INTRODUCTION-which of the following

represents a company?
A Farmasi Ibrahim
B Melor Enterprise
C Zali Sdn Bhd
D Perniagaan Itikmas & Adik Beradik
E Bank Islam Malaysia Berhad
F Klinik Rahim, Said dan Wong

Companies
The dominant form of business
organisation
Over half a million companies in Malaysia
Created through a process of registration
under statute an artificial legal person
Have special legal characteristics
(discussed in Lecture 3)
What is the purpose of
companies?
Traditionally, a means by which a large
group of people with capital and
management resources could come
together to conduct an enterprise on an
ongoing basis
Now also widely used for small business
and by individuals
Small and large companies
Most companies are small businesses
In 2001, there were 809 companies listed
on the Kuala Lumpur Stock Exchange
(KLSE). (Listed companies are
companies in which you can buy or sell
shares through the KLSE.)
The architecture of companies
Capital structure
equity capital (shares)
debt capital
Management structure
board of directors and other officers
members (shareholders)
Choice of form of business association
Types of companies
Registration of companies
Listing on the KLSE
Corporate groups
Choice of form
Distinguish between:
incorporated entities; and
unincorporated entities.
Incorporated entities (corporations) are
separate legal persons
Unincorporated entities have no legal
personality separate from their participants
Incorporated entities
Corporation is the general term.
Definition in sec 4 of the Companies Act
May be formed:
by special Act of Parliament
under an Act of Parliament conferring power
on some person to create corporations, eg.
the Companies Act 1965
Unincorporated entities
sole trader
general partnership
limited partnership
non-profit associations and clubs
trusts
syndicates and joint ventures
Some distinction between company,
partnership and sole proprietorship

-refer the notes
Relevant considerations
choice of form
In deciding the appropriate form, consider:
profit or non-profit
limited or unlimited liability
limits on size
ability to raise capital
formalities and expense
audit and reporting requirements
tax treatment
Choosing a company (cont)
Advantages:
can have more than 20 members (outsized
partnerships prohibited by sec 14)
limited liability
may be easier to raise capital
different tax treatment
company law as standard form contract
flexibility
Choosing a company (cont)
Disadvantages:
arguably, greater expense in formation and
compliance
publicity
The decision must always depend on the
individual circumstances of the business
Types of companies
Corporations formed under the Companies
Act are companies
Companies are classified:
by reference to basis and extent of the
members liability (sec 14(2))
as public or private
Some provisions of the Companies Act
apply only to certain types of companies
(sec 14A)

Types of companies
Classification by reference to
members liability
Company limited by shares (sec 214(1))
Company limited by guarantee (sec 14A)
Unlimited company
No liability company
Classification as public or
private
Private companies
section 15:
no more than 50 members
no fundraising activity requiring a disclosure
document under Part IV, Division 3, SCA
may be a company limited by shares or an
unlimited company with share capital sec 15
may be an exempt private company sec
4(1)
Classification (cont)
Public companies:
everything other than private companies
section 4:
companies limited by guarantee and no liability
companies are always public companies
companies limited by shares and unlimited
companies with share capital may be public
companies
Registration of companies
Lodge a Form 13A with ROC containing
prescribed information
Register the memorandum and articles
(if any)
Note restrictions on names.
Pre-registration conduct promoters can
act for the company before it is registered

sec 35
Corporate groups
Often different aspects of the business are
owned or carried out by different
companies in a group
Holding companies, subsidiaries and
related bodies corporate sec 6
Controlled entities sec 5(2)
Circumstances where law recognises
corporate groups
Company Law Lecture 3
Definition of corporation sec 4 of the
Companies Act 1965
The company as a separate legal entity
Corporate capacity
The doctrine of limited liability
The separate legal entity
doctrine
The company is a legal person separate
from its participants
This means that:
its obligations and property are its own and
not those of its participants
its existence continues unchanged even if the
identity of the participants changes
Merits of incorporation
Limited liability

