Presentation

The registered companyy A corporation, which has, in law, an existence rights and duties seperated from those of it members. y All companies (Public or Private) registered under the Companies Act is a registered company. y Companies are classified according to member s liability and according to whether they are public or private.

Public Companies

Public vs Private CompaniesPrivate Companies Any company that is registered as or converts to a private company under Sec 4(1) of Companies Act. Sec 22(4) All private companies limited by shares must include the words Sendirian Berhad (Sdn Bhd) [Private Limited (Pvt Ltd)] Exempted if it has less than 20 members and non of it members are themselves companies Exempt Private companies can keep financial information private. Restricts the right to transfer its shares Not permitted to have more than 50 shareholders Not allowed to undertake certain fund raising activities (issue of a prospectus)

Limited by shares or limited by guarantees and having a share capital, being a company. May be listed or unlisted

All companies listed on Bursa Malaysia are Public Companies Required to lodge financial reports

Required to maintain a register of substantial shareholders Restriction on loans to directors and connected persons

Limited Companiesy A company s liability to pay its debt are unlimited. y Liability of members are limited either by shares or guarantees. y Limited Companies have the word Berhad (Bhd) as part of name Sec 22(3)

The registered Company

Changing the status of a companyy A registered company may at any time, wish or be obliged to y

y

y y

change the status with which it was originally registered. Private company limited by shares may decide to increase its share capital by offering its securities to the general public to secure further capital. Where a public company's issued share capital falls below the minimum requirement of share capital permitted for a public company, the public company must re-register itself as a private company. The company must pass a special resolution to change the status of a company Identity of the company or any of its rights, or obligation or legal proceedings for or against the company is not affected by changing status of the company. (Sec 26, CA)

Incorporating a company and the legal consequencesy Under Sec 65(5), upon incorporation a company isy Is capable forthwith of performing all the functions of

an incorporated company, y Is capable of suing and being sued on its own name, y Has perpetual succession and shall have a common seal, and y Has the power to acquires, hold and dispose of property.

y Separate legal personality / entityy Distinct legal entity separate from its members and

management. y Corporate veil is drawn between the corporation and it membership and management. y Principle of veil of incorporation was established by the decision of House of Lord in the case of Salamon v Salamon & Co.

Salomon v Salomon & Co (1897)y Facts y Salamon, a leather businessman incorporated his business as a limited company. y S, his wife and 5 children were the shareholders. y Company purchased S business for 39000.00 y $20000 fully paid $1 shares and debenture to the value of $10000 y Debenture transfer to Mr.Broderip in return of a loan of $ 5000 y Company went to liquidation, sufficient fund to meet company debt to Broderip but not to other creditors

y Findingsy HC: Company was no more than an Agent of Its

Principle, Salmon y CA: there was a trust relationship, company held its property on trust for its beneficiary, Mr. S y According to the House of Lords, the Statutory language of the Companies Act 1862 (s 6) 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 companys affairs.

Effects of the Corporate veily Rights and duties of shareholders are determined in

the company s constitution. y A separate legal person from its members.Company is liable for its own debts Company s Liability Company s property Contractual capacity Company is liable for its own debts Crime Perpetual succession borrowing

a) Company is liable for its own debts

Shareholders not liable for debts and liabilities of company. Shareholder can be a debtor or creditor of the company can sue or be sued by the company. Lee v Lee s Air Farming LtdL Formed a company, L holds 2999 shares and his wife hold 1 share. L was employed as chief pilot in aerial crop spraying. L killed in a crash while flying. Wife sued the company for compensation. Held: the contract of employment was valid. His widow could recover compensation from the company

b) Company s liability

Companies liability is always unlimited. Members liability is limited. Members liability is to the Company not the creditors.c) Company s property

Company owns it own property. Shareholders has no direct right over company s property. Macaura v Nothern Assurance Co Ltd [1925]Timber merchant converted his business into a company. Property of company destroyed by fire. M brought an action against the insurance company. Held: Altough property has been insured it was under M s name. M no longer owned the property to which he claim and as such insurance company was held not be liable to meet claim.

