Historical Development

Due to the British administrative

structure in Malaya, before the
Second World War, there was no
uniform company legislation
applicable throughout Malaya.

Dr Hariati Mansor

 Initially, the Straits Settlements

applied the Indian Companies
Ordinance 1866. The Indian
legislation was later repealed and
replaced by the Straits Settlements
Ordinance 1889 which constituted
the first local company legislation.

Dr Hariati Mansor

 The 1889 legislation was later

repealed and replaced in 1915 and
1923 and continued until the
introduction of the Straits
Settlements Companies Ordinance
1940.

Dr Hariati Mansor

 In the Federated Malay States, the statute

applicable was the Companies Enactment
1897 which was later repealed and replaced
by the Companies Enactment 1917, while in
those outside the federation, each has its
own separate but similar companies statute.
Although there were separate laws governing
the states of Malaya, the basic principles of
the statute remained similar because they
were based on the English law at the time.
Dr Hariati Mansor

 Royal Charter of Justice 1807Penang

Royal Charter of Justice in 1826
which extended the applicability of
English law to Singapore and Malacca
Royal Charter of Justice 1855 further
extended the applicability of English
law to the Straits Settlements
Dr Hariati Mansor

 In the Federated Malay States, English law was

employed through the Civil Law Enactment 1937, and
when the Unfederated Malay States became part of the
Federation of Malaya in 1948, the application was
extended to those states through the Civil Law
(Extension) Ordinance 1951.
Later, both Enactments were replaced by the Civil Law
Ordinance 1956 which applied to all states in the
Federation. When Malaysia, which included Sabah and
Sarawak, was formed in 1963, the Civil Law Ordinance
was replaced by the Civil Law Act 1956 (Revised 1972).

Dr Hariati Mansor

 Companies Ordinance 1946

remained until 1965 when it was
replaced by the Companies Act of
that year

Dr Hariati Mansor

 Until 1965, there were two Companies

laws; the Straits Settlements Companies
Ordinance 1940 which applied to the
Straits Settlements and the Companies
Ordinance 1946 which was applicable in
the Federation of Malaya.
Sabah and Sarawak too remained separate
and had separate legislation: the
Companies Ordinance 1953 of Sabah and
the Companies Ordinance 1958 of Sarawak
Dr Hariati Mansor

 the Ministry of Commerce and Industry set

up a committee on 30th October 1963
chaired
by
Raja
Mohar
bin
Raja
Badiozaman (the committee is also known
as the Mohar Committee) to recommend
the new Companies legislation in Malaysia.
In recommending the new legislation, the
Committee considered legislation in force
at the time in England, Australia, India and
New Zealand.
Dr Hariati Mansor

Development of Corporate &

Insolvency Law
Corporate insolvency law historically originated from the
development of bankruptcy law. Prior to the
establishment of systematic bankruptcy procedures in
the early sixteenth century, creditors had to resort to the
ordinary process of the court to recover their debts.
Remedies afforded by insolvency law at the time were
either to seize the body or the effects of the debtor.
During that time, there was no collective action and
therefore the debtor was subjected to multiple actions.
The creditors were competing against each other for the
effects of the debtor on a first come first served basis
because the principle of equal distribution had not yet
been developed.
Dr Hariati Mansor

10

 Legislation borrowing (from Roman Law),

the concept of equal distribution of the
debtors assets in proportion to his debts
to the creditors was passed in 1543 and
was further enhanced with the passing of
subsequent legislation in 1570.
The same legislation also established
provisions on fraudulent trading and they
remained part of insolvency law until
replaced by the Companies Act 1925.
Dr Hariati Mansor

11

 In response to the crisis, the government made some

amendments to the provisions of the Companies Act
1965. The purpose of these amendments was to ensure
transparency in the transactions and to overcome
weaknesses identified in corporate governance. One of
the shortcomings of the current company legislation is
the lack of rescue mechanisms for companies in
financial difficulties. The only such mechanism is
available under section 176 of the Act which stipulates
the power to compromise with creditors and members.
Companies in financial difficulties had resorted to
section 176 to avoid liquidation due to the dearth of
any other alternatives.
Dr Hariati Mansor

12

 To remedy these weaknesses, the provision in

section 176 was amended with the objectives to:
Ensure transparency in obtaining protection
orders;
Ensure creditors are protected by having strict
time periods for applications to extend protection
orders;
Prevent disposition of assets; and
Enable creditors to decide the viability of the
proposals by requiring the company to make full
disclosure at an early stage.
Dr Hariati Mansor

13

 Although heavily relied on during the financial crisis, the

mechanism in section 176 has several weaknesses;,
The provision did not specify the timeframe for
companies to make with proposals. The companies have
thus used this as an opportunity to delay obligations
towards creditors rather than making any proposals in a
genuine attempt to compromise;
The management which was responsible for the
companys financial difficulties was allowed to take
charge and manage the company which might result in
disposition of its assets to the detriment of creditors; and
The provision did not specify the period of protection
accorded to the company.
Dr Hariati Mansor

14

 The government also introduced various measures to

soften the impact of the crisis. Amongst the measures
taken was the establishment of the Pengurusan
Danaharta Nasional Bhd (Danaharta), a wholly
government-owned assets management company for
the purpose of acquiring non-performing loans from
financial institutions. In order to achieve its objectives,
the Pengurusan Danaharta Nasional Berhad Act 1998
(the Danaharta Act 1998) was passed outlining the
framework and existence of Danaharta, together with
special powers of acquisition and disposal of assets.

Dr Hariati Mansor

15

 In 2003, the Companies Commission of

Malaysia established the Corporate Law
Reform Committee (CLRC) with the purpose of
reviewing the current corporate law in order to
ensure that the law conforms to the
international
standard
of
corporate
governance. The CLRC undertook the task of
reviewing the current Companies Act 1965 in
2004. Among the areas reviewed were
directors duties, corporate insolvency and
capital maintenance rule and share capital.
Dr Hariati Mansor

16

 A consultative document was published in

2006 on reforming directors roles and duties.
The consultative document took the view that
in considering directors roles and duties, the
interests of other stakeholders should be
taken into consideration. The CLRC did not
directly propose that directors should directly
consider the interests of creditors in insolvent
situations and considered the relationship
between a company and its creditors is
sufficiently dealt by the existing law.
Dr Hariati Mansor

17

 The committee also recognized the need to

introduce the business judgment rule in the
company legislation, a suggestion which has
been adopted in the latest amendment to the
Companies Act in 2007. The view sanctioned by
the committee on the need to insist on protection
to directors in discharging their duties by
including the business judgment rule is to protect
honest directors and also to dissuade them from
leaving the company so that they will continue to
use their skills to manage the company.
Dr Hariati Mansor

18

Conclusion
The influences of English law in Malaysian
courts
remain
steadfast,
although
the
decisions by English courts are only persuasive
and not binding. In addition, English
commercial law will be applicable in Malaysia,
provided there is a lacuna in the law and so
long as the law is appropriate to the local
circumstances. Section 5(1) of the Civil Law
Act 1956 stipulates that the law in England as
at 7 April 1956 is applicable in all States in
Malaysia except for Penang and Malacca.
Dr Hariati Mansor

19

 In Sabah, Sarawak, Penang and

Malacca, section 5(2) of the Civil Law
Act 1956 allows continuing reliance
on the current English law. Although
section 5(2) allows for the continuing
reception of English commercial law
in the four states, in practice, judges
seldom refer to the provision in
section 5 when making decisions and
do not make distinctions as to where
Dr Hariati Mansor

20