BBUS2103|SEPT09

Table of Contents.
REMARK.Page
ISSUE .1 QUESTION (a)2-5 (b)6-7 (c)8-9 (d)10-11 (e)...12-13

REFERENCE.14

APPENDIXCES.................15-43 Memorandum and Article of Association (private limited)..15-23 Article of Association (public limited by share)....24-33 Article of Association (public limited by guarantee).34-38 Form 48 & 48A..39-40 Form 49...41 ROC Circular..42 Debentures Form 35 & 36...43

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ISSUE. Zimam is a successful sole trader of a poultry business where his business reaps huge profits. For sometime, he has been interested in expanding his business and decides to incorporate it into a private limited company, Golden Poultry Sdn. Bhd. (GP Sdn. Bhd.). The company purchases Zimams business for the sum of RM50,000 which Zimam received by means of shares and debentures.

Zimam appointed Chan as the manager. Since the manager has little business experience in the poultry business, he was given training in poultry business by Zimam. In Chans letter of appointment there is a restrictive covenant, which states that in the event that he leaves GP for another company, he should not reveal any trade secrets or solicit their customers for another company.

The business was prosper during the first year. Unfortunately, in the second year, GP business collapsed due to bird flu disease. The poultry animals in the farms of this company were infected with bird flu virus which has caused the farm to be closed down and the animals were culled. Zimam sought to recoup his losses by claiming insurance compensation.

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BBUS2103|SEPT09 In anticipation that the company (GP Sdn. Bhd.) may be winding up soon, Chan left and formed a new company and solicits GPs. customers.

a) A company may be incorporated as limited or unlimited company. With reference to the Company Act 1965, discuss the meaning of limited and unlimited company and the various types of limited companies according to the Companies Act 1965.

Limited Company and Unlimited Company

Company is a corporation, an artificial legal person created by law; any person (natural person) who wishes to embark on any business must register under Registrar of Business Act 1956 or the Company Act 1965. Memorandum and article and other document of the company shall be lodge to the registrar (s16(1) CA1965). Company is a form of corporation which is a legal entity, it may be incorporated as a limited company (s14 (2) (a) (b) (c) CA 1965) or unlimited company(s14 (2)(d) CA 1965) ,as registration of the memorandum and articles of the company, registrar shall certify and issue a certificate of incorporation that states the company incorporation status as s16(4)(a)(b)(c)(d) of CA. These two types of incorporation are distinguished by its limitation of liability between members in the company and the company itself towards the debts and other legal aspect of liabilities upon winding up or during the business period (s4(1) CA 1965).

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BBUS2103|SEPT09 According to Company Act 1965 (s4 (1) CA 1965), Limited Company is regarded as a distinct legal entity, thus it has unlimited liability to pay all the debs and the liability of members are limited toward the company debs and liabilities. The members of the company are not liable for the company debs and liabilities (s18 (1) (d) (e). Limited company could be limited by share, limited by guarantee and limited by share and guarantee (s14 (2) (a)(b)(c) CA 1965).

Referred to the s14 (2) (d) of CA 1965, Unlimited company could be incorporated subject to a lawful purpose and s4 (1) of CA states that Unlimited Company is formed on the principle of having unlimited place of liabilities of its members (directors/ shareholders). Directors and share holders are liable to all the companys debs and liabilities s18 (1) (f). Private assets of directors and shareholders could be used to satisfy company debs and liabilities.

Various types of Limited Companies

Company Act 1965 subsection 4(1) state that company could be incorporated as private company or public company limited or unlimited. Pursuant to s4(1) of CA 1965 Private company is a company that is registered as or public company having share capital that converted into private company according to subsection 26(1). Names of Private company shall have the words Sendirian Berhad (abbreviation Sdn.Bhd) after the name of the company (s22 (4)) unless it with the consent of the Minister it shall not be register (s22 (1)) and to published in the gazette (22(2)). Private company with share capital may be incorporated if its memorandum or articles (s15(1)) (see appendix pg 15 for MAA sample);

Restrict the right to transfer share. Limits not more than 50 shareholders.

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BBUS2103|SEPT09 Prohibits the publics to subscribe for any share or debenture Not allowed to undertake certain fund raising activities that requires the issue of prospectus A private company is exempted if it has less than 20 members and none of whom is a corporation s4 (1), exempt private companies can keep their financial information private. A private limited company could be limited by;

Limited by share (s14 (2)(a) of CA), where the liabilities of the member is limited by the memorandum of association, to the amount , if any, unpaid on the share held by them (s4(1) & s18(1)). A Company limited by share usually has their shareholders as their members.