d) Contractual capacityy Has full contractual capacity, can enforce its contracts y May also be liable for negligence, shareholder cannot be

held liable unless he is personally negligent.e) Crimesy Company can be convicted of a crime, regardless of its

directors are also convicted. y Limitation: crimes which requires physical act of driving vehicle.

y courts may regard the mens rea of those individuals

who control the company to be the mens rea of the company.

y Crime against the companyy Company can be victim of a crime.

f) Perpetual successiony Existence of the company does not depend on existence

of members. y the company continues in existence until wound up.g) Borrowingy A company can borrow money and grant a security for a

debt. y Only a company can create a floating charge.

LIFTING THE VEIL OF INCORPORATIONy Separate legal personality of company operates as a shield. y The screen separating the company from its individual shareholders and directors is commonly referred to as "the veil of incorporation". y Sometimes the law is prepared to examine the reality which lies behind the company faade

Common lawy Judiciary universally accepts the principle of a company as a separate legal entity. In exceptional instances court dislodges the corporate veil . y It is difficult to classify the justification which merit the exercise of courts power. y Court will seek to remove the corporate veil in pursuit of application of equitable principles. y In Malaysia, doing justice appears to be the sole criterion that motivates the courts to exercise their inherent jurisdiction and this has been the case ever since the decision of Hotel Jaya Puri Sdn. Bhd. v National Union Bar & Restaurant Workers & Anor [1980].

Instances court might allow to lift corporate veil i. Company Identity Used to Evade Obligations (Fraud orFacade Cases) y Underlying motive for the incorporation of a company is to enable its membership to impugn an existing binding obligation with a third party or instigate some other form of fraud. y In such a case court may dislodge the corporate veil to prevent those involved in the fraudulent act from escaping a liability.

ii. Agencyy company is merely carrying on business as the agent of

another - so that transactions entered into by the subsidiary can be regarded as transactions of the holding company:

iii. Group entityy Group of companies act as a single economic unit

y Later cases has doubted this principle

National Union of Hotel, Bar & Restaurant Workers v Hotel Malaya Sdn Bhd [1987] Held: The court was not prepared to hold that the hotel company was the employer of the workers of the restaurant company. The general manager was common both to the hotel and restaurant companies. The hotel company only held 90.75% of the paid up capital of the restaurant company.

iv. Justice and equity

Courts have sometimes been prepared to pierce the corporate veil where they feel this is in the interests of justice.

y There are situations where corporation veil was not liftedCases Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1996] Lim Sung Huak & Ors v Sykt Pemaju Tanah Tikam Batu Sdn. Bhd. [1993] Development & Commercial Bank Bhd v Lam Chuan Co & Anor [1989] JH Rayner ) Mincing Lane) Ltd & Ors v Manila Sons (M) Sdn. Bhd. & Anor [1987] Yap Sing Hock & Anor v Public Prosecutor [1992] explanation Where there is no dispute as to the identity of the controller of the company. Where there is delay in bringing proceedings by those who seek to lift the corporate veil. When a company has been duly incorporated and the alleged wrongdoer is not even a shareholder or director of that duly incorporated company. Where the subsidiary whose veil that is sought to be lifted is not wholly owned by the holding company. Where the company is a victim of fraud or wrongful deprivation by the person who solely controls it.

LegislationCA 1965 Provision S 67(5)If a company contravenes this provision then notwithstanding section 369 the company is not guilty of the offence. The officers will be criminally liable and the penalty is imprisonment for 5 years or find of RM100, 000 or both. Requires the directors of a holding company to prepare consolidated accounts incorporating the financial position of the holding company and its subsidiaries. The act clearly recognises the function of a group related companies as a single commercial entity. Provides that an officer of the company who signs or is authorised to sign on the company's behalf any bill of exchange, cheque or promissory notes where the company s name is not properly or legibly written is guilty of an offence and is liable to the holder of the instrument or order for the amount due (unless it is paid by the company). Provides that an officer can be personally liable to creditors for debts incurred by the company Provides that if the number of member falls below two (except in the case of a wholly owned subsidiary) and the company carries on business for more than six months , any member who is aware of this is personally liable for debts contracted after the period and is also guilty of an offence.