Limited liability
Limited liability
Salomon v Salomon (1897)
Salomon
family
Pty Ltd
company
shoe business
cash, debenture
20,001 shares
6 shares
Salomon (cont)
Issue was Mr Salomon entitled to priority
under the debenture over other,
unsecured creditors of the company?
Depends on whether the company and its
controller are separate legal entities, and
not agents or trustees for each other
Court said yes
Characteristics of companies
Important features of companies arising
from their separate legal personality
can incur obligations and hold rights, and sue
and be sued, in their own name
can contract with their controllers
have perpetual succession
are separate taxpayers
participants (may) have limited liability
Companies are separate from
their controllers
Lee v Lees Air Farming Ltd: issue
could Mr Lee be both the controller of a
company and its employee?
Macaura v Northern Assurance: issue
was Mr Macaura the owner of property
that belonged to a company controlled by
him?
Companies can enforce rights
Vu Siew Chin v Wong Fah Yoon
issue : can incur liabilities and be sued
Foss v Harbottle
issue : enforce rights in its own name

Lifting the veil/ exceptions
Some time the above principle can produce unsatisfactory results-
thus there are exceptions:
Number of members below 2-the person is personally liable
Responsibility for fraudulent trading-the person who knew the fraud
is personally liable
Publication of a name-when the name of the co is not published-the
person would be personally liable
Taxation-nationality of members may affect the national status of the
co
Holding and subsidiary co-the 2 co are separate legal entities,
however decisions show that they may also be treated as a single
entity
Evasion of legal obligation
To do justice-eg the director making secret profit
Exceptions piercing the
corporate veil
At common law (rare)
just and equitable ground Tan Guan Eng &
Anor v Ng Kwong Hee
corporate form used to avoid an existing legal
duty Gilford
company is the agent or partner of the
controller Smith, Stone & Knight
principles underlying a particular law require
the veil to be pierced Re Darby
Exceptions (cont)
position of group of companies People
Insurance Co Sdn Bhd v People Insurance Co
Ltd
Under the Companies Act, in the insolvent
trading provisions in sec 304 and sec 36
Other statutory exceptions:
sec 67(5) financial assistance
sec 167 profit and loss account
Exceptions (cont)
sec 121 publication of name
sec 140(1) Income Tax Act 1967
Constitution of company

Company Law Lecture 5
Internal governance rules/constitution
comprising :
(a) memorandum of association; and
(b) articles of association
Legal effect of the memorandum and
articles of association.



Constitution of company
Sample memorandum
Sample Article
What are internal governance
rules ?
Rules agreed between the members to govern
the internal workings of the company
Typically deal with appointment, powers and
removal of officers, meetings, classes of shares,
dividends, transfer of shares, inspection of
books
Where can we find the internal governance rules
for a company?
in the companys memorandum and articles of
association
Constitution
A company can adopt a constitution
Constitution contains customised internal
governance rules for that particular
company called:
(a) The Memorandum of Association; and
(b) The Articles of Association.
Adopting a constitution
Memorandum must be lodged at the
time of incorporation.
Articles of Association can be lodged
when the company is registered, or not.
Adopting, amending or repealing the
articles requires a special resolution.
Memorandum may be altered by special
resolution unless provisions therein
state otherwise

Model Articles of Association
Table A, Fourth schedule of the
Companies Act 1965
Sec 30 of the Companies Act 1965
Listed companies must have an articles of
association that is consistent with the
Kuala Lumpur Listing Requirements,
Chapter 7
Legal effect of the
memorandum and articles of
association
Section 33 statutory contract
interpretation
rights of members and officers to enforce
consequences of non-compliance
Legal effect of the
memorandum and articles of
association (Cont)

