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
- 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
- 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?
Body of person combined for common object
2 or more person business
1 man business
Under CA 1965
registration fee is cheaper
Easier & economical,
No agreement necessary,
Registration fee is also cheaper
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
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
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
Min 2 Max 20
j. Liability of members
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 the co.
Dissolves the partnership except agreement to that contrary
Automatically dissolves the business
CHAPTER 2: CLASSIFICATION OF THE COMPANY
1. What are the types of company according to liability of members?
a. Company limited by share
Liability of members limited to the memorandum to the amount, unpaid shares respectively held by them
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
Requires limited company to have the word ‘Berhad’ as part of and at the end of its name
b. Company limited by guarantee
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
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
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
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)
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
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
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?
A public company having a share capital may convert to a private company by lodging with the registrar a copy of a special resolution
A private company may, subject to anything contained in its memorandum or articles, convert to a public company by lodging with the registrar
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
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 company’s 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 company’s 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 company’s 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 company’s 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 Façade
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 Trelby’s 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 Trelby’s shares.
o Held: The court of appeal declined to allow Jackson and Shaw Holding to take advantage of this section to buy Trelby’s 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 company’s constitutions?
- It sets out the essential details of the company’s 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
- 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 company’s 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 company’s 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
- 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 company’s 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 company’s 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?
Subject to the act and the company’s MOA, a company may by special resolution alter or add to is AOA
Any alteration or addition to the articles is valid as if originally contained in the AOA
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 plaintiff’s 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 member’s 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 company’s 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 Wong’s share i.e. he served a requisite to buy out Wong’s 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 hotel’s 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 company’s 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
CHAPTER 5: OFFICERS OF COMPANY: DIRECTORS
1. What does it mean by directors?
- S122 – A co. must have at least 2 directors, both of them must be residence of Malaysia
- No comprehensive definition of director but the term director include any person occupying the position of director by whatever name called
“Includes any person occupying the position of a director of a corporation by whatever name called and include a person in accordance with whose directions and instructions the director of a corporation are accustomed to act and an alternate or substitute director”
- Under section 4 - A director is an officer of a company but he is not an employee unless he has separate contract of employment as a salaried executive.
2. What are the types of directors?
a. Non-executive director
- Take part in the collective decision of the BOD
- He has no other function except by express delegation
b. Managing or Executive Director
- Who is in addition to their function of attending board meeting (as full members)
- but also work, usually full-time, in the management of the company as employee
3. How director can be appointed?
- S122(3) & S123(1) – First 2 directors must be appointed and named in MOA & AOA
- It is more common that they are appointed by subscribers to the Memorandum Documents which are lodged with the Registrar
- It must include particulars of the first directors and their signed consent to act as such
- Subsequent appointments of directors are arranged by the AOA of the company. The AOA of most public or private company are in accordance with Table A (Article 63-71)
- S129 – appointment & reappointment for director at age 70years old or older
4. What are the qualifications of a director?
- S122(1) – Director must have his principal or only place of residence within Malaysia
- S122(2)-Must be a natural person of full age
- S125(1)-An undischarged bankrupt may not (except with the leave of the court which he was adjudicated bankrupt) be a director of or otherwise concerned in the management of any company. The person may not be a director or promoter or is in any way whether directly or indirectly concerned or takes part in the management of a corporation.
- S130- Where a person is convicted whether within or without Malaysia
- S123&124- No rule of law that a director must also a member of a company but the AOA may impose such a requirement.
- S129- Age qualification, (a) not over 70 , (b) the office shall become vacant at the conclusion of AGM commencing next after he attains the age of 70 years & (c) 14 days notice specifics his age, and member noticed at the AGM and appointment and reappointment need ¾ of members vote to pass a resolution about it
5. How director can be removed?
- In certain events directors may be removed from office by disqualification arising under the statutory provisions or under the terms of the articles
- S28- For public companies, general meeting may by ordinary resolution remove a director before the expiration of his or her period in office notwithstanding the provision of the articles of any other agreement between the director and the company
- The office of director then becomes vacant on the passing of the resolution
- This is not the case where the director was appointed to represent the interest of a particular class or shareholder or debenture holder. In such case, the resolution to remove the director does not take effect until a successor has been appointed
- S123(2)&(3)- special notice to the director within 28 days must be given for him or her to defense himself both by written representation and by addressing the meeting before a vote is taken
- S128(2)- Independent right of removal without giving special notice
- A proper procedure must be followed whether a director is removed in accordance with the AOA or under section 128.
- Case: Soliappan V Lim Yoke Fan
The company’s AOA provided that a director might be removed. The AOA also provided that 7 days notice to be given of any general meeting. The P wanted to removed all the directors of the company. 3 days before the meeting, the first P sent notice to the company of a resolution to remove the directors. At the meeting, the P were purportedly elected as directors after the D had been removed. The D refused to relinquish office, and the P brought an action.
Held: Trial judge held that P were not properly appointed as the 28 days notice required before the old directors could be removed under section 128 had not been given.
