CLASSIFICATIONS AND THE

CHANGING STATUS OF COMPANIES

 The registered company
A corporation, which has, in law, an existence rights and
duties seperated from those of it members.
All companies (Public or Private) registered under the
Companies Act is a registered company.
Companies are classified according to member’s liability
and according to whether they are public or private.
 Public vs Private Companies
Public Companies
Limited by shares or limited by
guarantees and having a share capital,
being a company.
May be listed or unlisted
All companies listed on Bursa Malaysia
are Public Companies
Required to lodge financial reports
Required to maintain a register of
substantial shareholders
Restriction on loans to directors and
connected persons
Private Companies
Any company that is registered as or
converts to a private company under Sec
4(1) of Companies Act.
Sec 22(4) All private companies limited
by shares must include the words
‘Sendirian Berhad’ (Sdn Bhd) [Private
Limited (Pvt Ltd)]
Exempted if it has less than 20
members and non of it members are
themselves companies
Exempt Private companies can keep
financial information private.
Restricts the right to transfer its shares
Not permitted to have more than 50
shareholders
Not allowed to undertake certain fund
raising activities (issue of a prospectus)
 Limited Companies
A company’s liability to pay its debt are unlimited.
Liability of members are limited either by shares or
guarantees.
Limited Companies have the word ‘Berhad’ (Bhd) as part of
name – Sec 22(3)
The registered Company
 Changing the status of a company
A registered company may at any time, wish or be obliged to change
the status with which it was originally registered.
Private company limited by shares may decide to increase its share
capital by offering its securities to the general public to secure
further capital.
Where a public company's issued share capital falls below the
minimum requirement of share capital permitted for a public
company, the public company must re-register itself as a private
company.
The company must pass a special resolution to change the status of a
company
Identity of the company or any of its rights, or obligation or legal
proceedings for or against the company is not affected by changing
status of the company. (Sec 26, CA)
 Incorporating a company and the
legal consequences
Under Sec 65(5), upon incorporation a company is
Is capable forthwith of performing all the functions of
an incorporated company,
Is capable of suing and being sued on its own name,
Has perpetual succession and shall have a common seal,
and
Has the power to acquires, hold and dispose of property.
Separate legal personality / entity
Distinct legal entity separate from its members and
management.
Corporate veil is “drawn” between the corporation and it
membership and management.
Principle of veil of incorporation was established by the
decision of House of Lord in the case of Salamon v
Salamon & Co.
 Salomon v Salomon & Co (1897)
Facts
Salamon, a leather businessman incorporated his business
as a limited company.
S, his wife and 5 children were the shareholders.
Company purchased S business for 39000.00
$20000 fully paid $1 shares and debenture to the value of
$10000
 Debenture transfer to Mr.Broderip in return of a loan of $
5000
Company went to liquidation, sufficient fund to meet
company debt to Broderip but not to other creditors
Findings
HC: Company was no more than an Agent of Its
Principle, Salmon
CA: there was a trust relationship, company held its
property on trust for its beneficiary, Mr. S
According to the House of Lords, the Statutory language of
the Companies Act 1862 (s 6) was clear. A company could
be incorporated providing it had at least seven members
irrespective of whether or not all seven members made a
substantial contribution to the company’s affairs.
 Effects of the Corporate veil
Rights and duties of shareholders are determined in
the company’s constitution.
A separate legal person from its members.
Company is liable for its own debts

Company’s Liability

Company’s property
Consequences Contractual capacity

Company is liable for its own debts

Crime

Perpetual succession

borrowing
a) Company is liable for its own debts
 Shareholders not liable for debts and liabilities of
company.
 Shareholder can be a debtor or creditor of the
company can sue or be sued by the company.
 Lee v Lee’s Air Farming Ltd
L Formed a company, L holds 2999 shares and his wife hold 1
share. L was employed as chief pilot in aerial crop
spraying. L killed in a crash while flying. Wife sued the
company for compensation.
Held: the contract of employment was valid. His widow could
recover compensation from the company
b) Company’s liability
Companies liability is always unlimited. Members liability is
limited. Members liability is to the Company not the
creditors.

