shared.e8 3iscussion is possible and new ideas may develop as a result.f8 1artnerships are often small * may be closer&more responsive to

clients&customers.g8 1rivacy. +o disclosure of accounts etc to public.h8 1artners bound to one another. ,iduciary duties to each other deal in utmost

good faith @ no competition with the firm.i8 Less costs&regulation compared to companies 7e.g. no need for statutorymeetings8.

48 1artnerships can be dissolved easily * by mere consent 7companies elaborateprocedure for dissolution and removal of co. name from the 2egister8.

This form of business is most common amongst:


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a8 1rofessionals: Accountants$ lawyers$ doctors$ dentists$ architects$ surveyors$actuaries$ patent agents$ etc.

b8 Traders: 1lumbers$ 4oiners$ electricians.c8 ,amily business.d8 2etail and road haulage.e8 1op roups. ,or e%ample$ the famous band in ()$ The ?eatles was a partnership

worth millions. It came to an end when one of the partners$ 1aul McCartney$went to the 'nglish


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e%press or implied agreement of the parties$ and re6uires no formalities$though it is common to have a written agreement.

b8 A company incurs greater e%penses at formation$ throughout its life and ondissolution$ though these need not be e%cessive.

c8 A company is an artificial legal person distinct from its members.

d8 A company can have as little as one member and there is no upper limit onmembership. A partnership must have at least two members and has an upperlimit of EF 7with some e%ceptions8.

e8 hares in a company are normally transferable 7must be so in a publiccompany8. A partner cannot transfer his share of the partnership without theconsent of all the other partners.

f8 Members of a company are not entitled to take part in the management of thecompany unless they are also directors of it. 'very partner is entitled to takepart in the management of the partnership business unless the partnershipagreement provides otherwise.

g8 A member of a company who is not also a director is not regarded as an agentof the company$ and cannot bind the company by his actions. A partner in afirm is an agent of the firm$ which will be bound by his acts.

h8 The liability of a member of a company for the debts and obligations of thecompany may be limited. A partner in an ordinary partnership can be madeliable without limit for the debts and obligations of the firm.

i8 The powers and duties of a company$ and those who run it$ are closelyregulated by the Companies Acts and by its own constitution as contained inthe Memorandum and Articles of Association. 1artners have more freedom toalter the nature of their business by agreement and without formality$ and tomake their own arrangements as to the manner in which the firm will be run.

48 A company must comply with formalities regarding the keeping of registersand the auditing of accounts which do not apply to partnerships.

k8 The affairs of a company are sub4ect to more publicity than those of apartnership * e.g. companies must file accounts which are available for publicinspection.

l8 A company can create a security over its assets called a floating charge$ whichpermits it to raise funds without impeding its ability to deal with its assets. Apartnership cannot create a floating charge.

m8 If a company owes a debt to any of its shareholders they can claim paymentfrom its assets ratably with its other creditors. A partner who is owed money

by the partnership cannot claim payment in competition with other creditors.n8 A partnership 7unless entered into for a fi%ed period8 can be dissolved by any

partner$ and is automatically dissolved by the death or bankruptcy of apartner$ unless the agreement provides otherwise. A company cannot normallybe wound up on the will of a single member$ and the death$ bankruptcy orinsanity of a member will not result in its being wound up.


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CLA""I-ICATION" AND T/+ C/AN0IN0 "TATU" O- COM3ANI+".

%he Companies #ct allows for registration of various forms of companies. # company may change itsstatus $ecause of its change of activities. %his is also permitted $y the Companies #ct.

The Re7itered Company.

#ll pu$lic and private companies registered under the Companies #ct from time to time in force areregistered companies. # registered company is a type of corporation! that is! an association of persons!which has! in law! an e"istence rights and duties separated from those of the persons who are from time totime its mem$ers.

%hus! a corporation is an artificial legal person! which e"ists despite the demise of its various mem$ers.Companies are classified according to the mem$ersB lia$ility and according to whether they are pu$lic orprivate.

35&lic and 3rivate Companie.

# pu$lic company is one! which fits the definition of pu$lic company given in the C# 163

# pu$lic company and a private company may $e differentiated as shown in %a$le 1.>.

%a$le 1.>: Differences $etween +u$lic Company and +rivate Company.

+u$lic Company +rivate Company

Limited $y shares or limited $yguarantee and having a share capital!$eing a company.

+u$lic companies may $e listed orunlisted.

#ny company that is registered as! or converts to aprivate company under (; 718 of the #ct.

( 7;8 , (tates that a private company limited $yshares must always include the words (endirian-erhad of the a$$reviation (dn. -hd in its name.


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#ll companies listed on the -ursaMalaysia are pu$lic companies.

# private company is e"empted if it has less than /mem$ers and none of its mem$ers are themselvescompanies.

9"empt private companies can eep their financialinformation private.

Must in its memorandum of association! restrict theright to transfer its shares.

