Law 385 Business Organ is at Ions 2011

7/31/2019 Law 385 Business Organ is at Ions 2011

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BUSINESS ORGANISATIONS

BACHELOR OF ACCOUNTANCY

LAW 385COMMERCIAL LAW


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BUSINESS ORGANISATIONS

SOLEPROPRIETORSHIP

PARTNERSHIPCOMPANY


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SOLE PROPRIETORSHIP

The simplest economic and legal unit is thesole proprietor

an individual carrying on business eitherentirely alone or employing others.

very vulnerable - can be made personallybankrupt for his business trade. i.e one personin business for himself.


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CHARACTERISTICS OF A SOLEPROPRIETORSHIP

a.k.a. one manshow

Simplest form of business

organisation

No special rules

Can be formedinformally

SP provideseverything i.e. skill,

labour, capital

Takes all profits andlosses

Needs to beregistered underthe ROBA 1956

Business istransferable

No agreementnecessary

Unrestrictedpowers of borrowing

May withdrawcapital

Unlimited liability Cannot createfloating charge

Can mortgageassets

Can be dissolvedinformally


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PARTNERSHIP

S.3(1) Partnership Act 1961:Partnership is the relation which subsists

between persons carrying on business incommon with a view of profit.


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PARTNERSHIP

REGISTRATIONOF

PARTNERSHIP

PENINSULAMALAYSIA: ROBA

1961

SARAWAK: SK CAP 64(BUSINESS NAMES) &

CAP 33 (BUSINESS,PROFESSIONS ANDTRADE LICENSING)

SABAH: TRADE

LICENSINGORDINANCE NO 161948


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PARTNERSHIP

Partnership is the relation of two or morepersons carrying on a business in a commonview to make profit.

Involves principles of commercial agency. Sole proprietorship and partnerships are

business organisations referred to as

unincorporated associations.


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PARTNERSHIP

PARTIES CAN STILL ENFORCE THEIR RIGHTS EVENIF FAIL TO REGISTER THE PARTNERSHIP

Gulazam V Noorzaman and Sobath (1957)) 2MLJ 45

Cow partnership one party to provide capitaland the other to provide labour/expertise


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ELEMENTS OF PARTNERSHIP

MORE THAN

ONE PERSON

AGREEMENTBETWEENPARTIES

BUSINESS

ACTIVITIES

AGENCYPURPOSE ISFOR PROFIT


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MORE THAN ONE PERSON A partnership is between legal persons whether

human or otherwise Minimum 2 pax

s.47(2) PA maximum 20 pax s.14(3)(a) Companies Act 1965 professionalpartnerships unlimited

TAN TECK HEE V CHONG TIAN PENG firm of 25

partners was void and could not sue. SHIM FATT V LEYLAND ROAD BUS CO firm of

more than 20 partners is void.


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AGREEMENT BETWEEN PARTIES

No any special form, though it is usually written. relationship between partners governed bycontract or agreement either express or implied.

Ratna Ammal & Anor v Tan Chow Soo (1964)Syndicate agreement for the purpose of selling

condensed milk. Court still considered it as a partnershipeven though the word syndicate used. Substance overform. Relation of parties had a business character of a

partnership together with a common view of profit.


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BUSINESS ACTIVITIES

Parties must be carrying out a presentbusiness, not future business

S.2 PA - Business: any trade, occupation orprofession

Preparation for future business is NOT apartnership.


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BUSINESS ACTIVITIES

KEITH SPICER LTD V MANSELL

M and B lost their jobs. They agreed to go into businesstogether and form a limited company to run a restaurant.

While they were forming the company and before it hadreceived its certificate of incorporation from the registrar,B ordered some goods from Spicers for the business. Bwent bankrupt before Spicer had been paid. Spicer sued

M on the basis that he was a partner of B. HELD. B and Mwere not partners. They were not carrying businesstogether in partnership but only preparing to carry on a

business as a company as soon as they could.


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AGENCY Every partner is an agent to the firm and his other

partners the acts of every partner for the firm binds the firm

and his partners, unless the partner so acting has in

fact no authority to act for the firm in the particularmatter, and the person with whom he is dealing eitherknows that he has no authority or does not know orbelieve him to be a partner British Homes AssuranceCorporation v Peterson [1902]

S.7 PA: each partner in an agent to other partner. Eachpartner when contracting with outsiders are agentsand principals at the same time.