Not a contract with outsiders
Unenforceable by outsiders
Raffles Hotel

Company Law Lecture 10
Types of directors
Board composition
Appointment, resignation, removal &
disqualification of directors
How boards operate in practice
Types of directors
Every company must have at least two
directors, resident in Malaysia.
Executive directors
CEO / managing director
Others (eg finance director)
Non-executive directors
may or may not be independent
Types of directors (cont)
Chairperson
Governing director
Nominee director
Alternate director
De facto and shadow directors
sec 4
Standard Chartered Bank v Antico
Malaysian Boards for listed
companies
Independent NED
90% with
2 or more
Board composition in Australias
largest companies
Appointment of directors
Who can be appointed ?
someone who consents
human, not company
minimum 18 years old
not disqualified
if 70 years or older in a public company,
special rules apply
Appointment of directors (cont)
New companies
directors named in application
Existing companies
check companys articles of association
(see Lecture 7)
Resignation / removal of
directors
Resignation
director needs to notify the company
Removal
by other directors
maybe in private companies (check articles)
by members
private companies check articles : Art 69
public companies sec 128
Disqualification of directors
Grounds (reasons) :
automatically due to certain offences
where the person must obtain leave of
court
where court orders disqualification of
directors of insolvent companies
where the Securities Commission
disqualifies under the SIA.


How boards operate
Delegation of powers to :
Board committees :
eg audit, remuneration, nomination
CEO / managing director
Director, employee or other person
Directors access to information :
common law (information broader)
companys books, in relation to legal
proceedings.
How boards operate (cont)
Meetings of directors
usually called board meetings
all directors must be told (receive notice)
a quorum requirement: articles of association
use of technology (e.g. video conf.,
telephone)
paper meetings
Art 90
Company Law Lecture 11
Duties of directors and other officers
Summary of the duties
Who owes the duties?
To whom are the duties owed?
Who enforces the duties?
Consequences of breaching a duty
The duty of care

Summary of the duties
Who owes the duties?
General law duties
Directors
Senior executive officers
Why? Because they are fiduciaries
Statutory duties
All statutory duties apply to directors
This includes de facto and shadow
directors (see Lecture 10)
Most statutory duties apply to officers
(sec 9) but not sec 132(1)



To whom are the duties owed?
Answer = the company
In exceptional circumstances, a duty will
be owed to an individual shareholder
Brunninghausen v Glavanics
Who enforces the duties?
Statutory duties Suruhanjaya Syarikat
Malaysia (Companies Commission of
Malaysia)
Common law duties the company (or
liquidator if company is being wound up)
What are the consequences of
breaching a duty?
Discussed in Lecture 13
Breach of statutory duties may result in :
a disqualification order
an order to pay a penalty
an order to pay compensation to the
company = 132D(7)
an injunction = 132C, 132E
imprisonment

What are the consequences of
breaching a duty? (cont)
Breach of a common law duty may result
in the person paying compensation to the
company, damages for breach of duty or
giving an account of profit.
Duty of care, skill & diligence
Sources of the duty :
section 132(1)
common law
contract of employment for executive
directors and other executive officers
A director or other officer breaches this
duty if he or she is negligent

Duty of care (cont)
Statutory duty sec 132(1)
A director shall at all times act
honestly and use reasonable diligence
in the discharge of his duties
Re City Equitable Fire Insurance
The duty of care and skill
Use reasonable diligence
Can directors delegate?
Duty of care (cont)
What is the standard of care ?
Originally, under the common law, the
courts used a largely subjective test :
Took into account the background, skills and
experience of the director concerned
A director with little knowledge of his/her
companys business, and little skill, was judged
against the standard of someone with the same
(poor) knowledge and skill
Duty of care (cont)
What is the standard of care? (cont)
Now :
Daniels v AWA Ltd common law
There is no uniform standard for all directors
But it is no longer a largely subjective test
The standard of care required of director X is
the care that a reasonable person doing Xs
job in Xs company would exercise (a largely
objective test)
Duty of care (cont)
Under the modern standard, is there
any minimum requirement for all
directors?
Yes (Daniels v AWA Ltd). Every director
must :
Obtain a basic understanding of their
companys business
Keep informed about and monitor the
companys activities and regularly attend board
meetings
Monitor the companys financial position
Duty of care (cont)
Higher standards are expected of some
directors :
Those with special skill
Executive directors in relation to the time
spent on company matters, compared to
non-executive directors
Duty of care (cont)
Delegation and reliance
Delegation
Re City Equitable Fire Insurance
Directors may delegate any of their powers to any
person, unless the articles restricts delegation
If delegate is negligent, director will be liable
unless directors have monitored or supervised and
use reasonable care to appoint a competent
person



