Students Manuals Cca CSF

CERTIFICATE IN CORPORATE ADMINISTRATION (CertCA)
STUDY MANUAL COMPLIANCE AND STATUTORY FORMS
Compliance and Statutory Forms 1
Contents
Page Contents All rights reserved Chapter 1 Chapter 2 Chapter 3 Chapter 4 Chapter 5 Chapter 6 Chapter 7 Chapter 8 Chapter 9 Chapter 10 Chapter 11 Chapter 12 Types of Company Incorporation of Companies Memorandum and Articles of Association Company Meetings Directors, Company Secretaries and Auditors Shares, Preference Shares and Debentures Share Certificates, Transfer and Transmission Charges Prospectus Receivers and Managers Winding Up Regulatory Bodies 4 20 44 68 93 164 182 201 217 224 235 254 2 3
2008 MAICSA All rights reserved. No part of this work covered by copyright may be reproduced or copied in any from or by any means (graphics, electronic or mechanical, including photocopying, recording taping, or information or information retrieval systems) without the written permission of the writers. Disclaimer This publication is sold on the terms and understanding that (1) the editor or the Malaysian Institute of Chartered Secretaries and Administrators (MAICSA) as the publisher, are not construed as giving legal, secretarial, professional or other advice or services. (2) No person or entity should rely on the contents of this publication without first obtaining advice from another professional person. (3) To the extent permitted by law, neither MAICSA nor the editor is responsible for; (a) the result of any act or omission by any person or entity who relied on the whole or any part of this book; or (b) the completeness or accuracy of the information contained in this book. (4) To the extent permitted by law, the editor and MAICSA, each of them disclaim all and any liability for the consequences of any act or omission, including but not limited to any negligent act or omission by any person or entity who relies on the whole or any part of this publication. (5) Neither the editor nor MAICSA assumes any responsibility to inform any person or entity or any matter arising or coming to the notice of the editor or MAICSA which may affect or quality the completeness or accuracy of the information contained in this book. (6) Paragraph (1) to (5) of this Disclaimer prevails over any representation to the contrary that may be contained in this publication. First Published in November 2008
Chapter 1
TYPES OF COMPANIES Learning objectives: After reading this chapter, you should be able to: Distinguish a limited company from a partnership. Explain the classification of companies that may be incorporated under the Companies Act 1965. Distinguish a company limited by shares from a company limited by guarantee and unlimited company. Distinguish a private company, public company and public-listed companies. Explain what is meant by a holding company and a wholly-owned subsidiary.
1.
BUSINESS ORGANIZATIONS IN MALAYSIA
Business organizations in Malaysia consist of sole proprietorship, partnership and companies incorporated under the Companies Act 1965. In comparison, non-business organizations may be in the form of clubs, societies and trade unions. 1.1. Sole Proprietorship
Establishment of a sole proprietorship is under the Registration of Business Act 1956. A sole proprietor is often at a disadvantage as his ability to raise capital is limited. At the same time, he bears unlimited liabilities for the debts of the business. 1.2. Partnerships
Where two or more persons choose to operate a business together, they may run the business as a partnership.
Under Section 3(1) of the Partnership Act 1961, a partnership is defined as the relation which subsists between persons carrying on business in common with a view of profit. However, the following relations are not considered a partnership: the relation between members of any company registered under the Companies Act 1965 or members of a cooperative society under any written law relating to co-operative societies. A partnership is governed by the Partnership Act 1961. Nevertheless, the mutual rights and duties of partners, whether ascertained by agreement or defined by the Act, may be varied by the consent of all the partners. 1.3. Companies under the Companies Act 1965 Another option for two or more persons who choose to operate a business together is to run it in the form of a limited company. A company is an organization that is incorporated according to the requirements of the Companies Act 1965 and any corresponding previous enactments. Under s 16(5) of the Companies Act 1965, the effect of incorporation of a company is that: - It is a body corporate that is capable of exercising all the functions of an incorporated company, - It is capable of suing and being sued in its own name, - It shall have a perpetual (i.e. lasting) succession, - It shall have a common seal, - It shall have the power to hold land, and - The liability of the members to contribute to the assets of the company in the event of winding up is limited. A limited company, unlike a sole proprietor or partnership, is able to raise more capital. At the same time, the members or shareholders of such limited companies have limited liability, i.e. their liabilities for the debts of the business are limited. An incorporated, limited company has a legal personality of its own apart from its members or shareholders. As such, its debts belong to itself and not to the members or shareholders Salomon v A. Salomon & Co Ltd [1897] AC 22.
2.
DISTINCTION BETWEEN A LIMITED COMPANY AND A PARTNERSHIP
A limited company may be distinguished from a partnership in the following ways: a. Separate legal entity
Company: It is an artificial legal person, and has an entity (personality) that is

separate and distinct from its members or shareholders. Partnership: It does not have a legal entity that is separate from its partners.
b.
Commercial activities
Company: It need not be formed for the purpose of conducting commercial activities
only. It can be formed for the purposes of promoting art, science, religion, charity or any other object useful to the community. Partnership: The partners must be carrying on a business in common with a view of profit. c. Limits on the number of members
Company: Every company must have a minimum number of two (2) members. In the
case of private companies, the maximum number permitted is fifty (50), while there is no such limitation on public companies. Partnership: A partnership that is formed for purpose of gain (i.e. profit) is limited to twenty (20), unless it is a partnership formed for the purpose of carrying on any profession that is gazetted by the Minister in the Government Gazette. d. Right to properties of the organisation
Company: All properties are owned by the company itself. While the company is
not wound-up yet, the members do not have any interest in its assets. Partnership: Each partner has an interest in the partnership properties. e. Liability for debts
Company: The liability of members to contribute towards the assets of the company
on a winding-up is limited. In the case of a company limited by shares, the contribution is limited to the amount, if any, unpaid on the shares held by that member s 214(1)(d). In case of a company limited by guarantee, the contribution is limited to the amount that the member has guaranteed to pay.
Partnership: Partners are jointly liable for the contractual debts of the partnership.
Each partner is therefore liable up to the full extent of the partnership debts. Even
retirement will not release the partner from the liability for debts incurred prior to retirement.
f.
Legal actions and proceedings
Company: In case of legal actions, a company may sue or be sued in its own name,
without involving its directors or members. In fact, the members are generally not permitted to take action in the name of the company even if the company has been wronged in some ways the rule in Foss v Harbottle [1843] 67 ER 189.
Partnership: Although a partnership has no separate legal entity, under the Malaysian
civil procedural rules, a partnership can sue and be sued in its own name. Alternatively, action may be taken in the names of all the partners in order to enforce the rights of the partnership. g. Existence and succession
Company: A company has perpetual (i.e. lasting) succession. Even though its
shareholders and directors may come and go, the company remains until it is dissolved in accordance with the law. Even the death of all members of the company will not terminate its existence Re Noel Tedman Holdings Pty Ltd [1967] Qd R 561.
Partnership: In the case of a partnership, it may be formed for a fixed term or until a
partner gives notice to dissolve it. Where a partner dies or is declared a bankrupt, the partnership is also dissolved by operation of law, unless there is an agreement to the contrary. h. Compliance with legal requirements
Company: Once incorporated, a company needs to comply with various provisions

under the law relating to the maintenance of accounting records, statutory registers and other records. At the end of each financial year, a company must appoint an independent auditor to audit its accounts and to lodge the audited accounts with the Companies Commission of Malaysia. Thus, to comply with the various legal requirements, a company needs to incur high expenses to engage qualified professionals like auditors, company secretaries, tax agents and lawyers. .
Partnership: In the case of a partnership, it need not appoint an auditor to audit its accounts, unless there is a specific law that requires this to be done, e.g. for client
accounts of a legal firm.
i.
Raising of capital
Company: A company is able to raise capital by offering shares or borrowing money.

For private companies, this must be done on an invitation basis. For a public company, it may do so publicly. It is also possible for an investor in a public company to freely dispose off the shares purchased. For private companies, the Memorandum and Articles of Association do provide some restrictions.
Partnership: The capital in a partnership is derived from the partners contributions

and from loans taken from financial institutions. Thus, its ability to raise capital is limited compared to a company. Also, it is not easy to dispose off a partners shares as the consent of all other partners is required.
3.
CLASSIFICATION OF COMPANIES
There are many ways to classify the different types of companies incorporated under the
Companies Act 1965.

A company may be classified according to: s 14(2): The liability of its members, e.g. a company limited by shares, a company limited by guarantee or an unlimited company. The openness of its membership, e.g. a private company or a public company
Classification of companies according to liability of members s 14(2) Companies Act 1965:
Limited Companies
Unlimited Companies
Limited by shares
Limited by guarantee
Limited by shares and guarantee (no longer allowed)
Business Organisations SOLE PROPRIETORSHIP PARTNERSHIP COMPANIES UNDER CA 1965
Private Companies (Sdn Bhd)
Public Companies (Bhd)
Private companies
Exempt private companies
Non-listed public companies
Listed public companies
There are other ways to classify a company, e.g.: The holding and subsidiary relationship between one company and its parent company and other companies within the same group of companies. Whether a company is a local or foreign company The concept of limited liabilities in a limited company is as follow: - The liability of members to contribute towards the assets of the company on winding up is limited. - Under s 214(1)(d), the extent of contribution of members in a company limited by shares is limited to the amount, if any, unpaid on the shares held by that member. - Under s 214(1)(e), the extent of contribution of members in a company limited by guarantee is limited to the amount that the member has guaranteed to pay. - Thus, members in a limited company cannot be made to contribute an amount in excess of the amount set out in s 214. - Such companies must have the word Berhad (or its abbreviation Bhd) or Sendirian Berhad (or its abbreviation Sdn Bhd) as part of their names, to put creditors on notice that they are dealing with a limited company.
3.1.
COMPANY LIMITED BY SHARES
This is a company having a share capital, but with limited liability for its members. Under s 4(1), it is 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 the members. Thus, in a compulsory liquidation, the members liability to contribute towards the assets of the company is limited. The member merely loses his investment, while the creditors may not look to his personal assets for recovery of the debts. The debts belong to the company, and its liability for the debts is in turn unlimited. Such company is suitable for trading, since the risks involved are high. The company must have the word Berhad or its abbreviation Bhd as part of its name, in order to put creditors on notice of the members limited liability.
3.2.
COMPANY LIMITED BY GUARANTEE
This is a company not having a share capital. Under s 4(1), it is a company formed on the principle of having the liability of its members limited by the Memorandum to such amount as they may respectively undertake to contribute to the assets of the company in the event of a winding up. The amount specified as the members guarantee must be stated in the Memorandum and Articles of Association. Thus, in a compulsory liquidation, the members liability to contribute towards the assets of the company is limited, not exceeding what he has undertaken to contribute. Such company is commonly used for non-profit objectives such as for carrying on artistic, scientific, religious, charitable, educational or research or any other activities useful to the community. It may also be in the form of a trade association or chamber of commerce. Under s 24(1), upon the companys application, the Minister (of Domestic Trade and Consumer Affairs) may by licence direct that such company be registered as a company with limited liability but without the addition of the word Berhad to its name. The company will have to comply with the conditions as imposed by the Minister. Several restrictions apply to a company limited by guarantee, which must be stated in its Memorandum and Articles of Association: - Its activities are restricted to providing recreation, amusement or promoting commerce, industry, art, science, religion, charity, pension or superannuation schemes or any other object useful to the community.
Compliance and Statutory Forms10
- Under s 19(2), such company shall not acquire any land without the licence of the Minister, who may by licence empower the company to hold lands in such quantity and conditions as he thinks fit. - The profits made by the company cannot be distributed to its members as dividends, but instead to be applied to the promotion of its objects,
3.3
UNLIMITED COMPANY
Under s 4(1), it is a company formed on the principle of having no limit placed on members liability. In a compulsory liquidation, every present and past member is liable to contribute an amount sufficient for the payment of the companys debts and liabilities. The members liability is thus unlimited. It can be a private or public unlimited company. For a private unlimited company, the name should end with the word Sendirian or the abbreviation Sdn, while for a public unlimited company, its name shall not have the word Berhad or the abbreviation Bhd. Such company is not suited for trading, since the risks involved are high. The company is able to return capital to members without having to comply with the restrictions in s 64. 3.3.1. Conversion of an unlimited company to a limited company Under s 25(1), an unlimited company may convert to a limited company by passing a special resolution and lodging a copy of the resolution with the Companies Commission of Malaysia for registration. The Memorandum of the company must also be altered according to the terms of that resolution. The conversion takes effect when the Registrar issues a certificate of incorporation on conversion to a limited company, in Form 16. Nevertheless, a conversion does not affect the identity of the company. The existing rights and obligations of the company are not affected. It also does not render defective any legal proceedings by or against the company. 3.4. PRIVATE COMPANY
Under s 4(1), a private company is: - a company incorporated as a private company by virtue of s 15, or - any company that is converted to a private company under s 26(1).
It must not have ceased to be a private company under s 26, i.e. converts from a private to public company, or s 27, i.e. commits a default in complying with the requirements as to private companies. Under s 22(4), a private company must have the word Sendirian or the abbreviation Sdn as part of its name. Under s 15(1), the Memorandum or Articles of a private company must contain four (4) restrictions, i.e.: a. restricts the right to transfer its shares. b. limits the number of its members to not more than fifty (50). Joint holders of shares are counted as one person, and any past or present employees who continue to remain members are not counted. c. prohibits any invitation to the public to subscribe for any of its shares or debentures, and d. prohibits any invitation to the public to deposit money with the company for fixed periods or payable at call, whether or not with interest.
3.4.1. Exempt private company Under s 4(1), such company is a private company in which: 1. No corporation owns any shares directly or indirectly 2. There are not more than twenty members, none of whom is a corporation For such company, it is exempted from lodging with the Companies Commission of Malaysia its income statement and balance sheet together with its annual return after the conclusion of its annual general meeting (AGM). Under s 165A, the company shall attach to its annual return, a statement relating to the accounts of the company, signed by the auditor who states whether: - the company has in his opinion kept proper accounting records and other books - the accounts have been audited in accordance with the Act - the auditors report on the accounts was subject to any qualification, and - as at the date to which the accounts are made up, the company appears to be able to meet its liabilities as and when they fall due. An exempt company is not bound by the prohibition in s 133 and s 133A, i.e it may make loans to its directors or persons connected with the directors.
3.5.
PUBLIC COMPANY
Under s 4(1), a public company is as a company other than a private company. It is open to the public, with membership of more than fifty (50). There is no limit as to the maximum number of members it can have. Public companies may offer or invite the public to invest in its securities, provided they comply with the Securities Commission Act 1993 and the Capital Market and Services Act
2007.
A public company can be a limited company or unlimited company. If it is a public unlimited company, its name shall not have the word Berhad or the abbreviation Bhd. A public company may also be either limited by shares or limited by guarantee. Where a public company is limited by shares and the shares are quoted on Bursa Malaysia, it is known as a public-listed company. To be listed on Bursa Malaysia, a public company must obtain approval from the Securities Commission and Bursa Malaysia. Where the shares of a public company are not quoted on Bursa Malaysia, it is a non-listed public company. 3.5.1. Distinction between a private company and a public company A private company can be distinguished from a public company in the following ways: a. Name of company
Private company: A private limited company must have the word Sendirian Berhad
or its abbreviation Sdn Bhd as part of its name. If it is an unlimited company, its name shall end with Sendirian or Sdn.
Public company: A public limited company must have the word Berhad or its
abbreviation Bhd as part of its name. If it is a public unlimited company, its name shall not have the word Berhad or the abbreviation Bhd. b. Membership in the company
Private company: membership is limited to fifty (50) members. Public company: There is no limit on the number of members.
c. Restrictions in the Memorandum and Articles of Association
Private company: Under s 15(1), its Memorandum or Articles must contain four (4) prohibitions, i.e. pertaining to the number of members, right to transfer of shares and
to raise financing from the public. Public company: Its Memorandum or Articles do not contain those four (4) restrictions. It is allowed to raise financing from the public by issuing and registering a prospectus. d. Commencing business
Private company: After receiving its certificate of incorporation, it may commence

