COMPANY LAW TUTORIAL: DECEMBER 2020

1. Effects of company having a constitution?

- A company having a constitution is regulated under s 31 to s 37 of CA 2016
- A company may or may not have a constitution.
- If it does not, then the Act will regulate what a company can do
- If it adopts a constitution, that constitution cannot be contrary to the Act
- If it is contrary to the Act, that provision that contradict the Act will be void
- A company can only adopt a constitution by special resolution of the company
- The constitution will grant the company, each director and each member the
rights, powers, duties and obligations set out in the Act unless so modified by the
constitution.
- The constitution binds the company and members as if the constitution had been
signed and sealed by each member and bound by the constitution

2. ‘Veil of incorporation’ of a company

- Veil of incorporation means when a company is incorporated, it becomes a
separate legal entity from the persons who incorporated that company.
- Persons who incorporated the company will not be liable for the debts or liabilities
of the company.
- This principle is derived from the common law case, Salomon v Salomon & Co
Ltd.

3. ‘Subsidiary company’
- It is defined in s 4 CA 2016
- Its board of directors is controlled by another corporation
- More than half of its voting power is controlled by another corporation
- More than half of its issued share capital is held by another corporation

4. Essential requirements of a company

- Under s 9 of CA 2016 shall have the following essential requirements
- It must have a name
- It must have one or more members
- It must have one or more shares
- It must have one or more directors

5. ‘Promoter’
- Under s 2 of CA 2016, a promoter of a company means a person who is a party
to the preparation of the prospectus or of any relevant portion of the prospectus
but does not include any person by reason only of his acting in a professional
capacity.
- But unfortunately, this definition only referred to a promoter of a company in the
preparation of the company prospectus.
- There is also a promoter who initiates the formation of a company and get it
going as decided in the common law case, Twycross v Grant.
 - As such a promoter could include such person not cover under s 2 of the Act.
6. Types of capital available to a company
- Capital of a company is derived from 2 sources.
- The first is share capital comprising of ordinary shares and preference shares, &
- The other source, is loan capital derived from loans granted to the company by
financial institutions.
- This is defined in s 69 to s 72 of CA 2016.

7. ‘Fixed charge’
- A company can raise its capital through loan from financial institutions
- When it does so it will have to charge its asset or property to the financial
institutions
- Where a company charged its immovable property, e.g., land or building to the
financial institutions, it is known as a fixed charge.
- When a company creates a fixed charge, it has no more control over that
property. It cannot charge the same property to another institution.
- Details are as in s 352 onwards.

8. Floating charge
- A floating charge is a charge created by the company over its movable property,
e.g., Raw materials, machinery, to a financial institution
- While the property is charged to the institution, the company can still continue to
deal with the property, meaning, it can still use the raw materials to build its
products and sell the products.
- When the company cannot pay the loan, the institution will crystalise that
property to sell and recover the institution’s loan to the company
- Details in s 528 of CA 2016

9. ‘Ordinary resolution’
- A company, though, is managed by its board of directors, but the shareholders
under s 71 have rights to propose and decide resolutions under s 290.
- An ordinary resolution is defined in s 291 to mean a resolution passed by a
simple majority, meaning, more than 51% of the shareholders in the company
general meeting. An ordinary resolution can be used in the case of removal of
director under s 209 CA 2016.

10. Types of winding up of a company

- Winding up of a company is regulated under s 431 to 475 CA 2016
- Winding up can be done in 3 ways
- Voluntary winding up by the members to prevent further loss.
- This can only be done if the company is solvent
- Voluntary winding up by creditors
- If the company in the course of voluntary winding up by members discovered that
the company is insolvent, the creditors can takeover to wind up the company.
- Winding up by court order
 - Winding up by members or creditors or other parties as stated in s 464 can be
done by way of petition to the court wind up the company.
On 20 June 2019, SB Bhd entered into a contract with SL Sdn Bhd. SB was to sell SL 100
acres of land in JB for RM4million. The contract was signed by the directors of SB, and
Ashak, the promoter, on behalf of SL.
On 25 June 2019, SB entered into another contract with BU Bhd. BU was to buy SB’s fleet of
10 ships for RM2million. The contract was signed by the directors of SB, and Mansor, the
promoter, on behalf of BU.
When SB demanded payments from SL and BU, their Boards of Directors denied any
knowledge of such contracts. SB discovered from Companies Commission of Malaysia that
SL and BU were given their Certificates of Incorporation on 22 June 2019 and 24 June 2019
respectively. No other certificate has been issued to any of them.
Discuss whether SB can take court action against SL and BU for their payments.

