Introduction to Company Law

Note 1 of 7 Notes
Incorporation of a company and its effects

Universiti Kebangsaan Malaysia

Faculty of Law
PHD Program in Law
P58462
Musbri Mohamed
DIL; ADIL ( ITM )
MBL ( UKM )

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Introduction
The main objective of this scribd is to
provide the readers with knowledge on the
fundamentals principles of company law.
In modern times company or corporation
have become an increasingly dominant part
of economic life.
The majority of students studying company
law whether it be for a degree, professional
qualification or on any other type of
courses opined that company law can be
very dry and boring.

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A company is an artificial person
created by the law.
A company is a type of corporation.
The term corporation is wider than
company as it includes foreign
companies and various other
corporate bodies.
As at September 2007, there were
over 784,000 registered companies in
Malaysia and over 4200 are foreign
companies.

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When you form a company, you form an imaginary legal
person which can hold and dispose of property, take legal
action and sign documents.

Because of this separate legal entity a company can have

assets and liabilities and make profits and losses quite
separately from its members.

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You will have difficulty understanding the rest of company law if
you do not have basis grasp of the legal materials and principles
surrounding the existence of the separate corporate personality.
The effect of incorporation of a company is that the company is
vested with a corporate personality i.e a company is treated as a
legal person. Companies are creature of statute. Therefore a
company is separate and distinct from its shareholders and
directors as facts shown in the case of Salomon v Saloman & Co
Ltd [1897] AC 22.
And as Adam Smith pointed in The Wealth of Nations when
ownership is separated from management the latter will inevitably
begin to neglect the interest of the former thereby creating
dysfunction within the company.

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Ooregum Gold Mining Co of India Ltd v Roper [1892]
AC 125 pp133; Per Lord Halsbury LC :-

...the whole structure of a limited company owes its existence

to the Act of Parliament, and it is to the Act of Parliament
one must refer to see what are its powers, and within what
limits it is free to act.

Per Lord Denning The Discipline of Law ,

Butterworths, London, 1979, p.9

“ Beyond doubt the task of the lawyer – and of the judge

– is to find out the intention of Parliament. In doing this,
you must, of course, start with the words used in the
statute ; but not end with them – as some people seem to
think. You must discover the meaning of the words.”

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Types of companies

Most companies fall into two categories, depending on the type of liability
that can be imposed on the owners:

A company limited by shares, limits the liability of shareholders to the value

of their shares. This structure is suitable for most trading businesses and can
be a private company or a public company.

A company limited by guarantee, most often used by non-trading

organisations, for example, sporting clubs and foundations.

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S.4 - defines ‘company limited by shares’
as a company formed on the principle of
having the liability of its members limited
by the memorandum to the amount (if
any) unpaid on the shares respectively
held by them. This is the most common
form of company. The liability of a
member of this company will depend on
whether his shares are fully paid or not. If
he holds fully paid shares, he has no
further liability to the company. If the
company becomes insolvent he cannot be
made to contribute to the assets of the
company. Only if his shares are partly
paid, he will be liable to contribute to the
company’s assets, up to the amount still
unpaid on his shares.

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A company limited by guarantee id defined by section 4 as ‘a company in the
principle of having the liability of its members limited by the memorandum to
such amount as the members may respectively undertake to contribute to the
assets of the company in the event of its being wound up’. 

This type of company does not have a share capital and so does not require the
members is specified in the memorandum of association. If the company is
wound up, then a person who has been its member may be required to
contribute up to his amount of guarantee towards payment of debts incurred by
the company while he was a member. This liability extends to those who has
left the company but was a member within a year before the company wound
up. Although this type of company does not have a share capital, it is a separate
legal entity. It is not normally used for trading, but is often formed to run clubs
and other organizations that is maintained by subscription, social activities and
donations.

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An important feature of corporation is limited liability. If a corporation
fails, shareholders normally only stand to lose their investment, and
employees will lose their jobs, but neither will be further liable for
debts that remain owing to the corporation's creditors.