business and exercise any borrowing powers. Public company: After receiving its certificate of incorporation, it still has to comply with s 52 in order to apply for a certificate of entitlement to commence business. Only upon receiving this certificate can it commence business and exercise any borrowing powers. e. Statutory meeting
Private company: After incorporation, it needs not hold its first annual general
meeting at least for eighteen (18) months. It may hold board meetings or extraordinary general meetings as it sees fit. Public company: In case of a public having a share capital, it is required under s 142 to hold a statutory meeting, i.e. its first meeting of its members, between one (1) month and three (3) months after the date it is entitled to commence business. . Exempt status The privileges and benefits of exempt company apply only to a private company, as defined in s 4. g. Restrictions and limitations on directors In the case of a public company, several restrictions and limitations apply to its directors: - Under s 126, appointments of directors in a public company must be voted on individually by separate resolutions. This is unless the members unanimously agree to appoint the directors by a singe resolution. - Under s. 128, a director of a public company may only be removed by an ordinary resolution of the general meeting, and not by the board of directors. The articles of a private company sometimes may allow the board to remove a director.
f.
- Under s 129, a person of or over the age of seventy (70) years shall not be appointed as a director of a public company unless he is reappointed by a resolution passed by a majority of three-fourths (3/4) of the shareholders at an AGM. - Under s 138, directors of a public company cannot assign their office unless approved by special resolution of its shareholders.
h.
Allotment of shares
Private company: It is not allowed to raise financing from the public. In an allotment
of shares, there is no restriction that applies to the private company. Public company: In an allotment of shares, where a prospectus is issued, the company must comply with s 48 (minimum subscription). Where a prospectus is not issued, the company must comply with s 50 (statement in lieu of prospectus).
3.6.
RELATED COMPANIES
Under s 6, companies are deemed to be related to each other if a company is: - The holding company of another company, - A subsidiary of another company, or - A subsidiary within the same group of companies that have the same holding company Following the definition under s 5(1), a company (e.g. Syarikat S) shall be deemed a subsidiary of another company (e.g. Syarikat H) if: - Syarikat H controls the composition of the board of directors of Syarikat S; - Syarikat H controls more than half of the voting power of Syarikat S; or - Syarikat H holds more than half of the issued share capital of Syarikat S (excluding preference shares); or - Syarikat S is a subsidiary of any company (e.g. Syarikat Y) that is Syarikat Hs subsidiary.
s 5(1) - When a Holding-subsidiary relationship exists: Syarikat H
Syarikat S
Syarikat Y
Syarikat S
Following the definition under s 5A, a company (e.g. Syarikat H) shall be deemed to be the ultimate holding company of another company (e.g. Syarikat S) if: - Syarikat S is a subsidiary of Syarikat H; and - Syarikat H is not itself a subsidiary of any company. Following the definition in s 5B, a company (e.g. Syarikat S) shall be deemed a whollyowned subsidiary of another company (e.g. Syarikat H), if all members of Syarikat S are: - Syarikat H - a nominee of Syarikat H - another wholly owned subsidiary (e.g. Syarikat Y) of Syarikat H, or - a nominee of Syarikat Y
Syarikat H hold all shares by itself or through nominees in
Syarikat S
Syarikat Y (Syarikat Y holds all shares by itself or through nominees in Syarikat S
Obligations applicable to related companies s 17(1) A company cannot be a member of its holding company, and any allotment or transfer of shares to its subsidiary is void. s 133 A company cannot give loans to a director of itself or a director of its related companies. s 168 the directors of a holding company must ensure that the financial year of each subsidiary coincides with that of the holding company within two (2) years after the subsidiary becomes a subsidiary of the holding company. S. 169(5) directors of a holding company must make a report on the profit or loss and the state of affairs of the holding company and all its subsidiaries. 3.7. ASSOCIATED COMPANIES
This applies where a company is not a parent company, but is still able to exercise some influence on another company called an associated company. Here, where a company (called an investing company), holds not less than twenty percent (20%) but not more than fifty percent (50%) of the voting shares of another company (called an investee company, the investee company is known as an associated company of the investing company. 4. 4.1. SPECIAL CLASSES OF COMPANIES INVESTMENT COMPANIES
Under s 319, this is a corporation, not being a private company that is for the time being declared by the Minister to be an investment company. It is engaged primarily in the making of investments in marketable securities for the purpose of revenue and for profit, and not for purpose of exercising control. S 320 to s 327 impose several restrictions on such company: - It cannot borrow an amount that exceeds an amount equivalent to twice its net tangible asset. - It cannot invest an amount in another company if the amount exceeds an amount equivalent to ten percent (10%) of its net tangible assets. Similarly, it may not invest in more than 10% of the ordinary shares of that other company. - It cannot underwrite any issue of authorized securities to an amount that exceeds an amount equivalent to forty percent (40%) of its net tangible assets. Authorized securities refers to securities in which the trustees are authorized to invest trust funds in their hands. - It cannot underwrite any issue of non authorized securities to an amount that exceeds an amount equivalent to twenty percent (20%) of its net tangible assets. - If it issues a prospectus, its prospectus must specify the type of security which is among the objects of the company to invest and whether within or outside Malaysia. - it cannot purchase or hold any shares or debentures of any other investment companies whether incorporated within or outside Malaysia. - It shall not speculate in commodities - its balance sheet must be attached with a complete list of all the investments, descriptions and quantities of those investments as at the date of the balance sheet. - the profit and loss accounts must show separately income from underwriting or subunderwriting, and - it must keep an investment fluctuation reserve account in which the net profits and losses from the sale and purchase of securities are recorded.
4.2.
FOREIGN COMPANIES
Under s 4(1), foreign company means: - a company, corporation, society, association or other body incorporated outside Malaysia, or - an unincorporated society, association or other body which does not have its head office or principal place of business in Malaysia. It may sue or be sued or hold property in the name of the secretary or other officer duly appointed for these purposes. The obligations under Division 2 of the Companies Act 1965 apply only if the foreign company has a place of business or carrying on business within Malaysia. Under s 330(1), carrying on business includes: - using a share registration office or - administering, managing or otherwise dealing with property situated in Malaysia, as an agent, trustee or legal personal representative. The definition carrying on business does not include the activities in s 330(2). A foreign company is empowered under s 331 to hold immovable property in Malaysia. Under s 332(1), if a foreign company wishes to establish a place of business or to carry on business within Malaysia, it must be registered with the Companies Commission of Malaysia and lodge copies of a few key documents, e.g. its certificate of incorporation from its place of origin, the Memorandum and Articles of Association, list of directors (foreign and local) and documents giving authority to agents to accept notices on behalf of the foreign company.
4.3.
TRUSTEE COMPANIES
Under s 4(1), a trustee company is: - a company registered as a trust company under the Trust Companies Act 1949, or - a public company under the Companies Act 1965 which has been declared by the Minister to be a trustee corporation for the purpose of the Act.
QUESTIONS
1.
Explain the differences between a partnership and a private company limited by shares under the Companies Act 1965. (10 marks) Explain the distinction between a limited company and an unlimited company. (10 marks) Explain the distinction between a private company and a public company. (10 marks)
2.
3.
4.
List down the advantages of a private company in comparison to a public company. (5 marks) Explain what an exempt private company is. (5 marks)
5. 6.
Herman, your eldest brothers friend, ran a successful sole proprietorship business in selling educational books in a neighbouring country. He has returned to Malaysia with a view to setting up a similar company to sell educational books. He hopes that this company will become a public company in future. At the same time, Herman, who holds a Master in Arts (Asian History), wishes to promote a research on the history and culture of the Waritos, an extinct tribe. He is unsure of the type of company that he ought to set up, since he hears that the liability of members differ from one type of company to another. Herman visits you today to seek your advice on the following: a. b. c. the liability of members in a company limited by shares. the liability of members in a company limited by guarantee. (5 marks) (5 marks)
the distinction between a private company and an exempt private company. (5 marks)
7.
State the provisions that must be mentioned in the Memorandum and Articles of Association of a company limited by guarantee. (3 marks)
Chapter 2
INCORPORATION OF COMPANIES Learning objectives: After reading this chapter, you should be able to: Describe the preliminary steps to incorporating a company limited by shares. Explain the responsibilities of promoters and the effects of pre-incorporation contracts. Explain the steps to be taken after a company has been incorporated. Explain the changes that may take place after incorporation and describe the steps to be taken; i.e. in case of a conversion, change of name, change of objects, changes in authorized capital and alterations to a companys Memorandum and Articles of Association. Distinguish the different procedures for private and public companies. Describe the statutory registers of a company.
1. INCORPORATION OF A COMPANY LIMITED BY SHARES To incorporate a company, an applicant has to lodge (i.e. file in) the relevant documents with a registering authority called the Companies Commission of Malaysia (CCM). It is also one of the regulatory bodies regulating companies. The basic steps in incorporating a private limited company are as follow: a. application for approval of a proposed name or names by the CCM, b. preparation and filing of the various pre-incorporation documents, and c. payment of the incorporation fees, stamping fees and other relevant fees. A faster way to start up a company is by purchasing an off the shelf company. Such a company has already been incorporated by other persons, i.e. professionals like accountants, lawyers and chartered secretaries, who do this as part of their business.
1.1.
NAME SEARCH AND RESERVATION OF NAME
Under Section 22(6) of the Companies Act 1965, prior to the registration of an intended company, the applicant must apply for a search as to the availability of the proposed name for the company, and for reservation of that name.
The applicant needs to lodge in Form 13A and pay a search fee of RM30/- per one name search. The applicant may lodge in multiple applications by filing up a few Forms 13A and pay a fee of RM30/- for each name. Under s 22(1), a companys proposed name must be approved first by the Registrar. The Registrar shall not register a name that is: - in his opinion, undesirable or - is disapproved by the Minister (of Domestic Trade and Consumer Affairs). Among the names that the Registrar cannot accept for registration without the consent of the Minister are as follow: (a) Names suggesting connection with a member of the Royal family or Royal patronage including names containing such words as Royal, King, Queen, Prince, Princess, Crown, Regent or Imperial; (b) Names suggesting connection with a State or Federal government department, statutory body, authority or government agency or other local authority, including names containing such words as Federal, State or National; (c) Names suggesting connection with any ASEAN, Commonwealth or foreign government or with the United Nations or with any other international organizations, including names containing such words as ASEAN, UNESCO, NATO, EEC ,OPEC; (d) Names suggesting connection with any political party, society, trade union, cooperative society or building society; (e) Names including the following words or any words of like import: Bank, Banker, Banking, Bumiputra, Bureau, Chamber of Commerce and Industry, Chartered, College, Council, Credit, Exchange, Executor, Fair Price, Finance, Foundation, Fund, Guarantee, Institute, Insurance, Investment, Leasing, Registry, Treasury, Trust, Unit Trust, University (f) Names that are misleading as to the identity, nature, objects or purposes of a company or in any other manner;
(g) Names that are blasphemous or likely to be offensive to members of the public;
(h) Names which (i) are translations of a name of a company or foreign company registered; or (ii) may resemble or be mistaken for the name of any other company or foreign company registered; or (iii) may resemble or be mistaken for a name that is being reserved for the purpose of incorporation or for the purpose of a change of name. Under s 22 also, there are a few requirements as to the names of certain types of companies: - a limited company shall have Berhad or its abbreviation Bhd at the end of its name. - a private company shall have the word Sendirian or its abbreviation Sdn as part of its name, inserted immediately before the word Berhad or its abbreviation Bhd. - an unlimited company shall also have the word Sendirian or its abbreviation Sdn at the end of its name. Following s 23, a company may by special resolution resolve that its name changed to name by which the company could have been registered without contravention of s 22(1). Upon approval by the Registrar, a name approval letter shall be issued, and the name is reserved for three (3) months. Nevertheless, even if the name has been approved, the company must not be incorporated for unlawful purpose or contrary to security or public order or morality
1.2.
INCORPORATION DOCUMENTS
The following documents must be lodged as part of the incorporation documents: - the Memorandum and Articles of Association of the proposed company. Two (2) individuals must be named as the first directors of the company. - Form 48A, i.e. a statutory declaration by a person before appointment as a director or by a promoter before incorporation of a corporation, must be signed by each director and duly attested (i.e. witnessed under oath). - Form 6, i.e. a declaration of compliance, must be signed by the Secretary - a copy of the name approval letter together with a copy of Form 13A that has been returned by the Registrar. In case of incorporation of a public company, Form 46, i.e. an undertaking by a director to take and pay for qualification shares, must be signed where a director is required by the Articles of Association to hold qualification shares.
Registration fees are also payable to the Companies Commission, in accordance with the nominal or authorized share capital: Amount of nominal or authorised share capital RM100,000 and below RM100,001 - RM500,000 RM500,001 RM1 million RM50,000,001 RM100 million Above RM100 million Registration fees RM1,000/RM3,000/RM5,000/RM50,000/RM70,000/-
Additionally, stamp duties are also payable to the Inland Revenue Department for the stamping of the Memorandum and Articles of Association.
1.3.
CERTIFICATE OF INCORPORATION
When the incorporation documents are found to be in order, the Registrar will issue a certificate of incorporation. for a private company, it is in Form 9 for a public company, it is in Form 8 Like a natural persons birth certificate, a companys certificate of incorporation is a significant and important document. Pursuant to s 361, the certificate is conclusive evidence that all requirements of the Companies Act 1965 pertaining to incorporation have been complied with. The company is deemed duly incorporated under the Companies Act 1965 and is from then on, a corporate body having a separate and independent legal entity from its members or directors. The certificate contains key information like the company name, number, date of incorporation, type of company (i.e. whether limited by shares, limited by guarantee or is an unlimited company) and its status (i.e. whether it is a private or public company). The certificate is required for important legal and commercial transactions.
2.
PROMOTERS AND PREINCORPORATION CONTRACTS
Prior to incorporation of a company, there may have been contracts entered into by certain persons on behalf of the yet-to-be incorporated company. The persons are known as promoters and the contracts are known as pre-incorporation contracts. It is necessary to be aware of the rights, duties and liabilities of promoters and the company (after incorporation).
2.1.
PROMOTERS
In Twycross v Grant [1877] 2 CPD 469, it was held that a promoter is a person who undertakes to form a company, takes the necessary steps to form one and to set the company going. As he is acting on behalf of a yet-to-be incorporated company, his relationship with the company is one of trust and confidence.
2.1.1. Promoters duties A promoter, being in a relationship of trust and confidence, owes fiduciary duties to the proposed company. His primary duties are as follow: To act bona fide (i.e. in good faith) for the benefit of the proposed company. Not to put himself in a position where his personal interests conflict with his duty to the proposed company. Not to make profit out of his position as a promoter, without adequate disclosure to an independent board of directors Erlanger v New Sombrero Phosphate Co [1878] 3 App
Cas 1218.
Thus, while making profits are not per se (on its own) prohibited, what is prohibited of promoters is the failure to disclose and to obtain the relevant consent from the shareholders of the company after its formation.
2.1.2. Remedies for breach of duties A few remedies are available to a company where its promoters have breach their duties:
a. Rescission of contracts entered into by promoters in breach of their duties. However, there are bars (i.e. obstacles) to rescissions: i. Affirmation of the contracts by the company. ii. Parties to the contracts cannot be restored to their original positions. iii. Third parties have acquired rights under the contracts and these rights cannot be defeated. b. Recovery of secret profits made by the promoter. c. Recovery of damages from the promoter for breach of his fiduciary duties, deceit or negligence Gluckstein v Barnes [1900] AC 240.
2.2.
PRE-INCORPORATION CONTRACTS
Pre-Incorporation contracts are entered into by a companys promoters on behalf of the company prior to its incorporation. E.g. contracts to rent or lease buildings, to buy equipments or even to engage staff. The promoters are usually the would-be directors who acted as agents for the company. Under Section 35(1) of the Companies Act 1965, where a contract or transaction is purported (i.e. supposedly) to be entered into by a company or by any person on its behalf prior to its incorporation, such contract may be ratified by the company after its incorporation. After ratification, the company shall be bound by the contract and be entitled to the benefits of the contract as if it had been a party on the date of the contract. Under s 35(2), prior to the companys ratification of the preincorporation contract, the promoter who purported to act on its behalf shall be personally bound by the contract and be entitled to the benefits of the contract. The promoter shall be personally bound by the contract in absence of express agreement to the contrary Ahmad bin Salleh & Ors v Rawang Hills Resort Sdn Bhd (1995) 3 MLJ 211. The company is not bound to ratify any preincorporation contracts, although it would normally do so. Upon ratification of the contract, the contract takes effect from the date of the contract.
3.
POST-INCORPORATION PROCEDURE
After incorporation, a company needs to comply with various post incorporation requirements. 3.1. RETURNS TO BE LODGED WITH CCM WITHIN ONE (1) MONTH AFTER INCORPORATION
Within one (1) month after incorporation, a company must lodge (i.e. file in) the following statutory forms (called returns) with the Companies Commission of Malaysia: - a return on allotment of shares Form 24 - a return containing particulars of situation of its registered office Form 44 - a return containing particulars of its directors, managers and secretaries Form 49 Upon lodgment of the returns, entries must also be made to the relevant statutory registers, in particular the Register of members and Register of directors, managers and secretaries.
3.2.
CERTIFICATE OF ENTITLEMENT TO COMMENCE BUSINESS
The requirement to obtain a certificate for entitlement to commence business and to exercise borrowing powers applies only to public companies having a share capital. Under s 52, certain documents are to be submitted in order to obtain this certificate: i. Where the company has issued a prospectus - The company must lodge Form 22, i.e. a statutory declaration verifying the companys compliance with the requirements under s 52(1), and pay a fee of RM350/-. The Form is to be signed by the secretary or one director. ii. Where the company has not issued a prospectus - The company must lodge the following documents: - a statement in lieu of prospectus in the form of and matters specified in Part I and Part II of the Sixth Schedule, CA 1965. - Form 18, i.e. a statutory declaration verifying the companys compliance with the requirements under s 52(2), and pay a fee of RM350/-. The Form is to be signed by the secretary or one director. Form 23, i.e. a certificate that a company is entitled to commence business, shall be issued upon the above requirements being fulfilled. The certificate is conclusive evidence that the public company is entitled to commence business and exercise its borrowing powers.
3.3.
STATUTORY MEETING
This requirement applies to a public company having a share capital. For such a company, it must hold its first meeting of its members between one (1) month and three (3) months after the date it is entitled to commence business. The objective of statutory meeting is to provide the members with information as to the newly incorporated company and for the members to freely discuss any matter relating to the formation of the company or arising out of the statutory report, including future directions of the company. Pursuant to the requirements of s 142(2) and (5), a Statutory Report in Form 51 prepared by the directors and an Auditors Report must be lodged with the Companies Commission of Malaysia. These two reports must then be circulated to all members at least seven (7) days before the statutory meeting. Under s 142(3): at least two (2) directors must certify the Statutory Report, which shall state the following: - the total number of shares allotted, the amount of allotment, amount paid up on partlypaid shares and the consideration for which the shares have been allotted. - the total amount of cash received by the company in respect of all allotted shares. - an abstract of the receipts of the company and payments made up to 7 days before the date of report and an account or estimates of the preliminary expenses. - the names, addresses and descriptions of the directors, secretary, and if any, trustee for holders of debentures, auditors and managers. - the particulars of any contracts and any proposed modifications to the contracts. Where the company fails to hold the statutory meeting and lodged the required statutory report, this is a ground for compulsory winding up pursuant to Section 218(1)(b). Usually, business will not be transacted at the meeting unless notice has been given. 3.3.1. First board of directors meeting Unlike a statutory meeting, the first board of directors meeting is not a statutory requirement. It is a meeting of directors and among the businesses that are usually transacted are: - to adopt the companys certificate of incorporation, common seal and its Memorandum and Articles of Association. - to appoint or confirm the appointment of company officers like the first directors, additional directors and the Chairman (where necessary).
- to confirm the appointment of the Secretary and to fix the situation of the registered office - to allot subscribers shares and additional shares. - to ratify pre-incorporation contracts. - for directors to declare their interests.
3.4. OTHER MATTERS TO ATTEND TO 3.4.1. Publication and use of company name A company has to comply with several statutory requirements pertaining to the use and publication of its name. Under Section 121(1), its name must appear in legible romanized letters, whether or not it is carrying on a business under a business name. The company number, which is allocated by the Registrar upon the companys incorporation, ought to be stated within brackets after or beneath the company name. It shall also appear on its common seal and all business letters, statements of accounts, invoices, official notices, publications, cheques, receipts and other negotiable instruments that purport to be issued or signed on behalf of the company. Failure to do so would make the company guilty of an offence against the Act. A company shall also paint or affix its name in romanized letters that is easily legible and in a prominent position on the outside of every of its offices or places of business. In the case of the registered office of a company, the words Pejabat Yang Didaftarkan must also be painted or affixed on the outside of the registered office. 3.4.2. Common Seal A company is also required to have a common seal, which must be kept in a safe custody. Under Article 96, the seal should only be used by the authority of the directors or a committee of directors. Every instrument to which the seal is affixed shall be signed by a director and counter-signed by the secretary or by a second director or some other persons appointed by the directors.
3.4.3. Maintenance of registered office Under Section 119, a company is required to have a registered office within Malaysia, to which all communications and notices may be addressed. It shall be open and accessible to the public for not less than three (3) hours during ordinary business hours on each day, with the exception of weekly and public holidays. Form 44, a notice of the situation of the registered office, must be lodged with the Companies Commission of Malaysia. A company may be serviced by either an in-house or external company secretary. - Where the company is serviced by an external professional company secretary, the external secretarys firm shall function as the companys registered office. - Where the company has an in-house company secretary, the registered office is usually the same as the companys business address. It is important to maintain a registered office for the following reasons: - to locate the company for the purposes of service of legal and other commercial documents or notices - for the purpose of holding board meetings and general meetings - for keeping statutory registers and other records such as the Register of members, Register of directors, managers and secretaries, Register of debentures, Register of charges, Register of directors shareholdings, interests and debentures, and minute books of general meetings
3.4.4. Maintenance of statutory registers and other records A company is required to maintain a few statutory registers and records: - Register of Members S.158 - Register of Directors, Managers and Secretaries S.141 - Register of Option holders S. 68A - Register of Charges S.115 - Register of Debenture holders S.70 - Minute books for board meetings and general meetings. - Books of accounts - Register of Substantial Shareholders S.69L (for public company only) - Register of Directors shareholdings, debentures & interests S.134 Whenever there are any changes, entries are to be made to the relevant registers. The company has to permit inspections of certain registers by interested parties. (see next heading).
3.4.5. Upkeep of accounts and holding of general meetings A company is also required to maintain proper accounting records so as to enable preparation and audit of its accounts that will give a true and fair view of its financial position. Auditors must be appointed at any time before the company holds its first annual general meeting (AGM). Pursuant to s 143, all companies must hold an AGM at least once in every calendar year and at the intervals of not more than fifteen (15) months between the AGMs. For a newly incorporated company, its first AGM may be held within eighteen (18) months after its incorporation. Within a month after the AGM, the company is required to lodge an Annual Return. - In case of a company having a share capital, the return must show the particulars referred to in Part 1 of the Eight Schedule and include documents referred to in Part 2. - In case of a company not having a share capital, the return is according to Form 55.
4.
MAINTENANCE OF STATUTORY REGISTERS AND OTHER RECORDS
A company must maintain a few statutory registers and other records. The books may be kept in bound books, loose leaf or microfilms. They can also be stored in computer media, as long as the records are capable of being reproduced in a legible form. The company must take reasonable precautions against falsification. It must also provide proper facilities to enable interested persons to make inspection or take copies of certain registers. - Inspection is where a member or any person makes own notes or takes extracts from the register. - Taking copies is where the person concerned is furnished with a copy of the contents of the register. Under s 362(1), if the company fails to comply with certain entitled persons request for inspection or taking copies of the registers, the persons may apply to the court for an order to compel an immediate inspection or copy to be supplied.
Statutory Registers and other records
Register of Members
Register of Directors Managers & Secretary
Register of Option Holders
Register of Charges
Register of Debenture Holders
Minutes book
Books of Accounts
Register of Substantial Shareholders
Register of Directors Shareholdings Interests and Debentures
Register of Participatory Interest Holders
5.1.
REGISTER OF MEMBERS (S 158)
The Register of members is maintained under Section 158. It is maintained as a prima facie evidence (i.e. evidence on the face of it) of any matter inserted therein as required by the Act. A person who purchases shares in a company may be a shareholder, but he is not considered a member until his name is entered into the Register. The particulars that may be found: Members personal particulars name, address, identity card number, nationality Particulars of shares number of shares held, share certificate number (if any), amount paid or agreed to be considered as paid on the shares of each member, Date at which the persons name is entered as a Member Date of cessation as member Date of every allotment of shares to members and number of shares in each allotment Date of acquisition or transfer of shares, amount and particulars of shares involved. Every company having more than fifty (50) members shall keep an index which enables the account of any member to be conveniently located. If there is non-compliance of this section, the company and every officer in default are guilty of an offence. Penalty: RM2,000/- and default penalty. The Register must be kept at the registered office of the Secretary or Share Registrar. If it is kept at another place, notification must be made to the Registrar in Form 53 within fourteen (14) days.
Inspection and taking of copies: Open for inspection: Member may inspect free of charge, while any other person may inspect upon payment of RM1/- or less as the company may prescribe Taking of copies: Member and any other person may take copies at a fee of RM1/- for every 100 words. The information only relates to names and addresses, number of shares held and amount paid on the shares. The company must send the copies within twentyone (21) days after receipt of request. A company may close the Register of members for an aggregate period of not more than thirty (30) days in any calendar year, for the purpose of entitlements to dividends, interests, new shares or other rights. During the book closure, transfers will not be accepted for registration and the rights to inspection or taking of copies will be suspended.
Record of Depositors A Record of depositors is different from a Register of members. The Record of depositors is provided by Bursa Malaysia Depository Sdn Bhd (Bursa Depository) to a listed company upon request. It contains particulars of depositors (i.e. the CDS account holders) and the number of securities in the account. Upon request of a listed company, Bursa Depository will generate a Record of depositors (ROD) not later than three (3) market days from the date of request. Inspection and taking of copies: Open for inspection: Member may inspect free of charge, while any other person may inspect upon payment of RM1/- or less as the company may prescribe Taking of copies: Member and any other person may take copies at a fee of RM1/- for every 100 words. The information only relates to names, addresses and number of shares held. The company must send the copies within twenty-one (21) days after receipt of request.
5.2.
REGISTER OF DIRECTORS, MANAGERS AND SECRETARIES (S 141)
The Register of directors, managers and secretaries is maintained under Section 141. This is to provide a record pertaining to the officers of the company and their consent in writing to the appointment. The particulars that may be found:
- Particulars of every Director present and former name in full, usual residential address, date of birth, business occupation, identification, consent in writing - Particulars of any directorship of other public companies/subsidiaries. - Particulars of Alternate Directors - The statement alternate to _____ is inserted against his name for identification purposes. - Date of appointment, resignation and removal and any changes in his particulars. - Particulars of Secretaries full name, identity card number, residential address, other occupation. - Particulars of Managers the principal executive officer of the company, whether or not he is a director. This register is usually updated when the company lodges Form 49. The form must be lodged within one (1) month after incorporation of the company and whenever there are any changes in the name, residential address and particulars of a director, manager or secretary. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: RM1,000/- with default penalty. Inspection and taking of copies: Open for inspection: Member may inspect free of charge, while any other person may inspect upon payment of RM2/- or less as the company may prescribe Taking of copies: Member and any other person are generally not permitted to take copies. 5.3. REGISTER OF OPTION HOLDERS (S 68A)
The Register of option holders is maintained under Section 68A. This is where options are granted to persons to take up unissued shares in the company. Within fourteen (14) days after the grant of options, entries must be made to this Register. The Register must be kept at the registered office of the Secretary or Share Registrar. If it is kept at another place, notification must be made to the Registrar in Form 53 within fourteen (14) days. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: RM100,000/- with default penalty. However, the default will not affect any rights in respect of the options. Inspection and taking of copies: Open for inspection: Member may inspect free of charge, while any other person may inspect upon payment of RM1/- or less as the company may prescribe Taking of copies: Member and any other person may take copies at a fee of RM1/- for every 100 words. The company must send the copies within twenty-one (21) days after receipt of request.