High Court Held: Section 128 was not mandatory. The power to remove directors under that section co-existed with any power contained in the AOA. Therefore 28 days notice is not necessary, the removal could be affected in accordance with the AOA. However on the facts the proper notice required under the AOA had not been given either, so removed as director and consequently the P was not properly appointed as director of the company
- In the case of private companies, the procedures for removal of directors is governed by the AOA
- Table A, Article 69 and most AOA of private companies do provide for the removal of directors by ordinary resolution and the position is deemed to have been vacated in certain situation such as absence without leave for 6 months, failure to declare his interest in contract entered into by the company
- If the AOA does not provide for the removal of a director of private companies, a special resolution would first be necessary to alter the AOA to provide the necessary authority
- If not the members could wait until he retires via rotation clause in the AOA and not reappointed him at that time
6. Can a company loaned fund to its director?
S133- A Company shall not make a loan to a director of the company and vice versa.
S6- Deemed to be related to the company, or enter any guarantee or provide any security in connection with a loan made to such a director by any other person.
7. What are the three types of director’s duties? (FDS)
a. Fiduciary Duties
b. Duties of skill, care and diligence
c. Statutory duties
8. What duties included under fiduciary duties? (EAA)
a. Duty to exercise power in good faith and in the interest of the company
- The directors occupy a fiduciary position and must therefore exercise their power in good faith and in the interest of the company as a whole
- S132- “ A director shall at all times at honestly…”
- Case: Merchesi V Keogh
“ to act honestly refers to acting bona fide in the interest of the company in the performance of the functions attaching to the office of director.”
- Case: RE Smith & Fawcett Ltd
Lone Greene MR:
“they must exercise their discretion bona fide in what they consider and not what the court may consider to be in the interest of the company, and not for any collateral purpose.”
- Case: RE W & M Roith Ltd
Roith was the controlling spirit of what is commonly referred to as a ‘one-man company’ He owned the majority of the company’s shares and ran the company’s business. He was one of the 3 directors. Roith wanted to make provision for his wife after his death. He therefore entered into a contract with the company, under which his wife would be paid a pension if he died. Of course, there was no problem in having this agreement adopted by the company as he controlled it. Roith died. His executor put claim for the widow’s pension. The liquidator of the company rejected the claim.
Held: Liquidator was right to do so. When the directors of the company agreed to make the contract they were not considering the interest of the company ie Roith considered the interest of his wife. .
- Case: Walker & Wimborne
The directors of Asiatics, had administered that company and several others of which they were directors as a group.
They had caused Asiatic to pay money to Australian Sound (another company within a group), for the sole reason that Australian Sound needed the money.
There was no security and no promise to pay interest nor was there any considerations for the payment. The directors had also used Asiatic’s fund to pay the employees of the group companies
Held: Majority of Court of Australia held that the payments were made in breach of the directors’ duties. They were had to be liable to pay to the company the amount that had been lost.
b. Duty to avoid conflict of interest
- Directors should not enter into engagement in which there is possibility that the directors’ personal interest could conflict with those of the company which they were bound to protect
- Case: Cook & Deeks
The directors of a company carrying on the business of railway construction contractor obtained a contract in their own name. The director also procured a resolution of the company ratifying their conduct.
On an action brought by shareholders to the Privy Council that it was held that it was a breach of trust on the part of the director and that the benefit of the contract belonged to the company and they were bound to account to the company for it.
- Case: Avel Consultant Sdn Bhd v Mohd Zain Yusof & Ors
Avel Consultant Sdn Bhd (Avel) is a subsidiary of Elmex Consultant Sdn Bhd (Elmex). The first and second R were directors of both Elmex and Avel whilst the 3rd R was a director of Elmex only. Both Avel and Elmex were appointed as consultant of Sistem Televisyen Malaysia Bhd, a subsidiary of the Fleet Group, in respect of an engineering project known as Channel 3 @ TV3. A term of the said appointment was that in the event of the resignation of any key personal involved in Channel 3 project, the A were required to inform the Fleet Group of such fact, so that it could decide what to do next. Subsequently the 3Rs formed a firm called Perunding AJZ with the object of carrying on business of consultant engineers. It began to canvass for work and even approached established clients of Avel and Elmex for the purpose of obtaining work. Even before Perunding AJZ was registered, the first R as managing director of Avel was informed STMB that the 3 of the key personnel of Avel on the Channel 3 project were resigning. However, at that time none of the said 3 personnel had given resignation letter. Then Avel’s engagement as consultant engineer was terminated and Perunding AJZ was appointed instead to carry on with the Channel 3 Project. Avel and Elmex then sued the R for breach of fiduciary duties. The learned judge dismiss the application, hence this appeal.
Held: A director of a company is in fiduciary relationship with his company and as such he is precluded from acting in a manner which will bring his personal interest into conflict with that of his company. The R had carefully planned the formation of Perunding AJZ which later on obtained the very job which was Avel’s job. It is therefore clear that there can be no defense to the issue of fiduciary duties.
c. Duty to act for proper purposes
- A director might be acting honestly in what he considers to be the company’s interest and yet still be in breach of his fiduciary duties
- This would occur if he misapplies the company’s assets or he uses the powers he is delegated for the wrong purpose
- If a director misapplies the company’s assets he is in breach of his duty to the company
- It does not matter whether he is acting honestly, or in what he considers the interest of the company because the breach lies in misusing the company’s property
- Case: RE Duomatic Ltd
A payment was made to an ex-director as compensation for loss of office. This payment was not disclosed to the shareholders as required by a section which is equivalent to S137 of our CA. Therefore, it was a payment that the company could not lawfully make.