#re not permitted to have more than 3/shareholders.

#re not allowed to undertae certain fund,raisingactivities that reuire the issue of a prospectus.

E$ligations imposed on pu$lic company are as shown in %a$le 1.;.

%a$le 1.;: E$ligations as Imposed on +u$lic Company.

CA 1'() 3roviion

(6L =euired to maintain a register of su$stantial shareholders(16 718 =euired to lodge financial reports! regardless of the sie of the companyBs operations.(1>> G (1>># =estrictions on loans to directors or connected persons

Limited and Unlimited Company.

a. Limited Companies.A company is a separate legal entity and its liability to pay its debts areunlimited * it must pay all debts due. Ghere it does not have sufficient assets to

meet due debts$ the company will go into li6uidation$ receivership oradministration.


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(12 =euires these companies to state in their memorandum of association! theamount of share capital and its division into shares of fi"ed amount.

It must also state that the lia$ility of its mem$er is limited. owever! ine"ceptional circumstances! the Bveil on incorporationB may $e lifted and mem$ersor company officers made lia$le for all or some of the companyBs de$t.

(1; (ets out the lia$ility of mem$ers in a company limited $y shares to contri$ute to meetthe companyBs de$ts on a winding up.

ii. Limited by Guarantee


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A registered company may at some time during the course of its e%istence wish orbe obliged to change the status with which it was originally registered.

A rapidly e%panding private company limited by shares may decide that the onlyway in which its e%pansion can be achieved is to increase its share capital byoffering its securities to the general public to secure further capital top finance

growth.

Ghere a public companys issued share capital falls below the minimumre6uirement of share capital permitted for a public company$ the public companymust re*register itself as a private company.

A9TI:IT,.

Ghich would be the best form of business organisationH If you were given anopportunity to set a business$ which type of organisation would you choose andwhyH

"ncorporating a Company and the Lega! Conse#uences.

Lia$ility on the part of the mem$ers to contri$ute to the assets of the company in the event of its $eingwound up is as provided $y the Companies #ct.


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a8 eparate Legal 1ersonality&'ntity

i. A company is regarded as a distinct legal entity with a separate e%istencefrom its membership and management team.

ii. The corporate veil is drawnJ between the corporate entity and themembership and management of a company so as to separate itsindependent legal e%istence from that of its human constituents.

iii. The principle of the veil of incorporation was tested and finally established bythe decision of the


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aughan Gilliams -$ believed that the /"E Companies Act$ in its re6uirement for=seven persons associated for a lawful purpose$> meant seven persons with a bonafide intention of participating in a trading venture$ and not as in the present case$ acompany which was in reality akin to a one man business.

Court of Appea! %C'A&

The decision of aughnan Gilliams - was upheld$ although$ in the C9As opinion$the correct analogy between the company and Mr. was that of a trust relationship$i.e. the company held its property on trust for its beneficiary$ Mr. $ as such thecreditors of A alomon Ltd. were entitled to a claim against Mr. through thecompany. As at first instance$ the C9A recognied that A alomon Ltd.$ in complyingwith the registration provisions of the Companies Act /"E$ had been validlyincorporated as a separate legal entity.


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%he legal rights and duties of shareholders! in respect of their relationship with the company and fellowshareholders are determined $y the companyBs constitution.

# company is a separate person in law from its mem$ers. %his has several important conseuences. %heconseuences are as shown in Figure 1.>.

Figure 1.>: Important conseuences in forming a company.

a8 Company is Liable for its 9wn 3ebts

The shareholders are not liable for the debts and liabilities of the company and

cannot be sued by the companys creditors. A shareholder can be a debtor orcreditor of the company and can sue or be sued by the company as in alomonv A alomon K Co Ltd.

b8 Companys Liability


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The fact that the company is a separate person from its shareholders makeslimited liability possible. It should be noted that the companys liability is alwaysunlimited. It is the members liability that is limited and that liability is to thecompany$ not to the individual creditors.

c8 Companys 1roperty

A company owns its own property and the shareholders have no direct right tothis or any share of it. 1erson who no longer wishes to be a member is onlyentitled to whatever price he can get for his shares. A shareholder has no legalinterest in the companys property and cannot insure it against theft$ damage$etc.

d8 Contractual Capacity

A company has full contractual capacity * and only the company can enforce itscontracts. Companies may also be liable in negligence. hareholders$ on the

other hand cannot be made liable for the negligence of the company$ unless hewas also personally negligent.

e8 Crimes

A company can be convicted of a crime$ regardless of whether its directors arealso convicted.


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A company can borrow money and grant a security for a debt. 9nly a companycan create a floating charge. ,loating charge is a kind of security for a loan. Thecharge DfloatsD because is does not attach to any particular asset$ but floatsover the companyNs assets as they e%ist from time to time. Certain eventscause the charge to DcrystalliseD and attach to whatever assets the companyhas at the time.

Topic 1. Bahaya Mata

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