UNIT 1: INTRODUCTION TO COMPANY LAW

INTRODUCTION

 This chapter provides an outline of the various business entities in Malaysia and their
differences
 In Malaysia there are few types of business entities namely sole proprietorship,
partnership and company.
 There are a few factors which entrepreneur should consider before deciding which
type of business entity is best to their needs. The following are some of the factors
o Procedure required- some business entities require more steps and expenses
for the purpose of formation as well as to continue their existence
o Liability- owners of some business entities are liable for the debts of the
business vehicle
o Continuity- some business entities may have perpetual existence/ however
the existence of some entities is closely connected with the identity of the
owner.
SOLE PROPRIETORSHIP

 The sole-proprietorship is a business entity in which the business is owned by one

person, the sole proprietor. As the sole-proprietor owns the business, he himself is
responsible for the capital required for the business and the running of the business.
Though he may borrow and obtain goods and services on credit, he alone is
responsible for the repayment of the debts incurred by the business. Similarly, he
may employ other people to run the business for him, but ultimately, he is the one
who enjoys the rights to the business and also responsible for the business’
liabilities. In sum, the sole proprietor is solely responsible for all liabilities and debts
incurred
 In Malaysia, there is no legal requirement to register the sole proprietorship.
However, the business itself is required to be registered with the Registrar of
Businesses (ROB) under the Registration of Businesses Act 1956 within 30 days of its
commencement
 What then are the consequences if the business is not registered? Section 12 of the
Act states that it is an offence and the sole-proprietor is liable to a fine not exceeding
RM50,000 or to imprisonment for a term not exceeding two years or to both.
PARTNERSHIP

 The sole-proprietorship as a business vehicle is only suitable where the business is

small. A bigger business may require more funds and manpower. Then, the trader
may have to consider joining forces with another person and form a partnership.
 In Malaysia, the relationship of partners among themselves and with third parties
having dealings with them are prescribed in the Partnership Act 1961.
 Section 3(1) of the Partnership Act defines a partnership as “the relationship which
subsists between persons carrying on business in common with a view of profit”.
  Thus, it is important that there must be at least two persons who agree to do a
business to make profit. Section 47(2) of the Partnership Act as well as section 13 of
the Companies Act 2016 prescribe that the maximum number of persons in this
business relationship is 20. However, section 13 of the Companies Act 2016 does not
prohibit the formation of a partnership for profit consisting of more than 20 persons
under any other written laws. This should include the formation of professional
partnerships such as partnerships of accountants (Accountants Act 1967), architects
(Architects Act 1967), and lawyers (Legal Profession Act 1976).
 Currently, the Minister charged with the responsibility for companies is the Minister
of Domestic Trade, Co-operatives and Consumerism
Liability

 Section 11 of the Partnership Act further provides that every partner is jointly liable
with his other partners for all debts of the firm incurred while he is a partner.
 The court in IAC (Singapore) Pte Ltd v Koh Meng Wan (1979) discussed the concept
of joint liability of partners. If the firm fails to pay a debt, the creditor can take action
and obtain judgment against the firm. However, if the partnership property is
insufficient to satisfy the judgment sum, the creditor may execute the judgment
against the partners. The judgment creditor may elect to execute the judgment
against only one of them, and such a partner is liable to settle the amount
outstanding notwithstanding the partnership agreement.
COMPANY

