Tutorial 1 Different Forms of Business Organisations, Types of Companies

Sole proprietorship, Partnership

Advantages and Disadvantages

Classification of companies public/privates, limited/unlimited liability

Question 1
Refer to the Companies Act, and answer the following questions:
a) Who is the minister currently in charged with the responsibility for companies in
Malaysia?
The Minister of Domestic Trade, Co-operatives and Consumerism

b) Based on s 4(1), explain whether the term Company has the same meaning as
Corporation.
Company a co incorporated pursuant to this Act or pursuant to any corresponding previous
enactment ie a co incorporated in Malaysia. Ie local company.

Corporation covers local and foreign companies

c) Refer to s21(1) and s 25 and explain whether a limited company can be converted into
an unlimited company and vice versa.
Unltd to ltd benefit members but not to creditors.
S 21(1) CA Memorandum of co may be altered to the extent and in the manner
provided by this Act but not otherwise.
Can convert fr unltd to ltd s25 though special resolution but not ltd to unltd (no
section).

d) Discuss the implication of introducing Limited liability Partnership and how it affects the
existing partnership and private company structure.
No limit on nos of partnership.
6 mths to increase no to at least 2 if no falls below 2 with possibility for extension of
time to registrar.
Liabilities are solely borne out of the partnership assets, partners not liable.
Keep proper accounting records for at least 7 years but need not be audited or lodged
with the Registrar of LLP.instead to file an annual statement of solvency status with
registrar.
Cos upside over LLP

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 partners of LLP who commits a tortious wrong will still be personally liable to
the victim for his wrongful act or omission committed in the course of the LLPs
business. However a shareholder of a director of a limited co who commits a
tortious wrong whilst acting as the cos agent will not be personally liable
unless the veil of incorporation is lifted.
Creditors of the business may still require audited financial statements of the
business vehicle before extending credit to the business.

Question 2
Advise Leena who wishes to reorganize her business. Leena currently operates as a sole trader,
making and then selling children's clothing from premises on the local high street (which she
rents). She wishes to expand her business to make clothes for department stores and this will
probably require her to move to new premises and hire staff to assist her. Explain the options
available to Leena to reorganize her business, and outline the legal consequences of this.

Answer
Leena is currently operating as a sole trader which is the simplest business
organisation due to the ease of establishing and dissolving the business.
Public limited companies and limited liability partnerships are not being discussed
(they probably wouldn't be suitable for Leena's business) but should be
acknowledged.
A sole trader carries on his/her business as an individual; he/she personally owns the
property and assets; he/she may perform the work themselves unless he/she
employs others or sub-contracts work; and he/she has unlimited liability for any acts
or omissions. As such, whilst Leena has complete control over her business, she has
substantial risks if she continues to operate as a sole trader but expands the business
(and the business fails). The key element here is Leena's unlimited liability.
Leena could form a simple partnership with someone else who has money to invest
(buy into the partnership) or who may offer skills/customers etc. that would make
the expansion of the business (potentially) more secure. The issues of joint and
several liability, good faith, and the right for management of the business should be
raised as possible areas for concern. Also, Leena and her partner(s) would share any
losses, but they would also share profits and the issue of unlimited liability remains.
Leena could establish a limited company. Issues of separate legal personality (Salomon v
Salomon) should be raised and the main advantage of limited liability of the shareholders
should be specifically explained. This may be a key advantage when Leena is attempting to
expand her business. Further, benefits such as perpetual succession of the company and the
(apparent) ease of obtaining credit (when compared to sole traders) should be discussed.
A disadvantage to be explained is the increased external regulation that limited
companies must comply with (compared with sole traders). This will add additional
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 administrative burdens and require disclosure of information that the other, simpler,
forms of business organization do not have to contend with.