Held: Buckley J held that the directors responsible for making the payment were liable in respect of it on the grounds of misapplication of the company’s fund. This was so even though he found that the directors concerned had acted honestly, out of ignorance of law.
- Case: Mills V Mills
Dixon J said: “Directors of a company are fiduciary agents, and a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power.
- Case: Howard Smith Ltd V Ampol Petroleum Ltd
This case is concerned the issue of shares by the directors of a company (Miller). The A (Howard Smith) and the R (Ampol) were both trying to take control of Millers. The directors of Millers considered that it would be in the best interest of the company to be taken over by Howard Miller. However, Howard Smith’s takeover bid could not succeed as Ampol controlled shares in Millers to block the bid. Accordingly, the directors of Miller issued new shares to Howard Smith which diluted Ampol’s holding to the point where it could not no longer block the takeover. The directors of Millers had the power to issue shares if Millers needs money. However it transpired that the reason for the issue of the shares was not raise money, but assist Howard Smith and stymie Ampol. In acting as they did, the directors of Millers were trying to advance the interest of the company. They honestly thought that it would be in the interest of the company for the Howard Smith bid to succeed.
Held: Privy Council held that they had misused their powers and nullified the issue of the shares. According to Lord Wilberforce, the directors’ power was a fiduciary one. The exercise of such a power, though formally valid, could be attacked on the ground that it was not exercised for the purpose for which it was granted. The power to issue shares was for the purpose of raising money for the company. It has been used to forestall a takeover bid. This was an abuse of the power even though the directors had not acted to further their self-interest.
9. What are the remedies for breach of fiduciary duties?
a. The company may sue for damages or for the return of specific property
b. The company may claim any secret profit that the director made.
c. The exercisable of the power which in breach of director’s duties may be declared to be invalid
10. What duties included under duties of still, care and diligence?
- The rule is that the director not have to possess any skill for the job and the fact that he is unskillful is not a breach of contract
- The director is under duty to exercise the power using the level of skill he has
- If he uses less than the level of skill that he has, he is in breach of this duty
- Case: RE City Equitable Fire Insurance Co Ltd
“A director need not exhibit in the performance of his duties a greater degree than may be reasonably be expected from a person of his knowledge and experience.”
- A director owes duty of care to the company of which he is auditor and the standard is that of reasonable care in that he must take care in the affairs of the company as he would reasonably take in his own affairs
- Case: RE Brazilian Rubber Plantation & Estate Ltd
“….such reasonable care must be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf.
- Case: Huckerby V Elliot
The company runs a gaming club without license. This was an offence under the custom and exercise act 1952. Huckerby was a director of the company and she was charged with the offence on that basis that offence committed by the company was attributable to her neglect. The evidence showed that although she was a director, she knew little of the business and the running of the business was left to her co-director and the manager of the company.
Held: The magistrate convicted Huckerby on the principle that as director, she should have exercised some control over the co-director and the manager.
High Court Held: Court quashed the conviction and stated that there was no general principle that each director has to exercise some degree of control over the company’s business. It was proper for the director to leave the matters to another director or to an official of the company. As long as there was no reason to distrust the delegates, a director was entitled to believe what they say. However, once there is a reason for suspicion, a director who trusts a delegate does so at his own risk.
- S132 (1) – “….use reasonable diligence in the discharge of the duties of his office.”
- Case:RE Forest Of Dean Coal Mining Co
“Director are bound to use reasonable diligence having regard to their position, though probably an ordinary director, who only attends at the board meeting occasionally, cannot be expected to devote as much time and attention to the business as the sole managing partner of an ordinary partnership, but they are bound to use their fair and reasonable diligence in the management of company’s affairs and to act honestly.”
11. What sections related to duty of skill, care and diligence new amendments?
a. Section 132(1A)
b. Section 132(1B)
c. Section 132(1C)
d. Section 132(1D)
e. Section 132(1F)
f. Section 132(1G)
12. What sections included under statutory duties?
a. Section 132C
b. Section 132D
c. Section 142
d. Section 144
e. Section 154
f. Section 156
g. Section 167
h. Section 169
i. Section 170
j. Section 167A
k. Section 131B
CHAPTER 6: OFFICERS OF COMPANY: AUDITORS & COMPANY SECRETARY
1. How auditor can be appointed?
- S172 – Appointment of auditor
- First auditors are appointed by the directors within three months of the incorporation
- Then, the auditors are appointed at each AGM
- Office of the auditors term= appointment à following AGM
- In the event of death of any auditor, director may filled the office but it is not compulsory to do so ie the remaining auditors may continue to act until their term of office expires
- If not appointed as required, registrar will do so on the written application of any member
- S9(6) of CA 1965
o A written consent must be obtained before a person can be appointed as an auditor
o It a new auditor is nominated, notice of the nomination must be given by a member at least 21 days before the AGM
o The act seems to contemplate that individual will be appointed as auditors of companies
o However, it is usual practice to appoint a firm of accountants as auditors
o Such an appoint operates as an appointment of all the partners of the firm at the time as auditors of the company
2. What is the qualification of an auditor?
- Approved company auditor
- Requires auditor to be competent, approved by the Minister of Finance (MoF) and must ordinarily be registered as a public accountant with the MIA under the Accountants Act 1967