5.4.
REGISTER OF CHARGES (S 115)
The Register of charges is maintained under Section 115. This is to enable shareholders, creditors and any person to see whether the companys assets have been charged and the extent of the charge. It must be maintained even if there is no charge created. The particulars that may be found: - All fixed and floating charges - A short description of the property charged, - The amount of the charge - Names of persons entitled to the charge together with the relevant instruments and copies thereof at the registered office. The company must keep a Register of charges together with the instrument (i.e. document) creating the charge at the registered office. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: RM2,000/- with default penalty. Inspection and taking of copies: Open for inspection: Members and existing creditors may inspect free of charge, while any other person may inspect upon payment of RM2/- or such sum as the company may prescribe Taking of copies: Member, creditor and any other person may take copies at a fee of RM1/- for every page. The company must send the copies within three (3) days after receipt of request.
5.5.
REGISTER OF DEBENTURE HOLDERS (S 70)
The Register of debenture holders is maintained under Section 70. It is to show the companys borrowing. It is maintained only when debentures are issued. The particulars that may be found: - Name of debenture holders - Address - Amount held by debenture holder The Register must be kept at the registered office of the Secretary or Share Registrar. If it is kept at another place, notification must be made to the Registrar in Form 30 within seven (7) days. In case of a branch register, notification in Form 54 must be lodged.
Inspection and taking of copies: Open for inspection: Any registered debenture holders may inspect free of charge. Taking of copies: Member and debenture holder may take copies at a fee of RM1/- for every 100 words. The information only relates to names, addresses and number of debentures held by the debenture holders. The company must send the copies within one (1) month after receipt of request. Non-compliance with request: RM1,000/- with default penalty.
5.6.
REGISTER OF SUBSTANTIAL SHAREHOLDERS (S 69L)
The Register of substantial shareholders is maintained under Section 69L. It is required to be maintained only in case of public companies limited by shares. It is to enable the company to comply with the disclosure requirements under s 69E-69G and to enable directors to be notified of such substantial shareholdings. The particulars that may be found: - Names in alphabetical order of shareholders who have given Form 29A and their addresses. - Date of notification, date of interest acquired/change - Full particulars/information in the notices on Form 29B and Form 29C number of shares acquired or sold and the balance. - Full particulars of each interest and circumstances giving rise to interest or change. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: RM5,000/-, with a default penalty of RM500/-. Inspection and taking of copies: Open for inspection: Member may inspect free of charge, while any other person may inspect upon payment of RM5/- or less as the company may prescribe Taking of copies: Member and any other person are generally not permitted to take copies. The Registrar has power under s 69L(3) to require a company to furnish, within fourteen (14) days, a copy of the register.
5.7.
REGISTER OF DIRECTORS SHAREHOLDING, INTERESTS AND DEBENTURES (S 134)
The Register of directors shareholdings, interests and debentures is maintained under
Section 134.
This is to enable the company to comply with the disclosure requirements under s 134 and 135 and to enable directors to be notified of such shareholdings and other interests.
The particulars that may be found: - Shares in the company or in a related corporation, being share in which the director has an interest, the nature and extent of that interest. - Debentures of or participatory interests made available by the company or related corporation, debentures or participatory interests in which the director has an interest and nature and extent of that interest. - Rights or options of the directors and/or other persons (s) in respect of the acquisition or disposal of shares in the debentures/participatory interest made available by the company or related corporation - Contracts to which the director is a party or under which he is entitled to a benefit Within three (3) days after receiving a notice from a director under s 135(1), a company must enter in the Register those particulars, i.e. the number and description of shares, debenture, interests, rights, options and contracts. Every company must keep the Register at its registered office and the register must be accessible to all persons during a companys annual general meeting. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: Imprisonment for three (3) years or fine of RM15,000/-, default penalty. Inspection and taking of copies: Open for inspection: Member may inspect free of charge, while any other person may inspect upon payment as prescribed by the company. Taking of copies: Member and any other person may take copies at a prescribed fee. The company must send the copies within twentyone (21) days after receipt of request.
5.8.
MINUTE BOOKS (S 156)
A company must maintain minute books for its board meetings and general meetings. The books are usually kept in bound books or loose leaf. It should have alphabetical index, the pages serially-numbered and the items numbered consecutively from No. 1 onwards. The minutes must be entered in the minute books within fourteen (14) days of meeting Minutes of general meetings are kept at the companys registered office, while minutes of board meeting may be kept at the companys principal place of business. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: RM2,000/-, default penalty. Inspection and taking of copies:
Open for inspection: General meeting: Member may inspect free of charge Board meeting: Directors may inspect free of charge, while members and any other persons are generally not allowed. Taking of copies: General meeting: Member may take copies at a fee of RM1/- for every 100 words. The company must send the copies within fourteen (14) days after receipt of request. Any other persons are not allowed to take copies. Board meeting: Members and other persons are not allowed. 5.9. BOOKS OF ACCOUNTS (S 167)
The books of accounts are maintained under Section 167. A company must keep proper accounting records to sufficiently explain the transactions and its financial position, and to enable true and fair income statement, balance sheet and other documents to be prepared for purpose of audit. Where there are subsidiaries, a parent company must keep accounting records to explain the financial position of subsidiaries as well. Entries must be made to the accounts within sixty (60) days of the completion of the transactions and the records shall be retained for seven (7) years. The accounting records may be kept at the registered office or at such other places in Malaysia. In case of the companys operations outside Malaysia, the books of accounts can be maintained outside Malaysia, but must also be sent and kept in Malaysia The accounting records must be kept open at all times for inspection by directors. Members and any other persons are not permitted to inspect or take copies of the accounts. A director may apply to the court to allow an approved auditor acting for him to inspect the records. If there is non-compliance of the section, the company and every officer in default are guilty of an offence. Penalty: Imprisonment for six (6) months or fine of RM5,000/- or both. 5.10. OTHER NON-STATUTORY REGISTERS A company may keep other non-statutory registers: Register of Transfer for the purpose of registration of transfers. This can facilitate the posting of particulars from transfer forms to Register of members. Register of Application & Allotment for the purpose of recording application for shares and the allotments made. This can facilitate the posting of particulars from the share application forms to the Register of members.
5. 5.1.
EVENTS AFTER INCORPORATION OF A COMPANY CHANGE OF COMPANY NAME
Under Section 23(1), a company may by special resolution change its name. The name must not contravene s 22(1). The company must lodge a copy of the special resolution in Form 11 with the Registrar, and pay the fees of RM100/-. Upon approval of the Registrar of the new name of the company, a Certificate of Incorporation on change of name of the company, i.e. Form 13, shall be issued and the change shall then take effect. Under Section 23(2), if the name of the company contravenes s 22(1), the company may by special resolution change its name to one that does not so contravenes. The Registrar may similarly direct a company to change its name if it contravenes s 22(1) and the company shall so change it within six weeks after the direction. Under Section 23(6), a change of name does not affect the identity of the company or of its rights or obligations or render defective any legal proceedings by or against the company. Under Section 121(1A), where a company has changed its name pursuant to Section 23, the former name of the company shall appear beneath its present name on all its official documents for a period of not less than twelve (12) months from the date of the change. Failure to do so would make the company guilty of an offence against the Act. If a company commences winding up within a year after the change of name, the former name of the company must still appear on all notices and advertisements on the winding up. Under Section 121(2), it is an offence by an officer of a company or any person on its behalf to use or authorize the use of any seal of the company or the issue of any business documents on behalf of the company, wherein the companys name and former name (where applicable) is not so mentioned. The officer or any person on the companys behalf shall be guilty of an offence against this Act. Additionally, where he has signed or issued on behalf of the company any negotiable instrument wherein the companys name and former name (where applicable) is not so mentioned, the officer or the person shall be liable to the holder of the instrument for the amount due. This is so unless the amount is paid by the company.
5.2.
CHANGE OF COMPANYS REGISTERED OFFICE
The companys registered office may change in the following circumstances: - Where the company is serviced by an external professional company secretary and there is a change of the external secretary and his/her firm. - Where the companys external professional company secretary changes his/her firms address - Where the company has an in-house company secretary, the registered office is usually the same as the companys business address. A change of the companys business address will also result in a change of registered office. The procedure for change of registered office: - The board of directors shall pass a resolution regarding the change of address of the registered office. - Within one (1) month, Form 44, i.e. a notice as to the situation of the companys registered office, must be lodged with the Companies Commission of Malaysia, and entries must be made to the Register of directors, managers and secretaries. - In case of a public company, the Securities Commission is to be notified in writing also
5.3
CONVERSION
OF A PUBLIC COMPANY TO A PRIVATE COMPANY AND FROM A PRIVATE
COMPANY TO A PUBLIC COMPANY
Section 26(1) allows a public company having a share capital to convert to a private company by lodging with the Registrar a copy of a special resolution in Form 11: - Determining to convert to a private company and specifying an appropriate alteration to its name; and - Altering the provisions in the companys Memorandum or Articles to impose the restrictions referred to in s 15(1). A printed copy of the altered Memorandum and Articles shall also be lodged. The Registrar shall issue Form 19, the Certificate of Incorporation on conversion to a private company. The effects of conversion from a public company to a private company are that all restrictions applicable to a private company shall now apply. It does not however affect the identity of the company or of its rights or obligations or render defective any legal proceedings by or against the company.
Section 26(2) allows a private company, subject to the restrictions in its Memorandum or Articles, to convert to a public company by lodging with the Registrar: - a copy of a special resolution in Form 11 determining to convert to a public company and specifying an appropriate alteration to its name - a statement in lieu of prospectus; and - a statutory declaration in Form 18 to verify that s 52(2)(b) has been complied with. - printed copy of the altered Memorandum and Articles of Association The Registrar shall issue Form 20, the Certificate of Incorporation on conversion to a public company. The effects of conversion from a private company to a public company are that all restrictions applicable to a private company shall cease to apply. It also does not affect the identity of the company or of its rights or obligations or render defective any legal proceedings by or against the company.
5.4.
DEFAULT IN COMPLYING WITH REQUIREMENTS AS TO PRIVATE COMPANIES
This is where a private company may involuntarily become a public company. Under Section 27, the Minister, any member or any creditor of a private company may apply to court for an order to determine that the company ceases to be a private company from the date of the court order. This is on the grounds that the company has made a default in contravening the restrictions and prohibitions contained in s 15(1)(c) or (d), i.e. contravenes the prohibition on inviting the public to subscribe for its shares or deposit money with the company. Another way is where the Registrar serves a notice to determine that the company ceases to be a private company from the date specified in the notice on the grounds that: a. It has contravened the restrictions and prohibitions contained in s 15(1)(c) or (d), b. It has been convicted of an offence under s 27(7), relating to the prohibitions in s 15(1)(c) or (d), c. The Memorandum or Articles have been altered such that they no longer include the restrictions specified in s 15(1); or d. The company has ceased to have a share capital. From the date of the court order or the notice by the Registrar, the private company shall become a public company and is deemed to have changed its name by the omission of the word Sdn from its name. It cannot be converted to a private company again without the leave of the court.
Under s 27(3)(c), within fourteen (14) days after the date specified in the court order or the Registrars notice (where applicable), the company has to lodge with the Registrar the following documents: - A statement in lieu of prospectus - A statutory declaration in Form 18 verifying compliance with s. 52(2)(b), and - An office copy of the court order (where applicable) If there is non-compliance of s 27(3)(c), the company and every officer in default shall be guilty of an offence. Penalty: RM1,000/- default penalty. The company may appeal to the court on the grounds that the non-compliance was accidental, inadvertent or due to other sufficient cause or that it is just and equitable for the court to grant relief. 5.5. ALTERATIONS OF OBJECTS CLAUSE IN THE MEMORANDUM
Section 28 provides that a company may by special resolution alter the provisions in its Memorandum with respect to its objects. The company shall give by post twenty-one days written notice specifying the intention to propose the resolution as a special resolution at a meeting of the company. The notice shall be given to all members and trustees for debenture holders or all debenture holders. The special resolution must be passed by a majority of not less than of the members who are entitled to vote in person or by proxies. A copy of the special resolution passed in Form 11 must be lodged with the Registrar within fourteen (14) days after the expiration of twenty-one (21) days after the passing of the special resolution. Under Section 28(5), within 21 days after the date of the passing of the special resolution, the following persons may apply to the court for cancellation of the alteration: - the holders of no less than 10% in nominal value of the companys issued share capital or any class of that capital; or - not less than 10% of the companys members (if the company is not limited by shares); or - the holders of not less than 10% in nominal value of the companys debentures. Alteration of the companys object shall not have effect if such application for the cancellation is made, except in so far as it is confirmed by the court. The court shall have regard to the rights and interests of the members of the company or any class of members of the company. It may give such directions and make orders for the arrangement to purchase of the interests of the dissentient members. The court may also make an order canceling or confirming the alteration either wholly or in part.
QUESTIONS 1. 2. Explain the process of incorporation of a company limited by shares. (10 marks)
Explain the situations in which the Registrar may refuse the registration of a company. (5 marks) A friend of yours plans to incorporate a private limited company with the proposed name of Nokia Assurance Co, to market and distribute computer-security software. Explain whether the Companies Commission of Malaysia would approve the proposed name. (5 marks) Explain the information contained in a certificate of incorporation. Explain the duties of promoters of a proposed company. (5 marks) (5 marks)
3.
4. 5. 6.
Describe the status of pre incorporation contracts that are entered into by promoters on behalf of a proposed company. (5 marks) Explain the returns that must be filed by a company after it has been incorporated. (5 marks) Explain how the common seal of a company is kept and used. (5 marks)
7.
8. 9.
Explain the meanings of statutory meeting and statutory report" under Section 142 of the Companies Act 1965. (5 marks) In case of a public company, explain what must be done after it has obtained its certificate of incorporation. (5 marks) Describe the basic procedure for changing the name of a private company (10 marks) Describe the basic procedure for a public company to convert to a private company. (5 marks) Describe the basic procedure for a private company to convert to a public company. (5 marks)
10.
11. 12.
13.
14.
Explain what happens when, pursuant to Section 27(3) Companies Act 1965, the Registrar determines that a company has ceased to be a private company. Explain also the actions to be taken by the company. (5 marks) Assume that a company, Syarikat Maju Sdn Bhd wishes to alter its objects clause. Explain briefly the steps to be taken to change its objects clause. (5 marks) List down the statutory registers to be maintained by a company. Explain where the statutory registers of a company must be kept. registers that may be kept at place other than the registered office. (5 marks) Identify the (5 marks)
15.
16. 17.
18.
Describe the contents of a Register of charges. Explain the requirements under the Companies Act 1965 as to its maintenance. (5 marks) In relation to the following statutory registers and records, explain whether a member and any other person may make inspection and take copies of the register: a. b. c. d. e. f. g. Register of members Register of directors shareholding, interests and debentures. Register of directors, managers and secretaries Register of charges Register of option Minutes of general meetings. Minutes of board meetings. (5 marks for each register/record)
19.
Chapter 3
MEMORANDUM AND ARTICLES OF ASSOCIATION LEARNING OBJECTIVES After reading this chapter, you should be able to: Explain the basic constitutional documents of a company. Explain the contents of a companys Memorandum and Articles of Association. Understand the key clauses in relation to name, capital and objects of a company. Understand the doctrine of ultra-vires and limited instances in which it may be raised. Describe the legal effects of the Articles of Association on a company and its members. Describe how the Memorandum and Articles of a company may be altered and the restrictions that may apply.
1.
BASIC CONSTITUIONAL DOCUMENTS OF A COMPANY
A company, being a corporate body, is governed by its own set of Constitution. The basic constitutional documents of a company are collectively referred to as the Memorandum and Articles of Association. The Memorandum and Articles of Association comprise two sets of documents, i.e. Memorandum of Association and Articles of Association. The Memorandum of Association (Memorandum) sets out various provisions which are mainly concerned with the relationship between the company and third parties or outsiders. The Articles of Association (Articles) set out various regulations which are mainly concerned with internal arrangements in a company, i.e. the relationship between the company and its members and also between members themselves. Where there are any inconsistencies or conflicting provisions in the Memorandum and the Articles of Association, the provisions in the Memorandum shall take precedence.
2.
THE MEMORANDUM OF ASSOCIATION
The Memorandum of Association (Memorandum) sets out the companys aims and structure. This enables potential investors and creditors to obtain information which will affect their decisions on whether to invest or lend money to the company.
It is important therefore for potential investors and creditors to be aware of the aims and objects of the company, the extent of liabilities of the companys existing members and how the assets of the company are to be used. Any member may request for a copy of the Memorandum and Articles of the company by paying RM5 or less as fixed by the directors. 2.1. STATUTORY REQUIREMENTS AS TO THE CONTENTS OF THE MEMORANDUM OF ASSOCIATION
Section 18(1) of the Companies Act 1965 requires every companys Memorandum to be printed, divided into numbered paragraphs and dated. Section 154 requires certain resolutions and agreements to be lodged with the Companies Commission of Malaysia, e.g. special resolutions and resolutions or agreements that bind any class of shareholders. A copy of such resolution/agreement must be annexed to the Memorandum and Articles of Association. The Memorandum shall contain the following information: 1. the name of the company. E.g. The name of the company is Syarikat Maju Enterprise Sdn Bhd. If the word Company is included in the Certificate of Incorporation, the name may not be abbreviated to Co. If the word Syarikat is not included in the Certificate of Incorporation, then it is not part of the companys name. 2. the registered office or domicile of the company. The registered office must be situated in Malaysia. Where a company is serviced by an external Secretary, the Secretarys office is the registered office. 2. the objects of the company. E.g. To carry on all or any of the business of transport, cartage and haulage contractors, garage proprietors, owners and charterers of road vehicles, aircraft of every description, lightermen and carriers of goods and passengers by road, rail or air, carmen cartage contractors and agents, forwarding, transport and commission agents, Customs agents, stevedores, wharfingers, cargo superintendents, packers, hauliers, warehousemen, store-keepers, electricians and jobmasters. 3. the amount of share capital with which the company proposes to be registered and the division of the share capital into shares of a fixed amount. E.g. The capital of the company is RM100,000/- divided into 100,000 shares of RM1/each.
This requirement does not apply to a company limited by guarantee and an unlimited company. 4. the liability of the members. If the company is a company limited by shares, the Memorandum shall state that the liability of the members is limited. Section 18(3) explains that this means the liability of the members is limited to the amount, if any, unpaid on the shares respectively held by them. If the company is a company limited by guarantee, the Memorandum shall state that the liability of the members is limited and that each member undertakes to contribute to the assets of the company such amount as may be required not exceeding a specified amount. Contribution is required in the event of the company being wound-up while he is a member or within one year after he ceases to be a member. The contribution shall be for the payment of: - the debts and liabilities of the company contracted before he ceases to be a member, - the costs, charges and expenses of winding-up and - the adjustment of the rights of the contributories among themselves. If the company is an unlimited company, the Memorandum shall state that the liability of the members is unlimted. 5. the full names, addresses and occupations of the subscribers to the Memorandum. 6. a statement that the subscribers are desirous of being formed into a company in pursuance of the Memorandum. Where the company is to have a share capital, the statement states that the subscribers respectively agree to take the number of shares, as set out opposite their respective names, in the capital of the company. The subscribers are deemed to have agreed to become members, and their subscribers shares are deemed to be allotted on the incorporation of the company. The Memorandum may include other clauses, e.g. a clause to prohibit the alteration of certain articles in the Articles of Associations. According to Section 21(1A) of the Companies Act 1965, if there are clauses in the Memorandum that might have been included in the Articles of Association, these clauses can be deleted or altered. E.g. clauses on appointment of directors, etc.
2.2.
THE NAME OF THE COMPANY
According to Section 22(3) of the Companies Act 1965, a limited company shall have Berhad or the abbreviation Bhd. as part of and at then end of its name. This applies to both a company limited by shares and a company limited by guarantee. Under Section 22(4), a private company must have the word Sendirian or the abbreviation Sdn. as part of its name. This must be inserted immediately before the word Berhad or Bhd. In case of an unlimited company, the word Sendirian or the abbreviation Sdn. Shall be inserted at the end of its name. The purpose of the requirement on the name of a company is to protect people who deal with the company. Once they deal with a company which has the word Berhad or Bhd. as part of its name, they will be alerted to the fact that members of such companies have limited liability and will not be entirely responsible for those debts. 2.2.1. Omission of the word Berhad or Bhd. in name of charitable and other companies Under Section 24(1) of the Companies Act 1965, the Minister may by licence direct that a proposed limited company be registered as a company with limited liability without the addition of the word Berhad to its name, if the Minister is satisfied that the company: - is being formed for the purpose of providing recreation, amusement, promoting commerce, industry, art, science, religion, charity or any other object useful to the community; - will apply its profits, if any, or other income to promote its objects; and - will prohibit the payment of dividends to its members. The Minister may also by licence authorize a limited company to change its name to a name which does not contain the word Berhad, being a name approved by the Registrar. This is if the Minister is satisfied that: - its objects are restricted to those specified in Section 24(1) and to objects incidental or conducive to the main objects; and - the companys constitution requires it to apply its profits or other income in promoting its objects; and - it is prohibited from paying any dividend to its members. Non-profit organizations may therefore dispense with the appearance of being a commercial enterprise and at the same time, still enjoy the benefits of being a limited company.
2.2.2. Publication and use of company name Under Section 121(1), the name of a company must appear in legible romanized letters, whether or not it is carrying on a business under a business name. The company number, which is allocated by the Registrar upon the companys incorporation, shall also appear on its common seal and all business letters, statements of accounts, invoices, official notices, publications, cheques, receipts and other negotiable instruments that purport to be issued or signed on behalf of the company. Failure to do so would make the company guilty of an offence against the Act. A company shall also paint or affix its name in romanized letters that is easily legible and in a prominent position on the outside of every of its offices or places of business. In case of the registered office of a company, the words Pejabat Yang Didaftarkan must also be painted or affixed on the outside of the registered office. Under Section 121(1A), where a company has changed its name pursuant to Section 23, the former name of the company shall appear beneath its present name on all its official documents for a period of not less than twelve (12) months from the date of the change. Failure to do so would make the company guilty of an offence against the Act. Under Section 121(2), it is an offence by an officer of a company or any person on its behalf to use or authorize the use of any seal of the company or the issue of any business documents on behalf of the company, wherein the companys name and former name (where applicable) is not so mentioned. The officer or any person on the companys behalf shall be guilty of an offence against this Act. Additionally, where he has signed or issued on behalf of the company any negotiable instrument wherein the companys name and former name (where applicable) is not so mentioned, the officer or the person shall be liable to the holder of the instrument for the amount due. This is so unless the amount is paid by the company.
2.3.
OBJECTS AND POWERS OF A COMPANY
The objects of a company must be stated in its Memorandum of Association. An objects clause of a companys memorandum may be classified as main or independent objects, dependant objects and powers. The main or independent objects refer to the main activity or business of the company. E.g. to carry on the business of transport, cartage and haulage contractors
The objects clause must not state that the company shall carry out every possible business. The dependant objects refers to other activities or businesses which are capable of being conveniently carried on in connection with its main objects. This is especially if the other businesses are calculated to directly or indirectly enhance the value of or render profitable any of the companys property or rights. There is a difference between the object and power of a company. 2.3.1. Difference between object and power Object refers to the description of the nature of the companys trade or business. It represents the purposes of the company. E.g. to carry on the business of transport, cartage and haulage contractors. Powers refers to the legal abilities given to a company to be exercised in furtherance of the companys objects. E.g. power to borrow money, charge land and give guarantee. Arab-Malaysian Finance Bhd v Meridien International Credit Corp Ltd London [1993] 3
MLJ 193
The court distinguished objects and powers of a company. The court held: - An objects clause sets out the perimeter of activities that are allowed to be carried out by a company. - Powers are given to a company to enable it to carry out its primary objects or businesses. Powers are ancillary to the main objects.
2.4.
THE DOCTRINE OF ULTRA VIRES
This doctrine states that if a company attempts to carry out any activity or transaction that is not authorized by its objects clause, then the company is said to be acting ultra vires, i.e. beyond its capacity. Ashbury Railway Co. v Riche [1875] LR 7HL 653 The court held that ultra vires are acts that are not within the objects of the company. These acts are therefore beyond the companys capacity. The ultra vires acts are confined to acts that are beyond the objects clause of the company. The following are not considered ultra vires acts: - An act which is in breach of the companys Articles of Association - A breach of directors powers - An act which is beyond the powers of an agent of the company - An act that is illegal
2.4.1. The common law position regarding ultra vires acts At common law, where a company carries out an act or transaction that is not authorized by its objects clause, the act or transaction is void. As a result, neither the company nor the other contracting party shall be bound by the act or transaction. There is no right or liability that arises from such act or transaction. The purpose behind this doctrine is to protect shareholders and creditors who invest or lend money to a company based on the companys objects. With the operation of this doctrine, any contracts entered into by the company or loans taken by the company for ultra vires purposes shall be rendered void. Third parties who enter into transactions with a company are bound by the doctrine of constructive notice. This is to say they are deemed to have notice of all public documents of the company that have been registered and lodged with the relevant authorities. Since the Memorandum of Association is a public document registered with the relevant authorities, third parties may not argue that they have no actual notice of its contents. They are thus deemed to know the objects of the company that they deal with. Ashbury Railway Co. v Riche [1875] LR 7HL 653 Facts: The objects clause of the company stated that it was to engage in the manufacture of railway carriages, wagons and railway equipment, and also that it was to act as general contractors. The company entered into a contract to finance the building of a railway in a foreign country. The question that arose was whether the contract was within the companys objects. The court held that the contract was an ultra vires act and so it was void. If an act was ultra vires, not even the unanimous or majority assent of the companys members can make it intra vires, i.e. permissible and within capacity. Nevertheless, in another case, AG v Great Eastern Railway Co. [1880] 5 AC 473, the court held that incidental objects or powers of a company were valid although they might conflict with its actual objects, as long as they were tied-up to the companys main objects.
2.4.2. The Malaysian legal position regarding ultra vires acts Section 20 of the Companies Act 1965 represents the Malaysian legal position on ultra vires acts. Section 20(1) provides that no act or purported act of a company and no conveyance or transfer of property to or by a company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to take the conveyance or transfer. The act of the company includes its entering into an agreement and includes any act done on its behalf by its officer or agent under any purported authority of the company, whether express or implied. The effect of Section 20 is to abolish the doctrine of ultra vires. Thus, when an act is beyond the companys capacity, i.e. when it is outside the companys objects clause, the act is still valid as far as the company and the other contracting party are concerned. Ultra vires acts can no longer be challenged merely on the ground of the companys lack of capacity. Pameron Holdings Sdn Bhd v Ganda Holdings Bhd [1988] 1 MSCLC 90,165 The court held that neither a company nor a third party could raise the argument of ultra vires in seeking to invalidate a transaction that had been entered into. Public Bank Bhd v Metro Construction Sdn Bhd [1991] 3 MLJ 56 The court held that the company in question could not raise the argument of ultra-vires, as this had been removed by s 20(1). The company also failed to show that the third party outsider knew about fraud or misuse of powers on the part of the companys directors. Executive Aids Sdn Bhd v Kuala Lumpur.Finance Bhd [1992] 1 MLJ 89 The court held that knowledge of fraud on the part of a director could not be imputed to the third party outsider. In arriving at the above decisions, our courts followed the English decision of Rolled Steel
Products (Holdings) Ltd v British Steel Corporation [1982] 3 AER 1057

