NOTESFORLAWOFBUSINESSORGANIZATION.pdf

Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA Page 1

CHAPTER 1: BUSINESS ORGANIZATIONS

1. What are three types of business organizations?

i. Sole Proprietorship

- One man is in business for himself

- No special rules governing sole proprietorship,

- Treated no differently from anyone else at law

- Use own to resources to provide skill, labor, capital, and other resources to run the business

- Unlimited liabilities

- Registered under Registration of Business Act 1956

ii. Partnership

- Exist when two or more persons pool their skills, labor, capital and other resources together to form a business jointly

- Under Partnership Act 1961

- Applied English Court decision

iii. Company

- A business organization of two or more individuals

- Registered under Company Act 1965

2. What are the sources of Malaysian Company Law?

i. Statutes (CT CS)

- Companies Act 1965

- Companies Regulation 1966

- Securities Industry Act 1983

- The Registration of Business Act 1956

ii. Judicial precedent/ common law

- Fundamental principles of company law which are based on judicial precedent and applicable in Malaysia, includes:

o Case: Solomon V Solomon & Co (1897), principles of separate legal entity or personality

o Case: Foss V Harbottle (1843), principles of Proper plaintiff and majority rule

o Case: Royal British Bank V Turquand (1855), principle of indoor management rule

iii. Common law, equity and acts of England

- By virtue S3 & S5 of the civil law act 1956

- In certain situations, the law of England and several acts of England not though not passed as an act in Malaysia are applicable in Malaysia

3. What are the comparison between company, partnership and sole proprietorship?

Company Partnership Sole Proprietorship


a. Definition Body of person combined for

common object

2 or more

person business 1 man business

b. Formation Under CA 1965 Easier, no formalities, registration fee

is cheaper

Easier &

economical, No agreement

necessary, Registration fee

is also cheaper

c. Registration With Registrar of The

Company

Registration of

Business Act

1956

Registration of

Business Act

1956

d. Special Law Companies Law 1965

Partnership Act

1961 No special Act

e. Separate entity Separate legal entity

No separate

entity, property

of members is

property of the

partnership as

well

No separate

entity

f. Agency Act of SH not bind the co

A partner is an

agent of the

partnership (S7)

and binding the

firm

Not agent to his

business

g. Transferability of shares Transferable but for private

co it is under

restrictions in

sec 15.

Cannot transfer

without consent

of other

partners

May transfer to

somebody else

h. Management Managed by BOD

Every partner

entitled to take

part of the firm

Manages

himself and can

employ

employees to

manage for

him.

i. Number of members Pub- no limit Priv.-max 50

Min 2 Max 20

Single person

j. Liability of members Limited Unlimited Unlimited

k. Rule, procedure and

information to public Subjected to

regulations by

RoC, Court &

Department of

Trade &

Industry

No provision

subjected No provision

subjected,

accounts are

never subject to

public scrutiny

l. Death & bankruptcy Does not affect Dissolves the Automatically


the co. partnership except

agreement to

that contrary

dissolves the

business

m. Dissolution Formal WU&L

Informal-Agree. Informal-own

CHAPTER 2: CLASSIFICATION OF THE COMPANY

1. What are the types of company according to liability of members? a. Company limited by share

- S4(1) Liability of members limited to the memorandum to the amount, unpaid shares respectively held

by them

- S18(1)(c) Required to state in its memorandum of Association the amount of its share capital and its

division into shares of a fixed amount, limited liability of members also must be stated

- S22(3) Requires limited company to have the word Berhad as part of and at the end of its name

b. Company limited by guarantee

- S4(1) A Company formed on the principle of having the liability of its members limited by the

memorandum to respective amount that the members undertake to contribute to the property of

the company in the event of its being wound up. c. Company limited by both share and guarantee

- S214(4) A member of such a company is liable to pay the amount, if any unpaid on any shares held by

him or her, in addition to meeting her or his guaranteed undertaking to contribute a specified

amount in the event the co. is wound up d. Unlimited company

- S4(1) A company formed on the principle of having no limit placed on the liability of its members

2. What are the differences and characteristics of private and public companies?

i) Private Company

- S4(1) o A company incorporated as such by virtue of S15 or its predecessors which have retained its

private status o Any company converted into private under S26(1)