3. Who cannot be a company auditor?
S9-The following cannot be a company auditor:
(i) He is not an approved auditor
(ii) He is indebted to the company for an amount exceeding RM2.5K
(iii) He is:
a. An officer of the company
b. A partner, employer or employee of an officer of the company
c. A shareholder or his spouse is an officer of the company
(iv) He is responsible for or he is a partner, employee, or employer of a person responsible for the making of the register of members or the register of debenture holders of the company
4. How auditor can be removed or resign?
- S172(14) - An auditor may resign if he is not the sole auditor of the company or at a general meeting of a company
- S172(11)&(12) – no person shall be appointed as auditor of the company at an AGM other than the retiring auditor unless notice of his nomination of as auditor was given to the company by a member not less than 21 days before meeting
The company must send a copy of the notice of nomination to the person nominated and to all members at least 7 days before the AGM.
5. What are the rights and power of auditors?
o Rights to access accounting book/records, vouchers, and other records of the company and its subsidiaries
o Entitlement to require from any officer of the company and any auditor of a related company or of any subsidiaries, such information and explanation as he desires for the purpose of carrying out his duties
o The entitlement to attend any general meeting of any company and to speak on any part of the business of that meeting that concern him in his capacity as auditor
o Rights to receive all notices of any other communication relating to any general meeting in which a member entitled to receive
- S172 (6)-Auditor has a right to be heard at the meeting
6. What are the duties of auditors to company?
a. Statutory Duties (S174)
b. Duty to carry out audit
c. Duty to report to appropriate management
d. Duty to be independent
e. Duty to use reasonable care and skill
7. What are the auditor’s duties or liabilities to shareholders and outsiders
- An auditor is under a duty to exercise the appropriate standard of care to shareholders and outsiders.
- Any failure to do that may lead the auditor liable in an action for the tort of negligent
- Case: Cadler V Crane Christmas & Co
It was held that a firm of accountant was not liable to outsider investor who had relied on a negligently prepared report. This was because there was no contract between the accountants and outsider and they were under no duty of care.
- Case: Shaddock & Associates Pty Ltd V Paramatta City Council
- Case: Arenson V Cassan Beckman Rutley & Co
8. What is company secretary?
a. Must be natural person of full age
b. Has principal in Malaysia or place of residence in Malaysia
c. Must be a member of prescribed body or is licensed by the registrar of companies
9. What is the qualification of company secretary?
- Every company shall have one or more secretaries, each of whom shall be a natural person of full age. With effect 10th September 1992, NO PERSON shall act as a company secretary to a company unless:
a. He is member of
- Any person who contravenes the above requirement shall be guilty of an offence against the CA, shall be liable to a penalty not exceeding RM5K
10. What are the secretary’s appointment procedures?
- The first secretary shall be named in the articles
- Appointment is effective from the date of incorporation.
- Subsequent appointment apart from first secretary must be by the board.
- Subsequent appointment only requires formal board resolution.
- The first form 49 required to be filed with Registrar of Companies within one month from the date of incorporation.
- The particulars of the first secretary shall be entered into the register book.
11. What sections relating to resignation and removal of company secretary?
- A company Secretary may resign by giving resignation letter to the board
- The position of the vacant secretary must not be left unfilled for more than one month
- Form 49 – reflecting the resignation and appointment of new secretary must be lodged with Registrar of companies
- In practice, the removal of secretary and appointment is done simultaneously
12. How an office secretary can vacate in deserted companies?
- Intention to vacate office of secretary through Form 48E after failure to contact the directors from last known address.
CHAPTER 7: MEETINGS
1. What are the types of meetings? (SAGE)
a. Statutory Meeting
- Applies to public company limited by shares and incorporation
- Does not apply to public company by guarantee
- S142 CA 1965 – Not less than one month and not more than 3 months to do statutory meeting from business commencement date
- Its purpose to receive and consider the statutory reports of the company together with auditor’s report
- The Statutory Report (Form 51) must:
a. Contains particulars as provided under 142(3)(a)(b)(c)(d)&(e)
b. Be certified at least by two directors
c. Be forwarded to every member of the company at least 7 days before the day on which Statutory Meeting is to be held
d. Be lodged with registrar of companies at least 7 days before the date of statutory meeting
b. Annual General Meeting
- Mandatory for every type of company or for that matter any formal
organization under its relevant legislation to convene and hold a general meeting in each calendar year as its AGM.
- The AGM of every type of company under the C.A. is required under S143 to
be held once in every calendar year –S143
- First AGM 18 months of its incorporation
- Subsequent AGM 15 months after the holding of the last preceding AGM
- Extension to time may be granted by the Registrar of Companies (S143(2)
- Matters to be transacted at the AGM (Table A, 4th Schedule)
a. Declaration of final dividend as recommended by BOD
b. Receive and consider the audited accounts together with the reports of the
Director and auditor thereof
c. To elect director with the Articles
d. To appoint auditors and affix their remuneration
- Business other than the above ordinary business at any AGM is classified as ‘special business’
c. Extraordinary General Meeting
- Subject to the Articles, EGM of members may be convened at anytime for the transaction of business which requires attention before the next AGM
- S132D- Empower the D pursuant before the AGM
d. General Meeting on Requisition of Members
- Members of voting right may at any time lodge a resolution requiring the D to convene an EGM for the purposes stated in the requisition