Facts of Rolled Steel Products: Rolled Steel Products gave a corporate guarantee in consideration of a loan by a third party to an unrelated company that was controlled by Rolled Steels major shareholder.
The following decisions were held by the English Court of Appeal: - the corporate guarantee was not ultra vires, as the giving of the guarantee was expressly permitted by the companys Memorandum. - Ultra vires is a doctrine that deals with capacity of a company, and it does not deal with the ordinary powers of the company. - If a company has powers as provided by its Memorandum of Association, the third party outsider is not under a duty to inquire whether the power is exercised in accordance with its objects. - If the outsider knows that the directors, being the agents of the company, were exercising and misusing their powers for an improper purpose, this issue relates to a breach of directors duties. In the meantime, the companys capacity is not affected in anyway. - Even if a particular transaction (e.g the giving of corporate guarantee or the charging of the companys assets) is for an ultra vires purpose and not for the companys benefit, this fact alone does not operate to invalidate the transaction. This is despite the fact that the directors may have breached their authority as agents of the company. ,- When an agents act is unauthorized by the principal, and the third party outsider knows about it, the principal would not be bound. Thus, if the outsider is put into inquiry and has knowledge that a power is exercised for an ultra vires purpose, then the company would not be bound by the transaction.
2.4.3. The Exceptions under Section 20(2) Even though the ultra vires doctrine has diminished in its importance by virtue of s 20(1), ultra vires argument may still be raised in certain circumstances, e.g. against directors and other officers, as provided in the circumstances laid down in Section 20(2)(a) to (c): Section 20(2) Any such lack of capacity or power may be asserted only in: a. s 20(2)(a) proceedings against the company by any member of the company or debenture holders (who are secured by a floating charge) or the trustee for the debenture holders, to restrain the doing of any act or the conveyance or transfer of any property to or by the company. In applying to restrain the company, the member or debenture holder can only seek injunction against the company, and not the other contracting parties (the third party). The third party may apply to intervene, or the court has the power to order its joinder to the action.
Under s 20(3), the court has the discretion, if it deems it to be just and equitable, to set aside and restrain the performance of the contract. In ordering this, the court may allow compensation to be payable to the company or to the third party (as the case requires) for loss or damage sustained as a result of the courts action. However, anticipated profits to be derived from the performance of the contract shall not be awarded as a loss or damage sustained. ii. s 20(2)(b) any proceedings by the company or by any member against the present or former officers of the company for carrying out the ultra-vires act; and iii. s 20(2)(c) any petition by the Minister to the court to wind up the company for carrying out ultra-vires activities.
2.4.4. Powers of a company under Section 19 Section 19(1) of the Companies Act 1965 gives certain powers to a company, for e.g.: (a) power to make donations for patriotic or charitable purposes. This may include purposes like the relief of poverty, education, religion and other benefits to the community. (b) power to transact any lawful business in aid of Malaysia in the prosecution of any war or hostilities in which Malaysia is engaged (c) the powers set forth in the Third Schedule of the Companies Act 1965, unless the companys Memorandum or Articles expressly excludes or modifies the powers. Section 19(1)(c) also provides that in case of a company which has been registered without the word Berhad by the licence of the Minister under Section 24, the powers of such company shall not include any of the powers set forth in the Third Schedule, unless expressly included in the Memorandum or Articles with the written approval of the Minister. Section 19(2) provides a restriction as to the power of a company formed for the purpose of providing recreation or amusement or promoting commerce, industry, art, science, religion or any other like object not involving the acquisition of gain by the company or by its individual members. Such a company shall not acquire any land without the licence of the Minister. The Minister may by licence empower any such company to hold lands, subject to conditions imposed. Any company that is dissatisfied with the Ministers decision may appeal within one month of the order to the Yang di Pertuan-Agong, whose decision shall be final.
2.5.
ALTERATION OF THE MEMORANDUM OF ASSOCIATION
Although the Memorandum of Association comprises an integral part of a companys constitutional documents, its contents may be altered to reflect the changing needs and aspirations of the company and its shareholders. The Memorandum may be altered in a few ways as stated below.
2.5.1. Section 21(1) - General provisions as to the alteration of the Memorandum It provides that the Memorandum of a company may be altered to the extent and in the manner provided by this Act but not otherwise. A special resolution is required, in which: - the resolution is passed by a majority of not less than of the members who are entitled to vote in person or by proxies. - it is passed at a general meeting of which not less than twenty-one (21) days notice specifying the intention to propose the resolution as a special resolution has been duly given. Section 21(1A) provides that if a provision of a companys Memorandum could lawfully have been contained in its Articles, the company may, by special resolution, alter the Memorandum by altering or deleting that provision, unless the Memorandum itself prohibits the alteration or deletion of that provision. This is subject to Section 33 and Section 181. Section 21(1B) provides a limitation to s 21(1A), i.e. a provision of the Memorandum that relates to rights held by members in a particular class cannot be altered or deleted.
2.5.2 Section 23 Change of company name Under Section 23(1), a company may by special resolution change its name. The name must not contravene s 22(1). The company must lodge a copy of the special resolution in Form 11 with the Registrar. Upon approval of the Registrar of the new name of the company, a Certificate of Incorporation on change of name of the company, i.e. Form 13, shall be issued and the change shall then take effect.
Under Section 23(2), if the name of the company contravenes s 22(1), the company may by special resolution change its name to one that does not so contravenes. The Registrar may similarly direct a company to change its name if it contravenes s 22(1) and the company shall so change it within six weeks after the direction. Under Section 121(1A), the former name of the company shall appear beneath its present name on all its official documents for a period of not less than twelve (12) months from the date of the change. Failure to do so would make the company guilty of an offence against the Act. If a company commences winding up within a year after the change of name, the former name of the company must still appear on all notices and advertisements on the winding up. Under Section 23(6), a change of name does not affect the identity of the company or of its rights or obligations or render defective any legal proceedings by or against the company.
2.5.3. Section 26 Conversion of a public company to a private company and from a private company to a public company Section 26(1) allows a public company having a share capital to convert to a private company by lodging with the Registrar a copy of a special resolution in Form 11: - Determining to convert to a private company and specifying an appropriate alteration to its name; and - Altering the provisions in the companys Memorandum or Articles to impose the restrictions referred to in s 15(1). A printed copy of the altered Memorandum and Articles shall also be lodged. The Registrar shall issue Form 19, the Certificate of Incorporation on conversion to a private company. The effects of conversion from a public company to a private company are that all restrictions applicable to a private company shall now apply. It does not however affect the identity of the company or of its rights or obligations or render defective any legal proceedings by or against the company.
Section 26(2) allows a private company, subject to the restrictions in its Memorandum or Articles, to convert to a public company by lodging with the Registrar: - a copy of a special resolution in Form 11 determining to convert to a public company and specifying an appropriate alteration to its name - a statement in lieu of prospectus; and - a statutory declaration in Form 18 to verify that s 52(2)(b) has been complied with. - printed copy of the altered Memorandum and Articles of Association The Registrar shall issue Form 20, the Certificate of Incorporation on conversion to a public company. The effects of conversion from a private company to a public company are that all restrictions applicable to a private company shall cease to apply. It also does not affect the identity of the company or of its rights or obligations or render defective any legal proceedings by or against the company.
2.5.4. Section 28 Alterations of objects in Memorandum Section 28 provides that a company may by special resolution alter the provisions in its Memorandum with respect to its objects. The company shall give by post twenty-one days written notice specifying the intention to propose the resolution as a special resolution at a meeting of the company. The notice shall be given to all members and trustees for debenture holders or all debenture holders. The special resolution must be passed by a majority of not less than of the members who are entitled to vote in person or by proxies. A copy of the special resolution passed in Form 11 must be lodged with the Registrar within fourteen (14) days after the expiration of twenty-one (21) days after the passing of the special resolution. Under Section 28(5), within 21 days after the date of the passing of the special resolution, the following persons may apply to the court for cancellation of the alteration: - the holders of no less than 10% in nominal value of the companys issued share capital or any class of that capital; or - not less than 10% of the companys members (if the company is not limited by shares); or - the holders of not less than 10% in nominal value of the companys debentures.
Alteration of the companys object shall not have effect if such application for the cancellation is made, except in so far as it is confirmed by the court. The court shall have regard to the rights and interests of the members of the company or any class of members of the company. It may give such directions and make orders for the arrangement to purchase of the interests of the dissentient members. The court may also make an order canceling or confirming the alteration either wholly or in part.
2.5.5. Section 33(3) Effect of alterations on members who do not consent Under Section 33(3), after the date on which he becomes a member, a member of the company is not bound by an alteration made in the Memorandum or Articles which: - requires him to subscribe for more shares than the number held by him at the date of the alteration - or in any way increases his liability to contribute to the share capital or - otherwise to pay money to the company. He would not be bound by any such alteration unless before or after the alteration is made, he agrees in writing to be bound by such alteration.
2.5.6. Section 62 Power of company to alter its share capital Under Section 62(1), if authorized by its Articles, a company may in general meeting alter the conditions of its memorandum in any of the following ways: (a) increase its share capital by the creation of new shares of such amount as it thinks expedient (b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (c) convert all or any of its paid-up shares into stock and re-convert that stock into paid-up shares of any denomination; (d) sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum; or (e) cancel shares which have not been taken by any person as at the date of the resolution and diminish the amount of its share capital by the amount of the shares so cancelled. This shall not be deemed to be a reduction of share capital. Where a company has passed the resolution to increase its share capital beyond the registered capital, it shall within fourteen (14) days after the resolution lodge with the Registrar a notice of the increase in Form 28.
Fees are payable for the increase of authorized capital, i.e. the difference between the fees for the increased authorized capital and the existing authorized capital.
2.5.7. Section 64 Power of company to alter its share capital Under Section 64, if authorized by its articles and subject to confirmation by the Court, a company may by special resolution reduce its share capital in the following ways: (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) cancel any paid-up capital which is lost or unrepresented by available assets; or (c) pay off any paid-up share capital which is in excess of the needs of the company. The Memorandum shall be altered to reduce the amount of the companys share capital and its shares. Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, every creditor of the company is entitled to object to the reduction. If the Court is satisfied that the consent of the creditors to the reduction has been obtained, or their claims have been discharged or secured, it shall make an order confirming the reduction on such terms and conditions as it thinks fit. When an office copy of the Court Order has been lodged with the Registrar, the resolution for reducing share capital shall take effect. Section 64 shall not apply to an unlimited company, but such company may reduce its share capital in any way, including any amount in its share capital account.
3.
THE ARTICLES OF ASSOCIATION
The Articles of Association (Articles) of a company deals with the internal arrangements and regulations in a company. A model Articles, known as Table A, is provided in the Fourth Schedule of the Companies Act 1965,. 3.1. STATUTORY REQUIREMENTS AS TO THE ARTICLES OF ASSOCIATION
Under Section 29(1) of the Companies Act 1965, it is optional for a company limited by shares to register its Articles with the Memorandum. If it does not register its Articles, then Table A shall, so far as applicable, be the articles of the company. It is however mandatory for a company limited by guarantee or an unlimited company to register their Articles with the Memorandum. Under Section 29(2): The Articles must be printed, divided into numbered paragraphs and signed by each subscriber, in the presence of at least one witness, who is not another subscriber, who must attest the signature and add his address. Under Section 29(3), for an unlimited company with a share capital, the Articles must state the amount of share capital and the division into shares of a fixed amount. For a company limited by guarantee or an unlimited company, the Articles must state the number of members. Where such company increases the number of its members beyond the registered number, it must lodge the notice of increase with the Registrar within one month after the increase. Failure to do so will render the company and every officer in default guilty of an offence against the Act. Under Section 30(1), the Articles may adopt all or any of the regulations in Table A. In case of a company limited by shares, it may adopt all or some of the provisions of Table A, or it may also exclude Table A. If there is ambiguity in a provision in the Memorandum, the Articles may be resorted to. Nevertheless, in any conflict between Memorandum and Articles, the Memorandum shall prevail.
The usual contents of Articles of Association: - Statement as to whether Table A is adopted - restrictions set out in Section 15 Companies Act 1965 - allotment of shares, transfer and transmission of shares - alteration of share capital - modification of class rights - general meetings and vote of members - appointment, powers, duties and proceedings of directors - Dividends & capitalization of profits - Winding up Other matters that may be included: - term of office for directors whether specified or should retire by rotation - whether directors must have share qualification - appointment of executive directors and managing director - mode of voting and proxy forms - whether the Chairman has a casting vote - any special provisions
3.2.
ALTERATION OF THE ARTICLES OF ASSOCIATION
Under Section 31(1), Subject to this Act and to any conditions in its Memorandum, a company may by special resolution alter or add to its Articles. This is a statutory right to alter the Articles of a company. No one can stop the company or its members from altering the Articles. Any company shall be deemed to have the power to amend its Articles by the adoption of all or any of the regulations in Table A.
3.2.1 Restriction on alteration of the Articles of Association

