Topic 1. Introduction to Company Law. INTRODUCTION. The first topic of this module introduces you to Company Law.

You will begin by looking 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 business association is most important. The area of discussion will be on types of business entities and distinctions between the forms of organisations. The registration of different types of companies and the changing of status is allowed by the Companies Act. The legal characteristic of a company allows it to undertake activities in its own right and to sue and be sued in its own name. The separate legal personality characteristic and their implications will be discussed. Although a company is regarded as a person$ unfortunately unlike humans$ it cannot 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 for a contract. The motive behind the formation of a company is relevant. This is because of the way the law treats certain activities carried out in the company. The motive 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 the fundamental principles governing Malaysian Company law$ one must understand how company law was first developed in the (nited )ingdom and how these principles became the core principles of Modern Company Law. The concept of registered company was born during the mid*nineteenth century and as such$ company law is a comparatively modern legal phenomenon. +evertheless$ prior to the mid*nineteenth century$ business associations e%isted in such a form as to warrant them being properly described as ancestors of and necessary catalysts to our present system of company law. ,igure . illustrates the development of modern Company Law.

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 the e"pansion in the world shipping trade. # joint stoc company was an association of mem$ers where$y each mem$er contri$uted capital towards specific trade ventures. %he joint company was a sophisticated form of partnership concern! created $y royal charter. %he charter often provided the association with monopolistic rights in specific trades. %he company was also deemed to have a separate legal entity! although unless specifically provided for in the charter! the mem$erships of such companies were devoid of any form of limited lia$ility. # mem$er of a company would ta e shares in the company in proportion to his initial contri$ution towards the company&s stoc . %he growth in joint stoc companies mirrored an e"pansion in the num$er of share dealings. In 1'11! (outh (ea Company was founded) the o$jective was to o$tain a monopoly of trade with the colonies in (outh #merica. %he surge of confidence in the (outh (ea shares resulted in a general that increased in share dealings and speculative $oom in the general value of share prices of other companies. *nfortunately! many companies with du$ious corporate o$jectives! many of which had $een formed $y purchasing chatterers of long e"tinct companies! thrived as a result of the general acceptance $y naive investors that a company share could do nothing $ut escalate in value. # collapse in the mar ets was inevita$le! fraudulently conceived companies were prosecuted! mem$ers of the government who has $een involved in the share dealings fell from grace and +arliament! in an attempt to cur$ the improper use of the corporate form! passed the so,called -u$$le #ct 1'./. %he o$jective was to prohi$it the promotion and operation of 0dangerous and mischievous underta ings and projects! wherein the underta ers and su$scri$ers have presumed to act as if they were corporate $odies&. %he south sea $u$$le episode was the first speculative $oom and crash in -ritish history although it was certainly not to $e the last. Unincorporated A ociation .

%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 $y this method was e"tremely prohi$itive of smaller $usiness ventures. %he principal disadvantage of the unincorporated association was that the mem$ers of these $usinesses did not have limited lia$ility. In addition! the legality of the right of mem$ers to transfer shares freely in the associations remained undou$tedly 1uestiona$le under the provisions of the -u$$le #ct! an #ct that was not repealed until 12.3. The !oint "toc# Companie Act 1$%%. The -oint .tock Companies Act /00 gave birth to the first form of registered company. This allowed a company to be incorporated by a registration procedure as opposed to incorporation by royal charter or by an individual Act of 1arliament. This Act also created the 2egistrar of Companies with whom particulars of registered companies had to be lodged. 3espite the creation of the registered company$ 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 to incorporate with a limited lia$ility status. %he 1233 #ct was incorporated into the 5oint (toc Companies #ct 1236. %his #ct re1uired a company to have and registered constitutional documents 7memorandum and articles of association8. It removed the restriction relating to the minimum amount of capital to $e contri$uted $y mem$ers of a company and also reduced the minimum num$er of mem$ers re1uired for the purpose of incorporation from .3 to ' mem$ers. %he companies legislation was consolidated into the Companies #ct of 126.. %his act introduced companies limited $y guaranteed and unlimited companies. (ince then! 9nglish Company law has consistently undergone a series of review and consolidations that ultimately lead to the passing of the 9nglish Companies #ct 1:;2 and then Companies #ct 1:23. It has continued to grow since the *nited <ingdom inception into the 9uropean *nion in 1:'..