2. What are the convocations of meeting?
- A meeting of a company other than for the passing of a special resolution shall be called by notice in writing of not less than 14 days or such longer period as it provided in the articles of association
- The notice is to be given to every member and the auditor of the company, if listed notice also given to Bursa Malaysia
- Passing resolution meeting – 21 days notice (Section 152)
- AGM - 21 days notice
3. What are the conducts of meeting? (QC VP MMR)
- S147(1)- A quorum is min two members personally present
- A meeting cannot be constituted by one member and any resolution purported to be passed at such a ‘meeting’ are invalid
- Case: United Investment & Finance Ltd V Tee Ching Yong & Ors
- Case: Sum Hong Kum V Li Pin Furniture Industries Pte Ltd
The articles of a co provided that no business could be transacted unless a quorum was present. The plaintiff was removed as D at a meeting convened without the requisite quorum.
Held: The Singapore High Court granted a declaration that the meeting was invalid. The court held that the procedural irregularity in the meeting caused by substantial injustice to the plaintiff and could not be validated.
- Case: Tan Guang Eng V BH Low Holdings Sdn Bhd & Ors
The HC construed the relevant articles to mean that a quorum was required only at the time when the meeting proceeded business, ie the continued meeting with the presence of only bolder of a valid proxy was a valid meeting. Therefore the resolution passed was a valid resolution.
- S147(1)-Any member present at the meeting may be elected to chair the meeting
- Chairman duties
a. to direct the meeting
b. preserve order
c. ensure that proceeding are conducted at proper manner
- The power to vote is not a fiduciary power and a shareholder owes no duty to anybody as to how he or she will exercise their vote.
- Table A art 54 states that by providing a show of hands each member or representative of a member has one vote.
- Case: Bin Hee Heng V Management Corp Strata Title No 647 was held that the term ‘show of hands’ included a ‘voice vote’
- S146(1)-Any provision in the articles excluding the rights is void
- It is a person authorized to vote on behalf of the appointing member. It also describes the instrument of appointment.
- S149(1)- The proxy need not be a member
- S149(2)- A member are entitled to appoint one or two proxies who need not be members
- S149(1)(a) – A proxy has the same right to speak at a meeting as the appointing member, but can only vote on poll, unless the articles allow the proxy to vote on show of hands
- Case: Ansett v Butler Air Transport Ltd
- It is a proposal which is being put forward at a meeting for discussion before it is formally accepted, passed or adopted
- It is moved by a ‘mover’ or ‘proposer’ and unless it is a formal motion does not require a ‘seconder’ unless the Articles provide so.
- It is common for the Chairman to ask for a seconder to gauge whether or not there is support for the motion
- If there is no seconder, it may imply that there is no support for the motion and the chairman usually proceeds to the next business
- Manner in which motion may be adopted or rejected is by way of vote by common method such as (i) by voice, (ii) by show of hands, (iii) by poll and (iv) by ballot
- It is a motion or proposal that has been accepted or passed by the necessary majority at a meeting duly convened and held
- Several aspects to consider to pass or adopt: (PC MPP)
a. Content and duration of any notice required to be given
b. Majority required for adopting the motion as a resolution
c. Persons affected by the resolution
d. Proper person having been in the chair
e. Presence of a quorum
- Ordinary resolution passed by a simple majority of those present and voting
- Special resolution are resolutions passed at meetings requiring
a. written notice at least 21 days
b. approval of ¾ of such members of the company present at the meeting
- Minutes are records of proceedings and resolutions passed at the meetings
- The minutes that have been signed and entered in the record are conclusive evidence that a meeting has been duly held and convened that all appointments of officers shall be deemed to be valid and that all proceedings were duly conducted
- The minutes book shall be kept at the registered office and any member could inspect them without charge.
CHAPTER 8: SHARES
1. What is share?
- S4(1) of CA 1965
Shares in the share capital of a corporation and includes stock except where a distinction between stock and shares is expressed or implied
2. What is the nature of shares?
- S98 of CA 1965
The shares….shall be moveable property transferable in the manner provided by the articles, and shall not be of the nature of immovable property
3. What are the main characteristics of shares? (SLR)
a. Give right to receive dividend declared on the class of share
b. It carries right to vote at a general meeting except non-voting share
c. In the event if liquidation, shares defined right to receive assets distributed to members of that class
d. Carries liabilities in the event of winding up
e. Various ‘right of members’ is given by CA, MOA & AOA in term of shares.
f. Subject to any restriction of the AOA
4. What are three kinds of share capital?
a. Authorized share capital
- It is the amount which the company can issue
- S18(1) Required all companies except unlimited state in MOA amount of share capital.
b. Issued share capital
- It is the nominal value of share capital that actually issued.