Other duties
Duty to act in good faith in the best
interests of the company
Duty to act for a proper purpose
Duty to retain discretion
Consequences of breach of duty
Duty to act in good faith in the
best interests of the company
Section 132(1) also a common law
duty
What is meant by good faith?
Director must act honestly



Duty to act in the best
interests of the company
(cont)
What are the companys interests?
Possibilities are :
Members
Company as a commercial entity separate
from its members
Creditors
Other companies within a group of
companies
Employees, customers, suppliers and the
community

Duty to act in the best
interests of the company
(cont)
What are the companys interests?
(cont)
Members
. Interests of company are generally those of its
members
. But interests of members may conflict and
directors
must balance interests
Company as a commercial entity
separate
from its members
. Conflicting court decisions
Duty to act in the best interests
of the company (cont)
What are the companys interests? (cont)
Creditors
. Common law principle when a company is
insolvent or nearly insolvent, its interests are those
of its creditors, not its members
. Kinsela v Russell Kinsela Pty Ltd
Duty to act in the best interests
of the company (cont)
What are the companys interests? (cont)
Corporate groups

A Ltd
B Ltd C Ltd
50%+ (or control) 50%+ (or control)
Can the directors of B cause B to enter a transaction
that benefits A or C, but does not directly benefit B ?
Duty to act in the best
interests of the company
(cont)
What are the companys interests?
(cont)
Corporate groups (cont)
. Walker v Wimborne
- High Court : directors must put their
companys interests before the groups
interests
Duty to act in the best
interests of the company
(cont)
Corporate groups (cont)
. Test
Whether a person in the position of the director
could have reasonably believed the decision
would
benefit the company: Charterbridge
. Equiticorp Finance v BNZ
Directors can approve a transaction that
benefits the
group (or another group company) if their
company
will benefit indirectly
Duty to act in best interests of
the company (cont)
Employees, customers, suppliers and
the
community
. Do not receive priority over interests of members
. Parke v Daily News Ltd

Duty to act for a proper purpose
Section 132(1) also a general law duty
Even if directors actions are in companys
best interests, may still be a breach of duty
if power not exercised for a proper
purpose
Duty to act for a proper
purpose (cont)
Two questions :
Question of law : what are the proper
purposes for which the power in question
may be exercised?
Question of fact : for what purpose was the
power actually exercised?
If more than one purpose, use but for test
Whitehouse v Carlton Hotel
Duty to act for a proper
purpose (cont)
eg The power to issue shares
Normally a power of the board of directors
Proper purposes include :
to raise capital
for an employee share scheme
as consideration for purchase of an asset
Improper purposes include :
to entrench the existing board of directors
to fight off a hostile take-over bidder
to make a majority member a minority member

Duty to act for a proper purpose
(cont)
Powers other than issuing shares
Kwality Textiles (Msia) Sdn Bhd. v Arunachalam &
Ors
Lim Koei Ing v Pan Asia Shipyard & Engineering Co.
Pte Ltd
Permanent Building Society (in liq) v Wheeler
Duty to retain discretion
Directors cannot undertake or agree that
they will not exercise powers given to
them in the company's articles of
association or under the Companies Act
1965
This would be against the duty to act in the
best interests of the company.
Consequences of breach of
duty
Section 132(1)
Fine or imprisonment or both
Common law duties
Company has civil remedies such as
compensation, damages for breach of
duty
Company secretary
See p 40, 33, 144
Auditors
An auditor must be registered under the
Companies Act sec 8
Special rules apply to appoint or remove
auditors, which are designed to protect
their independence from management :
sec 9
Auditors owe duties to the company, and
may owe a duty of care to others :
sec 174(1)
Company Law Lecture 16