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AGENCY

There are four elements which must be satisfied for the act of the partner to bind the firm and other partners.

act must be done in relationto the partnership business

carrying on usual way of business

the act must be done in thecapacity as a partner and not

as an individual person.

the person with whom he isdealing either knows that he hasno authority or does not know or

believe him to be a partner.


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AGENCY

Re Briggs & Co (1906)

A father and son were partners in a firm. The firm was infinancial difficulties. They were being pressed by the

creditors and they have no money to pay back thecreditors. The son assigned book debts to the creditorswithout informing the other partner i.e the father. Laterthey firm was declared bankrupt and the trustee soughtto set a side the agreement stating that it was executed

by the individual. Court held that the agreement wasbinding because it was an instrument relating to thebusiness of the firm and there was some intention to bind

the firm.


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LIABILITY OF PARTNERS Every partner is liable jointly with the other partners for all

debts and obligations of the firm incurred while he was apartner.

a) Part II of the Partnership Act 1961 - a partners liability isfor debts and obligation if the firm incurred while he is apartner.b) Section 12 of the Partnership Act 1961 partners liabilityfor torts. Section 14 - a partner is jointly and severally liablefor torts committed by co partner while both are membersof the firm.c) Section 13 (a) - a partner is liable for his co partnersmisapplication of money received by the co partner in thecourse of his apparent authority


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PURPOSE IS FOR PROFIT

Business is carried on in common with a viewof profits

Profits = net profits To be shared equally unless otherwise agreed. Voluntary organisations are NOT partnerships

as not formed for the purpose to gain profits.


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PURPOSE IS FOR PROFIT

Soh Hood Beng v Khoo Chye Neo (1897) 4 SSLR 115

A Chinese loan association does not fall under theambit of partnership as its purpose was to assist its

members to secure loans.Choi Siew Cheong V Lucky Height Development

Sdn Bhd [1995]

A joint venture for property development as therewas no business with a common view for profits.


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TYPES OF PARTNERS

General partner a partner in thefullest sense.

An active partner activelyparticipates in the management of the business and is known to the

world as a partner.

Dormant partner sometimescalled as the sleeping partner, thatis, a partner who takes no activepart in the management but isnevertheless liable as a partner

Quasi partner not a partner but who isliable for debts of the partnership as a

consequence of holding out, that iscausing people to believe he is a partner.

Salaried partner commonly found inprofessional firms, may receive a fixedremuneration irrespective of profits orfixed salary every month plus a smallpercentage of the profits. The firm is

fully responsible for his acts


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FORMATION OF PARTNERSHIP

Written agreement unwrittenFormality

Anyone of sound mind including minors (minus liabilities) William Jacks & Co V Chan & Yong Trading CoCapacity

Partnership agreement or articles of partnershipDocuments

S.28(1) no requirement for duration Any partner can dissolve at anytime by notice May extend duration without new agreement

Duration


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DISSOLUTION OF PARTNERSHIP

Termination by way of expiry of partnershipduration as per agreement or articles

By mutual agreement

BYAGREEMENT

By expiration S.34(1)(a) & (b) By notice S34(1)(c) By death/bankruptcy S.35 By charging of shares S.35(2) By illegality S.36 When numbers exceed 20

BY OPERATIONOF LAW

Insanity S.37(a) Permanent incapacity S.37(b) Prejudicial conduct S.37(c) Willful and persistent breach S.37(d) Loss S.37(e) Justice and equity S.37(f)

BY ORDER OFTHE COURT


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COMPANY Governed by the Companies Act 1965 A company is a corporate body of a corporation. A corporation is an artificial legal person. A separate and independent of the persons who are

members of that corporate body. S.16(5) of the Companies Act, 1965 - after fulfilling all the

requirements of the Act, the Companies Commission of Malaysia (CCM) issues a certificate of incorporation, a newlegal entity comes into existence.

The company, an artificial person, is born out of theprocess of law. This new entity is separate from itsmembers. Like a natural person it has its own name and canown property.


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COMPANY

CONCEPT OF LEGAL PERSONALITY

Separate legal personality from its members advantages - limited liability principle. But shareholders may still be liable for the companys debt. A corporate body with limited liability means the

shareholders of a company limited by shares are not liablefor more than what they have to contribute for the sharesthey get.