- For example, 100 authorized capital of which 50 RM1 share have been issued
c. Reserve or uncalled capital
- A company may issue share and not receive the full par value immediately
- The share issued may be partly paid (paid-up capital)
- The amount unpaid called reserved @ uncalled capital
5. What are three classes of shares?
a. Ordinary shares
- Also known as equity shares
- Typically carry normal rights without special definitions
- Equity = Net value of real property= Appraised Property Value-unpaid debts
b. Preference Shares
- S4 Of CA1965
It is a share which does not entitle the holder thereof to vote at general meeting or to participate beyond a specified amount in any distributions, whether by way of dividend or redemption in a winding up or otherwise
- Also known as preferred shares
- Typically a higher ranking share than ordinary share
- May or may not carry voting right
- Will paid out in assets before the common stockholders after debt holders in winding up
c. Redeemable shares
- Are those shares that carry a right by the company to buyback the shares
6. What does section 18(1)(c) said about capital structure?
It stated that the amount of capital which a company proposes to be registered must be stated in the MOA which called authorized capital and the company cannot allot shares more than authorized in its MOA. Any such allotment is void.
7. What section described about the power of the company to alter its share capital?
- S62 of CA 1965
A company may alter its authorized capital in general meeting by the creation of new shares or consolidated or divide all or any of its shares capital into shares of larger amount
- S62(1)(C) of CA 1965
Fully paid up shares may also be converted into stock. Stock unlike shares, it does not exist as discrete unit but as fund
- S99(1) of CA 1965
Shares must be numbered but stock need not be
8. What is share certificate and share warrants?
- Share Certificate
a. It is a prima facie evidence that the person named in the certificate is the owner of the share in question (S100)
b. Must be issued to the holder of shares within 2 months of an allotment or within 1 month of transfer (S107)
c. Each share must normally be distinguished by an appropriate number (S99)
d. Name of the company, its address, name of the holder, statement of shares paid up appear in the certificate
- Share Warrants
a. It is a document that purports to allows transfer of title of shares by delivery of the warrant
9. How shares can be transferred?
- It occurs when a shareholder passes ownership of the shares to another
- Result in the transferee becoming member of the company after the name is entered in the register of members
- The transferor ceases to be a member if the entire shares are transferred
- In the general rule, shares in a company are freely transferable
- S98- Shares are transferable
- S15(1)(a)- restriction transfer of share in private companies
10. Are there any restrictions in transfer of share in private company?
- Most of AOA of Private Company gives the power to refuse the transfers of shares. This is because S15 of the act requires that there should be some kind of restrictions on transferability of shares in a private company
- Restrictions are rarely found in the articles of public companies because a company cannot have a stock exchange listing if such restrictions are there
- S105(1) of CA 1965
Where the co refuses to registrer a transfer of shares, to company within a month after the date on which the transfer was lodged send to the transferor and the transferee notice of such refusal.
- S105(2) of CA 1965
The company and every officers in default commit an offence, it may also result in the right to deny registration of to the transferee. (Case RE Swale Dale Cleaners Ltd (1968))
- Case Smith V Fawcetts
Smith’s father owned 400 units of shares died in an event. Smith want to sought to be registered as member of the company as an executor to his father assets. The D refused to register except Smith transfer unless 200 units of the shares sold to certain director at a stated price, in which case they would register a transfer of the remaining shares.
Held: The D only act bona fide on the interest of the company as seen by the court. The applicant failed to show that D act mala fide or bad faith. The D has right to refuse new membership.
- Charle Fort V Amanda
- In this case the director refused to register new member who oppose the company policy and interest.
- Held: The D had properly exercised his discretion which is for the best interest of the company. It is not wise to have such member who oppose the policy of the company.
- S181 – enables members to apply for a remedy if failures to register constitute ‘oppression or conduct which is unfairly discriminatory against or otherwise prejudicial to the members. May now enables members to obtain a remedy in cases such as Re Smith V Fawcett.
- Case: Gan Sin Tuan V Chew Kian Kor
In this case the Court of Appeal of Malaya held that a sale of shares without complying with AOA restricting the right of transfer was void.
11. Why Registration of transfer is so important?
- It is important because if an unscrupulous shareholder enters into a contract to sell the same shares to 2 buyers, the buyer who first obtains registration become holder of the shares.
- Case: EG Tan & Co (Pte) V Lim & Tan (1987)
- Khoo obtained a share certificate and executed transfer from the plaintiffs by fraud.
- After discovered, the the plaintiff claimed the return of share certificate from D.
- D attempted to register himself as the owner of the shares but failed. D resisted the plaintiff’s claim on the ground that he had bought the shares from Khoo in good faith for value.
- Held: The court found that D had obtained the shares from Khoo is payment of a gambling debt. He accordingly held that D was not a bona fide purchaser without notice. D was ordered to return the shares to the plaintiff.
CHAPTER 9: DEBENTURES
1. What debenture is as defined under section 4 of CO Act?
- There is no precise legal meaning attached to the word debenture
- Chitty J said in Levy v Abercorris Slate & Slab Co:
“….a debenture means a document which either creates a debt or acknowledges it, and any document which fulfills either of those conditions is a debenture….”
- S4(1)- The CA definition of debenture is singularly unhelpful “debenture includes any debenture stock, bonds, notes and any other securities of a corporation, whether constituting a charge
2. What are three kinds of debentures?
a. Registered Debenture & Bearer Debenture
- Registered Debenture
A debenture which is registered in the name of the holder in the company book.
It can be transferred in the same manner as that of shares.
- Bearer Debenture
A negotiable instrument and its little therefore can be transferred only by deliver it to the transferee. The does not register the name of holder
b. Secured and Unsecured Debenture
- Debenture which is not secured by a charge over the property of the company is an unsecured debenture.