Share capital
Membership
Shares
What are shares? (sec 4(1))
Classes of shares
generally
preference shares
Conversion of shares into stocks Table
A (Art 36 - 39)

What are shares?
Claims against a company to which
particular rights attach, in particular:
distribution rights (interim and final)
control rights (eg information, voting)
A chose in action a form of personal
property sec 98
Not an interest in the companys assets
(compare with a trust)
What are shares? (cont)
Borlands Trustee v Steel Bros & Co Ltd
(nature of shares)
Classes of shares
Shares can be created with different rights
attaching : sec 18(1)(c)
Power to issue shares in the hands of the
directors, but the issue of shares in a new
class may require shareholder approval if:
amendment to the constitution is required
the issue varies existing class rights
Table A, Art 2
Classes of shares (cont)
Typically classes of shares have differing:
entitlement to dividends
priority in relation to payment of dividends
voting rights
priority in repayment of capital on a winding
up
right to share in surplus assets on a winding
up
Contrast preference shares and ordinary
shares
Preference shares
Usually carry:
fixed dividend
priority for repayment of capital
limited voting rights
no right to share in surplus
Membership
A person can become a member by
subscribing for new shares, or acquiring
already issued shares from another
person
A person ceases to be a member by
transferring their shares, or having them
cancelled
Shareholder rights
Voting rights
Distribution rights
Information rights
Class rights
Variation of class rights (cont)
Certain actions taken to vary class rights
Section 65(1): rights of dissenting
members where the variation, cancellation
or modification does not have unanimous
consent. Members holding at least 10% of
the class can apply to the Court for
change to be set aside & the change is
effective with confirmation by the Court.
When is sec 65 applicable?
Section 65(1) requires that :
The company has different classes of shares
The articles (eg. Art 4) or memorandum
provides for a method to vary the class rights
The proposal is a variation
What is variation?
Change /alteration of the rights: sec 65(1)
Deletion /abrogation of the rights: sec
65(1)
See Greenhalgh v Arderne Cinemas
Issue of new preference shares ranking
equally or pari passu with existing
preference shares: sec 65(6)
Alteration of the modification of rights
clause: sec 65(7)
Method of variation under sec
65
Company must call separate class
meeting only of shareholders whose rights
are being affected by the variation
proposal
At least 75% of these shareholders must
approve
What if sec 65 not applicable?
Variation procedure depends on where the
rights are stated
If the rights are given in the articles of
association: sec 31
If rights given in memorandum: sec 21(1B)
Introduction to members
remedies
Members remedies may be available
where officers have breached their duties
But sometimes members can also obtain a
remedy even though there has been no
breach of officers duty
Members have statutory and common law
remedies
Introduction to members
remedies (cont)
Why do minority members need
remedies?
Directors and majority shareholders can use
their power to harm minority shareholders
Not always possible for a shareholder to sell
their shares
This explains why the oppression remedy is most
commonly sought by shareholders in private
companies rather than public companies
Members statutory remedies
Oppression remedy
Court-ordered winding up
Statutory injunction
Statutory right to inspect company
books
Other protection :
Variation of class rights (Lecture 7)
Transactions affecting share capital
(Lecture 17)
Oppression remedy sec 181
Court can give a member a remedy
where :
the conduct of the companys affairs or,
the directors powers are being exercised,
in an oppressive manner, or
in disregard of members interests including
himself (181(1)(a))
OR
an actual or proposed act or omission by or on
behalf of the company, or
a resolution, or a proposed resolution, of members
or a class of members is either
unfairly prejudicial to, or
unfairly discriminatory against members
(181(1)(b))
Oppression remedy (cont)
What types of companies can the remedy
apply to ?
In theory, any company
But in practice, most oppression actions are
brought by members of private companies
which have only a few participants, and
in which members are also involved in
management
Oppression remedy (cont)
What are the tests ?
Was directors decision one that no board of
directors acting reasonably would have
made?
Not necessary for directors / majority
shareholders to have acted dishonestly or
intended to harm the minority it is a
question of impact is the conduct
oppressive in effect ?
Reasonable expectations
Oppression remedy (cont)
Examples of oppressive conduct
Diversion of business opportunities
Improper exclusion from management
Does member have a reasonable expectation?
Unfairly restricting dividends
Oppressive conduct of board meetings
Share issue for improper purpose
Breaches of directors duties
Oppression remedy (cont)
What orders can the court make ?
Any order it thinks appropriate
e.g.
winding up
regulating the companys affairs
purchase of oppressed members shares
appointment of a receiver
restraining someone from doing something, or
requiring someone to do something
Statutory injunction
Court order to stop someone breaching
the Companies Act
Specific provisions : sec 132C , sec 132E
or sec 28.
Who can apply ?
Any member of the company
Statutory right to inspect books
Section 157 Member can apply to court
for authorisation to inspect company
books
Court can authorise either the member or
their representative
Member must be acting in good faith and for a
proper purpose
Foss v Harbottle
Also known as the proper plaintiff rule
The person who can enforce a wrong
against the company is the company itself
and not any individual shareholder
Exceptions
Where members personal rights are
infringed
Where the proposal requires special
resolution but passed by simple resolution
Ultra vires transaction: objects clause
Where there is fraud on the minority
Where the justice of the case so requires
Fraud on the minority
There must be wrongdoer control
Control may be because of majority
shareholding
The wrongdoer obtained benefit/
advantage at the companys expense
The wrongdoer prevents the company
from suing or enforcing the companys
rights