Company Law in Malay ia.

.ources of Company Law in Malaysia consists of Legislation$ Common Law$ and .elf 2egulation as e%plained in Table . .

The Companie Act 1'().

The Act came into force in April #th !"#. The purpose of the Act was to consolidate as well as amend the law pertaining to companies in Malaysia. In view of the historical relationship with Australia and (nited )ingdom$ the 4udicial

pronouncements on the interpretation of their respective company5s legislation are highly persuasive in interpreting the e6uivalent Malaysian provisions. The function of the Act can be seen as an enabling function and regulatory function. .#7 8 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 to be administered shall be the same as would be administered in 'ngland in the like case at the date of the coming into force of this ordinance$ if such 6uestion or issue had arisen or had to be decided in 'ngland$ unless in any case other provision is or shall be made by any written law. (ource of company law are e"plained in %a$le 1.1
.ources Legislation '%planation

Common Law

C# 1:63 and its accompanying regulations 7Companies =egulations 1:668. In addition to this #ct! the other legislation includes the (ecurities Commission #ct 1::>! the +engurusan Danaharta ?ational -erhad #ct 1::2! (ecurities Industry 7Central Depositories8 #ct 1::1 and the Companies Commission of Malaysia #ct .//1. %his module will $e primarily concerned with the C# 1:63 7here in after referred to as the @%he #ctA and sections referred to in this module refers to the #ct unless stated otherwise. %he act is not a code and reference are made to the common 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 with case law! which assists in the interpretation of the legislation. (elf,regulatory principles strictly spea ing is not law $ut is particularly relevant in the areas of company listing and measures ta en to enhance corporate governance.

.ell*2egulation

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

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 1:36 or the C# 1:63. %he =egistrar of Companies and =egistrar of -usiness administer $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 foreign investor coming to Malaysia must ma e use of a limited company as his $usiness vehicle. -UNDAM+NTAL DI"TINCTION" *+T.++N T/+ COMMON -ORM" O- OR0ANI"ATION" 1 "OL+ TRAD+R2 3ARTN+R"/I3 AND COM3AN, 4. "ole 3roprietor hip.

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

3artner hip.

<owever$ usually the terms of the agreement between partners are recorded in a formal legal document referred to as a =partnership agreement>. (nless otherwise provided in the partnership agreement$ whether specifically or impliedly the 1artnership Act !" will apply.

.hy i 3artner hip 3op5lar6 Advantages of the firm as a form of business enterprise. a8 1artnership can be formed 6uickly and easily without any great legal formalities 7created by contract8. b8 Larger amounts of capital available than would be the case with the sole proprietor. 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 a company8. 'ach partner may specialise in particular aspects of the business according 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 statutory meetings8. 48 1artnerships can be dissolved easily * by mere consent 7companies elaborate procedure for dissolution and removal of co. name from the 2egister8. This form of business is most common amongst:

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 Aroups. ,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 <igh Court to ask for a dissolution of the partnership 7McCartney v Lennon$ <arrison and .tarkey8 on March !B . A receiver was appointed to handle the ?eatleCs assets until the court granted the dissolution of D?eatles Co.D in !B#. f8 Agriculture 7many family farms8. Disadvantages of Partnership. a8 2elative lack of resources for e%pansion. +o ability to offer floating charges. b8 3ifferences of opinion among partners could threaten e%istence of the business. c8 The need for partners to consult one another on important matters creates infle%ibility. Ad4ustments to new situations may be less rapid 7than say$ sole trader8. d8 3ecisions of one partner are binding on all$ and could lead to problems if it is a poor decision. e8 (nlimited ability for debts. f8 3eath or bankruptcy may mean end of the business unless there is a written agreement to the contrary.

%a$le 1..: Definition of *nincorporated 5oint Centure and %rust.