- So the holder is the unsecured creditor of the company.
- But when the asset or property of the company is charged to the debenture holder, it is secured debenture and its holder is the secured creditor.
c. Redeemable and perpetual debenture
- Redeemable Debenture
Debenture which has been issued, generally, can be redeemed.
A redeemable debenture is where the principle money is repaid to the holder at the end of a specified period.
- Perpetual Debenture
It also known as irredeemable debenture, it issued without a fixed date for redemption.
3. What are the difference between share/shareholder and debenture/debenture holder?
SHARE/ SHARE HOLDER
Is a member of a company
Is an external creditor
Has the right to vote
Has no right to vote
Dividend on share can only be paid if the co has profit and cannot be paid out of capital
Interest on debenture can be paid regardless whether from profit available or paid out from capital
Share is not secured
Debenture, generally secured by charge
Share capital cannot be repaid without legal formalities
A company can repay the debenture in accordance with the term of the issue.
Generally, a co cannot purchase its own shares
A company may purchase its own debenture.
4. What is charge?
- There are two types of charges:
a. Specific or fixed charge, or
It is one that attachés to a specified asset.
b. Floating charge
It is a charge that does not attach to any fixed asset, until it is ‘crystallized’.
5. How floating charge created?
- There is no particular form of words required to create a floating charge
- It is a question of interpretation of the particular loan instrument to determine whether the security created is fixed or floating charge.
- Case: Re Bonds Ltd
The company arranged an overdraft with a bank, secured by a charge over their stock in trade given in two letters of lien. The co went into liquidation and the bank claimed to be a secured creditor under the letters of lien.
Held: It was a floating charge because the essence of the whole transaction was that the stock might be sold and replaced and there was no schedule or inventory of the goods charged
- Case: Re Lin Securities (Pte)
- The holder of a floating charge has no legal or equitable interest in the specific assets of the company while the charge is floating. This means that the borrowing company is free to deal with the assets subject to the charge in the ordinary course of business.
- Held: A letter of hypothecation created a floating charge because the company was free to substitute new securities for existing securities without the consent of the bank.
- Case: Reynolds Bros (Motors) Pty Ltd v Esanda Ltd
6. When a floating charge crystallizes?
- Liquidation of the company, all floating charges automatically crystallizes
- The appointment of the receiver by the court or by a creditor under a power contained in the debenture has the effect of crystallizing floating charges.
7. What is the comparison of fixed and floating charges?
- Confer immediate rights over identified assets
- Uncertain until the company fails, what assets will form the security
- Applicable to current asset, which may be easier to realize than fixed assets subject to fixed asset. Ex: easier to sell stock compared to empty factory.
- Postponed to claim of other creditors.
8. What are the weaknesses of floating charge?
a. Useful but is peculiarly vulnerable as a security
b. Mortgaging property is one of the incidents of a company’s normal business.
c. In liquidation, although the holder of a floating charge is secured creditor, certain preferred creditors have priority in a winding up (S292(4) & S191(1)
d. S294 Of CA 1965
A floating charge created within 6 months of the commencement of the winding up is void, unless it can be shown that the company was solvent at the time the charge was created. This to prevent some unsecured creditors being given priority over other creditors by the creation of a floating charge when insolvent liquidation is imminent.
9. What are the section regarding registration of charges?
- Part iv Division 7 of CA 1965
Provides for a system of registration of company with the registrar
Main purpose of these provision is to enable a potential creditor of the company, who propose to lend money on security of particular asses, to ascertain whether the company has already given a charge over those assets.
- S108(1)&(2) Of CA 1965
Where a charge is created it need to be registered within 30 days after the date of creation without prejudice to any contract or obligation for repayment if not it will become void against liquidator and creditor of the company and when a charge becomes void the money secured thereby shall immediately become payable.
- S109(1) Of CA 1965
The effect of failure to register the charge is that the charge, but no debt secured, becomes void against the liquidator or any creditor of the company, the company is liable to a default fine.
- S114 Of CA 1965
The court may sanction registration after the expiration of the 30days if an acceptable explanation (the grounds are to be specified) is given.
It will fact do so even where the explanation is mere oversight but not where the omission was a deliberate act of concealment
CHAPTER 10: WINDING UP
1. What is the definition of winding up?
- There are two types of winding up:
a. Compulsory Winding Up
It is a winding up by an order of the court which is initiated by the presentation of a petition by a person who is entitled to do so.
b. Voluntary Winding
A voluntary winding up should commence where a provisional liquidator has been appointed before the resolution for voluntary winding up was passed and in any other case, at the time of passion of the resolution for voluntary winding up. S255(6)
2. When can a company winding up by the court under section 218?
There are a few circumstances in which company may be wound up by court.
(1) The court may order the winding up if: (MC DOS D)
(a) The company has by special resolution resolved that it be wound up by the Court
(b) The company has defaulted in lodging the statutory report or in holding the statutory meeting
(c) The company does not commence business within a year from its incorporation or suspends its business for a whole year
(d) The number of members is reduced below two
(e) The company is unable to pay its debt
(f) The Directors have acted in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever which appears to be unfair or unjust to other member.
3. What are two things that must be shown before the court make a winding up order on a petition?
Two things to be shown before the court will make a winding up order on a petition are:
a. That the petitioner had the right to present the petition
b. That one of the grounds set out in the Acts as justifying a winding up has been made out.