- S26 o Allows a public company with a share capital to be incorporated as a private company.

o This means company limited by guarantee cannot be incorporated as a private company as it has

no share capital

- S15


o Restrict the right to transfer its shares

o Limit to 50 members, joint holder of shares counted as one person and any employees who are

members or past employees who continue to remain member are not counted o Prohibit any invitation or offer to public to subscribe for share in or debenture of the co

o Prohibit any invitation or offer to public to deposit money with the company for fixed periods or

payable at call, whether bearing or not interest

- Therefore if a company does not impose on itself the restrictions and prohibitions of S15, it must be a public company

ii) Public Company S4(1) o Provides public company means a company other than private company

- All companies listed on the Malaysia Stock Exchange are public company but not all public company are listed

- Therefore if a company does not impose on itself the restrictions and prohibitions of S15, it must be a public company

3. Which sections allows conversion of public to a private company and vice versa?

- S26(1) A public company having a share capital may convert to a private company by lodging with the

registrar a copy of a special resolution

- S26(2) A private company may, subject to anything contained in its memorandum or articles, convert to

a public company by lodging with the registrar

- S26(3) On compliance by a company with subsection (1) or (2) and on the issue of a certificate of

incorporation of the company altered accordingly the company shall be a private company or

public company

- S26(4) A conversion of a company pursuant to subsection (1) or (2) shall not affect the identity of the co

or any rights or obligations of the co or render defective any legal proceedings by or against the

co.

4. What does it mean by holding company?

- Is not directly defined under section 5

- S5(1)(a)- Deemed to be a subsidiary of a holding company if the holding co. with respect to the subsidiary, if the holding company: a) Controls the composition of the BOD of the subsidiary company b) Controls more than half of the voting power of the subsidiaries c) Controls more than half of the issued share capital of the subsidiaries

- S5(1)(b) a corporation is also deemed to be a subsidiary if it is a subsidiary of a holding company that itself a subsidiary

- 5. Which section state about the ultimate holding company and wholly owned subsidiary?

- S5A A corporation is an ultimate holding company of another corporation if:


a. That other corporation is a sub is that holding company b. The holding company is not itself a subsidiary of another

- S5B- A corporation is wholly owned subsidiary if none of its members is a person other than a. Its holding company b. A nominee of its holding company c. Another wholly owned subsidiary of the holding company, or d. Nominee of such a wholly owned subsidiary

6. What does it mean by related corporation? - S6 Corporation is deemed to be related to each other where a corporation:

a. Is the holding company of another corporation b. Is a subsidiary of another corporation c. Is a subsidiary of the holding company of another corporation

7. What does it mean by foreign company? - S4(1) Foreign Company means:

a. A company, corporation, society, association, or other body incorporated outside Malaysia b. An incorporated society, association or other body which under the law of its place of origin may

sue and be sued, or hold property in the name of the secretary or other officer of the body of or

association duly appointed for that purpose and which does not have its head office or principal

place of business in Malaysia


CHAPTER 3: INCORPORATION AND ITS EFFECT

1. What is certificate of incorporation (COI)? A certificate that should be issued where the pre-registration procedures have been complied

with (Sec 16(4))

2. What does COI serves?

It serve as conclusive evidence that a company has been duly registered from the date mentioned

in the certificate (Sec 361)

3. What need to be stated in the COI?

a. Type of company registered b. Date of registration

4. What is the effect of the company after registration? - The law shall regard the company to be of a body corporate (Sec 16(5))

- The registered company is now a corporate personality

- A fundamental concepts of corporate personality is that the corp. is in law a separate legal entity distinct from its members and controllers

5. What are the effects of incorporation?

It stated under section 16(5) including of: (CH2)

- Capable forthwith of performing all the functions of an incorporated company

- A company has a legal personality of its own apart from the person who forms it.

- The law treat the company and the members as separate legal persons

- Capable of suing and being sued

- A company may sue and be sued in its own name.

- In fact, it must sue on its own behalf according to what rights it has and duties owed to it

- Case: Foss V Harbottle (FvH) - In this case two shareholders brought an action against the companys directors. They alleged

that the property of the company has been misused.