Although a company has a statutory right to alter its Articles, several principles, as laid down by the statute and the court, restrict the alteration of a companys Articles: a. The power to alter the Articles may be excluded by a provision in the Memorandum. b. Alteration is void if it conflicts with the Companies Act 1965 or with the Memorandum of Association Welton v Saffery [1897] AC 299 c. Alteration may not be made with retrospective effect.
d. An alteration may be void if the majority who vote in favour of the alteration were not acting bona fide for the benefit of the company as a whole Allen v Gold Reefs of West
Africa Ltd [1900] 1 Ch 656.

e. Although a member may exercise his vote as he pleases in his own interests, the majority must not vote to oppress the minority Greenhalgh v Arderne Cinemas Ltd [1946] 1 AER 512. f. Although the Memorandum may prohibit the alteration of certain Articles, the Articles itself cannot provide that its own provisions are unalterable Peters American Delicacy Co Ltd v Heath [1938-9] 61 CLR 457. Such provisions are invalid because they would conflict with Section 31, which preserves the companys inherent and statutory right to alter. g. A separate contract entered into by the Company with its members, in which the parties agree not to alter the Articles, is ineffective. The company cannot contractually deprive itself of the right to amend its Articles Punt v Symons [1903] 2 Ch 506. If the company acts on the amended Articles, it would be in breach of contract Southern Foundries
(1926) Ltd v Shirlaw [1940] AC 701.

h. Under Section 15(4), a private company is restricted in its alteration of the Articles provisions in relation to the transfer of shares and number of members. The restriction against invitation to the public to subscribe for shares or to deposit money with the company must similarly not be removed. i. If the Memorandum or Articles authorizes the alteration of class rights only upon the consent of some specified proportion of the holders of shares in that class, then the class right holders must give the consent. If no consent is obtained and the alteration affects their class rights, the class right holders may apply to the court under Section 65 to restrain such alterations which affect their rights. j. An alteration must not contravene Section 33(3), i.e. must not require members to subscribe for more shares or in any way increases their liability to contribute to the share capital or otherwise to pay money to the company. S 33(3) provides that a member is not bound by such alteration unless before or after the alteration is made, he agrees in writing to be bound by such alteration. k. In case of small, private companies, where the shares are closely held, the Articles cannot be altered to affect a members rights contrary to the understanding that prevailed when the company was incorporated - Pang Ten Fatt v Tawau Transport Co Sdn Bhd [1986] 1
MLJ 179.
3.3.
THE LEGAL EFFECTS OF THE ARTICLES OF ASSOCIATION
Under Section 33(1), the Memorandum and Articles shall bind the company and the members as if they had been signed and sealed by each member. A statutory contract is created, binding the company and each member to observe all provisions of the Memorandum and Articles. Two (2) types of contractual effects arise: (i) Between the company and its members Members are bound to the company and the company is bound to the members (ii) Members are bound among themselves inter se.
3.3.1. Contractual effect between the company and its members The Articles has contractual effect not only between the subscribers who signed them, but also between the company and any person who later becomes a member Welton v Saffery
[1897] AC 299.
The company can take action against its members to force them to comply with the provisions in the Memorandum and Articles in the circumstances where the members are unwilling to do so voluntarily Hickman v Kent or Romney Marsh Sheep-breeders
Association [1915] 1 Ch 881.