*nincorporated 5oint Centure

Trust

#n unincorporated joint venture is a contractual agreement $etween two or more people that they will join together to conduct a particular venture. %he joint venture is not a separate legal entity and the assets and o$ligations of the venture are those of the ventures personally. (ome $usiness is conducted through private trust! often for ta" purpose and the unit trust is a common mode of pooling investments with a separate trustee and manager.

Compari on &etween Companie and 3artner hip. ?elow are comparison between companies and partnership. a8 A company can be created only by certain prescribed methods @ most commonly by registration under the CA !"#. A partnership is created by the

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 on dissolution$ 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 on membership. A partnership must have at least two members and has an upper limit of EF 7with some e%ceptions8. e8 .hares in a company are normally transferable 7must be so in a public company8. A partner cannot transfer his share of the partnership without the consent of all the other partners. f8 Members of a company are not entitled to take part in the management of the company unless they are also directors of it. 'very partner is entitled to take part in the management of the partnership business unless the partnership agreement provides otherwise. g8 A member of a company who is not also a director is not regarded as an agent of the company$ and cannot bind the company by his actions. A partner in a firm 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 the company may be limited. A partner in an ordinary partnership can be made liable without limit for the debts and obligations of the firm. i8 The powers and duties of a company$ and those who run it$ are closely regulated by the Companies Acts and by its own constitution as contained in the Memorandum and Articles of Association. 1artners have more freedom to alter the nature of their business by agreement and without formality$ and to make 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 registers and the auditing of accounts which do not apply to partnerships. k8 The affairs of a company are sub4ect to more publicity than those of a partnership * e.g. companies must file accounts which are available for public inspection. l8 A company can create a security over its assets called a floating charge$ which permits it to raise funds without impeding its ability to deal with its assets. A partnership cannot create a floating charge. m8 If a company owes a debt to any of its shareholders they can claim payment from 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 a partner$ unless the agreement provides otherwise. A company cannot normally be wound up on the will of a single member$ and the death$ bankruptcy or insanity of a member will not result in its being wound up.

CLA""I-ICATION" AND T/+ C/AN0IN0 "TATU" O- COM3ANI+". %he Companies #ct allows for registration of various forms of companies. # company may change its status $ecause of its change of activities. %his is also permitted $y the Companies #ct. The Re7i tered Company. #ll pu$lic and private companies registered under the Companies #ct from time to time in force are registered 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 to time 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$lic or private. 35&lic and 3rivate Companie . # pu$lic company is one! which fits the definition of pu$lic company given in the C# 1:63

# 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 Limited $y shares or limited $y guarantee and having a share capital! $eing a company. +u$lic companies may $e listed or unlisted. +rivate Company #ny company that is registered as! or converts to a private company under (; 718 of the #ct. (.. 7;8 , (tates that a private company limited $y shares must always include the words D(endirian -erhadD of the a$$reviation D(dn. -hdD in its name.

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

# private company is e"empted if it has less than ./ mem$ers and none of its mem$ers are themselves companies. 9"empt private companies can eep their financial information private. Must in its memorandum of association! restrict the right to transfer its shares. #re not permitted to have more than 3/ shareholders. #re not allowed to underta e certain fund,raising activities that re1uire 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'() (6:L (16: 718 (1>> G (1>># 3rovi ion =e1uired to maintain a register of su$stantial shareholders =e1uired to lodge financial reports! regardless of the siFe of the companyBs operations. =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 are unlimited * it must pay all debts due. Ghere it does not have sufficient assets to meet due debts$ the company will go into li6uidation$ receivership or administration. <owever$ the liability of the members is usually limited$ either by shares or by guarantee. i. Limited by Shares. In this situation the liability of each member is limited to the amount$ if any$ unpaid don his shares. Table .# e%plains the provisions governing members liability.