Question 3
The directors of Cenow Sdn Bhd have plans to expand the companys activities by
setting up subsidiaries.
Based on s 5 & s6 of Companies Act, state:
i) when is a corporation deemed to be subsidiary of another company. A company which is a
wholly owned subsidiary of another company is exempted from certain requirements in the
Companies Act 1965. State three (3) of these requirements.

i) Section 5 states that a corporation (A) is deemed to be a subsidiary of another corporation

(B) if corporation (B)
- controls the composition of the board of directors of the first mentioned corporation (A) or
- controls more than half of the voting power of the first mentioned corporation (A) or
- holds more than of the issue share capital of the first mentioned corporation (A) (excluding
any part thereof which consists of preference shares) or the first mentioned corporation (A)
is a subsidiary of any corporation which is that other corporations (Bs) subsidiary.

A wholly owned subsidiary:

need not prepare consolidated accounts
need not maintain a register of directors interest in shares of the company or related
corporations in respect of those directors of the company who are also directors of the
holding company.
it can have 1 member

ii) when is a corporation deemed to be related to another.

ii) Section 6 states a corporation is deemed to be related to another corporation
where
- it is the holding company of that other corporation
- it is subsidiary of that other corporation or
- it is a subsidiary of the holding company of that other corporation

iii) when is a corporation deemed to be the wholly owned subsidiary of another.

iii) Section 5B states that a corporation (A) is deemed to be the wholly owned subsidiary of
another corporation (B) if none of the members of the first mentioned corporation (A) is a
person other that:
- the second-mentioned corporation (B);
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- a nominee of the second-mentioned corporation (B);
- a subsidiary of the second-mentioned corporation (B), being a subsidiary none of the
members of which is a person other than the second-mentioned corporation B or a nominee
of the second mentioned corporation (B) or
- a nominee of such a subsidiary

c) What is an exempt private company?

(d) It is a private company, the shares of which no beneficial interest is held directly
or indirectly by any corporation and which has not more than twenty members
none of whom is a corporation. It is normally a family owned company and is
exempted from complying with certain requirements of the Companies Act 1965.

Subset of private co. exempt pvt co.

Why only pvt co ltd by shares can be an exempt pvt co?
Popular with entrepreneurs because of the benefits of
Hybrid between pnerhsip and a ltd co.
Not prohibited fr lending money or giving financial assistance to its directors &
connected persons under s133/s133A.
no need to file audited profit and loss accounts and balance sheet in its annual return
if sarisfy 2 conditions:
Co sec/auditor certify co is
Exempt co
Solvent
Tabled audited profit and loss account and b/s in cos AGM
S 165 says auditors shld also certify whether the exempt co
Accounting records are properly kept
Accounts properly audited
Accounts subject to qualification.

Question 4

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Darren sets up a company after graduation to provide consultancy on setting up business. By
way of encouragement, his mother fixes him up with 2 of her friends who want advice on the
following:

1) Uncle Sam who has been very successful in his palm oil business and is planning to expand
his business to Cambodia and Vietnam, wants to know how to convert his private company
into a public company.

2) Uncle John is a major shareholder of Jamz Bhd, a company dealing with high end nyatoh
wood furniture for export market for the last 2 decades. Recently he faced a major setback
when the companys application for listing on the Bursas ACE Market failed. Being
completely discouraged and also going through mid-life crisis, he is now contemplating
making a complete opposite move by converting the company into a private company. He
seeks your advice on the procedure involved and the any differences/limitations imposed
by the Companies Act which must be reflected in the articles of association when it
becomes a private company.

Ans
1) S 26(2) conversion from private to public:
A special resolution must be passed, the name altered to indicate that it is a
public company.
A prospectus or a statement in lieu of prospectus, or
A statutory declaration verifying that s 52(2) has been complied with
An application be made to the registrar lodging all the documents as
mentioned above.
The conversion of a co does not affect the identity of the co, nor any of its rights and
obligations s 26(4).