ISSUES
On 20 June 2019, SB entered into a contract with SL Sdn Bhd and on 25 June 2019, SB
entered into another contract with BU Bhd.
The issues are whether those contracts are valid or enforceable by law and secondly, the
liabilities of the parties under those contracts.

LAW
Those contracts were made by the companies, SB, SL and BU. Since those contracts were
made by the companies, the validity of the contracts and the liabilities of the parties to those
contracts would fall under the Companies Act 2016.

ANALYSIS
Contract between SB and SL
On 20 June 2019, Sb Bhd entered into a contract with SL Sdn Bhd to sell their land in JB for
RM4 million. That contract was signed by the directors of SB and Ashak, the promoter of the
company, SL. At the time the contract was made, SL has yet to receive their certificate of
incorporation from CCM. According to the investigation made with CCM by SB, they
discovered that SL only received their certificate of incorporation on 22 June 2019. The
contract that entered into between SB and SL on 20 June 2019 is therefore, a pre-
incorporation as defined in s 65(1) of CA 2016. When SB demanded payment from SL, their
directors refused to pay on the ground that the company was unaware of such contract
made by the company. As the company was then not in existence, they were right to refuse
to pay. Section 65(1) says that such contract is a pre-incorporation contract and the
company is not liable under the contract. The person who entered into such contract on
behalf of the company before it is incorporated would be liable. Ashak, the promoter, who
entered that contract would, therefore, be liable for the payment.
Ashak would not be liable, as provided under s65(2), if the company in its general meeting,
decided to ratify that contract. If the company decided to ratify the contract, the ratification
would be deemed to have effect from the date the contract was entered into, i.e., 20 June
2019. However, if the company decided not to ratify that contract, then the person, in this
case, Ashak the promoter, would be liable under the contract to pay to SB.

Contract between SB and BU Bhd

On 25 June 2019, SB Bhd entered into a contract with BU Bhd to sell their fleet of ships for
RM2 million. At that time BU entered into the contract with SB, according to investigation
made by SB with CCM, the company has, on 24 June 2019, already been given their
certificate of incorporation by CCM. This means BU has already been in existence when it
entered into contract with SB. It would, therefore, have the right to enter into that contract.
But BU Bhd is a public limited company and, according to s 190(5) such a contract would be
a provisional contract. It is a contract made by the contract after it us incorporate but before
it is issued with the certificate to commence business by CCM. That contract would not be
valid until the company has been issued with the certificate to commence business.
According to s 190 (3), BU would have to satisfy CCM that they have complied with s 190(1)
and (2) of CA 2016 before CCM issue them the certificate to commence business. Under s
190(1)(a), the company will have to satisfy CCM money liable to be repaid to the applicants
on shares offered to the public have been repaid. Under s 190(1)(b)(i), the company will
have to satisfy CCM that the directors have paid for the shares they have contracted to take
from the company. Also, the company will have to satisfy CCM, as required under s 190(2)
(a) that they have issued statement in lieu of the prospectus has been submitted to CCM
and under s 190(2)(b), that the directors have paid for the shares they have contracted to
take up with the company.
If the company can satisfy CCM that they have comply with s 190 (1) and (2), then only will
CCM issue them with the certificate to commence business. In this case, as CCM has not
issued BU with the certificate to commence business, that contract made by BU and SB will
remain as a provisional contract and it would not be binding on the company. Mansor, the
promoter, would be liable under the contract.

CONCLUSIONS
It can be concluded that the contract made between SB and SL is a pre-incorporation
contract. It is not binding on the company unless the company agreed to ratify it. If it does
not then Ashak would be liable to pay. As to the contract between SB and BU, that contract
is a provisional contract, being a contract entered into after the public limited company
obtained their certificate of incorporation but before obtaining their certificate to commence
business. Unless the company obtained their certificate to commence business, the person
who entered into that contract would be liable, in this case, Mansor. But if the company
succeed in obtaining their certificate to commence business, then the company would be
liable.
Procedure of converting a private limited company to a public limited company.

