CHAPTER 5:

BUSINESS ENTITIES IN
MALAYSIA
BY
 OBJECTIVES

This chapter covers the fundamental principles of Business

Entities including:
 the principle of the legal entity of a company
 the basic factors which distinguish a company from a
partnership and sole-proprietorship
 types of companies
 formation and dissolution
 a company’s powers of borrowing and providing security
 duties and responsibilities of company directors
 other such matters concerning corporate bodies
 PREVIEW

 Introduction
 Legal Entity of a Company
 A Company and Its Members
 Lifting of the Corporate Veil
 Comparison and Distinction between a Company, Partnership
and Sole-proprietorship
 Types of Companies
 Formation of a Company
 Memorandum and Articles of Association
 A Company’s Powers of Borrowing and Providing Security
 Liquidation
 COMPARISON AND DISTINCTION BETWEEN A
COMPANY, PARTNERSHIP AND SOLE-
PROPRIETORSHIP
 can be compared in the following areas:
a) Structure
b) Registration
c) Transferability
d) Management
e) Number of members
f) Constitution
g) Capital and liability
h) Borrowing powers
i) Security over assets
j) Rules, procedure and information to public
k) Dissolution
 INTRODUCTION AND PREINCORPORATION OF A
COMPANY

• In Malaysia, there are basically four types of business entities , namely

a sole proprietorship, partnership, limited partnership and company.
• The important and most business entities in Malaysia are Company.
• Entrepreneurs may have to explore the option of incorporating a
company as their business vehicle.
• The principal statute that governs company law in Malaysia is the
Companies Act 2016.
 COMPANY
• The word company is defined to mean a company incorporated
under Companies Act 2016.
• Section 9, CA2016 – the essential requirement of a company as
having :

 A name
 One or more members having limited or unlimited liability for the
obligations of the company.
 In the case of a company limited by shares, one or more shares.
 One or more directors requires a public company to have at least
two directors.
 TYPES OF COMPANIES
• In Malaysia, companies can generally be classified as follows
:
Limited and Unlimited companies
Public and Private companies

• Section 192(1), CA2015 – A company is liable for its

debts.
• A member shall not be liable for an obligation of a
company by reason only of being a member of the
company.
 The important to know types of companies !!!

• Whether a member is liable for the company’s debts in the event

the company is wound up depends on whether the company is a
limited or unlimited company. – Section 192 (1) CA 2016.
 COMPANY LIMITED BY SHARES
• Section 10(2), CA 2015 – a company is limited by shares if the liability of its
members is limited to the amount, if any unpaid on shares held by the
members.
• Its members has either fully paid up on his shares or otherwise.
• Where a member of a limited company has fully paid up on his shares, the
general principle is that he will not be liable for the debts of the company.
• Even the company is wound up and the assets of the company are
insufficient to meet his liabilities, a member who has fully paid up on his
shares will not called upon to contribute for the companies debts.
• Where a member of a limited company has not fully paid up on his shares,
he may be called upon at any time by the company to pay the unpaid
portion.
• Thus the member of a limited company knows his maximum liability. At the most, he will lose
the amount he has agreed to invest in the company.
• His other personal assets will not be impacted when the company becomes insolvent. –
Section 435(2) CA2015.
 Company Limited By Guarantee
• A member’s liability is limited to the amount he agrees to contribute in the event if the
company is wound up. – Sec 10(3), Companies Act 2016.
• Section 31 (1), CA 2016 – requires company limited by guarantee to have a constitution
which shall contain matters prescribed:
1. The company is limited by guarantee
2. Object of the company
3. Capacity, rights, power and privileges of the company.
4. Number of members with which the company propose to be incorporated.
5. Others matters required by the CA 2016.
6. Other matters as the company so wishes.
• A member under company limited guarantee do not give upfront financial to kick start
the operation.
• Usually this types of company will not formed to carry on a business but rather to
provide recreation or amusement or promote commerce or any object to the
community or country. – Sec 45(1) CA 2016.
• Sec 45 (2), CA 2016 – does not allow the company to contributes its profits as dividend
to its members.
• According to Section 11(2), CA 2016 – a company limited by guarantee shall be a public
company.
 Unlimited Company
• Section 10(4), CA 2016 – as a company where there is no limit the liability of its members.
• Maybe classified under private company or public company – Section 11(3), CA 2016.
• Sec 25(1), CA 2016 – the name for unlimited company shall end with the word “Sendirian” or
“Sdn”.
• Members of an unlimited company are liable for all the debts of the company.
• There is no difference between members of an unlimited company and partners of a
partnership.
• The benefits of an unlimited company over that a partnership are unlimited company enjoys
separate legal entity from its members of an unlimited company and has a perpetual
succession.
• Those who wants to set up company under unlimited, they are required to comply with strict
regulations in the CA 2016, particularly with the requirements for the company’s account and
meetings. Most of them likely to choose to set up partnership than unlimited company.
• Sec 15(1), CA 2016 – the requirement of a private company that they must
have a share capital , memorandum of articles that contain restriction on
the right to transfer shares in the company, limiting the number of
members, prohibits the company from inviting the public to subscribe to its
shares or debenture and prohibits the company from inviting the public to
deposit money.
• The number of members is limited to only 50 person in a company only. –
Sec 42(3), CA 2016.
• It restricts the transfer of its shares. – Sec 15(1)(c), CA 2016.
• It cannot offer its shares or debentures to the public.
• It cannot allot shares or debentures with a view of offering them to the
public.
• It cannot invite the public to deposit money with the company.
 Public Companies ****