Company Law Lecture 8
Member meetings
types of meeting
calling meetings
conducting meetings
voting
Decision-making without a meeting
Procedural irregularities
Annual and extraordinary
general meetings
All companies must hold an annual
general meeting: sec 143
All public companies must hold its
statutory meeting: sec 142(1)
Other meetings are called extraordinary
general meetings
Rules governing meetings are set out in
the Companies Act and the articles of
association
Calling a meeting
Usually, meetings are called by the board.
Art 44 authorises a single director or board
collectively to call meetings.
The Court may order a meeting on
application of a director or member if it is
impractical to call otherwise: sec 150
Calling a meeting (cont)
Directors must call a meeting when requested to
do so by members holding not less than 10% of
paid up capital: sec 144. If the directors fail to
call the meeting within 21 days, the members
can do so and the company must pay their
reasonable expenses
Two or more members with at least 10% of
issued share capital or 5% in number of
members may call a meeting, at their expense:
sec 145
Agenda
Only matters that have been included in the
notice of meeting can be considered at the
meeting other than matters stated in Art 46 of
Table A
Usually, where the directors are calling a
meeting, they will determine the agenda
Members can request the inclusion of
resolutions for consideration by the meeting:
sec 151
Member resolutions
Section 151 allows members with at least 5% of
the votes, or numbering at least 100, to give
notice to the company of a resolution they
propose to move at the next general meeting
held more than two months after the notice is
received
Copies of the resolution and a members
statement are distributed, usually with the notice
of meeting
Notice of meeting
General rule 14 days. Consent to short
notice is possible: sec 145(3)
For passing special resolution: sec 152
(21 days)
Notice must be given to members,
directors and auditor
Contents of notice: sec 152 and Art 46.
Notice of meeting (cont)
Notice must contain sufficient information
to enable members to decide whether or
not to attend the meeting and how to vote
Must not be misleading, and must fully
and fairly inform and instruct the
shareholder about the matter on which he
or she will have to vote: Devereaux
Holdings
Need to balance information presented:
Fraser v NRMA
Conduct of meetings
Quorum
Use of technology
Proxies and corporate representatives
Conduct (role of the chair)
Voting
Members entitlement to vote
Section 148(1)
Section 148(2): preference shareholders
Voting by proxies
Voting (show of hands and poll)
Demanding voting by poll
Ordinary and special resolutions
Disqualification from voting
Companies Act, articles of association and
KLSE Listing Requirements prevent
interested parties from voting their shares
in certain circumstances, including:
related party transactions
Interested director in relation to sec 131