%a$le 1.3: +rovisions Hoverning Mem$ers Lia$ility. 3rovi ion (;718 +8planation # company limited $y shares is Da company formed on the principle of having he lia$ility of its mem$ers limited! $y the memorandum of association! to the amount 7if any8 unpaid on the shares respectively held $y them.D

(12

(.1;

=e1uires these companies to state in their memorandum of association! the amount 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. Iowever! in e"ceptional circumstances! the Bveil on incorporationB may $e lifted and mem$ers or company officers made lia$le for all or some of the companyBs de$t. (ets out the lia$ility of mem$ers in a company limited $y shares to contri$ute to meet the companyBs de$ts on a winding up.

ii. Limited by Guarantee <ere$ the liability of members is limited to the guarantee amount which they have respectively agreed to contribute to the assets of the company in the event of its being wound*up: .07 8 of the Act. As long as the company is a going concern$ no contribution is re6uired. <owever$ it is possible to have a company limited by guarantee and having a share capital. iii. Companies Limited by Both Shares and Guarantee. Ghere members are liable as shareholders and as guarantors. Although there may be members who do not hold shares in a company limited both by shares and guarantee$ all member are liable to honor the guarantee. <ere$ the members must pay for their shares in the normal way and will be liable for the amount$ if any$ unpaid on the shares and for the guaranteed amount. In practice$ guarantee companies are private rather than public companies and are used for charitable or non*trading concerns. '%amples include colleges and theater clubs. b. n!imited Companies A company may be registered as an unlimited company$ in which case the liability of its members is unlimited: .07 8 of the Act. Thus$ the private assets 7e.g. house$ car8 of a shareholder could be used to satisfy debts unpaid by the company. +evertheless$ a few such companies do e%ist$ the chief advantage being is that an unlimited company does not have to file annual accounts with the 2egistrar * its financial affairs are private. It has some similarities to a partnership and has the advantage of other characteristics of incorporation such as the concept of legal personality.

Chan7in7 the "tat5 of a Company.

A registered company may at some time during the course of its e%istence wish or be obliged to change the status with which it was originally registered. A rapidly e%panding private company limited by shares may decide that the only way in which its e%pansion can be achieved is to increase its share capital by offering its securities to the general public to secure further capital top finance growth. Ghere a public companyCs issued share capital falls below the minimum re6uirement of share capital permitted for a public company$ the public company must re*register itself as a private company.

A9TI:IT,. Ghich would be the best form of business organisationH If you were given an opportunity to set a business$ which type of organisation would you choose and whyH

"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 $eing wound up is as provided $y the Companies #ct.

a8 .eparate Legal 1ersonality&'ntity i. ii. iii. A company is regarded as a distinct legal entity with a separate e%istence from its membership and management team. The corporate veil is IdrawnJ between the corporate entity and the membership and management of a company so as to separate its independent legal e%istence from that of its human constituents. The principle of the veil of incorporation was tested and finally established by the decision of the <ouse of Lords in .alomon v .alomon K Co 7 /!B8.

2efer to the following .alomonCs case.

$e!d: $igh Court %$C& The li6uidator admitted the validity of ?roderipCs prior claim to be repaid from the companyCs assets$ i.e. as holder of a secured loan. +evertheless$ the li6uidator counter*claimed that the company 7and therefore the companyCs unsecured creditors8 was entitled to be reimbursed by .alomon personally. The trial 4udge$ Laughn Gilliams -.$ agreed with this contention. Ghilst admitting that on its registration a company was a legal entity distinct form its corporations$ the learned 4udge opinioned that A .alomon Ltd. 7the company8 was no more than an agent of its principal$ i.e. Mr. .alomon. As such$ the principal was responsible for the debts of its agent. The basis for the agency argument was that the company was a mere alias of its founder and had not been formed in accordance with the true spirit of the Companies Act /"E.