 In Malaysia, the current statute of general application for companies is the

Companies Act 2016 (Act 777) (“the CA 2016”). The CA 2016, which replaced the
Companies Act 1965 (“the CA 1965”), was gazetted on September 15, 2016. The
enactment of this 2016 Act is the culmination of the process which started with the
establishment of the Corporate Law Reform Committee (CLRC) on December 17,
2003 to review the CA 1965.
 One of the objectives of the CA 2016 is to reform and modernise company law in
Malaysia in tandem with global practice. The formation and management of
companies, particularly private companies are simplified
 The reform of company law in Malaysia with the enactment of the CA 2016 brought
forth changes to the structure of a company which could be incorporated in
Malaysia.
 Section 9 of the CA 2016 defines the essential requirements of a company as having:
o A name;
o One or more members having limited or unlimited liability for the obligations
of the company;
o In the case of a company limited by shares, one or more shares; and One or
more directors (however section 196(1)(b) requires a public company to have
at least two directors).
 Contrast this with the structure of a company under the Companies Act 1965 where:
 o Every company, other than a wholly owned subsidiary should have at least
two members;
o Every company should have at least two directors;
o A company limited by shares should have issued at least two shares;
 Section 20 of the CA 2016 provides that a company shall have a separate legal entity
and unlimited capacity. It reads as follows: A company incorporated under this Act is
a body corporate and shall–
o have legal personality separate from that of its members;
o and continue in existence until it is removed from the register.
 Though section 20 appears to prescribe the separate legal entity concept only for
companies incorporated under the CA 2016, such concept is applicable to all
companies incorporated in Malaysia. Section 619(5) provides that “a company …
registered under any corresponding previous written law shall be deemed to be
registered under this Act and this Act shall extend and apply to the company
accordingly…”.
 Thus, all companies in Malaysia are legal persons. Unlike a partnership which may be
dissolved upon the retirement or death of a partner, the company enjoys perpetual
existence. It has its own legal personality and is separate from its members and
officers. The change of its members or officers does not affect its legal personality. It
continues in existence until it is removed from the register through liquidation or
deregistration by the Registrar of Companies (“the ROC”)
SOURCES OF COMPANY LAW IN MALAYSIA

 The sources of company law in Malaysia can generally be divided into legal sources
and non-legal sources.
Legal sources

 The principal source is the CA 2016. This Act of Parliament applies to all companies
though certain types of companies are exempted from specific provisions.
 Section 613 of the CA 2016 empowers the Minister charged with the responsibility
for companies (currently, it is the Minister of Domestic Trade, Co-operatives and
Consumerism) to make regulations to give effect to the Act. Pursuant to this power,
the Minister has made the Companies Regulations 2017.
 Other Acts of Parliament which are relevant are the Securities Commission Act 1993,
the Companies Commission of Malaysia Act 2001 and the Capital Markets and
Services Act 2007.
 Although there are statutes which are applicable to companies, sections 3 and 5 of
the Civil Law Act 1956 provide that reference may be made to English court cases if
there is a vacuum and subject to such qualifications as local circumstances permit.
 Further, the courts in Malaysia have also been known to refer to the decisions in
other commonwealth jurisdictions. Though these decisions are not binding, they are
persuasive precedents.
Non-legal sources
  The regulators and authorities have also issued codes of conduct and best practices
from time to time. These codes do not have the force of law. For example, the
Minister together with the ROC issued the Code of Ethics for Company Secretaries
and the Code of Ethics for Company Directors in July 1996.
 In March 2000, the High Level Finance Committee on Corporate Governance issued
the Malaysian Code on Corporate Governance, and this Code was revised in 2007
and 2012
UNDERLYING PRINCIPLES
Separate legal entity

 A company, upon incorporation, is a body corporate which is recognised by law to

have a separate legal entity from its members and officers. This fundamental
principle of company law was established in the case of Salomon v Salomon & Co Ltd
(1897), and formed the foundation of company law in Malaysia.
Concept of agency and trust

 There may be many members in a company. To manage the company, the members
will appoint a team to manage it. This team is known as the board of directors. Thus,
in a company, there are two organs: the members and the board of directors. They
have distinct powers which are usually defined in the CA 2016 and in some
companies, also in their respective constitution.
 In Great Eastern Ry v Turner (1872), Lord Selbourne aptly said this about directors:
Directors are the mere trustees or agents of the company, trustees of the company’s
money and property; agents in the transactions which they enter into on behalf of
the company.
 Thus, at common law, a director, when exercising his powers, owes a fiduciary duty
to the company. The director is to act honestly, in good faith for the benefit of the
company. He is not to abuse his power or position. He should avoid any conflict of
interest. The CA 2016 has also codified these duties in section 213.