Advantages of a company include :

(a) it is a separate legal entity from the owners;

(b) you can own property in the name of the company;

(c) there is usually limited liability for the shareholders (unless they have given
a personal guarantee);

(d) you may be able to take advantage of tax minimisation schemes (legal ones,
of course);

(e) it can be owned and operated by only one shareholder and director; and

(f) it may make it easier to attract capital investment because of shareholders'

limited liability.

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Possible disadvantages include:

(a) they can be complicated and expensive to establish and administer

if it is a "large company";

(b) if you are not a sole shareholder, the shares may be difficult to sell;

(c) if you have only a minority shareholding you may be allowed little
or no input into the affairs of the company;

(d) you will only be able to leave the shares in the company to your
beneficiaries under your will, not the assets of the company separately;
and

(e) they require expensive procedures to comply with reporting

regulations.

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In order to create an environmentally friendly attitudes towards the
studying of company law the syllabus appear in this scribd includes
various aspects of company law inter alia ;

1.Incorporation of a company and its effects ,

2.The memorandum and articles of association ,

3.Directors duty and liabilities,

4.Shares,

5.Insider trading,

6.Merger & Takeover , and

7.Winding-up.

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1.Incorporation of a company and its effects
Separate Legal Personality

Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor
[1997] 1 CLJ 529, FC

… the law treats a company as being a separate person

from its members and those who manage its operations.
This is the doctrine of separate legal personality.

Goh Hooi Yin v Lim Teong Ghee [1977] 2 MLJ 26 ,

Arulanandom J held that it was incumbent for Malaysian courts

to comply with the doctrine as enunciated by the English courts
unless there are compelling reasons not to do so.

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Abdul Aziz bin Atan & Ors v Ladang Rengo Malay
Estate Sdn Bhd [1985] 2 MLJ 165 , it was held that
transfer of ownership of the shareholders does not entail a
change in the entity of the company.

Perman Sdn Bhd & Ors v European Commodities

Sdn Bhd & Anor [2005] 4 CLJ 750 , Gopal Sri Ram
JCA held that a company is a separate person from the
shareholders. The shareholders have no interest, legal or
beneficial over the property of the company.

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Perpetual succession is one of the principal distinguishing characteristics
of a company whereby it retains its legal persona even though its
membership may change over time. Its status as a legal entity, which
evolved from Salomon v Salomon & Co Ltd and since codified under
s 16(5) of the Malaysian Companies Act 1965 , continues until
such time as the company is liquidated or wound up.

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Pre-incorporation Contract

A pre-incorporation contract is one which is

attempted to be made on behalf of a company
which is not yet formed.

The problem with these contracts is who

exactly is liable under them. The question to be
asked is, is the company liable or is it the
promoter who incurs liability. At common law,
a number of rules were established. The first
one is that until the company is formed it has
no legal existence. A company comes into
being from the date on its certificate of
incorporation .

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A pre-corporation contarct is one which is entered into when
the Company is in the process of being incorporated but is not
yet completed it. At common law such contracts were held to
be void, as the Company is not yet in existence Newborne v
Sensolid [1954]

IN the case of Kelner x Baxter [1866] certain individuals

were purportedly acting on behalf of the Gravesend Royal
Alexandra Hotel Co. Ltd which was in the process of being
formed. The individuals entered into a contract for the
purchase of wine from K.The wine was delivered to the
Company after its formation but before K was paid the
Company went into liquidation.

The Court held that the Company was not liable but the
individuals were personally liable as they had entered into
contracts before the Company came into existence .

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In the case of Phonogram v Lane [1982] before incorporating a
company called Fragile Management Ltd.L contracted with the
Plaintiff for a loan of 12,000 to finance a pop group called Cheap,
Mean & Nasty. The Plaintiff wrote to L in which reference was made
to him undertaking to pay. He neverthelss was required to sign and
return a copy for and on behalf of Fragile Management Ltd.The
Company was never performed and the group never performed.

The Court held that the defendant was personally liable to repay the
money advanced.

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The above problems were overcome when the
legislation was enacted in the form of Sect35(1)
and Sect 35(2) of the Companies Act 1965.