S 169

S 121

S 304 S 36

The Agency relationshipy An agency is a relationship where one person ( the company) consents

or is deemed to have consented that the other person (eg. director, employee, secretary) should act on its behalf so as to affect its relations with third parties. y Whether an individual officer of a company is possessed of an authority to bind the company in a contractual relationship with a third party will be dependent upon the rules of agency.

y The act of an agent could only bind the company if they were within the objects of the company. Acts outside the scope of company objectives is ultra vires. y Sec 20: an act of the company is not invalid merely because it is outside any objects in the company s constitution.

Types of AuthorityValid authority Actual Authority (Expressed, implied or usual) Ostensible (Apparent) Authority

"An 'actual' authority is a legal relationship between principal and agent created by a consensual agreement to which they alone are parties. To this agreement the contractor is a stranger; he may be totally ignorant of the existence of any authority on the part of the agent. Freeman and Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (Diplock LJ).

y Actual authority may be limited or entirely absent by virtue of :y The object clause y Clause in the Articles y GM resolution y Director s duties to the company y A defective or no appointment

What if the Agent exceed the limitation? Principal is not bound by the transaction if the 3rd party is aware of the limitation on the agent s authority and entered into contract anyway. What amounts to notice under common law? i. Actually knew, ii. Ought to have known: duty of enquiry where circumstance suspicious. iii. Could have known: constructive notice"If ..the directors have powers and authority to bind the company, but certain preliminaries are required to be gone through on the part of the company before that power can be duly exercise, then the person contracting with the directors is not bound to see that all these preliminaries have been observed. Indoor management Rule

Fountaine v Carmarthen Railway Co (1868) LR 5Eq 316 When there are persons conducting the affairs of the company in a manner which appears to be perfectly consonant with the articles of association, then those dealing with them, externally, are not be affected by any irregularities which may take place in the internal management of the company.

y If agent exceeds authorityy P/company can ratify contract by ordinary resolution, or y Agent incurs liability vis--vis P and vis--vis third party.

y Exceptions to Turquand s case rule:y Actual knowledge of the fact that transaction is outside the authority. Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors [1998] y Third party is an insider in th organisation (officer of

company). Morris v Kansen [1946] y Suspicious circumstance surrounding the authorisation of a transaction an third party should reasonable have been aware of such circumstances. Underwood v Bank of Liverpool & Martins Ltd [1924] y Authorisation was forgery. Ruben v Great Fingall consolidated [1906] y Transaction requires special resolution, third party is deemed to have notice of the outcome. Irvine v Union Bank of Australia (1877)

Doctrine of ostensible authorityy Always come when actual authority was absent.y Freeman & Lockyer v Buckhurst Park Properties (Mangel) Ltd [1964]

A principal is bound, not only by such acts of the agent as are within the scope of the agent s actual authority, but by such act as are within the larger margin of an apparent or ostensible authority derived from the representations, acts, or default of the principal. y Conditions to be fulfilled I. Representation that agent has authority. II. Such representation was made by a person who has actual authority to manage the business. III. Third party (contractor) actually relied on the representation IV. That under its memorandum or articles of association the company was not deprived of the capacity either to enter into a contract of the kind

a) Representation

Board of directors who has actual authority under MOA to manage the business permit the agent to act in the management, thereby represent to all person dealing with such agent that he has the authority

b) Representation by someone with actual authority.

First Energy Ltd. v Hungarian International Bank Ltd [1993] c) Notice y there is no liability on the basis of ostensible authority if the third party on notice or put on inquiry as to extent of the person's authority. y If third party was on notice of agent s limited authority and ignored than company will not be liable.