Company Law 1

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Universiti Kebangsaan MalaysiaFaculty of Law PHD Program in Law P58462

Musbri MohamedDIL; ADIL ( ITM )MBL ( UKM )

Introduction to Company Law

Note 1 of 7 Notes

Incorporation of a company and its effects

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Introduction

The main objective of this scribd is to provide the readers with knowledge on the fundamentals principles of company law.

In modern times company or corporation have become an increasingly dominant part of economic life.

The majority of students studying company law whether it be for a degree, professional qualification or on any other type of courses opined that company law can be very dry and boring.

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A company is an artificial person created by the law.

A company is a type of corporation. The term corporation is wider than company as it includes foreign companies and various other corporate bodies.

As at September 2007, there were over 784,000 registered companies in Malaysia and over 4200 are foreign companies.

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When you form a company, you form an imaginary legal person which can hold and dispose of property, take legal action and sign documents.

Because of this separate legal entity a company can have assets and liabilities and make profits and losses quite separately from its members.

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You will have difficulty understanding the rest of company law if you do not have basis grasp of the legal materials and principles surrounding the existence of the separate corporate personality.

The effect of incorporation of a company is that the company is vested with a corporate personality i.e a company is treated as a legal person. Companies are creature of statute. Therefore a company is separate and distinct from its shareholders and directors as facts shown in the case of Salomon v Saloman & Co Ltd [1897] AC 22.

And as Adam Smith pointed in The Wealth of Nations when ownership is separated from management the latter will inevitably begin to neglect the interest of the former thereby creating dysfunction within the company.

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Per Lord Denning The Discipline of Law , Butterworths, London, 1979, p.9

“ Beyond doubt the task of the lawyer – and of the judge – is to find out the intention of Parliament. In doing this, you must, of course, start with the words used in the statute ; but not end with them – as some people seem to think. You must discover the meaning of the words.”

Ooregum Gold Mining Co of India Ltd v Roper [1892] AC 125 pp133; Per Lord Halsbury LC :-

...the whole structure of a limited company owes its existence to the Act of Parliament, and it is to the Act of Parliament one must refer to see what are its powers, and within what limits it is free to act.

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Types of companies

Most companies fall into two categories, depending on the type of liability that can be imposed on the owners:

A company limited by shares, limits the liability of shareholders to the value of their shares. This structure is suitable for most trading businesses and can be a private company or a public company. A company limited by guarantee, most often used by non-trading organisations, for example, sporting clubs and foundations.

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S.4 - defines ‘company limited by shares’ as a company formed on the principle of having the liability of its members limited by the memorandum to the amount (if any) unpaid on the shares respectively held by them. This is the most common form of company. The liability of a member of this company will depend on whether his shares are fully paid or not. If he holds fully paid shares, he has no further liability to the company. If the company becomes insolvent he cannot be made to contribute to the assets of the company. Only if his shares are partly paid, he will be liable to contribute to the company’s assets, up to the amount still unpaid on his shares.

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A company limited by guarantee id defined by section 4 as ‘a company in the principle of having the liability of its members limited by the memorandum to such amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up’. 

This type of company does not have a share capital and so does not require the members is specified in the memorandum of association. If the company is wound up, then a person who has been its member may be required to contribute up to his amount of guarantee towards payment of debts incurred by the company while he was a member. This liability extends to those who has left the company but was a member within a year before the company wound up. Although this type of company does not have a share capital, it is a separate legal entity. It is not normally used for trading, but is often formed to run clubs and other organizations that is maintained by subscription, social activities and donations.

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Advantages of a company include :

(a) it is a separate legal entity from the owners;

(b) you can own property in the name of the company; (c) there is usually limited liability for the shareholders (unless they have given a personal guarantee);

(d) you may be able to take advantage of tax minimisation schemes (legal ones, of course);

(e) it can be owned and operated by only one shareholder and director; and

(f) it may make it easier to attract capital investment because of shareholders' limited liability.

An important feature of corporation is limited liability. If a corporation fails, shareholders normally only stand to lose their investment, and employees will lose their jobs, but neither will be further liable for debts that remain owing to the corporation's creditors.

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Possible disadvantages include:

(a) they can be complicated and expensive to establish and administer if it is a "large company";

(b) if you are not a sole shareholder, the shares may be difficult to sell;

(c) if you have only a minority shareholding you may be allowed little or no input into the affairs of the company;

(d) you will only be able to leave the shares in the company to your beneficiaries under your will, not the assets of the company separately; and

(e) they require expensive procedures to comply with reporting regulations.

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In order to create an environmentally friendly attitudes towards the studying of company law the syllabus appear in this scribd includes various aspects of company law inter alia ;

1.Incorporation of a company and its effects ,

2.The memorandum and articles of association ,

3.Directors duty and liabilities,

4.Shares,

5.Insider trading,

6.Merger & Takeover , and

7.Winding-up.

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Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1997] 1 CLJ 529, FC

… the law treats a company as being a separate person from its members and those who manage its operations. This is the doctrine of separate legal personality.

Goh Hooi Yin v Lim Teong Ghee [1977] 2 MLJ 26 ,

Arulanandom J held that it was incumbent for Malaysian courts to comply with the doctrine as enunciated by the English courts unless there are compelling reasons not to do so.

1.Incorporation of a company and its effects

Separate Legal Personality

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Abdul Aziz bin Atan & Ors v Ladang Rengo Malay Estate Sdn Bhd [1985] 2 MLJ 165 , it was held that transfer of ownership of the shareholders does not entail a change in the entity of the company.

Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor [2005] 4 CLJ 750 , Gopal Sri Ram JCA held that a company is a separate person from the shareholders. The shareholders have no interest, legal or beneficial over the property of the company.