c) Company’s property
Company owns it own property. Shareholders has no direct
right over company’s property.
Macaura v Nothern Assurance Co Ltd [1925]
Timber merchant converted his business into a company. Property of
company destroyed by fire. M brought an action against the
insurance company.
Held: Altough property has been insured it was under M’s name. M
no longer owned the property to which he claim and as such
insurance company was held not be liable to meet claim.
d) Contractual capacity
Has full contractual capacity, can enforce its contracts
May also be liable for negligence, shareholder cannot be
held liable unless he is personally negligent.

e) Crimes
Company can be convicted of a crime, regardless of its
directors are also convicted.
Limitation: crimes which requires physical act of driving
vehicle.
courts may regard the mens rea of those individuals who
control the company to be the mens rea of the company.
Crime against the company
Company can be victim of a crime.
f) Perpetual succession
Existence of the company does not depend on existence
of members.
the company continues in existence until wound up.

g) Borrowing
A company can borrow money and grant a security for a
debt.
Only a company can create a floating charge.
 LIFTING THE VEIL OF
INCORPORATION
Separate legal personality of company operates as a shield.
The screen separating the company from its individual
shareholders and directors is commonly referred to as "the
veil of incorporation".
Sometimes the law is prepared to examine the reality
which lies behind the company façade
Common law
Judiciary universally accepts the principle of a company as a
separate legal entity. In exceptional instances court dislodges
the corporate veil .
It is difficult to classify the justification which merit the
exercise of courts power.
Court will seek to remove the corporate veil in pursuit of
application of equitable principles.
In Malaysia, “doing justice” appears to be the sole criterion that
motivates the courts to exercise their inherent jurisdiction and
this has been the case ever since the decision of Hotel Jaya Puri
Sdn. Bhd. v National Union Bar & Restaurant Workers & Anor
[1980].
Instances court might allow to lift corporate
veil
i. Company Identity Used to Evade Obligations (Fraud or
Facade Cases)
Underlying motive for the incorporation of a company is
to enable its membership to impugn an existing binding
obligation with a third party or instigate some other
form of fraud.
In such a case court may dislodge the corporate veil to
prevent those involved in the fraudulent act from
escaping a liability.
ii. Agency
company is merely carrying on business as the agent of
another - so that transactions entered into by the
subsidiary can be regarded as transactions of the
holding company:
iii. Group entity
Group of companies act as a single economic unit
 Later cases has doubted this principle

National Union of Hotel, Bar & Restaurant Workers v Hotel Malaya

Sdn Bhd [1987]
Held: The court was not prepared to hold that the hotel company was the
employer of the workers of the restaurant company. The general manager
was common both to the hotel and restaurant companies. The hotel
company only held 90.75% of the paid up capital of the restaurant company.
iv. Justice and equity
Courts have sometimes been prepared to pierce the
corporate veil where they feel this is in the interests of
justice.
There are situations where corporation veil was not lifted
Cases
Sunrise Sdn Bhd v First Profile
(M) Sdn Bhd & Anor [1996]
Lim Sung Huak & Ors v Sykt
Pemaju Tanah Tikam Batu Sdn.
Bhd. [1993]
Development & Commercial
Bank Bhd v Lam Chuan Co &
Anor [1989]
JH Rayner ) Mincing Lane) Ltd &
Ors v Manila Sons (M) Sdn. Bhd.
& Anor [1987]
Yap Sing Hock & Anor v Public
Prosecutor [1992]
explanation
Where there is no dispute as to the identity of
the controller of the company.
Where there is delay in bringing proceedings
by those who seek to lift the corporate veil.
When a company has been duly incorporated
and the alleged wrongdoer is not even a
shareholder or director of that duly
incorporated company.
Where the subsidiary whose veil that is sought
to be lifted is not wholly owned by the holding
company.
Where the company is a victim of fraud or
wrongful deprivation by the person who solely
controls it.
 Legislation
CA 1965 Provision
S 67(5) If a company contravenes this provision then notwithstanding section 369 the
company is not guilty of the offence.
− The officers will be criminally liable and the penalty is imprisonment for 5 years or
find of RM100, 000 or both.
S 169 Requires the directors of a holding company to prepare consolidated accounts
incorporating the financial position of the holding company and its subsidiaries. The
act clearly recognises the function of a group related companies as a single
commercial entity.
S 121 Provides that an officer of the company who signs or is authorised to sign on the
company's behalf any bill of exchange, cheque or promissory notes where the
company’s name is not properly or legibly written is guilty of an offence and is liable to
the holder of the instrument or order for the amount due (unless it is paid by the
company).
S 304 Provides that an officer can be personally liable to creditors for debts incurred by the
company
S 36 Provides that if the number of member falls below two (except in the case of a wholly
owned subsidiary) and the company carries on business for more than six months ,
any member who is aware of this is personally liable for debts contracted after the
period and is also guilty of an offence.
 The Agency relationship
 An agency is a relationship where one person ( the company) consents
or is deemed to have consented that the other person (eg. director,
employee, secretary) should act on its behalf so as to affect its relations
with third parties.
 Whether an individual officer of a company is possessed of an
authority to bind the company in a contractual relationship with a
third party will be dependent upon the rules of agency.
The act of an agent could only bind the company if they
were within the objects of the company. Acts outside the
scope of company objectives is ultra vires.
Sec 20: an act of the company is not invalid merely because
it is outside any objects in the company’s constitution.
 Types of Authority
Valid authority