- Held: The injury complained was an injury to the company. In law, the company and its members were not the same. Therefore the members cannot maintain such suit. It was for the

company to sue and not the members

- In other words, the company is the proper plaintiff to initiate actions in respect of wrongs done to it

- Thus, the proper organ to commence the action on behalf of the company is BOD

- A single director or officer of the company cannot sue on the companys behalf unless specifically authorized to do so.

- Has perpetual succession and shall have a common seal


- The company is immortal, it will continue to live until it is properly wound up or struck off the register

- Even if all the member dies, the business still exists

- Case: Re Noel Tedman Pty Ltd (NoelTed) - The company had 2 directors who were also the only shareholders, a husband and wife. Both

died in a traffic accident. One infant child survived.

- Has power to acquire, hold and dispose of property

- A company can own property in its name. Although the members have shares in the company, the company is held or owned by the company

- Case: Macaura v Northern Assurance Co Ltd (MNA) - In this case Macaura owned an estate and then sold all the timber on the estate to a company, he

and his nominees owned all the shares of the company, he insured the timber that he sold to the

company under his own name. The insurance policy was not transferred into the companys

name. The timber destroyed in a fire, Macaura claimed the insurance but the insurance company

refused to pay.

- Held: When Macaura sold the timber to the company, he gave up his interest in it and the company had become owner of it.

- Limited liability of shareholders

- Common seal

- S16(5)- required company to have common seal

- The company must use the common seal in any dealing with anybody to make it binding on the company

- S121(2)(a)- if an officer of a company or any person on its behalf uses or authorizes the use of any seal purporting to be seal of the co whereon its name does not appear, he or she shall be

guilty of an offence under the act.

- S121(2)(c)-Officer can be made personally liable when signing any instrument without the common seal of the co.

- Control and management

- Members of a company have no right to interfere in the management of the company

- Power to control and to manage the company mainly vested on the BOD

- Members only can involve in management only during companys meeting or if he is properly appointed as member in the BOD

6. What is corporate veil?

The principle of a corporation being a separate legal person from its members (ie. shareholders).

7. What are the statutory exceptions to the separate legal entity principle?

I. Section 121(2)(c) when the name of the co does not appear in instrument issued by behalf of the

company

- When signing or authorizing certain documents like promissory notes, bill of exchange, checks etc in which the name of the company is not stated properly

- If the company fails to honor such documents then the person who signs will be liable.


II. Section 303 (3) and 304(2)- when debts contracted at the time the co has no ability of repayment

- When debts are contracted when there is no reasonable or probable expectations of these debts being paid

- When debts are contracted, the officer must really find about the ability of the company to repay debts

- If he knew or has reasons to believe that the company is not in a position to repay debts, but still entered into the contract, he will be personally liable for the debts, if the co goes into liquidation.

III. Section 304(1)- when involving in fraudulent trading

- In the case of involving fraudulent trading, if the company is formed or the business of the company is carried for fraudulent purposes, the person who is knowingly a party to the carrying

on the business in that manner will be personally liable for the debts of the company if the

company goes into liquidation.

IV. Section 365(2)(b) when dividends are paid out of capital

- Where dividends are paid even though there are no available profits out of which to pay them, then directors who declared the dividend will be liable to the creditors of the company

- If the company is unable to pay the creditors in the event of liquidation, to the extent by which the dividend exceed the available profits.

V. Section 48(4) minimum subscription is not received within 4 months of the issue of prospectus

VI. Section 140(1) of the Income Tax Act avoiding of payment of tax

8. What are the judicial exceptions to the separate legal entity principles?

- In Malaysia, the court will lift the corporate veil when the justice of the case so requires

- Malaysian courts have in the past lifted the corporate veil in several circumstances such as fraud, agency, and where corporations within the group essentially one

- Sham Mere Faade o Incorporation is often used as a device to circumvent the law or to hide the true state of affairs

from the court o Some people might use the corporate form as a means to exploit loopholes in the law

o In such situation, the court will not be blinded to reality, notwithstanding the technical

separateness of the company and its members o Case: RE Bunggle Press Ltd

o Shaw and Jackson held 4,500 shares each and Trelby held the balance 1000 shares out of total of

10,000 shares. Shaw and Jackson wanted to buy over Trelbys shares. To effect this, they

incorporated a company called Jackson and Shaw (Holdings) Ltd., which made an offer to

purchase all the Bungle shares.Shaw and Jackson accepted this offer but Trelby declined.