Laughan Gilliams -$ believed that the /"E Companies Act$ in its re6uirement for =seven persons associated for a lawful purpose$> meant seven persons with a bona fide intention of participating in a trading venture$ and not as in the present case$ a company which was in reality akin to a one man business. Court of Appea! %C'A& The decision of Laughnan GilliamCs - was upheld$ although$ in the C9ACs 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 the creditors of A .alomon Ltd. were entitled to a claim against Mr. . through the company. As at first instance$ the C9A recogniMed that A .alomon Ltd.$ in complying with the registration provisions of the Companies Act /"E$ had been validly incorporated as a separate legal entity. <owever$ the court would not recogniMe that the liability of A .alomon Ltd. should be divorced from that of its founder$ Mr. .$ in so far as they agreed with Laughn Gilliams -.$ that in relation to the re6uirements of incorporation the correct interpretation of the Companies Act /"E was that the seven persons who became members of the company should participate in the venture rather than have a superficial interest in the company. +otwithstanding the fact that the business had been profitable prior to its incorporation$ Linley - was of the opinion that the manner in which it had been formed indicated that had been created for an illegitimate purpose$ that it was Cadvice to defraud creditorsC. Indeed$ in the Court of AppealCs opinion the companyCs illegitimacy stemmed from the fact that it was in reality a one company. $ouse of Lords %$'L& In reversing the decision of the C9A$ rigorously denied the belief held by the lower courts that a company could not be formed by one dominant character together with si% other persons divorced of a substantial interest in the business venture. According to the <ouse$ the .tatutory language of the Companies Act /"E 7s "8 was clear. A company could be incorporated providing it had at least seven members irrespective of whether or not all seven members made a substantial contribution to the company5s affairs. Although both the <C and the C9A recogniMed that A .alomon Ltd.$ having complied with the registration provisions of the Companies Act /"E$ was a corporate entity$ they had not contemplated the fact that once incorporate the company could not be considered as anything other than an independent entity$ totally separate and distinct from its founder$ Mr. .. The <9LCs interpretation of the separate legal identity of as company was$ in respect of A .alomon Ltd.$ absolute. The <9L$ in considering the agency and trust arguments of the lowers courts$ concluded that both were contradictory to the view that the company was a separate legal entity. The finding of an agency or trust relationship would have meant that Mr. . would have been personally liable for the companyCs debts.

+--+CT" O- T/+ COR3ORAT+ :+IL.

%he legal rights and duties of shareholders! in respect of their relationship with the company and fellow shareholders are determined $y the companyBs constitution. # company is a separate person in law from its mem$ers. %his has several important conse1uences. %he conse1uences are as shown in Figure 1.>.

Figure 1.>: Important conse1uences 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 companyCs creditors. A shareholder can be a debtor or creditor of the company and can sue or be sued by the company as in .alomon v A .alomon K Co Ltd.

b8 CompanyCs Liability

The fact that the company is a separate person from its shareholders makes limited liability possible. It should be noted that the companyCs liability is always unlimited. It is the membersC liability that is limited and that liability is to the company$ not to the individual creditors. c8 CompanyCs 1roperty A company owns its own property and the shareholders have no direct right to this or any share of it. 1erson who no longer wishes to be a member is only entitled to whatever price he can get for his shares. A shareholder has no legal interest in the companyCs property and cannot insure it against theft$ damage$ etc. d8 Contractual Capacity A company has full contractual capacity * and only the company can enforce its contracts. Companies may also be liable in negligence. .hareholders$ on the other hand cannot be made liable for the negligence of the company$ unless he was also personally negligent. e8 Crimes A company can be convicted of a crime$ regardless of whether its directors are also convicted. <owever$ e%ceptions to the limitations stated that a company cannot be convicted of a crime which re6uires the physical act of driving a vehicle.

There are particular problems with crimes which re6uire mens rea 7Da guilty mindD8 * most common law crimes re6uire mens rea$ while many statutory offences involve strict criminal liability. In order to convict companies of common law crimes$ courts may regard the mens rea of those individuals who control the company to be the mens rea of the company.

<owever$ the courts have been very restrictive in their use of this approach: Crimes Against the Company A company can be the victim of crime. It is theft to steal from a company$ even if those accused of the theft are also the companyCs only shareholders as in the case 2 v 1hippou 7 !/!8.

f8 1erpetual .uccession .eparate personality means that the e%istence of a company does not depend on the e%istence of its members. Membership may change or members may die * the company continues in e%istence until wound up. g8 ?orrowing

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