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 INTRODUCTIONCompany is a form of incorporated business organisation which is registered under the Companies Act 2016 (CA 2016). A company may be classified into limited and unlimited company depending on the extent of liability of its members. A company can also be classified as private or public ...

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Topic 

1

Introduction to Company Law

LEARN IN G OUTCOM ES

By the end of this topic, you should be able to:



1.

Identify the types of companies in Malaysia;

2.

Explain the effects of incorporation under the Companies Act 2016;

3.

Describe the duties of promoters; and

4.

Explain the effects of pre-incorporation contract.

INTRODUCTION

Company is a form of incorporated business organisation which is registered under the Companies Act 2016 (CA 2016). A company may be classified into limited and unlimited company depending on the extent of liability of its members. A company can also be classified as private or public company depending on whether it can offer its shares to public or whether there is any restriction on the company to transfer its shares. Once a company is incorporated under the CA 2016, it becomes a legal person and has a separate legal entity, distinct from its incorporators. The company can sue and be sued, and can hold, sell and acquire property. A person who initiates the companyÊs incorporation is known as the promoter of a company and has fiduciary duties towards the company, for example, the duty not to make secret profits and to make full disclosure of his interest in any transactions with the company. Generally, a promoter who enters into a contract on behalf of the company prior to its incorporation will be personally liable unless the company ratifies the contract after the incorporation.

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This topic will discuss the various types of companies such as company limited by shares or guarantee, public and private company, the effect of incorporation of company and pre-incorporation contract, and the fiduciary duties of promoters.

1.1

SOURCES OF COMPANY LAW IN MALAYSIA

In Malaysia, the main sources of references for company law is the CA 2016 and all subsidiary legislations made thereunder. There are other relevant legislations for company law, among others are Securities Commission Act (SCA) 1993, Capital Market and Securities Act (CMSA) 2007, Financial Services Act (FSA) 2013 and Islamic Financial Services Act (IFSA) 2013. There are also non-legislative sources of law for companies in Malaysia such as the Bursa Malaysia Listing Requirements, Malaysian Code on Take-over and Mergers 2016, Malaysian Code on Corporate Governance 2017, guidelines issued by Companies Commission of Malaysia and accounting standards. Case law is also an important source of company law. Section 3 and 5 of Civil Law Act 1956 provide that reference may be made to the English courtsÊ precedent if there is a lacuna and subject to qualification of local circumstances. Although the English case law is not binding, it serves as persuasive precedents.

1.2

CLASSIFICATION OF COMPANIES

Under the CA 2016, a company is defined as „a company incorporated under this Act or any corresponding previous written law.‰ As such, companies refer to any companies incorporated and registered in Malaysia under the Companies Act. Once a company is incorporated, it shall have the status of a corporate body with its own legal personality, distinct from its incorporators. The classification of companies can be based upon: (a)

Liability of members, whether limited and unlimited; and

(b)

Identity of the company, whether public or private company.

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INTRODUCTION TO COMPANY LAW

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Limited and Unlimited Company

Under Section 192(1) of the CA 2016, a member shall not be liable for the obligation of a company just because he is a member of the company. The liability of a member towards a companyÊs debts is determined by whether the company is a limited or unlimited company. Under Section 10(1) CA 2016, a company may be incorporated as comp company any limited by shares, com pany limited by guarantee or unlimited com company pany pany.. To distinguish a limited from an unlimited company, Section 25(1)(c) of CA 2016 provides that the name of an unlimited company must have the word Sendirian or the abbreviation Sdn which highlights that the liability of members in the company is unlimited. As highlighted in Section 10(1) (a) and (b) of CA 2016, membersÊ liability in a company can be limited either by shares or by guarantee. (a)

Company Lim ited by Shares Section 10(2) of CA 2016 provides that „a company is limited by shares if the liability of its members is limited to the amount, if any, unpaid on shares held by the members.‰ This means that in a company limited by shares, the liability of members is determined based on the amount of their unpaid shares. If the members have fully paid their shares, then they have no further obligation with regard to the companyÊs debts. In Salomon v Salomon & Co Ltd [1895-1899] All ER Rep 33, the court held that Mr Salomon cannot be made responsible for the debts of the company owed to the unsecured creditors as he had fully paid up his shares in the company. Under Section 435(2)(b) of CA 2016, it is clearly stated that at the time of commencement of winding up, no contribution exceeding the amount unpaid on the shares shall be required from any member of a company limited by shares. Section 435(2)(a) and (b) of CA 2016 further state that a past member shall not be liable to contribute if he has ceased to be a member for one year or more before the commencement of the winding up. Moreover, he will not be liable to contribute in respect of any debt or liability of the company that was incurred after he has ceased to be a member of the company.