Jackson and Shaw Holdings then purported to use section 209 (equivalent Malaysian section

180) of the UK Companies Act 1948 to acquire Trelbys shares. o Held: The court of appeal declined to allow Jackson and Shaw Holding to take advantage of this

section to buy Trelbys shares.


- Group Of Companies o In certain situation, a group of companies may be treated as a single corporate entity, although the

general rule is that each company within a group is distinct entity. This is due to commercial

realities. o Case: Hotel Jaya Puri Sdn Bhd V National Union Bar & Restaurant Workers

o Jaya Puri Chinese Garden Restaurant Sdn Bhd was closed down and workers were retrenched.

This company was wholly owned subsidiary of Hotel Jaya Puri Bhd whose premises the

restaurant was situated. The Union claimed that the actual employer was the hotel and the hotel

was still in business. Therefore the workers could not have been said to have being retrenched on

the closure of a business.The industrial court allowed this and made order of compensation

against the hotel. The hotel appeal to the High Court. o Held: Although technically the restaurant and the hotel were separate legal entities, in reality, the

companies were functionally as one. o Technically, a person working for the restaurant was an employee of the restaurant, the reality

was that the workers were employees of the hotel. o The court ignored the separate identities of the restaurant and the Hotel and treated them as one

single entity.


CHAPTER 4: MOA & AOA

1. What are two types of companys constitutions? a. MOA

- It sets out the essential details of the companys existence and governs the fundamental basis on which the company operates.

- It defines the essential components of the structure of the company, partly for the information of those who do business with it

- It concerns with the relationship between the company and outsider

- It sets out liability of its members and also defines objects and powers of the company b. AOA

- It governs day-to-day administration of the company affairs.

- It is a code of internal regulations applicable to the company and its members in their dealing with each other

2. What are the importances of MOA? - S16(1) Every co must have MOA

- S16(4)&(5) A company acquire legal status of a body corporate when its MOA registered

- S34(1)- A member of company is entitled to receive a copy of the MOA subject to payment of RM5 or such lesser sum as fixed by the directors

3. What are the contents in MOA? - S18(1) Requires the MOA of every company to be printed and divided into numbered

paragraphs and dated and content to be put in

- Content of memorandum are: a. Main Provisions

i. The name of the company ii. The objects of the company iii. The amount of shares iv. Liability of members v. Full name, addresses and occupation of subscribers vi. Subscribers are desirous of being formed into a company pursuance to the MOA

b. First Director

- S122(3)-MOA also contained names of the first directors of the company

- S16(7)- The Registrar must not register a MOA/AOA unless it contain the names of at least 2 persons who are to be the first directors of the company

c. First Secretary

- S139(1A) the first secretary must also be named in either MOA/AOA

- However, if the first secretary is not named, the Act does not expressly provide that the Registrar should not register the MOA/AOA

- S11(8)- It is suggested that the Registrar may request that the MOA/AOA be appropriately amended and resubmitted


4. What does it mean by the objects clause?

- S18 (1b) Requires the objects clause of a company to be stated in the MOA

- It define the companys capacity by reference to its business activities

- Object clause determine whether the company has acted ultra vires and rendering the act as void ab intio

- S28-An object clause of a company may be altered by special resolution

5. What are the purposes of the objects clause?

- It gives protection to the subscribers who learn it purposes to which their money can be applied

- It gives protection persons who deal with the company whereby they can infer the companys capacity and power

- Case: Cotman V Brougham

- It is also for the benefit of those who might become members and the outside public, particularly the creditors to know what its permitted range of enterprise

- Case: Ashbury Railway Carriage And Iron Co V Riche

6. What is the legality of the objects?

- S14(1)- The objects clause must be lawful

- So long as the objects are lawful, the act is not concerned with the purpose of the company and there is no restriction as to the purpose

- Case: R V Registrar of Joint Stock Companies

7. What are the general principles in MOA?

- Nothing in the MOA can contradict CA 1965

- MOA is regarded as commercial document, hence it must be construed according to accepted principles applicable to interpret legal documents

- However, the fact that a MOA is a commercial document does not prevent the court to construe it strictly because a MOA is an instrument which is relied on by third parties