If the company is limited by guarantee, they are not liablefor more than amount they have agreed to contribute tothe assets on winding up.


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CONCEPT OF LEGAL PERSONALITY Salomon v A. Salomon & Co. Ltd. (1897) AC 22

Salomon was a boot and shoe manufacturer. He ran his business as a sole trader. In 1892 Salomonformed a limited liability company. He gave his wife and children one share each in the company. He

then sold his shoe and boot business to the company for f39, 000. In consideration for the business, thecompany paid him partly in cash, partly in 20, 000 shares, and partly in 10, 000 debentures issued by

the company. By being a debenture holder, Salomon becomes a secured creditor of the company.

Salomon continued to run the business as one-man company. The business did not do well and aftersome time became insolvent. What was left of the assets of the company were not enough to pay off the creditors. It was mostly used to pay off the debenture held by Salomon. The other creditors tried toclaim that Salomon had no right to the remaining assets as the sale of this business to the company wasa sham, and that his wife and children were merely his nominees, and that Salomon and the company

were in fact one and the same.

Held that the incorporation process made Salomon and his company two separate persons. Even if thebusiness were the same as before, and it was still managed by Salomon himself, the company was not

an agent or trustee for the members. Although Salomon beneficially owned all the issued shares of thecompany, the court also recognized him as a separate person who can be a secured creditor withenforceable rights against the company.


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ADVANTAGES OF INCORPORATION Creates a veil no direct proceedings against the

members but only against the company itself. reduces the need to monitor management and other

shareholders.

Limited liability together with free transfer of shares, willalso facilitate the market for control. An incentive for the management to perform efficiently. Would increase the volume of transactions that would

improve the information fed to the market place. Allows shareholders to diversity their shareholdings. Limited liability will result in a positive attitude to risk

taking and so would facilitate investment decisions.


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DISADVANTAGES OF INCORPORATION

Tunstall v Steigmann (1962) Landlord forced to allowa new tenancy by a company set up by the existingtenant.

Shareholders cannot pledge or insure companys

property Macaura v Northern Assurance (1925) Causes hardship to members who own substantial

shares of the company, who cannot claim for insurancetaken under his own name.

Creditors will suffer if the company incurs debts whichit is unable to pay, as the shareholders are not liablebeyond the amount they have contributed in full fortheir shares.


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EFFECTS OF INCORPORATION S.16(5) of the Companies Act, 1965:

On and from the date of incorporation specified in thecertificate of incorporation the subscribers to thememorandum together with such other persons as fromtime to time become members of the company shall be abody corporate by the name set out in the memorandum .

S.16(5) states the effect of incorporation are:shall be a body corporatecapable forthwith of exercising all the functions of an incorporated body and of suing and being sued and having perpetual succession anda common seal with power to hold land but with suchliability on the part of the members to contribute to theassets of the company in the event of its being wound up


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EFFECTS OF INCORPORATION

a body corporatecomes into existence

capable of exercisingall the functions of

an incorporatedcompany;

has the ability to sueand be sued;

enjoys perpetualsuccession;

has the power tohold property;

Able to contract withmembers; and

the liability of themembers depend on

the type of company


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A Body Corporate

A legal person that is created and given recognition by thelaw.

This legal person is actually a legal fiction. an artificial legal person unlike human individuals who are

known as natural persons. s.4(1 ) a corporation is any body corporate wherever

formed and includes any foreign company. A company is a type of corporation that is recognized by

the law as having powers and liabilities like an individual.


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Lee v Lees Air Farming (1961) AC 12

Lee formed Lees Air Farming Ltd. and held all the shares,except for one. The company was formed to undertake thebusiness of aerial crop spaying. Lee was employed as the

companys pilot. He was killed in an accident while carryingout his work. His wife claimed workmens compensation

under the New Zealand law, and she could only succeed if shecould show that Lee was in effect an employee.

The Privy Council held although Lee was the controller of thecompany, personally he was separate from the company. Hecould enter into a contract with the company, and could be an

employee.