Similarly, a member is able to require the company to comply with the provisions of the Articles, e.g. - payment of cash dividend: Wood v Odessa Waterworks [1889] 42 Ch 636. - counting of votes: Pender v Lushington [1887] 6 Ch 70. - enforcement of pre-emption clause: Mohamad Yahaya v MS Ally Sdn Bhd [1985] 1 MLJ
24.
A member may obtain injunction to restrain the company and its directors from acting in breach of the Articles of Association: Salmon v Quin & Axtens Ltd [1909] AC 442. The statutory contract between company and members confers rights upon a member only in his capacity as a member and not otherwise than as a member. A member can only enforce matters in the Articles that affect him personally as a member.
Members cannot seek to enforce provisions in the Articles that purport to give them rights in some other capacity than that of a member, such as a director, solicitor, accountant or promoter. These are known as outsider capacity. Eley v Positive Government Life
Security Assurance Co. [1876] 1ExD 88

If the right is conferred in a capacity other than that of a member, the right cannot be enforced against the company. Beattie v Beattie [1938] Ch 708.
3.3.2. Contractual effect among members inter se The Memorandum and Articles of Association also have the effect of a statutory contract between a member and every other member - Hickman v Kent or Romney Marsh Sheepbreeders Association [1915] 1 Ch 881. The members are bound inter se. Every member has a personal right to have the terms of the Memorandum and Articles observed. He may seek an injunction directly against the other members - Rayfield v
Hands [1960] Ch 1.
It must however be emphasized that the Articles constitute a statutory contract so far as they concerned the company and the members in their capacity as members Chung Khiaw Bank Ltd v Four Seas Communications Bank Ltd [1965] 2 MLJ 74 . Where the Articles contain a pre-emption clause, such clauses give shareholders the right of first refusal either to buy other shareholders shares or to sell their own shares to the remaining shareholders. A member may enforce this against another member Arunachalam & Ors v Kwality Textiles (M) Sdn Bhd [1990] 2 MLJ 167. As a consequence of this statutory contract, a member may at times find himself bound by terms that he has not consented to Borlands Trustee v Steel Bros & Co [1901] 1 Ch 279. An exception to this principle would be Section 33(3) which provides that an alteration of Articles to require a member to take more shares or which increases his liability upon shares already held by him will not bind him unless he consents in writing. It is irrelevant whether the provisions of the Articles were unfair. They may be enforced since a members rights and liabilities arising thereunder are a matter of contractual obligation Wong Kim Fatt v Leong & Co Sdn Bhd [1976] 1 MLJ 140 .
3.3.3. Shareholders Agreement There may be a separate agreement between shareholders, known as Shareholders Agreement. Such agreement is a supplemental document to the Memorandum and Articles of Association, not relating to or concerning the company - Russell v Northern Bank
Development Corporation [1992] BCLC 1016.

This is common in joint venture agreements, which are basically governed by the law of contract. The burden of enforcing such Shareholders Agreement is on the parties to the agreement. It usually set out how matters like board representation of ownership, management of the company and certain rights of shareholders on voting at general meetings. The shareholders agree among themselves on how they will exercise their voting rights on certain issues. In order to ensure that the Shareholders Agreement shall bind the shareholders inter se, it would be necessary to incorporate them into the Articles of a company Beh Chun Chuan
v Paloh Medical Centre Sdn Bhd [1999] 3 MLJ 262.

Although the Memorandum and Articles of Association create a statutory contract between a company and its members, a Shareholders Agreement is more advantageous because: A Shareholders Agreement has several advantages, e.g.: - Arrangements among shareholders may be kept secret. - Enforcement of the agreement is easier than enforcement of the Articles, since the agreement may be enforced by the immediate parties to the agreement.
3.4.
THE RELATIONSHIP BETWEEN THE COMPANY AND OUTSIDERS
The Articles is only a contract among members of the company. Third party outsiders are not privy to this statutory contract. As such, they may not enforce any rights that the Articles purports to confer upon them
Raffles Hotel Ltd v Malayan Banking Bhd (No 2) [1966] 1 MLJ 206.
The outsiders may seek to enforce their rights by arguing: - A separate contract between the company and outsider - A separate contract which incorporates the terms of the Articles. 3.4.1. A separate contract between the company and outsider Since the Articles do not constitute a statutory contract between the company and the outsider, any amendment of the Articles cannot similarly affect an existing relationship with an outsider. If there is a separate contract between the company and an outsider, the company may not be restrained from altering its Articles. However, for the company to act on the altered Articles, this may amount to a breach of contract, for which the outsider may sue the company Southern Foundries (1926) Ltd v Shirlaw [1940] AC 701. Held: The company could not justify a breach of contract by amending its Articles. The amendment did not bind an outsider. 3.4.2. A separate contract which incorporated the terms of the Articles The outsider might have a contract with the company that incorporates the terms of the Articles for the time being. This incorporation of the terms of the Articles may be express or implied. If a contract incorporates terms of the Articles for the time being, an alteration of the Articles will necessarily change the contract British Equitable Assurance Co Ltd V Baily
[1906] AC 35.
However, the alteration can only affect the contract prospectively and not retrospectively
Swabey v Port Darwin Gold Mining Co [1889] 1 Meg 385.

Re New British Iron Co exp Beckwith [1898] 1 Ch 324 - A provision of the Articles may go outside the Articles, hence it provides an implied contract, wherein the provisions in the Articles can be expressly incorporated into the contract. A party whose contract incorporates the Articles by reference may be protected by expressly stipulating that the terms of his contract will not be affected by the alteration of the Articles.
QUESTIONS 1. 2. What are the purposes of the Memorandum and Articles of Association? (5 marks)
What are the contents that must be found in a Memorandum under Section 18(1) of the Companies Act 1965? (5 marks) What is the effect of Section 20(1) of the Companies Act 1965 on transactions that are beyond the capacity of a company? (5 marks) If there is an ultra-vires act that is executory, what may be done by a member of a company? (5 marks) Explain how the Memorandum may be altered and the applicable statutory provisions. (10 marks) Kuek holds 20% of the shares in Syarikat Megah Sdn Bhd (the company). The other shareholders are Low and Minah, who each hold 40% of the shares. Low and Minah proposed a resolution to alter the objects clause of the company, but this was vehemently opposed by Kwek. Nevertheless, the said resolution was passed as Low and Minah held the majority of the votes. Advise Kwek on what he can do. (5 marks) What do you understand from Section 31 of the Companies Act 1965? (5 marks)
3.
4.
5.
6.
7. 8.
List down the restrictions on the alteration of a companys Articles of Association. (5 marks) Explain the 3 contractual effects of a companys Articles of Association. (5 marks)
9. 10.
Explain the contractual effect that a companys Articles of Association has between the company and its members. (5 marks) Explain the contractual effect that a companys Articles of Association has among its (10 marks) members inter se. Does the statutory contract between the company and its members mean that a member has a right to enforce every provision of the Articles? (5 marks) What do you understand from Section 33(3) of the Companies Act 1965? (5 marks)
11.
12.
13.
14.
Syarika Ria Sdn Bhd (the company), a private company, has five (5) shareholders, who are also directors. Samy, the majority shareholder, holds 30% of the shares. The Articles of the company provides that Samys best friend, Thilla, is to be the companys solicitor. Recently, the board of directors had a meeting, whereby a resolution was passed, appointing another solicitor for the company. Samy and Thilla are unhappy about this development. Advise Samy. (5 marks) Quah, an executive director of Syarikat Berjasa Sdn Bhd (the company). He is facing a bitter divorce case with his wife, who is an actress. The directors are worried that the high-profile divorce case is potentially embarrassing for the company, and would like to convene an extra ordinary general meeting to remove him as a director. Quentin has a service contract with the company, which will only expire in May 2010. Can he be removed as a director? (5 marks)
15.
Chapter 4
COMPANY MEETINGS LEARNING OBJECTIVES After reading this chapter, you should be able to: Distinguish the different types of meetings in a company. Understand the rules in relation to convening and conduct of meetings: Notice, quorum, duties of the Chairman, methods of voting, appointment of proxies and corporate representatives, minutes of proceedings, adjournment and postponement. Explain the different types of resolutions that may be passed in a company: ordinary resolution, special resolution and resolution requiring special notice.
1.
DECISION-MAKING IN A COMPANY
In a company, decisions are made either by holding meetings or passing resolutions in writing, depending on the requirements of the law and the nature of the decisions to be made. Meeting refers to two or more persons coming together to propose, discuss and vote on matters relating to the company. Requirements of a valid meeting of the company: It must be called by persons who have the proper authority, e.g. the board of directors Proper notice of meeting must have been given within the required number of days before the date of the meeting Proper notice of meeting must have been given to all persons who are entitled to receive notice of the meeting and to attend meeting. It is of course the choice of the recipient whether to attend the meeting. Sufficient number of persons must be present to form a Quorum, i.e. the minimum number of persons required to be present and to carry out the business of the meeting. The meeting must be presided by a Chairman. The meeting must be properly conducted according to the requirements of the Companies Act 1965 and the Memorandum and Articles of Association of the company.
How decisions are made in a Company Meetings No Meetings (Circular Resolutions/Resolutions in writing)
Board Meetings
General Meetings (Members)
Board Circular Resolutions
Members Circular Resolutions
AGM
EGM
- Resolutions
-Ordinary Resolution -Special Resolution - Resolution requiring Special Notice
- Ordinary - Resolutions Resolution - Special Resolution - Resolution requiring Special Notice
- Ordinary Resolution - Special Resolution
Key: AGM: Annual General Meeting EGM: Extraordinary General Meeting
There are generally two (2) types of meetings in a company, board meeting and general meeting. - Board meeting refers to a meeting of directors of a company. Shareholders and other non-directors may not attend this meeting, except with the approval of the board. - General meeting refers to a meeting of all shareholders of a company. Directors are required to attend this meeting also as part of the fulfillment of their duties as directors. This is regardless of whether they are also shareholders of the company. - A limited type of shareholders meeting is class meeting. Here, only shareholders belonging to a specific class of shareholders may attend such meeting. Under Section 145A of the Companies Act 1965, a company shall hold all meetings of its members within Malaysia. It may hold its meetings of members within Malaysia at more than one venue, using any technology that allows all members a reasonable opportunity to participate.
2.
TYPES OF COMPANY MEETINGS
Here, company meetings refer to meetings of shareholders of a company. There are seven (7) types: - Statutory Meetings - Annual General Meeting - Extraordinary General Meeting -Meeting requisitioned by members pursuant to Section 144 of the Companies Act 1965 - Meeting convened by members pursuant to Section 145 of the Companies Act 1965 - Meeting convened by court order pursuant to Section 150 of the Companies Act 1965 - Class meeting 2.1. STATUTORY MEETINGS SECTION 142
This applies to a public company having a share capital. For such company, it must hold its first meeting of its members between one (1) month and three (3) months after the date it is entitled to commence business. The objective of statutory meeting is to provide the members with information as to the newly-incorporated company and for the members to freely discuss any matter relating to the formation of the company or arising out of the statutory report, including future directions of the company. Pursuant to the requirements of Section 142(2) and (5), a Statutory Report prepared by the directors and an Auditors Report must be lodged with the Companies Commission of Malaysia. These two reports must then be circulated to all members at least seven (7) days before the statutory meeting. Under Section 142(3): at least two (2) directors must certify the Statutory Report, which shall state the following: - the total number of shares allotted, the amount of allotment, amount paid up on partlypaid shares and the consideration for which the shares have been allotted. - the total amount of cash received by the company in respect of all allotted shares. - an abstract of the receipts of the company and payments made up to 7 days before the date of report and an account or estimates of the preliminary expenses. - the names, addresses and descriptions of the directors, secretary, and if any, trustee for holders of debentures, auditors and managers. - the particulars of any contracts and any proposed modifications to the contracts. Where the company fails to hold the statutory meeting and lodge the required statutory report, this is a ground for compulsory winding up pursuant to Section 218(1)(b).
2.2
ANNUAL GENERAL MEETING (AGM) SECTTION143
Pursuant to Section 143 of the Companies Act 1965, all companies must hold an Annual General Meeting (AGM) at least once in every calendar year and at the intervals of not more than 15 months between the AGMs. For a newly incorporated company, its first AGM may be held within eighteen (18) months after its incorporation. Under s 143(4), if there is a default in holding AGM, the company and every officer in default shall be guilty of an offence, with a penalty of RM5,000/- and default penalty of RM100/-. A member of the company may apply to the court convene a general meeting. Pursuant to the requirements in Section 169, certain documents must be laid out before the AGM for adoption by the shareholders, namely the audited income statement (profit and loss account), the balance sheet, the directors report and the auditors report There are two (2) types of businesses to be carried out or transacted at an AGM, i.e. ordinary businesses and special businesses. The ordinary businesses to be transacted are: - to consider and adopt the accounts, balance sheet and reports of the directors and auditors - to declare dividends as recommended by the directors - to elect directors in place of retiring directors and to approve directors fees. - to appoint auditors and to fix their remuneration The special businesses of an AGM refer to all businesses to be transacted at the AGM, which are not usually part of the ordinary businesses. Such businesses may also be transacted at an Extraordinary General Meeting. Purposes of holding AGM: - to provide opportunities for communication between the directors and shareholders. - to enable members to obtain information on the company and its developments. - to enable members to participate in discussion of key policies and decisions of the company, regardless of whether they are majority or minority shareholders - to give shareholders opportunity to have direct public access to the directors of the company, so that the members may question the directors regarding the company affairs - to enable members to exercise their right to remove directors. - to enable members to meet and pass certain key resolutions as are required under the Companies Act 1965.
2.3.
EXTRAORDINARY GENERAL MEETING (EGM)
Extraordinary General Meeting refers to any general meeting apart from a statutory meeting and an Annual General Meeting. It can be held from time to time, depending on the needs and purposes of the directors and shareholders. It must however be convened by persons who have the proper authority or who are entitled to summon it: Nevertheless, if there is any defect in the authority to convene meeting, this defect may be rectified by all persons who are entitled to attend and vote at the meeting. The following persons may convene an Extraordinary General Meeting (EGM): a. The board of directors, pursuant to Article 44. b. Any director, if this is authorized by the Articles, e.g. Article 44. c. Requisitionists, usually certain members of the company, may also serve on the company, a requisition for the convening of an EGM under Section 144 of the Companies Act 1965. Upon the failure of the directors to convene the EGM as per the requisition, the requisitionists may proceed to convene the EGM on their own. d. Members of the company may also convene general meetings under Section 145 of the Companies Act 1965. e. The court may called for a general meeting under Section 150 if it is satisfied that it is impracticable t call a meeting in any manner in which meetings may be called, or to conduct the meeting in the manner prescribed by the Articles. 2.3.1. Convening of extraordinary general meeting on requisition Section 144
Members (who are the requisitionists) may also serve on the company, a written requisition for the convening of an extraordinary general meeting (EGM) under Section 144, if at the time of giving the requisition, they hold: - not less than one-tenth (10%) of the companys paid-up voting shares, or - not less than one-tenth (10%) of the total voting rights of all members (in case of a company not having a share capital). Within twenty-one (21) days after the date of receiving the requisition, the directors must proceed duly to convene a meeting, e.g. by issuing out a notice. The meeting must be held as soon as practicable, but not later than two (2) months after the date of receiving the requisition.
If the directors do not proceed to convene the meeting within twenty-one (21) days after the deposit of the requisition, the requisitionists who represent more than half () of the total voting rights of all the requisitionists may themselves convene the meeting. The meeting can be convened only after the expiration of the twenty-one (21) days, but cannot be held later than three (3) months from the date of the deposit of the original requisition. Any reasonable expenses incurred by the requisitionists by reason of the directors failure to convene a meeting shall be paid to the requisitionists by the company, out of the fees or remuneration of the directors who have failed to convene the meeting when originally requisitioned. 2.3.2. Calling of meetings Section 145
A general meeting may also be called under Section 145 of the Companies Act 1965 if called by: - two (2) or more members holding not less than one-tenth (10%) of the companys issued share capital, or - not less than five percent (5%) of the members. The members themselves must serve notice on all shareholders who are entitled to receive notice of the meeting and to attend and vote at the meeting. The costs incurred in calling of this meeting are to be borned by the members themselves. 2.3.3. Meeting called by court order Section 150
This meeting is called by court order when it is, for any reason, impracticable to call a general meeting in any manner. Examples of such instances: - the company is left without any member or director, owing to, for e.g. natural disaster or accidents. - certain shareholders or directors in a company indulge in quorum tactic, i.e. by intentionally refusing to attend meetings in order to prevent meetings from being held and decisions being made. - the company is unable to give proper notice to its shareholders because its records of membership have been lost or destroyed. Parties who are interested in holding a general meeting may make application to the court. In the case of quorum tactic, the applicant must satisfy the court that the effect of nonattendance by other shareholders is to paralyze the company, and in the process, the company is in danger of being imposed penalties for non-compliance with the requirements of the law. In dealing with such application, the court must be satisfied that it is totally impossible and impracticable to call or conduct a general meeting in any way. Compliance and Statutory Forms 73
The courts power to call for meeting applies to general meetings, and not to board meetings. 2.4. CLASS MEETINGS
Class meetings are to be held when there is a variation of class rights that are attached to a particular class of shareholders. Class meetings must be held separately from the general meeting of shareholders. Under Article 4, the provisions of the Articles on general meetings shall similarly apply to class meetings.
3. NOTICE OF MEETINGS All persons who are entitled to attend a meeting must be given notice of the time, place and nature of businesses to be transacted at the meeting. This is to enable members to know in advance the businesses to be transacted at the meeting. In turn, this can assist them in deciding whether to attend the meeting, and if so, how they wish to vote. If notice of the meeting is defective, meeting is improperly convened, and thus, it should not be held as the resolutions passed would be rendered void. Nevertheless, Section 355(2) of the Companies Act 1965 gives the court the power to remedy any defect, irregularity or deficiency of notice, and to validate the meeting accordingly.
3.1
LENGTH OF NOTICE
Under Section 145(2), in the case of annual general meeting (AGM), extraordinary general meeting or class meeting, a notice in writing of not less than fourteen (14) days or such longer period as the Articles provide, shall suffice. Nevertheless, under Section 145(2A), the AGM of a public company shall be called by a notice in writing of not less than twenty-one (21) days or such longer period as the Articles provide. If a meeting is to pass a special resolution, Section 152(1) provides for a notice of not less than twenty-one (21) days to be given. Short notice, i.e. notice shorter than is required by the Act, may be waived and the meeting shall be deemed to be duly-called in the following situations: - In the case of an AGM, this is agreed to by all the members entitled to attend and vote thereat. Compliance and Statutory Forms 74
- In the case of EGM, this is agreed to by a majority of members together holding not less than 95% of voting shares, or by a majority of Members together holding not less than 95% of total voting rights
3.2.
SERVICE OF NOTICE
Notice must be served on the following persons: o Article 108 served personally or by posting to the members who are entitled to receive notice at the addresses shown in the companys Register of Members. o Article 109 In case of jointly-held shares, notice is to be given to the first-named joint holder in the Register of Member o Article 110 In case of a bankrupt member, notice is to be given to the Director-General of Insolvency. In case of a deceased member, to the members legal personal representative. o Article 111 notice is to be given also to the auditor of the company. Under Section 145(5), an accidental omission to give notice of a meeting, or non-receipt of notice by any member shall not invalidate the meeting, unless court declares proceedings at the meeting to be void. Similarly, under Section 355(1), a meeting will still be valid, despite the irregularity or deficiency of notice, unless court is of opinion that substantial injustice has been caused, which cannot be remedied. In case of a listed company, notice is to be given to depositors whose names appear in the Record of Depositors (ROD) maintained by Bursa Malaysia Depository Sdn Bhd at least three (3) market days before the notice is sent out.
3.3. CONTENTS OF NOTICE Under Article 45, notice of meeting must contain the date, hour, place of meeting and a list of businesses to be transacted at the meeting. In the case of a notice of annual general meeting, the notice shall show the ordinary businesses and special businesses (if any) to be transacted. If ordinary resolutions are to be proposed to be passed at the meeting, the notice needs only to set out the general nature of business to be transacted. If a special resolution or a resolution requiring special notice is to be proposed to be passed, the notice shall set out the text of the proposed resolution word for word in full. There should be an Explanatory Note which contains the necessary information and to explain the effect of the proposed resolution. Compliance and Statutory Forms 75
In the case of a listed company, the Explanatory Note usually takes the form of a Circular to Shareholders, which must first be approved by Bursa Malaysia. Directors are obliged to ensure the contents of notices of meeting and the explanatory documents sent to shareholders are not misleading. The information should fully and fairly informs and instructs the shareholders about the matter which they have to vote. If the notice misstates the true purpose of the meeting, both the notice and the subsequent proceedings, including the resolutions passed may be invalidated and overturned.
4. PROCEEDINGS AT MEETINGS Meetings should be held at a venue where members may attend simultaneously. It is not necessary for all persons to be together in the same room, if there are adequate audio-visual links, e.g. multi-speaker telephones and teleconferencing facilities, which will enable a member to hear everyone else - Byng v London Life Association Ltd [1989] BCLC
400.
Under Section 145A of the Companies Act 1965, a company shall hold all meetings of its members within Malaysia. It may hold its meetings of members within Malaysia at more than one venue, using any technology that allows all members a reasonable opportunity to participate. 4.1. QUORUM
Quorum refers to the minimum number of persons who are required to be present at a meeting, in order to constitute a meeting and to carry out or transact the businesses of the meeting. Under Section 147(1)(a), if the Articles do not provide for the quorum, two members of the company who are personally present shall be a quorum. Comparatively, Article 47 provides for quorum to be formed by two members present in person or by proxy. If there is no quorum, there is legally no meeting, and any business transacted or resolution passed shall be invalid United Investment & Finance Ltd v Tee Chin Yong
[1967] 1 MLJ 31.