Actual Authority Ostensible

(Expressed, (Apparent)
implied or usual) Authority

"An 'actual' authority is a legal relationship between principal and

agent created by a consensual agreement to which they alone are
parties. To this agreement the contractor is a stranger; he may be
totally ignorant of the existence of any authority on the part of the
agent.” Freeman and Lockyer v Buckhurst Park Properties
(Mangal) Ltd [1964] 2 QB 480 (Diplock LJ).
Actual authority may be limited or entirely absent by virtue
of :
The object clause
Clause in the Articles
GM resolution
Director’s duties to the company
A defective or no appointment
What if the Agent exceed the limitation?
Principal is not bound by the transaction if the 3rd party is aware of the
limitation on the agent’s authority and entered into contract anyway.
What amounts to notice under common law?
i. Actually knew,
ii. Ought to have known: duty of enquiry where circumstance
suspicious.
iii. Could have known: constructive notice

"If ..the directors have powers and authority to bind the company, but certain

preliminaries are required to be gone through on the part of the company before

that power can be duly exercise, then the person contracting with the directors is

not bound to see that all these preliminaries have been observed.” Indoor

management Rule
Fountaine v Carmarthen Railway Co (1868) LR 5Eq 316
When there are persons conducting the affairs of the company
in a manner which appears to be perfectly consonant with the
articles of association, then those dealing with them,
externally, are not be affected by any irregularities which may
take place in the internal management of the company.
If agent exceeds authority
P/company can ratify contract by ordinary resolution, or
Agent incurs liability vis-à-vis P and vis-à-vis third party.
Exceptions to Turquand’s case rule:
Actual knowledge of the fact that transaction is outside the
authority. Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen & Ors
[1998]
Third party is an insider in th organisation (officer of company).
Morris v Kansen [1946]
Suspicious circumstance surrounding the authorisation of a
transaction an third party should reasonable have been aware of such
circumstances. Underwood v Bank of Liverpool & Martins Ltd
[1924]
Authorisation was forgery. Ruben v Great Fingall consolidated
[1906]
Transaction requires special resolution, third party is deemed to have
notice of the outcome. Irvine v Union Bank of Australia (1877)
Doctrine of ostensible authority
Always come when actual authority was absent.
 Freeman & Lockyer v Buckhurst Park Properties (Mangel) Ltd [1964]
“A principal is bound, not only by such acts of the agent as are
within the scope of the agent’s actual authority, but by such act as
are within the larger margin of an apparent or ostensible
authority derived from the representations, acts, or default of the
principal.”
Conditions to be fulfilled
I. Representation that agent has authority.
II. Such representation was made by a person who has actual
authority to manage the business.
III. Third party (contractor) actually relied on the representation
IV. That under its memorandum or articles of association the
company was not deprived of the capacity either to enter into a
contract of the kind
a) Representation
Board of directors who has actual authority under MOA
to manage the business permit the agent to act in the
management, thereby represent to all person dealing
with such agent that he has the authority
b) Representation by someone with actual authority.
First Energy Ltd. v Hungarian International Bank Ltd
[1993]
c) Notice
there is no liability on the basis of ostensible authority if
the third party on notice or put on inquiry as to extent of
the person's authority.
If third party was on notice of agent’s limited authority
and ignored than company will not be liable.