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Can Sue and be Sued Has liabilities, others may sue against it. Members cannot take any legal action on behalf of the company. Only the company itself can enforce its rights. This is called the proper plaintiff rule and it was established in the case

of:

Foss v Harbottle (1843) 2 Hare 461

Two shareholders of a company brought action against directors of thecompany for misapplication and improper use of the companys property.

The court held that as the injury complained of was injury to the companyand not to the members. As such the members could not take action. Onlythe company had the right to sue.


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Perpetual Succession After incorporation, continues to exist until it is dissolved according to the law or it is

struck off the register. Even if the membership changes, or all the original members die, the company does not

come to an end. This continuous life of the company is said to be perpetual succession.

Re Noel Tedman Holdings Pty Ltd. (1967) QDR 561;

The company had a husband and a wife as its only shareholders. They were also thecompanys directors. They died in an accident, leaving behind an infant child. After theirdeath the company still existed. The problem that arose was, as the shareholders anddirectors had died, the shares could not be transferred as according to the will of thedeceased to the infant child.

The court thus allowed the personal representative of the deceased to appointdirectors of the company, so that these directors could allow the transfer of the sharesto the child.


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Power to Own Property

S. 19: a company has the power to hold land. Can own other types of property too. Property of a company is its own, and not that of its members. Even if a member holds almost all the shares of a company, he does

not have any proprietary interest in the companys property. Once a person has sold or given his property to the company he no

longer has any right over it.

The property belongs to the company, and the member no longer hasany right or interest.


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Macaura v Northern Assurance Co. Ltd. (1925)AC619

Macaura owned an estate and he sold all the timber one the estate tocompany called Irish Canadian Sawmills Ltd. All the shares in the

company were owned by him or his nominee. Macaura had insured

the timber that he sold to the company in his own name. After theinsurance was taken, a fire broke out destroying the timber. Theinsurance company refused to pay his claim.

The House of Lords agreed that Macaura had no right to claim,because when he sold the timber to the company, he had given up his

interest in it. The timber was the property of the company andMacaura no longer had insurable interest in it.


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Liability of the Members

A company is liable for its own debts and obligations. Members are not responsible for it. Members will make a contribution to the capital and he will be

given shares. If the company should suffer losses, the shareholder is not liable to

contribute any more to the company if he has fully paid for hisshares.

His actual loss would be the amount he has paid for the shares. Creditors of the company cannot be take any action against the

members, because the members are separate from the company.


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In the Application for Re Yee Yut Ee (1978)2 MLJ 142

Yee was the secretary of a company that was a wholly-ownedsubsidiary of an American corporation. The company had

retrenched their staff and dispute arose as to theretrenchment benefits. The matter was brought to theIndustrial Arbitration Court where an award was made in thecompanys absence. As the company did not comply with theaward, the Arbitration Court ordered that Yee be personally

liable as he had been appointed director by then.The High court held that a director is not liable for the

companys debts .


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COMMON SEAL The common seal is the companys

signature. Used in any of the companys dealings . Binding on the company

Requires approval of the board of directorsbefore usage.


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CONTROL AND MANAGEMENT

Vested in the boardof directors

Members have noright to interfere

unless appointed as amember of the board


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THE VEIL OF INCORPORATION

A fiction created by law separating thecompany as a legal personality from thepeople behind it.

GENERAL RULE: Courts would not lookbeyond the corporate veil to see who isbehind the company and why the companywas established.


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LIFTING THE VEIL

Exceptions to the general rule on the principle of veil of incorporation.

Under exceptional circumstances, the law willignore the separation between the company andits members or officers.

A.k.a. Lifting the veil. Members or officers will be made liable for the

companys obligations. Veil is lifted under situations provided by statute

and judicial precedents under the common law.


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LIFTING THE VEIL

s.36 When thenumbers is lessthan 2

s.304(1) whenthere isfraudulenttrading

s. 121(2) &s.121(1A)Failure to usethe Companysname

In the interestof public policy(Gilfor V Horne;Wellersteiner VMoir)


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TYPES OF COMPANIES

Companies in Malaysia are classified accordingto :

LIABILITY PUBLIC OR

PRIVATE STATUS


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TYPES OF COMPANIES

C o m p a n i e s c

l a s s i f i e d

a c c o r d i n g t o

l i a b i l i t y

.Company limited by

shares

company limited by

guarantee

company limited byshare and guarantee

unlimited company


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COMPANY LIMITED BY SHARES S.4 : a company formed on the principle of having the liability

of its members limited by the memorandum to the amount (if any) unpaid on the shares respectively held by them.

the most common form of company.