2) S 26(1) conversion of a public co to a private co:

A special resolution must be passed
The memorandum and the articles be altered in order to include the
restrictions in s 15(1). The name be altered too to include the word Sendirian
or its abbreviation Sdn
An application be made to the registrar together with a copy of the special
resolution and the altered memo & articles of association.
3) S 15 lays down the four conditions :
Restriction in the right to transfer shares
Limits to no more than 50 members
Prohibits any invitation to the public to subscribe for any of its shares
Prohibits any invitation to the public to deposit money with the company
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Question 5

a) What are the requirements as to the registration and incorporation of a company

See s16(1), (2), (3)(a) for the registration and incorporation of a co.

b) State and explain the benefits of incorporating a company

State the effects of Registration i.e. incorporation as provided Section 16(5) with relevant
cases;
i. is capable forthwith of performing all the functions of an incorporated company;
ii. is capable of suing and being sued on its own name;
iii. has perpetual succession and shall have a common seal; and
iv. has power to acquire, hold and dispose of property.
Cases ; Salomon v Salomon &Co Ltd (1897) AC 22
Tan Lai v Mohamed Bin Mahmud (1982) 1 MLJ

(c) What are the consequences of treating the company as a separate legal entity? (10 marks)

This question on company law tests the candidates knowledge and understanding
on the principle of separate legal personality. The law treats a company as being a
separate person from its members and those who manage its operation. This was
affirmed in the leading case of Salomon v Salomon (1897) where the House of Lords
held that, a company incorporated under the Companies Act is an independent legal
entity separate and distinct from its members. In that case, despite the fact that Mr
Salomon controlled the company, it was not his agent or trustee. The company was
treated as operating the business in its own right, and as separate from its controller,
Mr Salomon. The fact that a company is a separate entity form its controllers was
emphasised in Perman Sdn Bhd & Ors v European Commodities Sdn Bhd & Anor[2005]
where it was held that a company is a separate person from the shareholders. The
shareholders have no interest, legal or beneficial over the property of the company. The
effect of incorporation is set out in section 16(5) of the Companies Act 1965 and from the
date of incorporation, the company becomes a body corporate which is capable of
exercising all the functions of an incorporated company, it can sue and be sued, has
perpetual succession and a common seal and has power to hold land.
Liability on the part of the members may be limited.

The consequences of treating the company as separate legal entity are as follows:
(i) Liability of members to contribute in the event of winding up is limited by the
Companies Act. In the case of a company limited by guarantee, the liability is limited to
the amount nominated in the memorandum and article of association (see sections 18(1)
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 (e) and 214(1)(e), Companies Act). In the case of a company limited by share, the liability
is limited to the amount of any unpaid shares held by the member (sections 18(3) and
214(1)(d), Companies Act).

(ii) Where a company incurs a contractual obligation or a liability in tort, that obligation or
liability is the companys and not an obligation or liability of its members or officers.
Hence, the debts of a company are not the debts of its shareholders. See Fairview Schools
Bhd v Indrani Rajaratnam & Ors [1998].

(iii) A company can sue and be sued in its own name. Since a company is a separate legal
entity, it follows that it is liable for its own debts and may sue or be sued in its own name.
See Re Application by Yee Yut Ee [1978].

(iv) A company has perpetual succession. The company is a continuing entity in law with
its own identity regardless of changes in its membership. See Abdul Aziz bin Atan v
LaLinag Rengo Malay Estate Sdn Bhd [1985].

(v) A companys property is not the property of its participants. A company may own
property distinct from the property of its members. See Macaura v Northern Assurance
Co Ltd (1925)

(vi) A company can contract with its controlling participants. Because they are separate
legal entities, a company and its participants can enter into contracts with each other. See
Lee v Lees Air Farming Ltd (1961).

(vii) A company has the power to hold land. However, the right to hold land is subject to
certain restrictions as stated under section 199(2) of the Companies Act.
(10 marks)

d) With the concept of limited liability, members liability in the event a company is wound up is
to the extent of the amount unpaid on the shares. What then is the precaution to take if you are
a member of the public against the limited company to ensure that you are able to recover the
outstanding sum in the event the company is unable to settle the debt.

Require the cos directors/shareholders or both to guarantee the performance of the cos
obligations to him eg repayment of the cos debt. In the event of default by the co,
creditors may demand payment fr the gurantor pursuant to the guarantee given by the
guarantors. The rights of the creditors against the guarantors are found in the guarantee,
not pursuant to the relationship[ btw guarantors and the co.