Prior to ratification by the Company the person

or persons( promoters) who purported to act in
the name of the Company shall, unless there is
an agreement to the contrary , be personally
bound by the contract or other transaction and
entitled to its benefit. In short the outsider can
make the promoters who acted when the
Company was still in its pre-incorporation stage,
to be personally liable should the Company
decide not to ratify the contract after its
incorporation . For ratification to take place there
must be an express agreement between the
Company and the Promoter.

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Post-incorporation
requirements

•Appointment of directors
and secretary
•Common seal
•Registers
•Minute books
•Allotment of shares
•Returns
•Account and audit
•Use of name
•Responsible officers
•Bank account

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Lifting the corporate veil

Russell J in Jones v. Lipman [1962] 1 WLR

832 (High Court, England)

"the company was the creature of the defendant,

a device and a sham, a mask which he holds
before his face in an attempt to avoid the eye of
equity".

Lord Denning MR

"where corporations are just puppets of some hidden

controller and dance to his bidding, the Court may pull
aside the corporate veil and treat them as his creatures".

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Walter Woon
Company Law, Longman 1991, pp 31

"the situations in which the veil may be lifted are

exceptional. In general, the Courts will respect the
company's modesty and decline to lift the veil"

Aspatra Sdn Bhd & Ors v Bank Bumiputra Malaysia

Bhd & Anor 1988] 1 MLJ 97

Mohd Azmi SCJ :-

“The generality of the judicial power already vested in the

Superior Courts by the supreme law of the land is
unlimited, and for the purpose of achieving justice, the
power of the courts to do what is just under any law
requires no special legislation.”

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In Australia ………Sections 588G and 588H are the revised civil
remedy provisions in the Australian Corporations Law which lift
the corporate veil and allow for unlimited personal liability to be
imposed upon the directors of companies who fail to prevent the
company from incurring debts when there are reasonable grounds
for suspecting that it is insolvent.

These provisions apply exclusively to debts which are incurred

after June 1993. Its introduction was necessitated by the
deficiencies of the earlier provisions which were identified in the
Explanatory Memorandum accompanying the Corporate Law
Reform Act 1992

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Once a company is incorporated it is
liable for its own debts and obligations.
The members are not responsible for it.
This is one of the advantages of a
company that has limited liability. In a
company limited by shares, the members
will make a contribution to the capital
and he will be given shares. If the
company should suffer losses, the
shareholder is not liable to contribute any
more to the company if he has fully paid
for his shares. His actually loss would be
the amount he has paid for the shares.
Creditors of the company cannot be take
any action against the members, because
the members are separate from the
company.

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Holding company is the legal holding
of an organization. So, it could be that
we have a company called XYZ, and
our brand is called XYZ. But, it doesn't
necessarily mean that the owners of the
organization, or the investors,
shareholders, or partners of the
organization have the same name. So, it
could be that the holding company,
which is the funding, or the financially
supporting part of the organization is
not only, has a different name, it could
be based in a different country. Or if it's
based in the same country, in different
state.

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The holding company is really the organization that
incorporates the owners, the financiers of that organization. So
the holding company, is what we call like the mother ship. It is
the financial, financial responsible or, financial investor part of
the operation. It's almost like the silent partner within an
organization. You don't necessarily now it's there. It can be
based in a different state, different town, different country, and
yet it's very much responsible for the operation of the business,
but it could be operating a number of different businesses under
that particular holding. So, for example, it could be that your
company could be the holding organization that operates four or
five franchise operations in different, different trading
environments, but the investor, the management of that business
is what we call the holding company that funds the other
activities.

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Questions for Discussion :

1.State the legal principle on company law established by the

case of Saloman v Saloman.

2. When does a company become a separate legal entity?

3. What is the effect of the incorporation of a company?

4. Explain the significance of the “veil of incorporation”?

5. List out situations in which the veil will be lifted?

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This scribe provides a precise introduction to the incorporation of a
company concept and its implication which would enable a reader to
understand the legal implications of business transactions.

Continue to Note 2…………………….

Musbri Mohamed

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