Limited by guarantee (s14(2)(b)),liability of its members limited by memorandum to such amount as the members may agreed to contribute their assets of the company in the event of wound up (s4(1)). A company limited by guarantee does not have its shareholder as a member

Limited both by share and guarantee (s14(2)(c)), company limited by guarantee and share has been prohibited to be incorporation this section, came into forced on 1st February 1986, s14A C 1967 states that no private company are may be formed as a company limited by guarantee with share capital.

A Public Limited company is a company that does not have the restriction in s15 of CA 1965. Public limited company must have word Berhad after the company name ( s 22(3) of CA ) and may be omission the word Berhad by only with Minister consent for a special purpose operation (s24 of CA1965). In Malaysia Public limited company could be listed or unlisted on the Bursa Saham Malaysia. Public limited company could be limited by share or limited by guarantee.

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Public company limited by share (s14 (2)(a) of CA), where the liabilities of the member is limited by the memorandum of association, to the amount , if any, unpaid on the share held by them (s4(1) & s18(1)). A Company limited by share usually has their shareholders as their members. (see appendix pg24 AA limited by share sample).

Public Company Limited by guarantee (s14(2)(b)),having liability of its members limited by memorandum to such amount as the members may agreed to contribute their assets of the company in the event of wound up (s18(1)(e)). Public Company limited guarantee, usually operate as charity, Institute of Education, Institute of Research,

Industry/Commercial/Trade,Social,Sports, Art, Recreation, Religious, Club, Environment, Health colleges, charity organization, clubs, and non government organisation (NGOs).Public company that limited by guarantee are allowed to be incorporated under Company Act 1965 for lawful purpose and only to be incorporated as public company (see appendix.pg33 AA limited by guarantee sample). Public company that limited by guarantee is prohibits in England.

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b) GP Sdn Bhd wanted to appoint directors for the company. Advise the company on the appointment and qualifications of a director. Is there any possibility of removing the director from the company?

Appointment of Director

GP Sdn Bhd was incorporated as a private limited company, GP Sdn Bhd must have minimum numbers of two directors (S122 (1) CA1965). The appointment of the first director must be named in the memorandum or article of the company (s122 (3) CA1965) and the appointed directors must be in full age and he or she must be a natural person (s122 (2) CA1965). Directors that are going to be appointed shall before make a lodge with the registrar and the official Receiver a statutory declaration in a form describe by regulation and not contravene with the s125 of CA1925 ( undischarged of bankruptcy) and also s130 of CA1965(prohibits certain person from managing companies as he or she convicted within Malaysia or outside Malaysia). Forms 48 & 48A must be lodge to the registrar in order to appoint a director s141 (6) CA1965. (See appendix.pg39,form 48 & 48A). A subsequence appointment could be made after the first Fikri Ishak Page 7

BBUS2103|SEPT09 appointment of directors and must follow the Company Act 1965 by passing an ordinary resolution (simple majority vote) and register of directors shall be made. Register of director should pursuant to s141 (2) CA1965. Referred to the Malaysia Registrar of Company circular dated 19th July 2002 and come into forced on 1st August 2002 state that an appointment of director should submit the form 49 (form sample see appendix pg41) and also a copy of resolution regarding appointment of director by the company and it must be sign by at least one of the company director and company secretary to the registrar one month from the appointment date s141 (6) CA1965.

Qualification of Appointee Director.

In order to appoint a director, appointee must fulfill the director qualification in order to make the appointment valid. The appointee directors must be;

A natural person and full age at the appointment date .(s122(2) CA1965), Not over than seventy years old on the appointment date only for public company (s129(1),but it may be reappoint by a resolution passed by majority of not less than three-fourths votes (s129(6)).

Not a directors of insolvent companies (s130A CA1965) Not undischarged bankrupt( s 125 CA1965) Not a convicted within Malaysia or without Malaysia(s130 CA1965) Hold a minimum number of qualified share.(s123(1)(c) CA1965).

Removal of Director.