8. What are the relation between MOA and AOA?

- AOA play a subsidiary to the MOA

- MOA regulate external while AOA regulates internal

- MOA can override and overrule any provisions of the AOA

- Case: Ashbury Railway Carriage & Iron C Ltd V Riche

- In the event of conflict between AOA and MOA, the provision of MOA shall prevail because it is a dominant document

9. What is ultra vires?

Beyond the scope or in excess of legal power or authority

10. How to winding up when substratum is gone?

- When the substratum of the company is gone and the main purpose has become impossible, a winding up order may be granted under just and equitable grounds


- Case: RE German Date Cofee Co

11. What are the functions of object clause?

- The function of the object clause is to identify the activities in which the company may engaged

- On the other hands, powers of a company is defined as a legal capacity of that company

- Anything outside the objects and powers of the company is ultra vires

- Case: Ashbury Railway Carriage & Iron Co V Riche

12. What are the categories of objects clause?

- There are three categories of objects clause: a. Main or independent objects

- Are those activities in which a company is specifically authorized to engage b. Dependent Objects

- Unspecified additional activities in which a company is authorized to engage in association with one of its main or independent objects

c. Powers

- It is a principle of company law that companies have implied powers to do anything which is incidental to their stated objects

- Case: AG v Great Eastern Railway Co

13. Which sections permitted alteration of MOA?

- S21(1) MOA may be altered only in accordance with the Act

- S28 Alteration to an objects can be done

- S23- Alteration of the company name

- S62- Alteration of capital clause

14. What are the powers of company under Section 19 of Company Act 1965? a. Power to make donations for patriotic or for charitable purposes. b. Power to transact any lawful business in aid of Malaysia in the prosecution of war c. In the case of company with Berhad, the powers mentioned in Third Schedules unless expressly

excluded by MOA or AOA d. In the case of company without Berhad, Third Schedule Power shall not apply unless expressly

included by MOA or AOA

15. What does it mean by doctrine of ultra vires? - Any act by a company, which is not specified in its object or incidental, is regarded as void at

common law

- Such act is referred to as being ultra vires, that is beyond the power of the company

- In the past, the doctrine of ultra vires was strictly applied to protect the interest of the shareholders and creditors

- The doctrine of ultra vires was extended very broadly in the case of Re Jon Beauforte (London) Ltd

- Case: RE Jon Beauforte (London) Ltd


- A company was incorporated to carry on the business of tailors and manufacturers of clothes and materials. If then decided to manufacture veneered panels and ordered coke on the company

letterhead, which stated that the company was a manufacturer of veneered panels. The supplier of the coke then sought to enforce payment and he failed because the contract was

ultra vires. Held: Supplier cannot enforce contract because he had constructive notice that such an activity

was outside the companys object.

16. How to diminish importance of ultra vires doctrine? a. Interpretation of objects

- Sometimes, company may extend their object clause by inserting a clause that says: The objects set out should not be restrictively construed and that each of paragraphs should be

regarded as conferring a separate and independent object

- The validity of this clause was raised in Cotman V Brougham

- Case: Cotman V Brougham

b. Wide objects clause

- Sometimes in order to maintain flexibility, companies draft objects in the widest possible terms

- This would normally include independent and dependent objects clause

- The effect of such an objects clause is that company has the capacity to engage in any other business as long as it is not illegal and general meeting of members honestly believes that there

is a connection with its existing businesses and it is advantageous to the company

- Case: Bell Houses Ltd V City Wall Properties Ltd - The company was a housing developer and the MOA contained independent object clause

related to house development. It also have a dependent objects clause which allow the company

to carry on any other trade so long as it is advantageous and in connection with the business of

the company.