Nevertheless, under Section 355(3), where there is an absence of a quorum at any meeting of the company, the court may still validate the meeting, unless there is substantial injustice. Where the minutes of a meeting records the passing of a particular resolution, the quorum is presumed to be present and this shall not affect third parties who have no notice of any irregularity. Compliance and Statutory Forms 76
4.1.1 Exceptional circumstances allowing a one-person meeting: Unless the Articles authorize a one-person meeting, one person alone cannot constitute a quorum in order to transact the businesses of the meeting. There are several exceptions to the above: Class meeting Where one shareholder holds all shares of a particular class in the company. Creditors Meeting In a winding-up proceeding, where there is only a single creditor entitled to vote or he is the proxy for all other entitled creditors, he may alone constitute the quorum for the meeting. Board or Committee Meeting If the Articles authorizes, the board of directors may decide that a director alone shall be a quorum for board committee meetings. Meeting of a wholly-owned subsidiary Section 147(6) provides that if a minute is signed by a representative of the holding company stating that any resolution has been made or passed, the resolutions shall be deemed to have been duly passed. Meeting convened by sole continuing Director where a company is left with only one director, the sole director can act to appoint additional members in order to bring up to the minimum required number of directors for the company. Meeting called by the court Under Section 150, the court may allow a one-person meeting if the company is deadlocked or in danger of being imposed penalties for noncompliance with the requirements of law if meeting is not held. Where quorum is fixed by percentage of shares and not the physical person present In this situation, an individual who owns the prescribed percentage of shares will constitute a quorum.
4.1.2. Absence or lack of quorum Under Articles 47 and 48, a quorum must be present at the commencement of meeting, within half an hour ( hour) from the time fixed for the meeting. If there is failure to muster the quorum at the start of the meeting, the consequences are: - A meeting that is convened by a members requisition shall be dissolved. - For other types of meetings, the meeting will be adjourned to a time and place as determined by the directors, or if not, the following week at the same time and venue. Compliance and Statutory Forms 77
Quorum must be present throughout the whole proceeding unless the Articles provide otherwise. This is especially where the meeting is reduced to only one member. In absence of any contrary provision in the Articles, any business transacted is invalid because one member alone cannot constitute a valid meeting. A contrary provision is seen in Article 47, which provides that a quorum is required to be present when the meeting proceeds to business. Thus, as long as there is a quorum at the start of the meeting, the subsequent lack of quorum, e.g. through departure of members will not invalidate the proceedings thereafter. The meeting may continue and any subsequent resolution passed will be valid - Tan Guan
Eng v BH Low Holdings Sdn Bhd [1992] 1 MLJ 487.

Indeed, members who deliberately stage a protest walkout from a meeting cannot later try to rely on the argument of lack of quorum in their attempt to invalidate the meeting. Members who make up the quorum must be qualified to take part. A quorum must also be made up from disinterested persons who do not have conflicting interests, unless permitted by the Articles. Where the Articles permit interested persons to be counted for the purpose of a quorum, these persons may be present to form part of the quorum, but they may not participate or vote in that meeting. In case of decisions made in an inquorate meeting, i.e. in a meeting that lacks quorum, the acts or proceedings of such meeting will still be regarded as valid in favour of third parties. This is especially where the third parties have no notice of the irregularities and there are material consequences affecting them.
4.2.
CHAIRMAN
A meeting must be presided by a Chairman, whose main roles are to control the conduct of meeting and to enable the businesses of the meeting to be transacted or completed in an orderly, lawful fashion. Under Article 49, the Chairman of the board of directors shall preside as the Chairman at every general meeting of the company. If however there is no such Chairman or he is unwilling to act or he is not present within 15 minutes after the time appointed for the meeting, the members present may elect one of their number to be the Chairman of the meeting.
The main duties of a Chairman in a general meeting are: - To determine that a quorum is present and that the meeting is properly convened. - To conduct the meeting in accordance with the agenda as stated in the notice of meeting, in the proper sequence set out, unless the meeting consents to changing the order of the agenda item, - To table the proposed resolutions as per the agenda. - To maintain orderly conduct of meeting and to give reasonable opportunity to speak for all members present who are entitled to speak - To confine discussion within the scope and time of the meeting. - To decide points of order and other incidental questions arising - To decide whether any proposed motions and amendments are in order. - To put the relevant proposals and motions to vote and declare the results. - To conduct a poll if duly demanded within the Articles or the Companies Act 1965. - To declare the meeting closed when its businesses have been completed.
4.3.
VOTING
Two (2) common methods of voting in a general meeting are by show of hands and by poll. A shareholder who has the right to vote may vote in any way he pleases. Occasionally, some shareholders may be tied by Shareholders Agreement in which they are bound to vote in according with the agreement. 4.3.1. Voting by show of hands Voting is usually done by show of hands at first instance, unless a poll is demanded Article 51. As provided by Article 54, on a show of hands, every person present who is a member or a representative of a member shall have one vote. The voting does not take into account variations in sizes of shareholdings Under Section 149(1)(a), a proxy cannot vote on a show of hands, unless the Articles provide otherwise. E.g. the Articles of a listed company must give right to proxies to vote on a show of hands. 4.3.2. Voting by poll A vote by poll is where the voting is done by written ballots. The votes are in proportion to the number of shares held by each member. Under Section 147(1)(c)(iii), in case of a company having a share capital, on a poll, each member shall have one vote for each share held by him.
Under Article 54, every member shall have one vote for each share held by him, and he may exercise the vote either in person, by proxy or by other duly authorized representative. Members or proxies may demand for a vote by poll, i.e. demand for poll, either prior to or after a vote on a show of hands. If a poll is demanded after a vote on a show of hands, the votes on a show of hands are nullified.
4.3.3. How a poll should be demanded: Section 146(1)(a) provides for a right to demand a poll at any general meeting on any matter, except on the election of the Chairman of the meeting or the adjournment of the meeting, i.e. these two decisions must be voted by show of hands. Under Section 146(1)(b), a poll is deemed to be effectively demanded at any meeting at which a special resolution is submitted if demanded: - By not less than five (5) members having the right to vote at the meeting; or - By a member or members representing not less than one-tenth (10%) of the total voting rights of all members having the right to vote at the meeting or one-tenth (10%) of the total paid-up share capital of the company. In comparison, Article 51 gives a wider class of persons this right. It provides that a poll may be demanded: a. by the Chairman b. by at least three (3) members present in person or by proxy c. by any member or members present in person or by proxy and representing not less than one-tenth (10%) of the total voting rights of all the members having the right to vote at the meeting; or d. by a member or members holding not less than one-tenth (10%) of the total paid-up shares of the company. Once a demand for a poll is properly made by the member or proxy entitled, the demand must be accepted by the Chairman and a vote by poll should be taken. If not, the resolution or election passed will be invalid.
4.3.4. The Chairmans casting vote Casting vote refers to a second vote given to the Chairman when there is an equality of votes, whether on a show of hands or on a poll. The Articles must provide such casting vote in order for the Chairman to exercise this vote. If provided by the Articles, this vote shall be exercised by the Chairman in his capacity as a Chairman. This vote is different from the usual vote given to the Chairman in his capacity as a member of the company. The purpose of this casting vote is to enable the meeting to resolve a deadlocked decision, where voting is equally divided. Where the Chairman has been restrained from exercising his usual vote as a member, for e.g. in a related-party transaction that involves him, he is entitled to exercise the casting vote if the votes are found to be equal and the Articles provides for a casting vote. If the Articles have no provision for a casting vote, the Chairman cannot exercise this vote.
4.4.
PROXIES
A person, whether he is a member of the company or not, may be appointed by a member to attend and vote in place of the member (who is usually not present) at a company meeting. Such person is called a proxy, i.e. an agent who is lawfully constituted Re English,
Scottish & Australian Chartered Bank [1893] 3 Ch 385.

Under Section 149(1), a proxy has the same rights as a member to attend a general meeting on behalf of the member, to speak at the meeting and to vote on a poll. Under Section 149(1): (a) a proxy is not entitled to vote, except on a poll (b) a member cannot appoint a proxy who is not a member, unless the proxy is: - an advocate, - an approved company auditor, or - a person approved by the Registrar in a particular case. (c) a member cannot appoint more than two (2) proxies to attend and vote at the same meeting, and (d) If a member appoints two (2) proxies, he must specify the proportions of his holdings to be represented by each proxy. Compliance and Statutory Forms 81
Thus, unless the Articles provide otherwise, a proxy who is not a member must still be one of the three (3) categories of persons stated in Section 149(1)(b) - Tan Guan Eng v BH Low
Holdings Sdn Bhd [1992] 1 MLJ 487.

Exception can be found in case of a public listed company. The Articles of such company must give rights to proxies to vote on a show of hands and must enable authorized nominees to appoint at least one (1) proxy for each securities account that the nominees hold. Under Section 149(2), every notice calling for a company meeting or class meeting must contain a prominent statement drawing attention to the members right to appoint proxies to attend and vote instead of the member. The statement should also state that a proxy needs not also be a member.
4.4.1. Proxy Form Article 59 the proxy form must be in writing under the hand or seal of the appointor, which can be a corporation itself. Article 61 the proxy form shall be deposited with the companys registered office not less than forty-eight (48) hours before the appointed time of the meeting. If the form is deposited less than 48 hours, the proxy shall be treated as invalid. If the Articles do not prescribe a time-limit, it may be lodged at the meeting venue itself. If a proxy is invalidly given, any vote cast by the proxy is similarly invalid.
4.4.2. Must Proxies exercise the authority conferred upon them? A proxy has an obligation not to vote contrary to the members instructions. If he votes contrary to instructions, the vote is invalid. Nevertheless, the proxy needs not exercise the authority conferred upon him if he chooses not to. If there is a binding contract or if the proxy is under a fiduciary duty, then the proxy must obey the appointers instructions and vote accordingly. This applies to a Chairman or a director who is appointed by shareholders as their proxy.
4.4.3. Revocation of Proxy The authority of the proxy to vote on behalf of the appointer may be revoked at any time before the authority is effectively exercised. A proxy may be revoked in the following circumstances: i. information in writing received by the company before the commencement of the meeting ii. the member, the proxy himself or another proxy appointed in place of the proxy informs the Chairman verbally prior to the commencement of meeting. In case of a member who has appointed a proxy but later attends the meeting himself, his attendance at the same meeting will not automatically revoke the proxys appointment. For the appointment of Proxy to be revoked, the member must exercise his voting rights.
Cousins v International Brick Co Ltd [1931] 2 Ch 90, Ansett v Butter Air Transport (No.2) [1958] 75 WN (NSW) 306.
4.5.
Corporate Representatives
In case of a corporate member, it may be represented at the general meeting of the company (of which it is a member) either by a corporate representative or through a proxy. Corporate Representative refers to authorized representative or representatives that are appointed by a corporate member under Section 147(3). The requirements for the appointment of a corporate representative are a board resolution and a certificate under the corporations seal, which appoint or revoke the appointment of the corporate representative. This representative is entitled to exercise the same power on behalf of the corporation as if the corporation were an individual. The corporation is deemed personally present through its corporate representative. No proxy form is required to be executed and the representative is not subjected to the restrictions that are applicable to a proxy. If a Proxy is appointed for the corporation instead, the proxy form should be under the corporations seal or signed under the hand of an officer of the corporation. When this is done, only then is the proxy authorized to attend the meeting.
4.6 ADJOURNMENT & POSTPONEMENT Adjournment refers to the proceeding of a meeting that has been actually held, but is then discontinued for the time being. A motion shall be passed to adjourn a meeting, and the adjourned meeting shall be continued at a time fixed by the motion. Alternatively, a fresh notice may be issued. Where a meeting is adjourned, notice needs not be given again, unless it has been adjourned for thirty (30) days or more or sine die (without any fixed date). In the latter case, notice of the adjourned meeting must be given in order to continue the earlier meeting. An adjourned meeting can only deal with the remainder of the businesses of the original meeting, unless proper notice of the additional businesses has been given. A resolution passed at an adjourned meeting is deemed passed on the date of the adjourned meeting. 4.6.1. Who may adjourn a Meeting? The power to adjourn meetings lies with the meeting itself, i.e. the members or shareholders Article 50, Stoughton v Reynolds [1736] Fortes Rep 168. The Chairman has no power to stop or adjourn the meeting of shareholders of the company at his own will and pleasure. If a Chairman adjourns a meeting without the consent of the meeting, he has contravened the Articles of Association. The members may elect another Chairman and continue with the meeting, as it is competent to continue to transact any incomplete business Tan Guan Eng v BH Low
Holdings Sdn Bhd [1992] 1 MLJ 487.