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BBUS2103|SEPT09 A company can remove their director before the expiration of the term of the office by using article of association s29 (5) CA1965 lodge a form 49 (see appendix pg41,form sample) with a copy of board of directors resolution and to be signed by one of the director to the registrar one month from the removal date for removal of directors and company secretary.(circular from SSM, 1st august 2002). Accordance to table A 69 of CA1965 and section 128 states that a company can remove any directors before the expiration date of his office by an ordinary resolution. Case Tuan Hj Ishak Ismail & ORS v Leong Hup Holdings & other appeal shows that director may be removes before the expiration of his or her period in office, by passing an ordinary resolution and opposed by simple majority. The removal of directors is still allowed to do so even it is contrary with the article or agreement between the director and the company (s128 CA1965). c) Discuss whether Zimam or GP Sdn. Bhd. could be liable for the companys debt under the separate legal personality principle.

Mr. Zimam has incorporated his poultry business from sole proprietor into a private limited company. Private limited company is a legal entity ( s 4(1) CA 1965 ). Private limited company is liable for all the debts and liabilities are unlimited. Thus, under separation legal personality, any of its members, shareholders or directors are not liable for the companys debts and liabilities. Company is liable for their own debts as stated in section 18(1)(d)(e) CA1965. The effect of corporate veil (s16(5) CA1965) between the corporate entity and the membership and management of the company is to separate its existence, a company is liable for its own debts, liabilities, property, has a contractual capacity, crimes, perpetual succession, capable of suing and to be sued and perform borrowing.

The principle of separate legal entity is established by the decision of the House of Lords in Solomon v Solomon & Co (1897). The House of Lords states that a company that Fikri Ishak Page 9

BBUS2103|SEPT09 incorporates accordance to company act is an absolute company and it has a separate legal entity.

In Mr. Zimam and Golden Poultry Sdn Bhd case the company was incorporated as a Private Limited Company under Company act 1965 and Mr.Zimam was associate for a lawful purposed and appointed Chan as a member that made a substantial contribution to the company, it is proven by appointment and training given to Chan by Mr Zimam. Accordance to company incorporation, Golden Poultry Sdn Bhd is a valid company that has separate legal personality principle. Thus, Mr. Zimam is not liable for any debts that the company owed or any of company liabilities since separate legal personality principle is applied. Golden Poultry Sdn Bhd is Private limited company and having share capital, s4 (1) & s18 (1) d) state that a company limited by share is formed on principle of having the liability of its member limited. Thus, the effect of Golden poultry Sdn. Bhd. incorporation makes the company liable for all the liabilities and debts incurred by the company and also others companys liabilities s16 (5) CA1965. Golden Poultry Sdn Bhd( private limited company) is the only entity that liable for its own debts and liabilities.

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d) If Zimam is the only secured creditor, will he be able to recover the debt owing to him as a debentures holder if the company winds up?

Golden poultry Sdn Bhd was incorporated as a private limited company under Company Act 1965 (s14 (1) CA1965). Since the company was incorporated, the effect of corporate veil principle is applied, the company is a legal entity that are able to own a property, borrowing, perpetual succession, to sue and to be sued and also the company is responsible to all the debt and liabilities is unlimited (s16 (5) CA1965), the corporate veil separates the liabilities of the company towards its members (s18(1)(d)(e) CA1965 ).

According to the case, Golden Poultry Sdn Bhd is a new company and has no capital to start on poultry business. The company purchased Mr. Zimams business for the sum of RM50, 000.00 which Mr. Zimam received by means of shares and debenture to raised company initial capital. A debentures issued by Golden Poultry Sdn Bhd to Mr Ziman is in a form of secured loan capital. Under section 4(1) of CA1965 Debentures includes debentures stock, bonds, notes and any other securities of a corporation whether constituting a charge on the asset of the Fikri Ishak Page 11

BBUS2103|SEPT09 corporation or not. Thus, debentures (secured loan) have a special right given by the company over its property to the creditor. Debenture is a secured liability to company, it has a fixed particular interest rate over a period of time. The charge of the property is in a form of company property or capital. The debentures is a form of document (certificate) that state the company acknowledged that it has borrowed money over a period of time (s 38(1) of CA1965). Pursuant to the s108 of CA1965 a company should make a lodge with the registrar for registration of the debentures holder personnel details, total amount secured, date, general property charged and the name of trustee, thirty days after creation of the charge (s108(5) of CA1965)( see appendix
pg43 for sample form of debentures)