- Held: This dependent object allows the company to contract to introduce another company to a source of finance.

c. Section 20

- In Malaysia, ultra vires doctrine has been modified by this section

- The effect is that if certain transaction is valid, the fact that the company did not have the capacity to enter into it is immaterial

- The co. lack of capacity may only be relied in 3 situations: a. Proceedings by any member or holder of floating charge to restrain the co from doing any act,

conveyance or transfer of property to or by the co. b. Proceedings by the co. or member of the company against the present or former officer of the co.

and c. Any petition by the minister to wind up the company

d. Alteration of objects clause

- S28(1)- Allows a company to alter its object clause by special resolution

- S28(3)-Notice of general meeting where it is proposed to alter the object of the co must be given to all members and debenture holder


- S28(6)- application for cancellation of alteration to the objects clause must be made within 21 days after the passing of the special resolution

- S28(5) This application may be made by holders of not less than 10% of the companys issued capital

- When such application is made, the alteration does not have nay effect unless confirmed by the court

17. How AOA can be altered?

- S31 Subject to the act and the companys MOA, a company may by special resolution alter or add to

is AOA

- S31(1) Any alteration or addition to the articles is valid as if originally contained in the AOA

- S31(2) Provision in the MOA may restrict the ability of the co. to alter the AOA by imposing further

requirements in addition to a special resolution.

18. What are the legal of effects of MOA and AOA? a. Between member and member

- Constituted by the AOA is contract between a member and every other member

- Each member will observe all the provision of the MOA & AOA

- It also means that if one member is not observing these, another member has a right to make him observe it

- A member may enforce his rights to have the provisions of the MOA & AOA observed by injunction

- This action may be brought directly and the company does not have to be joined as a party

- Case: Rayfield v Hands The AOA required every director to be a shareholder and provided that if a member intended to

transfer his shares, he should inform the directors who would take the said shares equally

between them at fair value. The directors refused to purchase the plaintiffs shares. Held: It was held that there was a contract between P and the defendants constituted by the AOA

as they were all members and therefore they have to purchase the shares

- A members rights and liabilities under the AOA is a matter of contractual obligations the court will not look at whether it is fair to enforce it. Even if it may be unfair, it may be enforced

- Case Wong Kim Fatt v Leong & Co Sdn Bhd A companys AOA provided that if holders of 7/10 of issued capital requested the company to

transfer to them any particular shares held by others, then the company is bound to do it. One

shareholder held 250,000 shares out of total 300,000 shares. He asked the company to transfer

Wongs share i.e. he served a requisite to buy out Wongs shares. Wong objected to this and

went to court to get an order restraining the company from transferring his shares. Held: Wong has to sell the shares because AOA is a contract between the members and

therefore, this is a matter of contractual obligations and the plaintiffs has to do the obligations he

had undertaken

b. Between company and outsiders


- The AOA is a contract only members of the company

- The outsiders i.e. non members will not get any rights contained in the MOA & AOA

- Case: Raffles Hotel Ltd V Malaysian Banking Bhd - MBB was the lessor of the land on which Raffles Hotel was built. It was provided in the hotels

AOA that the lessor has a right to appoint a director of the company. MBB appointed itself as

director. The company went to get this appointment declared invalid. Held: The appointment was invalid because MBB was not a member and therefore AOA could

not constitute a contract between a company and an outsider and therefore it did not confer on

MBB any enforceable right even if it is provided in the AOA

c. Between company and members

- Each member is bound to observe the provisions found in the articles

- E.g. shareholder is bound to pay the amount outstanding on his shares when requested to do so by the company

- If the shareholder/member breaches i.e. goes against any provision, then the AOA are enforceable by the company against its members.

- Case: Hickman V Kent or Romney Marsh Sheepbreeders Association The companys AOA included a clause to the effect that all disputes between the company and

its members were to be referred to arbitration. A member brought court proceeding against the

company. The court proceeding was stayed as this was against the AOA, which provided for arbitration. A company is also bound by the AOA and must not deny members those right given to them in

the MOA & AOA.

- Case: Salmon V Quinn & Axtens Ltd A company AOA provided that certain types of contracts could be entered into by the company

only if both Salmon & Axtens agree to it. Salmon did not agree to purchase certain properties of

the company and approved the purchase by passing a resolution (this was possible because Axten

was majority shareholder). Salmon sued for restraining the company from acting on the

resolution. Held: The resolution was invalid because it was against the AOA

- Case: Eley V Postive Govenrnment Life Assurance Co. (PGLA) The company AOA was prepared by Eley and it was provided that he would be the solicitor of

the company. The company ceased to employ him as its solicitor and he sued for breach of the

provisions in the AOA. Held: The resolution was invalid because it was against the AOA.

- Other case Pender V Lushington and Salmon V Quin & Axtens Ltd

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NOTESFORLAWOFBUSINESSORGANIZATION.pdf