Decision-making without a
meeting
Private companies may use shareholders
written resolution, in which all members
entitled to vote must sign a document
agreeing to the resolution: sec 152A
Formality may be waived by all members
under ratification
Section 145(3)
Procedural irregularities
Section 355 decision may be valid
despite irregularity but there must be no
substantial injustice
DEBENTURES

What are debentures? sec 4(1) and
sec 38(11)
A loan or advance to a company may be
secured or unsecured
Debentures
Definition sec 4(1) and sec 38(11) of the
Companies Act, sec 4 of the SCA
Companies may choose to raise finance
through issuing debentures to the
investing public
More common for finance companies
Debentures are securities and may be
quoted on the KLSE
Sources of law governing debt
finance
Contract the loan agreement
Property securities
Company law priorities, registration of
charges, winding up, creditor protection
Secured debt
Repayment of the debt is secured by a
charge over some or all of the companys
assets
Security gives the lender the right to apply
the charged property to satisfy the debt in
the event of a default
Fixed and floating charges
Definition of charge sec 4
Fixed charge security over a specific
asset (eg land). Company cannot dispose
of the asset without the consent of the
lender
Fixed and floating charges
(cont)
Floating charge floats over the assets,
allowing the company to dispose of them
in the normal course of business and
replace them with others of the same class
until crystallisation
Yorkshire Woolcomber Association
Floating charges
Companys power to give a floating charge
is contained in Art 13, Third Sch of the
Companies Act
Useful device enabling companies to give
security over trading stock and book debts
Free to deal with charged assets in the
normal course of business, until
crystallisation
Crystallisation
Charge crystallises automatically on the
company ceasing to carry on business or
on winding up
Charge document may provide for
crystallisation on the happening of
specified events (events of default) eg
breaching debt/equity covenants
selling a major asset
Crystallisation (cont)
On crystallisation, the charge effectively
becomes a fixed charge over the assets at
that time and any later acquired assets
Registration of charges
Section 108 of the Companies Act
requires registration of certain charges
Most charges created by companies must
be registered with the ROC: sec 108(1)
Duty of companies to register charges :
sec 109
Includes all charges as specified in
sec 108(3)
The registration process
Company must lodge a notice containing
prescribed information within 30 days of
creation of the charge : sec 108(1)
Provisional registration permitted, to allow
for stamping
What is stamping?
Notice of variation and notice of
satisfaction and withdrawal
Priority
A company may create two or more
charges
Priority refers to the order in which the
charges are satisfied
Order of registration determines priority for
registrable charges
Note that priority can be altered by
agreement between the chargees
Priority (cont)
Generally give priority to the first
registered charge, unless the chargee had
actual or constructive notice of an earlier
unregistered charge : common law
principles
Does not affect priority as between
registered and unregistrable charges
Unenforceable charges
The Companies Act makes some
charges unenforceable
Charges that should be registered, but
are not, cannot be enforced against a
liquidator or creditors
Certain other charges created within six
months of winding up in insolvency :
sec 294
Effect of floating charge
Winding up
Involves a liquidator selling off
companys assets and distributing the
proceeds among creditors (and members
if any surplus remains)
Also known as liquidation
Provisional liquidator
A process where the company is brought to an end, and
the assets and property of the company are
redistributed.
DEREGISTRATION-CO MUST HAVE NO DEBT
(REASONS-NO BUSINESS, NOT ACTIVE)
VOLUNTARY WINDING UP-A RESOLUTION PASSED
IN AGM-(REASONS-NO BUSINESS, NOT ABLE TO
PAY ITS DEBT, DIRECTORS ONLY CONCERNED
WITH PERSONAL GAINS AS OPPOSED TO THE
MEMBERS). A LIQUIDATOR IS APPOINTED TO
ASSESS/COLLECT/SELL/CARRY OUT
INVESTIGATION AND PAY CREDITORS DEBT.
CREDITORS WINDING UP-IF IN THE VOLUNTARY WINDING UP
CREDITORS FEEL THAT COMPANY IS INSOLVENT,
CREDITORS CAN CALL CREDITORS MEETING AND WINDING
UP NOW BECOMES CREDITOR WINDING UP.
COURT-ORDERED WINDING UP-BEGINS WITH COURT ORDER
ON THE APPLICATION OF ONE OR MORE PARTIES.
PETITIONER MUST ESTABLISH THE COMPANY IS INSOLVENT-
EG FAILURE TO MEET STATUTORY DEMAND (DEBT MORE
THAN RM 500-THE FORM IS SERVED ON THE COMPANY BUT
THE COMPANY FAILED TO PAY IN 3 WEEKS TIME)-SEC 218. A
LIQUIDATOR IS APPOINTED OR IF NOT THE OFFICIAL
RECEIVER BECOMES LIQUIDATOR. CAN BE APPLIED BY
COMPANY, CREDTORS ETC.
Types of winding up
Voluntary winding up (sec 254)
Members voluntary winding up : sec 4(1) and
sec 258 - 263
Creditors voluntary winding up : sec 260 -
263 (Part X, Division 3)
Compulsory winding up (Part X, Division 2
sec 217)
In insolvency
On another ground
Voluntary winding up
Members voluntary winding up
Only possible for solvent companies
Commences when members pass a special
resolution
declaration of insolvency
Creditors voluntary winding up
Similar to members voluntary winding up,
except that the company is insolvent
Compulsory winding up in
insolvency
Begins with a court order
Company must be insolvent
Unable to pay debts as and when they
become due and payable: sec 218(2)(b)
Most common way to prove insolvency is via
the statutory demand procedure
Who can apply to court? (sec 217(1)(a)-
(g))
Several people, but most often it is a creditor
Compulsory winding up on
grounds other than insolvency
Grounds are set out in sec 218 eg:
Company has not commenced business
within one year from incorporation
Just and equitable see Lecture 16
Who can apply to court? sec 217(1)(a)-
(g)
Several people including creditors and
members
Effect of a winding up
Secured creditors rights unaffected
Other creditors cannot take action
Company cannot carry on business except
for the purposes of the winding up
Company management by the liquidator,
not the directors
Liquidators functions
Collect assets
Realise assets
Work out what debts are payable by
company, and what is owed to the
company
Distribute proceeds of realised assets
among creditors
If any surplus, distribute among members
Liquidators duties
Specific duties under the Companies Act
sec 227, sec 233, sec 235 and sec 281
Fiduciary duties
Duties as an officer sec 4
Funds available for distribution
Assets owned by company at time of
winding up, excluding any charged assets
Assets that come into companys
ownership after winding up starts, eg:
Compensation recovered under insolvent
trading provision sec 304
Funds recovered by liquidator under voidable
transactions provisions
Funds recovered from holders of void charges
Voidable transactions
Certain transactions entered into in period
leading up to winding up
Liquidator can apply to court to have a
voidable transaction undone so that
funds available for distribution are
increased

Void charges
Certain floating charges created shortly
before winding up sec 294
Unregistered charges sec 108(1)
How are funds distributed?
The general order is:
Secured creditors, then
Expenses of winding up, then
Unpaid wages, unpaid superannuation
contributions, and other employee
entitlements, then
Unsecured creditors, then
Members (assuming there is a surplus)
Deregistration
Deregistration brings companys
existence to an end sec 308
Three types:
Deregistration following winding up : sec
240
Voluntary deregistration : sec 272
Deregistration initiated by ROC : sec 308
Effect of deregistration
Reinstatement