Siti holds a majority shares in the company, AB Sdn Bhd. The company is involved in the
development of housing estates in Malaysia. The company requires additional capital to
develop several new housing estates in the country. Her general manager told her to
consider converting the company to a public limited company and list it on the Stock
Exchange to raise additional fund. Siti feared that, if she were to convert the company to a
public limited company, she might lose control of the management of the company. Siti
approached you for advice on the advantages and disadvantages of a private limited
company and a public limited company including whether she should retain the company as
a private limited company or convert it to a public limited company. Additionally, she wants to
know how she could retain control of the management of a public limited company if she
were to convert her company to a public limited company.
Advise her.
A, B and C are directors in the company, NW Sdn Bhd. In the recent Board of directors
meeting, it was decided that the company consider to buy a piece of land of 1000 acres
adjacent to the company’s land to enlarge its plantation.
A who was in the meeting later approached the owner of the land, Zul, to make arrangement
for Zul to appoint his son, Ason, as a consultant in the sale of his land to the company. His
son would be paid RM5 million to secure a selling price of his land for RM50 million to the
company. Zul agreed to the agreement.
Zul was invited to attend the next Bpard of Directors’ meeting. A and Ason attended that
meeting. Ason told the Board that Zul was prepared to sell the land for RM50 million. The
Board, with the recommendation of A, later agreed to buy the land.
B came to know about this arrangement. He was unhappy. He wanted to have A removed
from his directorship in the company.
B approaches you for advice on how he could have A removed from being a director in the
company.
Advise him.

ISSUES
NW wanted to buy a piece of land belonging to Zul to expand the company’s plantation. A,
who attented the board meeting made use of that information to approach Zul to appoint his
son Ason, as consultant to deal with the company. His son would be paid a fee of RM5
million to deal with the company to buy the land for RM50 million.
B, another director came to know about it. He wanted to have A removed as a director of the
company. The issue is how can he have A removed as a director of the company.

LAW
As the issue is on company matter, then it is necessary to consider it under the CA 2016, in
particular, the removal of director under s 206 CA 2016.

ANALYSIS
B wanted to have A removed as a director in the company NW. B would have to know he
could have A removed as a director in the company.
B must first show A has been in breach of his duties or responsibilities as a director of the
company and secondly, he must follow the procedure as set out in the Act.
Under the Act, a director has duties and responsibilities which he must, under s 213, at all
exercise his power for the proper purpose and in good faith in the best interest of the
company. Under s 218, a director shall not use any information acquired by virtue of his
position as a director of the company or use any opportunity of the company which he
became aware of, in the performance of his functions as the director to gain directly or
indirectly a benefit for himself or any other person or cause detriment to the company. Under
s 219, a director has a general duty to make disclosure of such events and matters affecting
or relating to himself as are necessary for the purposes of compliance with the requirements
of the Act. In this case, it is evident that A has been in breach of these sections of the Act for
failure to act in good faith in the best interest of the company, in using information acquired
by virtue of his position as a director to gain directly or indirectly a benefit for himself or his
son to the detriment of the company. He has also failed in his duty to make disclosure of the
matters affecting himself and the company. For these reasons, B would good ground to have
A removed as a director in the company.
B, in order to remove A as a director in the company, would have to follow as set out in s
206 of the Act. He would have to serve a 28 days’ written special notice giving reasons to
request the company to pass an ordinary resolution to have A removed as a director in the
company. The company, when it received that special notice from B, will have to, as soon as
possible, serve that special notice on A giving him 14 days period to make a written reply.
In addition to that, the company will have to issue a 14 days’ notice to all shareholders
calling a general meeting to consider an ordinary resolution to have A removed as a director
of the company.
If the company were to receive the written reply from A, then the company will have to attach
a copy of reply together with the notice calling for a general meeting to the shareholders. On
the date of the general meeting, A would be allowed to make oral representation to the
general meeting before that resolution is passed.
After hearing A’s representation and any other views expressed by any members in the
general meeting, the members would then be asked to cast their votes,
If more than 51% of the members presented agreed to the resolution, A would be removed
as a director from the company.
After the meeting and before the Bursa Malaysia closed its trading, the company will have to
give a written notice informing Bursa Malaysia that the company has passed a resolution to
remove A from his directorship in the company. (only for public limited company)
The company will also, within 14 days from the date of meeting give written notice to CCM to
inform them of passing of the resolution by the company to have A removed as a director.

CONCLUSIONS
In this case, it is evident that A has misused his position as a director to have the company
removed him of his position. The company has to follow the procedure as set out in s 206 of
the Act to remove A from his position. If that procedure is followed then there an be no cause
to A to continue his directorship in the company.
Siti is the majority shareholder of Siti Sdn Bhd. Over the past ten years the company has
been manufacturing component parts for supply to the car manufacturers in the ASEAN
countries. The business has flourished. She has now decided to convert her company into a
public limited company to increase the capital to expand the business.
She approaches you for advice on advantages and disadvantages of a private limited
company and a public limited company and secondly, if she was to convert it into a public
limited company how could she retain the management control of the company. Advise her.

