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ONLINE TUTORIALICSA INTERNATIONALQUALIFYING SCHEME (IQS)

Ms Ivy FernandezCORPORATELAWPresented by@ MAICSA. All Rights Reserved

Learning OutcomeTo understand the nature and effect of registration of companiesTo understand the principle of separate legal entity and limited liability companyTo understand the exceptions to the separate legal entity principle under the Companies Act 1965 and the common lawTo understand the differences between company and partnerships

Companies Act 1965The law relating to companies is governed by the Companies Act 1965

Extensive changes were made through the Companies (Amendment) Act 2007 especially in relation to the duties of directors, officers and auditors of companies

The governing body of companies is the Companies Commission of Malaysia

Formation / Incorporation of a Company Sec 14(1) of the Companies Act 1965 any two or more persons may, by subscribing their names to a memorandum and complying with the requirements as to registration, form an incorporated company.

The word person includes a body corporate

Effect of Registration or Incorporation under S 16(5)

The company is a body corporate capable of exercising all functions of an incorporated companyIt may sue external parties in its own name and also be sued in its own nameIt has perpetual succession means the company exist regardless of any change in the composition of its membership

Effect of Registration or Incorporation under S 16(5)

Transferability of shares subject to the provisions of the companys Articles of AssociationCompany has borrowing powers and also has the right to create security or charges or mortgagesIn respect of private companies - Minimum 2 members- Maximum 50 membersFor public companies, there is no limit in respect of the number of shareholders

Effect of registration or incorporation

The Management of company will be in the hands of directorsMemorandum and Articles of Association are the written constitutionLegal procedures are required to incorporate and to dissolve the company

Effect of registration or incorporation

Public companies are required to the file their accounts with the Registrar for public inspectionThere is also a requirement on companies to have regular meetings and to table their accounts during these meetingsCompany is not liable for the acts of its members / shareholdersOwnership is in the hands of shareholders

Effect of registration or incorporationCompany as an entity may enter into contracts with outside parties

A company may own land and also other types of property

The property of a company is its own, not that of members. A member does not have any legal or equitable interest in it

The principle of limited liability

In respect of a limited liability company - the liability of its members are limited e.g. limited to the amount, if any, unpaid on their shares - Sec 18(3) CA

This is provided in a statement in the memorandum of a company limited by shares

Company is an Artificial legal person Salomon v Salomon

Separate legal entity means members are separate from the company

Salomon v Salomon It was held that once a company is incorporated, the company and its members are separate persons this is known as the veil of incorporation

Company is an Artificial legal person Salomon v Salomon

The companys liabilities are its own, not those of its members.

The members of a company are not responsible for the debts of the company.

Company is an Artificial legal personSalomon v Salomon (1985)

Mr Salomon and his children held shares in the company, Salomon & Co and Mr Salomon in addition granted a loan to the company and held a debenture ( charge) over the company. This made Mr Salomon a secured creditor of the company.

As the company went into financial difficulties, the company went into liquidation and was unable to pay off the unsecured creditors.

Salomon v Salomon (1985)

Company is an Artificial legal person

The liquidator sued Mr Salomon (as a shareholder of the company) and the Court of Appeal held he was liable to indemnify the company.

BUT, the House of Lords held that-

The company was not an agent or trustee of the individual members and members were not liable in respect of the companys debts

Salomon v SalomonMr Salomon and his company were 2 separate persons with the result that :

(a) the business and debts were those of the company, not of Mr Salomon personally; and (b) although Mr Salomon owned beneficially all the issued shares of the company, he could also be a secured creditor with enforceable rights against the company

Salomon v SalomonMr Salomon was not liable for the companys obligations and as a secured creditor; he had priority over the unsecured creditors.

Lifting the veil of incorporation The Exceptions

There are certain instances where the court will ignore the separate legal personality of a company and look to the members of the company.

This is known as the lifting the veil of incorporation to make the members personally responsible for the debts of the company

Exceptions to the veil of incorporation Companies Act Sec 36 of the CA provides that where the number of members of company is reduced below two (other than a wholly owned subsidiary) and the company carries on business for more than 6 months while the number is so reduced

The remaining member will be liable to pay for all the debts of the company contracted after those 6 months

Lifting the corporate veil the Act Consolidated Accounts Sec 169(5) of Companies Act

Where companies are in the relationship of holding and subsidiary, the Act generally puts aside the independent legal entity concept by requiring by the holding company to present the financial state of affairs of all its subsidiary companies

Lifting the corporate veil the Act Fraudulent Trading

Sec 304 CA where the business of the company has been carried on with intent to defraud creditors of the company or for any fraudulent purpose.

The court may declare that any person who was knowingly a party to the carrying on of the business in that manner will be personally responsible for the debts or liabilities of the company, without any limitation of liability.

Lifting the corporate veil the Act Common LawIn Aspatra Sdn Bhd & 21 Others v Bank Bumiputra Malaysia Bhd (1988)

The court in this case lifted the corporate veil where it found that there was an element of fraud involved

Lorrain Osman was at all times a director of the BBMB and chairman of the board of directors of Aspatra

Aspatra Sdn Bhd & 21 Others v BBMB 1988)

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