• As a company other than a private company – Section 2(1), CA 2016.

• Characteristic:
• It can be a company limited by shares or guarantee or unlimited company.
• It can have more than 50 shareholders.
• It need not restrict the transfer of its shares.
• It can offer its shares or debentures to the public.
• It can allot shares or debentures with a view of offering them to public.
• It can invite the public to deposit money with the company.
• A public company cannot have the word sendirian or SDN at the back of the
company.- Section 597(2), CA 2016.
• Section 25(1)(a), CA 2016 – the name of a public company should end with the
word BHD or Berhad.
• Public listed company – are companies whose shares are listed on Bursa
Malaysia.
• The shareholding of a public listed company cannot be concentrated in a few
there must be a spread of shareholdres.
• To protect the public, a listed company in Malaysia is required to comply with
the listing requirement formulated by Bursa Malaysia.
• Currently, there are four types of business vehicles available throughout Malaysia,
sole-proprietorship, partnership, limited liability partnership and company.
• In a partnership, 2 – 20 persons agree to carry on business in common with a view
to profit. Section 3(1), Partnership Act 1961.
• Every partner is an agent of the firm and his other partners for the purpose of
carrying on the partnership business.
• Section 13, CA 2016 – does not prohibit the formation of a partnership for profit
consisting of more than 20 persons under any other written laws.
 Does not require the registration of the partnership with any
authority.
 Section 5, Registration Business Act 1956 – Partnership business need
to be registration and the details of their partner must be given.
 LIABILITY OF PARTNERSHIP
• Section 11, Partnership Act 1967 – every partners is jointly liable with his other
partners for all debts of the firm incurred while he is a partner.
• Case : IAC (Singapore) Pte Ltd v Koh Meng Wan
“ If the firm fails to pay a debt, the creditor can take action and obtain judgement
against the firm.”
 Pre – Incorporation contract in

Malaysia Position
Sec 65 (1), CA 2016 – A contract or transaction that purports to be made by or on
behalf of a company at a time when the company has not been formed has effect
as a contract or transaction made with the person purporting to act for the
company… and he is personally liable on the contract or transaction accordingly.

Sec 65(2), CA 2016 – a contract or transaction referred to in that subsection may be

ratified by the company after its incorporation and the company shall be bound by
the contract or transaction as if the company had been in existence at the date of
the contract or transaction and had been a party to the contract.
PROMOTERS
Case : Re cape Breton Co (1885)

“ A Person becomes a promoter before the company is

incorporated, for he is to take steps to incorporated for he
is to take step to incorporated and establish its business.”
 FIDUCIARY DUTY

• A PROMOTERS stands in a fiduciary relationship with the company. He has an

obligation to act in good faith for the benefit of the company, and also not to
have any conflict of interest with the company.

• A promoter cannot :
 make any secret profit.
Exercise undue influence over the company.
Have any conflict of interest with the company.

• Case : Erlanger v New Sombrero Phosphate Co (1878)

• Where the promoter fails to declare his interest in the contract with the company he
is promoting, the contract is voidable at the company’s option.

• So to make it safe the promoters need to declare his any interest to the company to
avoid any conflict of interest. Make full and frank disclosure to the company.
 If a promoter breaches his fiduciary duty towards the company, the company may avail
itself of the following remedies.

1) Rescind the Contract

 If the company terminates the contract, both parties are to return the benefits
received.
If the property has been transferred to the company in consideration for a sum of
money, the company has to return the property and the promoter has to return the
purchase price received.
Case : Earlarger v New Sombrero (1874)
2) Damages
 Where rescission is not possible, the court may order the promoter to pay damages to
the company for breach of his fiduciary duty.
Case : Re Leeds and Handley Theatres of Variety.

3) Constructive Trust
 a promoter may have purchased a property for his own gain or benefit instead of for
the company he is promoting.
 Thus the promoter is deemed to be a constructive trustee of the company.
 Case : Fairview Schools Bhd v Indrani a/p Rajaratnam