The liability of a member of this company will depend onwhether his shares are fully paid or not. If fully paid shares, he has no further liability to the company. If company insolvent he cannot be made to contribute to the

assets of the company. if his shares are partly paid, he will be liable to contribute to

the companys assets, up to the amount still unpaid on hisshares.


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COMPANY LIMITED BY GUARANTEE

S.4 : a company in the principle of having the liability of itsmembers limited by the memorandum to such amount as themembers may respectively undertake to contribute to the assets of the company in the event of its being wound up.

company does not have a share capital

specified in the memorandum of association. If the company is wound up, then a person who has been its

member may be required to contribute up to his amount of guarantee towards payment of debts incurred by the companywhile he was a member.

This liability extends to those who has left the company but was amember within a year before the company wound up.

Not normally used for trading. Often formed to run clubs and other organizations that is

maintained by subscription, social activities and donations.


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CLASSIFICATION ACCORDING TOSTATUS

C L A S S I F I C A T I O N A S P R I V A T E

O R P U B L I C C O M P A N I E S

Private Company

Public Company


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S.15(1): restricts right to transfer shares limit number of members to no more than 50 prohibits invitation or offer of shares or

debentures to public

prohibits invitation or offer public to depositmoney with company


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S.15(1): a company is classified as a privatecompany if its memorandum or articles: restricts the right to transfer shares. Limits the number of members to not more than

50. Employees of the company or its subsidiarieswho are not members are not counted.

Prohibits any invitation or offer to the public tosubscribe for shares in or debentures of thecompany.

Prohibits any invitation to the public to depositmoney with the company.


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A private company may have a share capital withlimited or unlimited liability.

Enjoy certain privileges that are not given to

public companies. A private company may be distinguished from a

public company in having the word Sendirian or

the abbreviation Sdn . as part of its name. If the company is a limited liability company then

this word should come before the word Bhd.


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DOCUMENTS OF COMPANIES

PRE-INCORPORATION DOCUMENTS Name of the company has to be approved Must submit to the CCM the pre-incorporation documents together

with the required fees:

(i) The memorandum and articles of association(ii) A statutory declaration by persons before appointment asdirector, or by a promoter(iii) A declaration by the person who has agreed to be the companysecretary(iv) approval letter for the use of the name

Application for the registration of the company must be madewithin the three months of the approval for the reservation of thename of the company.


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DOCUMENTS OF COMPANIES Memorandum of Association: essential

components of the structure and formation of the Company, alterable only according to S.21

Articles of Association: regulations for themanagement of the company alterable onaccording to S.31

Certificate of Incorporation (a.k.a birth

certificate) to the company issued. Once a company has been registered, it is

recognized as a separate legal entity.


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DISSOLUTION

Dissolution

Striking off S.308

Scheme of arrangement S.178

Voluntaryliquidation

Compulsoryliquidation

CO A A A A S S A


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COMPARATIVE ANALYSIS BETWEEN ACOMPANY AND A PARTNERSHIP

NATURE COMPANY PARTNERSHIP

STRUCTURE Company separate frommembers

2/> persons carrying onbusiness with a view of

profit

REGISTRATION ROC ROBA

TRANSFERABILITY Yes Subject to consent of allpartners

MANAGEMENT Can be non members Partners manage

NUMBER OF MEMBERS No maximum but 50 forSdn Bhd

Maximum 20 but no limitfor professional

partnerships

CONSTITUTION M & A Agreement

COMPARATIVE ANALYSIS BETWEEN A


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COMPARATIVE ANALYSIS BETWEEN ACOMPANY AND A PARTNERSHIP

NATURE COMPANY PARTNERSHIP

CAPITAL & LIABILITY Once capitalised, non-refundable. If not

capitalised, liable to pay forunpaid shares

May withdraw capital butretains unlimited

liability/debts

SECURITY OVER DEBTS Only for current assets videfloating charge

No floating charges, onlymortgage

RULES, PROCEDURE &INFORMATION TO PUBLIC

Yes No

DISSOLUTION Vide formal procedures

e.g. winding up orliquidation

Informal and at any time