4. When a company is considered as unable to pay its debt?
A company is deemed to be unable to pay its debt if any one of the following circumstances is shown to exist:
a. The petitioner has delivered to the company at its registered office, a written demand for payment of all debt owing to him of at least RM500 and within the ensuing three weeks, the company has neither paid the debt nor given security for the payment
b. A judgment has been obtained against the company for the debt and an attempt to obtain payment out of the company’s assets remain unsatisfied, or
c. The court is satisfied that the company is unable to pay its debt.
5. Who are the parties who can apply for winding up of an company?
Section 27(1) of CA 1965 provides that the following persons may petition for the winding up of a company:
a. The company itself
b. Any creditor, including a contingent or prospective creditor of the company
c. A contributor or any person who is the personal representative of a deceased contributory or the trustee in bankruptcy or the Official Assignee of the estate of a bankrupt contributory.
d. The liquidator
e. The minister pursuant to section 205 or on the ground specified in section 218(1)(d)
f. Bank Negara Malaysia
g. The registrar on the grounds specified in section 218(1)(m) or (n)
6. What does it mean by contributory in winding up process?
- Contributory include every person liable to contribute to the assets of the company in the events of its being wound up.
- It includes the present members and certain past members of the company
- It has been held that a holder of fully paid up share is a contributory and entitled to present a petition.
- Section 217(2) provides exceptions whereby contributory may not present a petition on any of the grounds specified in section 218(a),(b),(c),(e) or (l) unless
a. The number of members is reduced below two, or
b. The shares allocated to the contributor, or have been held by him and registered in his name at least 6 months during the 18 months before the presentation of the petition or have devolved on him through the death or bankruptcy of a former holder.
7. What are three types of application that commonly used for winding up?
a. Application by the company
- Section 217(1)(a)
Allows the company to apply to have itself compulsorily wound up. The general meeting is the appropriate organ to determine that the company be wound up.
- Application by a company for its compulsory winding up is quite rare. Usually, if the members wish to liquidate their company, they will do so by a voluntary winding up. A voluntary winding up does not involve a court hearing and so is cheaper.
- On the other hand, a voluntary winding up can only be initiated by a special resolution which requires 3 quarters majority, whereas under S217(1)(a), a compulsory winding up only requires an ordinary resolution.
- In some circumstances, the members may desire to place the company into liquidation as quickly as possible.
- If this is the case, a compulsory winding up may be preferred over a members’ winding up, because meetings at which ordinary resolutions are to be proposed require less notice than meetings at which it is proposed to pass special resolution
b. Application by the creditors as a ground for compulsory liquidation
- Section 218(1)(e)
Usually the vast majority of applications for compulsory winding up are presented by creditors on the grounds, i.e. the company is unable to pay its debt
Permits a creditor, a contingent or a prospective creditor to apply for a compulsory winding up. This section enables creditors to apply for a compulsory winding up even though their debts are not immediately due and payable at the date of application
- Case: RE William Ltd
- It was held that a person who is owed a debt by the company, which is still unpaid at the date of the application for winding up is a creditor
c. Application by the contributories as a ground for liquidation (S217(1)(C)
- Section 4 (1) defines a contributory to includes
a. A person liable as a member or past member to contribute to the assets of the company in the event of winding up
b. A holder of a fully paid shares in the company
- This definition of a contributory, in the case of a company limited by shares, includes persons who at the commencement of the winding up, held either fully paid or partly paid,
- even though strictly speaking, only a holder of partly paid, is able to contribute an amount on the winding up. Not only the contributories must hold the shares, their names must also be entered in the register of membership.
- S214 (1)
Past members may also be liable to contribute to the assets of a company if they were members within one year of the commencement of winding up and the present members are unable to satisfy the full extent of their liabilities.
- E.g. past member ceased to be a member for 1 or more years before the commencement of the winding up (a) till (g)
A contributory’s liabilities is that of a specialty debt. This diminishes the effect of the statute of limitations as a specialty debt can be enforced within 20 years of the liquidator making the call. The debt accrues from the contributory at the time that he or she is liable and becomes payable at the time when calls are made to enforce the liability.
8. What are the effects of an order for winding up?
- If an order is made it is retrospective in effect to the date on which the petition was presented to their court which becomes the date of commencement of liquidations (S219(2))
- Among the legal consequences of an order court for winding up are:
a. The effective dismissal of the directors and employees
b. A stay of any execution of a judgment against the company and of any legal proceeding in which it is either plaintiff or defendant.
c. A standstill on any disposition of assets or transfer of shares (unless approved by the court) from the date of commencement of liquidation S226.
9. How voluntary winding up can happen?
- It happened where a provisional liquidator has been appointed before the resolution for voluntary winding up was passed and in any other case, at the time of passion of the resolution for voluntary winding up (S255(6)).
- The resolution may be of two types:
a. Ordinary resolution
It passed when the articles provide that the company is to be wound up when a specified purpose has been achieved or a specified period has elapsed.
b. Special Resolution
It requires no ground for winding up and is used in any other case such as a solvent liquidation.
- Two types of voluntary winding up are:
a. Member Voluntary Winding Up – where the company is solvent
b. Creditor Voluntary Winding Up – where the company is insolvent