. Mr. Zimam is the secured creditor based on the company incorporation and also debentures issued by the company is complied with the Company Act1965. In the case of company winds up or liquidation Mr.Zimam has a priority over his debenture for the repayment of the debt. Referred to the landmark case Solomon v Solomon & Co it has a similarity where Mr. Solomon was a sole proprietor, incorporated his leather business into limited company. Mr. Solomon received GBP 10,000.00 as a debenture and later transfers the debentures to Mr. Broderip for a loan of GBP 5,000.00. After sometimes the company went to liquidation and Mr. Broderip appointed a receiver for the debts. House of Lord decides that the company is liable for the debt and not Mr. Solomon. From the decision made by House of Lords in Solomon v Solomon & Co case, it can be derived that Golden Poultry Sdn Bhd have a common ground that the company must be liable to the debt owed to Mr. Ziamam, as he is the absolute secured creditor. The separation of personality s18 (1) (d) (e) is applied. Mr zimam has an absolute right to recover the debt owing to him plus the debentures interest if the company winds up.

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e) Discuss whether Zimam will be successful in his insurance claim for GPs losses. Would your answer be different if the property was insured under Zimams name?

Golden Poultry Sdn Bhd was incorporated as a private limited company under Company Act 1965. As a result of the incorporation the company has an effect of corporate veil which enables the company to liable to its own debts, liable to its liabilities, has power to acquire, hold and dispose of property, contractual capacity, perpetual succession, borrowing and capability to suing and to be sued. This corporate veil is stated in section 16(5) of the company Act 1965. The incorporation of the company also separate legal personality, which separate the company liabilities and debts from its members (s18 (1) (d) CA 1965).

As the effect of corporate veil, a company owns its own property and the shareholders have no direct right and cannot insure the company against theft or damage. In Golden Poultry Sdn Bhd case it, does not state that the property was insured under which party whether Mr. Zimam or the company (GP Sdn Bhd).

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BBUS2103|SEPT09 According to the Mr. Zimam case he wills not success in his insurance claim for the Golden Poultry Sdn Bhd loss whether the insurance is insured under company name or his name. Mr. Zimam has no personal right to claim the insurance agency for insurance compensation even property that was insured under the company names and the property is belonging to the company. Only persons with a legal or equitable interest in property are regarded as having interest in it, this also applies to the second scenario where the company property was insured under Mr. Zimam names. From the case MACAURA v NORTHERN ASSURANCE CO LTD (1925) AC 619 clearly shows that that Mr. Macaura had insured the property under his name but the property is belonging to the company, he was unable to claim for the insurance since only persons with a legal or equitable interest in property are regarded as having interest in it. House of Lords decided that the insurers were not liable. Only Macauras company, as owner which had the requisite insurable interest in it and only the company could insure its property against loss or damage. Shareholders have no legal or equitable interest in their companys property. From Macaura v Northern Assurance Co Ltd (1925) it can be conclude that Mr. zimam is not a legal person in claiming the insurance compensation for the loss incurred to the business, thus Mr. Zimam will not success in claiming the insurance compensation for the loss incurred, only the Golden Poultry Sdn Bhd has the requisite interest insurable interest in it. Mr. Zimam wills not success in claiming the insurance compensation as the property was belongs to the golden Poultry Sdn Bhd.

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REFFERENCE . Lam.gov.my(2005).Private Limited Company MAA[online]. http://lam.gov.my/MAA(LAM & BEM)web.pdf[27-10-2009]

Latha Chitra Ramalingam(2009). BBUS2103 Company Law (2nd edition). Malaysia.OPEN UNIVERSITY MALAYSIA

Malalysia Legal Research Board.International Law Book Service(2009). Companies act 1965 (ACT 125):Regulation,Rules and Order.Syarikat Pencetakan Ihsan.

Md Rodzi Harun(1998).Nature Of Company[online]. http://syarikat.tripod.com/essential1.html[25-10-09]

Md Rodzi Harun(1998).Removal of director[online]. http://syarikat.tripod.com/directorship2.html[25-10-09] Fikri Ishak Page 15

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Pnb-LawNet(2006).Company Act 1965 (revised 1973). [online]. http://www.ssm.com.my/act/fscommand/a125.htm .[21-10-09]

Pnb-LawNet(2006).Guidelines of Incoporation of Company Limited by Guarantee. [online]http://www.ssm.com.my/en/docs/guidelines/GUIDELINES%20OF%20INCOPORATIO %20CLBG%20UNDER%20CA%201965.pdf[27-10-09]

Pnb-LawNet(2006). Pengumumam Awam SSM BIL.3/2002[online]. [online]. http://eaduan.ssm.com.my/media/perkhidmatan/pekeliling1.pdf.[22-10-09]

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