(b)

Company Limited by Guarantee Company limited by guarantee is a company that has no share capital. The company did not issue shares and is normally known as a non-profit company as it is not allowed to distribute profits or declare dividends. The source of funds of a company limited by guarantee is the initial amount

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contributed by subscribers and from annual fees or other social activities. Examples of a company limited by guarantee are schools, universities, foundations and non-trading companies formed for charitable, educational, trade associations or religious bodies. In the event of winding up, members are liable to contribute the amount that they agreed to guarantee as specified in the constitution. Members may have different classes to differentiate between voting and non-voting members. Members have rights as specified in the constitution and as conferred by the CA 2016. (c)

Unlimited Company Unlimited companies refer to companies where the liability of the members is unlimited. Unlimited companies can be in the form of private or public companies and can be a company limited by shares or a company limited by guarantee but its members have unlimited liability to contribute to the company during winding up if the company has insufficient assets to pay its debts.

1.2.2

Private and Public Companies

The CA 2016 allows a company to be formed either as a private or as a public company company. The differences between these two companies are found throughout the CA 2016 such as requirements for incorporation, number of members, restriction on the rights to transfer shares and rights to raise capital from the public. (a)

Pr Private ivate Companies Section 2(1) of CA defines a private company as: (i)

Any company, which immediately prior to the commencement of CA 2016, was a private company under any corresponding previous written law; or

(ii)

A company incorporated as a private company; or

(iii) Any company converted into a private company pursuant to Section 41 of CA 2016. Section 25(1) (b) of CA 2016 requires that the name of a private company should end with the words Sendirian Berhad or its abbreviation Sdn Bhd.

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Figure 1.1 illustrates the characteristics of a private company as specified in Section 42 of CA 2016.

Figure 1.1 1.1: Characteristics of private companies under S42 of CA 2016

Section 43 of CA 2016 further highlights the prohibitions of a private company to offer shares, debentures or invite to deposit money (see Figure 1.2).

Figure 1.2 1.2: Prohibitions of private companies under S43 of CA 2016

Section 196(1)(a) and (4)(a) of CA 2016 provide that a private company may have only one director, who ordinarily resides in Malaysia, by having a principal place of residence in Malaysia. A private company can be an exempt private company if it has less than 20 memb members ers and none of them is companies (Section 2(1) CA 2016). Table 1.1 show us the advantages of being an exempt private company.

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Table 1.1: Exempt Private Company Advantages According to the CA 2016

(b)

Section

Advantage

Section 224(2)(a) and 225(1)

Exempted from the prohibition on giving loans to its directors or persons connected to the directors.

Section 260(1)

Does not need to lodge financial statements and records on annual basis. However, it needs to submit a certificate relating to its status in lieu of the financial statements and reports.

Section 261

Must provide financial statement in the prescribed form to its shareholders. The financial statement needs to be signed by the auditor.

Pu Public blic Companies Section 2(1) of CA 2016 defines a public company as a company other than a private company. Section 25(1)(a) provides that the name of a public company should end with the words Berhad or its abbreviation Bhd. Under Section 11(2) of CA 2016, all companies limited by guarantee must be registered as public companies. A public company may raise capital by issuing shares to the public. However, it must adhere to the requirements under the CMSA 2007. There are also specific requirements imposed on public companies by the CA 2016 as illustrated in Figure 1.3.

Figure 1.3 1.3: Requirements imposed on public companies under the CA 2016

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A public listed ccompany ompany is a public company that has some or all of its shares quoted at the stock exchange xchange. Investors can buy and sell shares of public listed companies through the stock exchange. In Malaysia, the stock exchange is known as Bursa Malaysia and regulated by the Securities Commission. Nowadays, transaction for shares at the stock exchange are done via electronic trading system. In order to be a public listed company, the company must apply to the Bursa Malaysia and Securities Commission for the listing of the companyÊs securities. They must also comply with requirements of the CA 2016, CMSA 2007 and SCA 1993. A public company can directly apply for listing whilst a private company needs to convert to a public company before it can apply for listing. An initial public offering (IPO) is the first time that the stock of a private company is being offered to the public. The IPO listing application requires approval of both the Securities Commission and Bursa Malaysia. 1.2.3

Differences between Public and Private Companies

Table 1.2 shows the main differences between private and public companies under the CA 2016. Table 1.2 1.2: Differences between Public and Private Companies Companies Public Com panies

ompanies Private Com panies

At least two directors who ordinarily reside in Malaysia by having a principal place of residence in Malaysia and minimum of one promoter.

At least one director who ordinarily resides in Malaysia by having a principal place of residence in Malaysia and minimum of one promoter.

Mandated to hold its annual general meeting (S390 of CA 2016).

May pass a written resolution (S290 of CA 2016).

Must have its accounts audited.

Certain categories of private companies are exempted from having its accounts audited (S255 of CA 2016).

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Conversion of Company Status

The Companies Act allows for registration of various forms of companies. A company may change its status because of its change of activities. The status of a company can be changed or converted in accordance with the CA 2016. Under Section 40 of CA 2016, a public company limited by shares can be converted to a private company by: (a)

Passing a special resolution;

(b)

Lodging a notice of conversion with the Registrar;

(c)

Altering the name Bhd to Sdn Bhd; and

(d)

Altering the companyÊs constitution to fulfil requirements of a private company.