ISSUES
The issues that Siti seeks advice on are:
1. The advantages and disadvantages of private limited company and a public limited
company and
2. How could she retain management control of a public limited company if she was to
convert her private limited company to a public limited company.

LAW
The issues raised are relating to the regulation of companies. It will be necessary to examine
the issues under the Companies Act 2016.

ANALYSIS
Siti is a majority of a private limited company. As a majority shareholder of the company, she
would, it is presumed, have over 75% of the total share capital in the company. This means
whenever the company wanted to adopt an ordinary or a special resolution, she would be
able to exercise her right as a majority shareholder over the adoption of the resolution. In
other she would management control over the company.
This shows that the advantage of a private limited company is that a majority shareholder in
a private limited company has management control over the company. The other
advantages are that the company, though need its annual account to the Inland Revenue
Board, need not submit its annual account to the Companies Commission of Malaysia. It is,
therefore, not subject to public scrutiny. Also, the management of the company is not subject
to public knowledge.
However, the disadvantages are that it is subject to restrictions imposed under the 2016 Act.
Under s 42(1), a private limited company cannot have more than 50 members.
Under s 42(2), the company is restricted in the transfer of its shares.
Under s 43(1)(a), the company cannot offer its shares for sale to the public
Under s 43(1)(b), the company cannot allot or agree to allot any of its shares as securities to
the public
Under s 43(1)(c), the company cannot invite public to deposit money with it.
On the other hand, a public limited company has large number of shareholders and there are
no restrictions as that imposed for private limited company. The advantages are that a public
limited company, because of its large number of shareholders, could have raised large
amount of share capital. And because there are no restrictions the company could increase
its share capital by offering new shares to the public and at the same time invite them to
deposit money with the company. However, because of widespread of shareholding, it may
be difficult for any one person to have control over the management of the company. A
person may buy the company’s share in the open share market and gain control over the
management of the company.
Siti, from the advice given, will notice that there are advantages and disadvantages in both
private and public limited companies.
Siti will notice that it may be difficult to have management control in a public limited
company. The ways which she can adopt to have management control in a public limited
company, if she was to convert her private limited company to a public limited company,
would be:
1. She must not allow the public limited company to issue more ordinary shares than
she has so that she will continue to more voting right than other ordinary
shareholders.
2. She could get the company to issue more preference shares because the holders do
not any voting right. In this way, the company can increase its capital.
3. She could the company obtain loans from financial institutions to increase the
company’s finance to expand her business.

CONCLUSIONS
Siti is advised to examine the advantages and disadvantages of both private limited
company and public limited company before she decides to convert her company to a public
limited company. If she still decides to convert her company to a public limited company, she
may consider to adopt the suggestions made.
What is a company special resolution?
A company, though, owned by the shareholders, is managed by the board of directors. But
the shareholders can exercise their rights during company general meeting to control the
directors; management of the company. This is done by members proposing and adopting
resolutions in that meeting.
A special resolution is defined in s 292 (1) CA 2016 as; a resolution of which a notice of not
less than 21 days has been and passed by a majority of not less than 75% of the members
entitled to vote in that meeting.
Special resolution is generally used for important issues as in the change of company name,
increase in the share capital of the company or in the change of the object of the company.

What is an ordinary resolution?

A company, though, owned by the shareholders, is managed by the board of directors. But
the shareholders can exercise their rights during company general meeting to control the
directors; management of the company. This is done by members proposing and adopting
resolutions in that meeting.
An ordinary resolution is defined in s 291 CA 2016 as; a resolution passed by a simple
majority of more than 50% of the members entitled to vote. Usually, a notice of not less than
14 days has been to members informing them of the date and agenda of the meeting. It is
generally used in less important issue such as removal of director or on matters requiring
approval of general meeting.

What are the types of capital a company can have?

Company requires capital to carry out its objects. This capital is derived through various
means. The types of capital a company has are defined in s 69 to s 72 CA 2016.
It can be ordinary shares conferring the rights to the holders to participate in the
management of the company.
It can be preference shares conferring certain rights to the holders, though not the rights to
participate in the management of the company.
It can be loan capital where the company obtain loans from financial institutions against a
charge over the company’s property, which can either be an immovable property or movable
property owned by the company. The charge is regulated under s 352 CA 2016.