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Perpetual succession is one of the principal distinguishing characteristics of a company whereby it retains its legal persona even though its membership may change over time. Its status as a legal entity, which evolved from Salomon v Salomon & Co Ltd and since codified under s 16(5) of the Malaysian Companies Act 1965 , continues until such time as the company is liquidated or wound up.

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Pre-incorporation Contract

A pre-incorporation contract is one which is attempted to be made on behalf of a company which is not yet formed.

The problem with these contracts is who exactly is liable under them. The question to be asked is, is the company liable or is it the promoter who incurs liability. At common law, a number of rules were established. The first one is that until the company is formed it has no legal existence. A company comes into being from the date on its certificate of incorporation .

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A pre-corporation contarct is one which is entered into when the Company is in the process of being incorporated but is not yet completed it. At common law such contracts were held to be void, as the Company is not yet in existence Newborne v Sensolid [1954]

IN the case of Kelner x Baxter [1866] certain individuals were purportedly acting on behalf of the Gravesend Royal Alexandra Hotel Co. Ltd which was in the process of being formed. The individuals entered into a contract for the purchase of wine from K.The wine was delivered to the Company after its formation but before K was paid the Company went into liquidation.

The Court held that the Company was not liable but the individuals were personally liable as they had entered into contracts before the Company came into existence.

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In the case of Phonogram v Lane [1982] before incorporating a company called Fragile Management Ltd.L contracted with the Plaintiff for a loan of 12,000 to finance a pop group called Cheap, Mean & Nasty. The Plaintiff wrote to L in which reference was made to him undertaking to pay. He neverthelss was required to sign and return a copy for and on behalf of Fragile Management Ltd.The Company was never performed and the group never performed.

The Court held that the defendant was personally liable to repay the money advanced.

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The above problems were overcome when the legislation was enacted in the form of Sect35(1) and Sect 35(2) of the Companies Act 1965.

Prior to ratification by the Company the person or persons( promoters) who purported to act in the name of the Company shall, unless there is an agreement to the contrary , be personally bound by the contract or other transaction and entitled to its benefit. In short the outsider can make the promoters who acted when the Company was still in its pre-incorporation stage, to be personally liable should the Company decide not to ratify the contract after its incorporation . For ratification to take place there must be an express agreement between the Company and the Promoter.

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Post-incorporation requirements

•Appointment of directors and secretary•Common seal•Registers•Minute books•Allotment of shares•Returns•Account and audit•Use of name•Responsible officers•Bank account

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Lifting the corporate veil

Russell J in Jones v. Lipman [1962] 1 WLR 832 (High Court, England)

"the company was the creature of the defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid the eye of equity".

Lord Denning MR

"where corporations are just puppets of some hidden controller and dance to his bidding, the Court may pull aside the corporate veil and treat them as his creatures".

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Walter Woon Company Law, Longman 1991, pp 31

"the situations in which the veil may be lifted are exceptional. In general, the Courts will respect the company's modesty and decline to lift the veil"

Aspatra Sdn Bhd & Ors v Bank Bumiputra Malaysia Bhd & Anor 1988] 1 MLJ 97

Mohd Azmi SCJ :-

“The generality of the judicial power already vested in the Superior Courts by the supreme law of the land is unlimited, and for the purpose of achieving justice, the power of the courts to do what is just under any law requires no special legislation.”

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In Australia ………Sections 588G and 588H are the revised civil remedy provisions in the Australian Corporations Law which lift the corporate veil and allow for unlimited personal liability to be imposed upon the directors of companies who fail to prevent the company from incurring debts when there are reasonable grounds for suspecting that it is insolvent.

These provisions apply exclusively to debts which are incurred after June 1993. Its introduction was necessitated by the deficiencies of the earlier provisions which were identified in the Explanatory Memorandum accompanying the Corporate Law Reform Act 1992

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Once a company is incorporated it is liable for its own debts and obligations. The members are not responsible for it. This is one of the advantages of a company that has limited liability. In a company limited by shares, the members will make a contribution to the capital and he will be given shares. If the company should suffer losses, the shareholder is not liable to contribute any more to the company if he has fully paid for his shares. His actually loss would be the amount he has paid for the shares. Creditors of the company cannot be take any action against the members, because the members are separate from the company.

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Holding company is the legal holding of an organization. So, it could be that we have a company called XYZ, and our brand is called XYZ. But, it doesn't necessarily mean that the owners of the organization, or the investors, shareholders, or partners of the organization have the same name. So, it could be that the holding company, which is the funding, or the financially supporting part of the organization is not only, has a different name, it could be based in a different country. Or if it's based in the same country, in different state.

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The holding company is really the organization that incorporates the owners, the financiers of that organization. So the holding company, is what we call like the mother ship. It is the financial, financial responsible or, financial investor part of the operation. It's almost like the silent partner within an organization. You don't necessarily now it's there. It can be based in a different state, different town, different country, and yet it's very much responsible for the operation of the business, but it could be operating a number of different businesses under that particular holding. So, for example, it could be that your company could be the holding organization that operates four or five franchise operations in different, different trading environments, but the investor, the management of that business is what we call the holding company that funds the other activities.

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Questions for Discussion :

1.State the legal principle on company law established by the case of Saloman v Saloman.

2. When does a company become a separate legal entity? 3. What is the effect of the incorporation of a company? 4. Explain the significance of the “veil of incorporation”?

5. List out situations in which the veil will be lifted?

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This scribe provides a precise introduction to the incorporation of a company concept and its implication which would enable a reader to understand the legal implications of business transactions.

Continue to Note 2…………………….

Musbri Mohamed