Section 41(2) of CA 2016 provides for conversion of a private company to a public company whereby the company needs to: (a)

Pass a special resolution;

(b)

Lodge a notice of conversion with the Registrar;

(c)

Alter the name Sdn Bhd to Bhd;

(d)

Lodge a statement in lieu of a prospectus; and

(e)

Issue a statutory declaration in compliance with Section 190(2)(b) of CA 2016.

A company may also change it status from unlimited company to a limited company. Section 49 of CA 2016 provides that to convert from an unlimited company to a limited company, the following requirements must be fulfilled: (a)

Pass a special resolution;

(b)

Lodge a notice of conversion with the Registrar; and

(c)

Alter the name of the company to Bhd or Sdn Bhd.

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INTRODUCTION TO COMPANY LAW

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Related Companies

Section 7 of CA 2016 provides that a corporation is deemed to be related to each other if: (a)

It is the holding company of another corporation;

(b)

It is a subsidiary of another corporation; or

(c)

It is a subsidiary of the holding company of another corporation.

Holding and Subsidiar sidiariies Companies Under Section 4(1) of CA 2016, a corporation shall be deemed to be a subsidiary of another corporation if: (a)

The Other Corporation: (i)

Controls the composition of the board of directors of the corporation;

(ii)

Controls more than half of the voting power of the corporation; or

(iii) Holds more than half of the issued share capital of the corporation, excluding any part of the share capital which consists of preference shares; OR (b)

The Corporation is a Subsidiary of An Any y Corporation, which is that Other Corporat Corporation's ion's Subsidiary. Under Section 5 of CA 2016, a corporation shall be deemed to be the ultimate holding company of another corporation if: (i)

The other corporation is a subsidiary of the corporation; and

(ii)

The corporation is not itself a subsidiary of any corporation.

Under Section 6 of CA 2016, a corporation is a wholly-owned subsidiary of another corporation if it has no members except: (i)

That other corporation or its nominee; or

(ii)

A wholly-owned subsidiary of that other corporation or its nominee.

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SELF-CHECK 1.1

1.

Ali, who stays in Kuala Lumpur, intends to set up a company. He wants to know the types of companies that are available under the Companies Act 2016. Advise Ali.

2.

Explain the different characteristics of public and private companies.

3.

What are the differences between limited and unlimited companies?

4.

Can a company be converted from public to private and vice versa?

1.3

INCORPORATION OF A COMPANY

Registering a company in Malaysia can be a complex undertaking, whether you are setting up a brand new company or simply relocating your existing company to Malaysia. There are numerous requirements, procedures and strict timelines to follow. Thus, registering a new company can be cumbersome and intimidating. 1.3.1

Procedures of Incorporation

Now let us look at the procedures of incorporation of a company. (a)

Firstly, the applicant must make a name search to ensure that the proposed name is available. The applicant must complete the information for the name of the company online and if the name is approved by the Companies Commission of Malaysia (CCM), the name will be reserved for 30 days or longer as allowed by the Registrar (maximum 180 days) from the date of approval.

(b)

The applicant must also fill in the documents for incorporation. Under Section 14(1) of CA 2016, the applicant must provide the proposed name of the company, status of the company (either as a private or a public company), proposed type of business, address of the registered office, business address, complete details of director(s) and promoter(s) and declaration from th e director(s) or promoter(s) that he is not an undischarged bankrupt either in or outside Mala Malaysia ysia and that he has not been convicted of any offence either in or outside Malaysia. Additional documents required for incorporation include a copy of consent letter from the corporate body named as the

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member of the company, a copy of certificate of directorÊs qualification, if required, and a consent letter from a relevant agency, if any. The applicant must also make a declaration that he has complied with all the requirements of the CA 2016. (c)

Once the Registrar is satisfied that all information provided is complete and complied with the required procedures, he will issu issuee a notice of approval and registra registration. tion. A certificate of incorporation w ill be issued by the CC CCM M upon request, together with the prescribed fee. The company shall appoint a company secretary within 30 days after incorporation and if required, the company may file the constitution of the company after the incorporation of the company.

(d)

A private company can commence business immediately upon the issuance of the notice of registration. However, a public company has to fulfil additional steps and lodge a statutory declaration of compliance on matters prescribed in Section 190(1) of CA 2016 before it can commence business. ACTIVITY 1.1

You intend to incorporate a private company limited by share. Referring to Section 14 of CA 2016, prepare the required information to fill in the incorporation documents. 1.3.2

Promoters and Their Duties

A promoter is the person who initiates the companyÊs incorporation. In Twycross v Grant (1877) 2 CPD 469, a promoter is defined as a person who undertakes to form a company with reference to a given project and who takes the necessary steps to accomplish this purpose. Promoter can be a natural person or a company but an agent who carries out the process of incorporation is not considered a promoter. It is important to determine who the promoters of a company are because under the c...