Nevertheless, in certain circumstances, the Chairman may adjourn the meeting: - The accounts are not ready to be tabled for approval by the shareholders. - Failure to obtain a quorum within hour from the time appointed for the meeting. - For the purpose of taking a poll Article 52. - The meeting has gone out of hand and the shareholders have become unruly. The Chairman can close the meeting in good faith if after obtaining independent and expert advices, he concludes that there is no valid business before the meeting.
4.6.2. Postponement Postponement refers to a meeting that has been fixed but is then put off to a later date before it is held. Where a general meeting has been convened to be held, the directors may not bring forward the time originally fixed for the meeting. Unless the Articles allow, the directors also cannot postpone the meeting to another day. The meeting that is held after an earlier meeting is postponed is invalid.
4.7.
RESOLUTIONS
Resolution refers to a decision of the company. Usually, a proposal is first put forward, and after discussion, it is voted upon. Once there is support from the necessary majority, the company is said to pass a resolution. Resolutions may be passed at two (2) different levels in a company: i. Board of Directors Resolutions passed at Board meetings or by Circular Resolutions. ii. Members Resolutions passed at General Meetings or by Circular Resolutions. There are basically three (3) types of resolutions in a company: o Ordinary Resolutions o Special Resolutions o Resolutions requiring Special Notice
4.7.1. Ordinary Resolution Ordinary resolution refers to a resolution that is passed by a simple majority of members present and voting on a show of hands or by a poll. It is passed at a meeting of which notice of not less than fourteen (14) days must have been given. The resolution is passed by the majority of those who actually vote on the resolution. Thus, those who are present but who abstain from voting are not taken into account in determining the number of the votes cast. It is the most common form of resolution that is used for all routine businesses at a general meeting, unless required otherwise by the Companies Act 1965 or the Articles.
An ordinary resolution needs not be lodged with the Companies Commission of Malaysia, unless it effectively binds any class of shareholders, whether or not agreed to by all the members of the class: Section 154(1). A companys Articles may occasionally provide for a majority in excess of a simple majority, other than a majority. Edwards v Halliwell [1950] 2 AER 1064 the rules of a union allowed for an increase in subscription if a resolution was passed by a two-thirds (2/3) majority. Some ordinary resolutions may require a special majority (Resolution with special majority). A majority of three-fourths of members voting in person or by proxy is needed for: - Appointment of a person over the age of 70 years old as a director of a public company or subsidiary of a public company, pursuant to Section 129. - Appointment of another person nominated as an auditor at the meeting convened for the purpose of removing the present auditor, pursuant to Section 172(7)(a).
4.7.2. Special Resolution Section 152 Under Section.152(1), a special resolution refers to a resolution in which: - the resolution is passed by a majority of not less than three-fourths () of the members who are entitled to vote in person or by proxies, and - it is passed at a general meeting of which not less than twenty-one (21) days notice specifying the intention to propose the resolution as a special resolution has been duly given. Shorter notice of special resolution may be acceptable if so agreed by: - a majority of the Members together holding not less than 95% of the issued voting shares - a majority of the Members together holding not less than 95% of the total voting rights. The notice must specify the intention to propose the resolution as a special resolution. Special Resolutions are needed for the following: s 15(4) Alteration of any restriction in the Memorandum and Articles of Association of a private company, e.g. relating to rights to transfer shares or number of members. s 21(1) Alteration of the Memorandum of Association s 21(1A) Alteration or deletion of clauses in the Memorandum which could lawfully have been contained in the Articles. s 23 Change of name of the company Compliance and Statutory Forms 86
s 26 conversion from a public company to private company and vice versa. s 28 Alteration of objects clause s 31 Alteration of Articles s 64 Reduction of share capital. For the matters specified above, it is not open for a companys Articles to provide for a majority other than that specified in the Act. On other matters, the Articles may provide for a majority in excess of a simple majority. Under Section 154(1), every special resolution passed must be registered with the Companies Commission of Malaysia within one month after its passing. 4.7.3. Resolution requiring Special Notice S.153 This refers to special notice being required of a resolution, i.e. a notice of the intention of the companys members to move the resolution proposed. It must be given to the company not less than twenty-eight (28) days before the meeting at which it is moved. The company shall then give the members notice of such resolution at the same time as it gives notice of the meeting. Special Notice is required for resolutions on the following: - Removal of Auditor - Removal of a director before the expiration of his term - Appointment of another person in the place of the director being removed - Removal of liquidator in a members voluntary winding up 4.7.4. Circular Resolution or Resolution in writing Section 152A: Under Section 152A, a resolution in writing signed by or on behalf of all persons for the time being entitled to receive notice of and to attend and vote at general meetings of a company is as valid as a resolution duly passed at a general meeting of the company. Thus, a special or ordinary resolution may be passed without holding any physical meeting, so long as it is authorized by the Articles and signed by the relevant signatories. The Articles shall stipulate whether it must be signed by all directors or only a majority of them. There can be Members Circular Resolutions and Directors Circular Resolution. Such circular resolutions are valid as long as the transactions are within the companys powers, made honest and for the benefit of the company. Only the consent of the voting members is required. Compliance and Statutory Forms 87
Nevertheless, the Companies Act 1965 provides that it mandatory for certain acts to be performed at a physical meeting, and cannot be done by way of circular resolutions: - Declaration of solvency by Directors in a Members voluntary winding-up - Alteration of objects clauses - Annual General Meetings - Removal of Director of a Public Company by ordinary resolution - Removal of Auditor. 4.8. MINUTES
Minutes refers to the written records of resolutions and businesses transacted at a meeting, whether a general meeting or a board meeting. A book containing such records is called the minute book. - Any minute book may be kept either by making entries in a bound book or by recording the matters in any other manner. Reasonable precautions must be taken to guard against falsification. Under Section 156(1), minutes of all proceedings of general meetings, meetings of directors and meetings of managers (if any) must be: - entered in the minute books that are kept for those purposes, within fourteen (14) days of the meeting; - signed by the Chairman of the meeting at which the proceedings were had, or by the Chairman of the next succeeding meeting. Pursuant to Section 156(2) & (3), once the above requirements are fulfilled, the minutes shall be evidence of the proceedings to which it relates. Until the contrary is proven, the following are deemed to have taken place: - The meeting shall be deemed to have been duly convened and held; - All proceedings of the meeting shall be deemed to have been duly-conducted; and - All appointments of officers or liquidators made at the meeting shall be deemed to be valid. If the company fails to enter in the minute book within the required fourteen (14) days, the company and every officer in default shall be guilty of an offence against the Act. Under Section 157(1) & (2), the minute books of general meetings must be kept at the companys registered office. Members may inspect or request a copy. They are however not permitted to inspect board minutes, except by an order of the court.
5. POWER OF COURT TO VALIDATE IRREGULARITIES IN MEETINGS AND PROCEEDINGS Section 355 Under Section 355(2), the court has the power to remedy any defect, irregularity or deficiency of notice or time which renders any proceedings ineffective at any company or board meetings. The court can declare that a proceeding is valid or make orders to rectify or modify consequences of that irregularity Examples of procedural irregularities relating to meetings: - short notice of general meetings or creditors meetings. - defects in notice. - non-receipt of notice by member(s) - lack of quorum. The court may validate the meeting if no substantial injustice has been caused, or that the irregularity is of little consequences or that no shareholders interest is prejudiced. Example of substantial injustice: - Director who is removed at a meeting that is convened without quorum Sum Hong Kum v Li Pin Furniture Industries Pte Ltd [1996] 2 SLR 488. - Exclusion of proxy. - Important decisions affecting a class of members who are absent as a result of no notice being served on them. Under Section 355(3), where there is any omission, defect, error or irregularities (including lack of quorum in any company meeting or board meetings) has occurred in the management or administration of a company, resulting in a breach of this Act or default in the compliance with the companys constitution, or any company meetings or board meetings being rendered ineffective, the court has a discretion to make such orders as it thinks fit to rectify or modify such irregularities or to validate any of the acts done. Lack of quorum in any company meeting or board meetings may thus be rectified by the court under s 355(3).
QUESTIONS 1. Explain the meaning and requirements of: a. a general meeting requisitioned by the members under Section 144 of the Companies 1965. (5 marks) a general meeting convened by the members under Section 145 of the Companies Act 1965. (5 marks)
b.
2.
Syarikat Maju Bhd (Maju) receives a requisition from its shareholder, Kenyalang Bhd (Kenyalang) for an extra-ordinary general meeting to be convened. Explain what happens when Majus board refuses to convene the extra-ordinary general meeting as requisitioned by Kenyalang. What steps may Kenyalang take? (5 marks) Explain what you understand by the meaning of quorum in relation to company meetings. (5 marks) Explain who a proxy is and the rights of a proxy. Explain who qualifies to be a proxy. Explain who may demand for a poll. (5 marks) (5 marks) (5 marks)
3.
4. 5. 6. 7.
Explain what is meant by ordinary businesses and special businesses as transacted at a companys annual general meeting. (5 marks) Identify the differences between an ordinary resolution and a special resolution. (5 marks) Explain what is meant by a resolution requiring special notice, under Section 153 of the Companies Act 1965. (5 marks) Explain two (2) ways in which a company may be represented at another companys extra-ordinary general meeting. (10 marks) Explain the meaning of a corporate representative and how such person is appointed. (5 marks) Explain who may be the chairman of a general meeting in a company. (5 marks)
8.
9.
10.
11.
12.
13. 14. 15.
Identify any FIVE (4) duties of the chairman of a general meeting. Identify the circumstances in which the chairman can adjourn a meeting.
(5 marks) (5 marks)
Explain what happens in an equality of votes and the chairmans duties in relation to casting vote. (5 marks) Explain what is meant by adjournment of a meeting, and the steps to be taken if a meeting is adjourned. (5 marks) Explain the consequences of a failure to maintain a quorum. Problem Question: Syarikat All-Star Enterprise Sdn Bhd (the company), runs a business in distributing personal computers, printers and various other computer accessories. Currently, the company has an issued share capital of RM200,000/-, consisting of 200,000 ordinary shares of RM1-00 each. The companys board of directors consists of Alan, Bernard, Jamilah, Kamala and Lilian. Alan, the Chairman of the company, holds 40,000 shares. The rest of the directors collectively hold 40,000 shares. Ten (10) other members hold the balance of the companys issued share capital. An extra-ordinary general meeting (EGM) is to be held on 30-6-2008 to consider and pass two (2) proposed resolutions relating to: 1. the change of Companys object to music-recording. 2. the appointment of Fiona as a new Director. (first resolution) (second resolution) (5 marks)
16.
17. 18.
The notice of the meeting stated that the company would strictly enforce Section 149(1)(b) of the Companies Act 1965. On the day of the meeting, two (2) proxies, Pauline and Pamela, turned up at the venue of the meeting. Pauline represented a member, Michael, while Pamela represented Manfred. Neither Pauline nor Pamela were members of the company. The proxy forms were lodged a week before the meeting. Pamela was a businesswoman while Pauline was an auditor. The company secretary refused to let Pamela attend the meeting on the ground that she did not qualify to be a proxy for Manfred.
The first resolution was put to vote by a show of hand. Pauline, the only proxy left, represented 10,000 shares. She wanted to vote on a show of hand, but the chairman disallowed her. Eleven (11) members then voted in favour of the 1st resolution; while three (3) voted against. Alan declared the first resolution carried. On the second resolution, the Chairman wanted to put the matter to vote by a show of hand as well. Pauline persuaded another member, Maimunah, to join her together in demanding for a poll. Maimunah held 11,000 shares. The chairman allows a poll to be taken. There was an equality of votes cast. The chairman then used his casting vote to declare the second resolution carried. Based on the above situation, answer the following: a. Explain whether the secretary was correct in relation to Pamela and Paulines case as proxies. (10 marks) State the types of resolutions required for the first and second resolutions. Discuss whether the resolutions had been validly passed. (10 marks) Discuss whether the chairman was correct in allowing the demand for a poll on the second resolution. (5 marks)
b.
c.
Chapter 5
____________________________________________________
DIRECTORS, COMPANY SECRETARIES AND AUDITORS
LEARNING OBJECTIVES After reading this chapter, you should be able to understand the following in relation to directors, company secretaries and auditors of a company: Explain who a director is and understand the different types of directors in a company. Explain how directors are appointed and the ways in which their offices are terminated. Understand how directors work, their powers and the division of powers in a company. Describe the fiduciary and other statutory duties of directors. Explain who a company secretary is and his roles in a company. Explain how a secretary is appointed and the ways in which his office is terminated. Explain the duties and authority of a secretary. Explain how an auditor is appointed and the ways in which his office is terminated. Explain the powers and duties of an auditor.
DIRECTORS
Organs of a company Board of directors - represents the management General meeting - represents the ownership
1.
DIRECTORS
A company is managed and represented by its board of directors, which represent the top management of the company. The board of directors is answerable to the members of the company, who are collectively known as the general meeting. Members or shareholders of a company are the ultimate owners of the company. Directors fall within the category of persons known as officers of the company.
Under Section 4(1) of the Companies Act 1965, officers of a company include the following persons: - any director, secretary or employee of the company - a receiver and manager appointed by a special class of creditors known as debenture holders. - any liquidator of a company appointed in a members voluntary winding-up. Officers do not include the following persons: - a receiver who is not also a manager - a receiver and manager who is appointed by the court - a liquidator appointed by the court in a compulsory winding-up, or by creditors in a creditors voluntary winding-up. Under Section 4(1) also, a director is defined widely to include these persons: - any person occupying the position of director, by whatever name called. - an alternate or substitute director - any person whose directions or instructions are customarily followed by the actual directors of the company. Following the definitions in s 4(1), Chairman, Chief Executive Officer, President or Founder or General Manager may be considered a director if such a person is found to be occupying the position of a director. Also, a founder or ex-Chairman of a company may still be considered a director even if he has long since retired or resigned, if it can be proven that the actual directors of a company still refer to him for directions and instructions.
2. 2.1.
TYPES OF DIRECTORS EXECUTIVE DIRECTOR
This director is a full-director of a company. He is a member of the companys board of directors and is given specific executive responsibility, e.g. as a finance director or research director. He is paid salaries for performing his duties. He is an employee who is part of the senior or top management of the company.
2.2.
NON-EXECUTIVE DIRECTOR
This director is not a full-time director of a company, but he plays an equally important role in the company. He is also a member of the companys board of directors, but is not given any specific executive responsibility. However, he is still expected to attend board meetings and to participate in decision-makings in the company. He is not considered an employee of the company. As such, he is not paid salaries. As an incentive for serving on the board, he is paid directors fees, which are fixed by members during the companys general meetings. The purpose of appointing non-executive directors is to bring external views to the board and also to act as a watchdog on the executive directors. They are usually appointed by major shareholders of the company in order to safeguard the interests of their investments. 2.3. MANAGING DIRECTOR
He is appointed by the board of directors and is given the specific power of management to manage the company. He is the key person that deals with outsiders, especially in signing contracts. The boards power to appoint a managing director must be provided for in the Articles, e.g. Table A, Article 91. Although he is given powers to manage the company, his appointment and exercise of powers must still be subject to the board of directors. The board may override his decisions or even revoke his appointment. He is a full-time employee of the company, and he usually serves under a contract of service or appointment. The duties he is to perform, the limitations on his authority and particulars of remuneration will be stated in the contract. The term Managing Director is sometimes used interchangeably with the term Chief Executive Officer. 2.4. CHAIRMAN
A Chairman refers to the Chairman of the board of directors, the primary spokesperson for the board and the company as a whole. He is responsible for chairing board meetings and is a first-choice person to preside over company general meetings. He is responsible for highlighting to the board key matters and issues relating to the company.
In many listed companies and government-linked corporations, the Chairman is usually an influential or prominent public figure, or a retired Government official. For this purpose, he is tasked with the objective of raising and promoting the companys public profile. In the interest of improving governance of companies, to ensure no one individual has unfettered powers of making decisions the Chairmans position should ideally be separate from the position of the Chief Executive Director. This is as per the recommended best practices laid down in the Malaysian Code of Corporate Governance. 2.5. ALTERNATE OR SUBSTITUTE DIRECTOR
A director may sometimes be unable to perform his duties for the full duration of his appointment, e.g. owing to extensive traveling or temporary incapacity. If the Articles of the company allows for the appointment of an Alternate or substitute director, then the actual director may appoint any person to be his alternate. The appointment would require board approval also. The alternate director shall perform the actual directors functions on his behalf. He is entitled to receive notices of board meetings, to attend board meetings and to exercise all powers that the actual director has. Nevertheless, he is personally responsible for his own acts or omission, although these may have been performed on behalf of the absent director. The alternate director is also subject to the same standards of directors duties His appointment shall terminate once the actual director vacates his position or if the actual director revokes the appointment of the alternate director Article 82. 2.6. ASSOCIATE OR SPECIAL DIRECTOR
This person is not considered a director within the definition in s 4(1) of the Companies Act 1965. He is usually a senior executive of a company, coming from the employees rank and file, and could be valued for his expertise in the company. He may also be among the selected employees being groomed for potential appointment to the top management of the company. The directorship status would help improve his status in dealing with customers of the company, and may serve as a recognition of his expertise in key departments of the company. His appointment, powers, duties and remuneration are determined by the board of directors. Under Article 94, he is not required to hold any shares to qualify for appointment, and he does not have the right to attend or vote at board meetings, except by the board of directors invitation and consent.
2.7.
NOMINEE DIRECTORS
This refers to a director who is appointed to the board of directors to represent a particular group of major shareholders or creditors in the company. It is common for a holding or parent company to appoint nominee directors to sit in the board of subsidiary companies. Where a few companies have entered into a joint venture and set up a new company for that purpose, each member shall be entitled to appoint nominee directors in proportion to its shareholding in the joint venture company. In the case of a creditor that has given substantial loans to a company, and taken debentures in return, nominee directors would be appointed to watch over the debenture holders (creditor) investment in the company. A nominee director thus often finds himself in a position of conflict, i.e. whether he should always act in the best interest of the company that appoints him (nominator) or the company on whose board he now serves as a director (main company).
Nominator nominated by
Nominee Director
Main company sits in the board of
Conflict affecting a nominee director
Section 132(1E) provides that a nominee director must act in the best interest of the main company. Thus, in any conflict between his duties to both companies, he must give priority to the main company, and not to his nominator. Kumagai Gumi Co Ltd v Zenecon Nevertheless, as a nominee of the nominator, he still owes fiduciary duties to the nominator. If there is a clear conflict between his duties to both companies, he should as far as possible refrain from participating or voting in a decision affecting both companies. If he is removed from his directorship in the main company, his removal shall not take effect until another director is appointed in his place.
Pte Ltd [1995] 2 SLR 297.
2.8.
INDEPENDENT DIRECTOR
Independent directors play an important role in public listed companies, particularly where there is a large body of small investors known as minority shareholders. