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Registrar of Companies (ROC), Malaysia
Australian Securities Commission
Companies House, UK
 
 
NATURE OF A COMPANY
     
What is a Company?

A "company" is a business organisation that is registered (or "incorporated") under the Companies Act, 1965 or its predecessor legislation. Operationally, a small company may be run in exactly the same fashion as partnership. Legally, the organisation created is subject to quite different rules.

The primary statute governing companies in Malaysia is the Companies Act, 1965 (the Act). Although based originally on English and Australian models, the Malaysia legislation is quite distinct from the equivalents in the UK and Australia today. Cases from these jurisdiction and from Singapore (which has a similar statute) are treated as highly persuasive in Malaysia

THE CONSEQUENCES EFFECT OF INCORPORATION

Effect of Incorporating a Company

The incorporation of a company has two legal effects: firstly, it creates a legal person. Secondly, that legal person has "perpetual succession", i.e., it lasts until liquidated by an order of court.

Unlike a partnership, a company is recognised as a person in law. Thus, it is legally impossible to register a lease of an office in the name of a partnership; whereas in the case of a company, the lease can be registered in the name of a company. The law treats the persons who own and control the company as separate from the company itself. For instance A, B and C set up ABC Sdn Bhd, the law considers ABC Sdn Bhd to be separate person altogether. A company is an "artificial person", as opposed to a human who is a "natural person". Most of the advantages of companies stem from their separate legal personality. Because a company is a person in its own right, the following consequences ensue:

The resultants effects of incorporation are also stated in section 16(5). The company:

  • is capable forthwith of performing all the functions of an incorporated company
  • is capable of suing and being sued
  • has perpetual succession
  • have a common seal
  • has power to acquire, hold and dispose of property

BODY CORPORATE

A corporation or body corporate is a legal person created and recognised by the law. In this sense it is an artificial legal person as opposed to individuals who are known as natural persons. As a person, a company has:

  • the rights to take legal action
  • the rights to hold property
  • with powers and liabilities as an individual but is distinguished from the members it may have from time to time: Salomon v Salomon & Co Ltd (1897) AC 22.

SUING AND BEING SUED

Because a company is a separate legal entity it follows that it may enforce rights by suing and conversely it may incur liabilities and be sued by others. In fact the rule in Foss v Harbottle (1843) 2 Hare 461; 67 ER 189 requires the company itself to be the person enforcing the rights. Members generally cannot do this on their company’s behalf although a company may sue and be sued by its own members.

PERPETUAL SUCCESSION

A company does not die but continue to exist until its name is struck off or dissolved through a legal process known as winding up or liquidation even though without any directors, members, employees, business etc.: Re Noel Tedman Holdings Pty Ltd (1967) Qd R 561. Its members may come and go but this does not affect the legal personality of the company: Abdul Aziz Bin Atan & 87 Ors v Ladang Tengo Malay Estate Sdn Bhd (1985) 2 MLJ 165.

COMMON SEAL

A company is required to have a common seal: section 16 (5). At common law, a company could enter into a contract only if there was a contractual document bearing the impression of the company seal. Usually, the articles of a company provide that the seal can only be used with the authority of the board of directors: article 96, Table A. Section 35(4) alters the common law so that a person with the requisite authority can enter into a contract on behalf of a company as if it were a natural person without the company’s seal. Thus companies can enter into oral contracts or written contracts without the common seal where the law of contract and agency allows. Some documents such as share certificates and instrument of transfer of land require the seal of the company.

POWER TO OWN PROPERTY

A company may own property distinct from the property of its members. The members only own shares in the company but do not have a proprietary interest in the property of the company: Macaura v Northern Assurance Co Ltd (1925) AC 619. Therefore, a change in membership of a company will have no effect on the ownership of the company’s assets.

LIABILITY OF MEMBERS

Section 16(5) states that members of a company have such liability to contribute to the assets of the company in the winding up, as is provided by the At. The company's debts are separate from the debts of its members. For a company limited by shares the liability of members is limited to the amount, if any, unpaid on the nominal value of their shares: section 214 (1)(d).

THE COMPANY AS A SEPARATE LEGAL ENTITY

A company has a dual nature, as an association of its members but also as a person separate from its members. As soon as necessary formalities of incorporation are satisfied, a new entity comes into existence which is separate and distinct from its directors and shareholders.

SALOMON v SALOMON & CO

Fact

Salomon had incorporated his boot and shoe repair business. He transferred the business to a company own by him. He took all the shares of the company except six which were held by his wife, daughter and four sons. Part of the payment for the transfer of the business was made in the form of debentures ( a secured loan) issued by the company to Salomon. Salomon transferred the debentures to Broderib in exchange for a loan. Salomon defaulted on payment of interest on the loan and Broderib sought to enforce the security against the company. Unsecured creditors try to put the company into liquidation.

Issue

Is Broderib or the unsecured creditors (Salomon himself) had priority in relation to payment of the debts?It was argued for the unsecured creditors that Salomon’s security was void as the company was a sham an was in reality the agent of Salomon.

Held By House Of Lords

The company had been properly incorporated and therefore the security was valid and could be enforced. A company and its members are separate persons. This principle is known as the veil of incorporation.

ABDUL AZIZ BIN ATAN & 87 ORS V LADANG RENGO MALAY ESTATE SDN BHD (1985) 2 MLJ 165.

Facts

all the shareholders of the company sold and transferred their entire share holdings to a certain buyer

Issue

the court had to determine whether a change of employer took place

Held

An incorporated company is a legal person separate and distinct from its shareholders. The company, from the date of incorporation, has perpetual succession and did not change its identity or personality even though the entire share holding of the company changed hands.

LEE V LEE’S AIR FARMING LTD (1961) AC 12

Fact

Lee who was a pilot who conducted an aerial top-dressing business, formed a company to conduct the business. Lee hold 2999 shares of the 3000 shares in the company. The remaining one share was taken by his solicitor as nominee for Lee. Under the articles of association, Lee was governing director with very wide powers. Workers’ compensation insurance was taken out, naming Lee as an employee. Lee was killed when his aeroplane crashed while engaged in aerial top-dressing.

Issue

His widow made a claim for payment under the Workers’ Compensation Act 1922. Her claim was initially rejected on the ground that as Lee had full control of his company he could not be a "worker" within the meaning of the Act. "Worker’ was defined under the Act as a person "who has entered onto or works under a contract of service ... with an employer."

Held By Privy Council

  • the company was a separate legal entity distinct from its founder, Lee
  • Lee could enter into a contract of employment with him

MACAURA v NORTHERN ASSURANCE CO LTD (1925) AC 619

Fact

Macaura own land on which stood timber. He sold the land and timber to a company he formed and received as consideration all the fully paid shares. The company carried the business of felling and milling timber. A fire destroyed all timber which had been felled. Macaura had earlier insured the timber against loss of by fire in his own name. He had not transferred the insurance policy to the company.

Issue

When Macaura made a claim his insurers refused to pay arguing that he had no insurable interest in the timber. Only persons with a legal or equitable interest in property are regarded as having interest in it.

Held By House Of Lords

The insurers were not liable. Only Macaura’s company, as owner of the timber, which had the requisite insurable interest in it. Only the company, and not Macaura, could insure its property against loss or damage. Shareholders have no legal or equitable interest in their company’s property.

LIFTING THE VEIL OF INCORPORATION

The Veil

The law recognise that a company is a separate legal entity distinct from its shareholders. Therefore the courts usually do not look behind "the veil" to inquire why the company was formed or who really controls it

Exceptions (Lifting The Veil)

The company is treated as in some degree identified with its members or directors or managers. These exceptions are described as "lifting the veil of incorporation".

Lifting the Veil by Statute

  1. If a company breaches the prohibition against providing financial assistance for the purchase of its own shares, s67(3) makes its officers in default, and not the company, guilty of a criminal offence.
  2. Under s304(2) which should be read in conjunction with s303(3) an officer who knowingly contracts a debt with no reasonable or probable ground of expectation of the company being able to pay the debt is guilty of an offence, and a conviction may be the basis for a court to declare that the officer concerned shall be personally liable to pay that debt.
  3. Under s169 the directors of a holding company is required to prepare consolidated accounts consolidating the financial position of the holding company and its subsidiaries. In this respect the Act does not treat each company in the group as a separate legal entity but recognises the reality that a group of related companies functions as a single entity.
  4. Under s36 if the number of members of a company (other than a company whose issued shares are wholly held by a holding company) is reduced below two and it carries on business for more than six months while the number is so reduced, a person who is a member of the company during the time that it so carries on business after those six months, and is aware of it, is personally liable for all the debts of the company contracted after those six months and may be sued therefor, and shall also be guilty of an offence against the Act.
  5. Persons who were knowingly party to fraudulent trading may be personally liable to make such contribution to the assets of the company as the court may think proper under s304(1) of the Act.
  6. Under s121, an officer of a company who signs or authorises to be signed on the company’s behalf any bill of exchange, cheque or promissory note where the company’s name is not properly or legibly written thereon, will be personally liable for the amount if unpaid by the company.
  7. s140(1) of the Income Tax Act 1967 allows the Director-General of Inland Revenue to ignore transactions which have the effect of avoiding or evading tax: SBP Sdn Bhd v Director General of Inland Revenue (1988) MSTC 243.

Lifting the Veil at Common Law

1. Combating fraud

In Jones v Lipman (1962)1 WLR 832, a vendor had agreed to sell a piece of land. Subsequently, he changed his mind. In an effort to defeat a move to obtain specific performance the vendor transferred the land to a company which he controlled. The court refused to countenance this. The veil was lifted and specific performance was ordered against the vendor and the company.

In Gilford Motor Co v Horne (1933) Ch 935, an employee had entered into an agreement not to compete with his former employer after ceasing employment. In order to try to avoid this restriction the employee set up a company an acted through that. The court held that this manoeuvre would not be tolerated, the veil would be lifted and an injunction would be issued against the company too.

In Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988) 1 MLJ 97 the Supreme Court of Malaysia lifted the veil of incorporation to ascertain the actual ownership of assets in granting a Mareva injunction.

2. Agency

In Smith, Stone and Knight Ltd v Birmingham Corporation (1939) All ER 116, Atkinson J lifted the veil to enable a subsidiary company operating business on land owned by the holding company to claim compensation on the ground of agency.

In Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers (1950-1985) MSCLC 282, the Jaya Puri Chinese Garden Restaurant was closed down and the workers’ contracts were terminated. The industrial court found, on the facts, that the hotel was in fact the employer of the workers and ordered it to pay compensation. The hotel sought to quash the award. The High Court dismissed the application, holding that a court is willing to lift the veil of incorporation "when the justice of the case so demands" and that on the facts of the instant case there was the essential unity of a group enterprise and the restaurant and the hotel ought to be treated as a single unit.

In Firestone Tyre and Rubber Co Ltd v Lewellin (1957) 1 WLR 352, agency was once again the trigger for lifting the veil where a British company manufacturing tyres for an American holding company was held to be its agent. In Re FG (Films) Ltd (1953) 1 WLR 483, where fraud or sharp practice was also a factor the American holding company set up a British subsidiary to produce the film "monsoon’. It was held that there was an agency and that the film was an American one.

3. Groups

In Harold Holdsworth & Co (Wakefield) Ltd v Caddies (1955) 1 WLR 352, the respondent held an employment contract with the appellant company to serve it as Managing Director. The House of Lords held that the appellant company could require he respondent to serve a subsidiary company.

In DHN Food Distributors ltd v Tower Hamlets London Borough Council (1976) 1 WLR 852, the company operating the business was the holding company and the premises were owned by the company’s wholly owned subsidiary. Compensation was only payable for disturbance of the business if the business was operated on land owned by the company. It was held that the ownership of a lease and of the business which used the premises divided between two companies of the same group were treated as if owned by the same person.

4. Trust

In Trebanog Working Men’s Club and Institute Ltd v MacDonald (1940) 1 KB 576, the club was charged with selling liquor without a license. It was held that by the divisional court that the club in fact held the liquor on trust for its members so there was no offence.

In The Abbey, Malvern Wells Ltd v Ministry of Local Government and Planning (1951)Ch 728, it was held that shares in a company were held on trusts and that directing the affairs of the company were trustees so that the court could lift the veil and impose the terms of the trust on the company’s property.

PUBLIC PROSECUTOR V KASIHKU SDN. BHD.

(1991) 1 MSCLC 90, 653

KASIHKU had pleaded guilty to charges of failure to remit to the EPF contributions as required by the EPF Act 1951. The Magistrate imposed a fine and ordered that the defendant company pay the arrears of EPF contributions in seven monthly instalments. However, at the end of the seven month period, a portion of the arrears was still unpaid and KASIHKU was again brought to court. During the proceedings, the PP requested that a term of imprisonment be imposed on the manager of KASIHKU. Counsel for KASIHKU opposed, arguing that as the defendant company was a limited company it could not be sent to jail. The Magistrate refused to send the manager of the KASIHKU to prison for the default of KASIHKU and ordered that the balance of the arrears be recovered as a civil debt. PP appealed.

Issue

Whether an officer of KASIHKU could be imposed with a term of imprisonment for the default of the KASIHKU

Held

An officer of KASIHKU could not be sent to prison for offences committed by KASIHKU if there was no prosecution instituted against him as an officer of the defendant company.

There was no issue of process against any officer of the defendant company and none of the officers of the defendant company had been charged for offences relating to the Act.

 

Copyright 1998 Md. Rodzi Harun. All rights reserved.
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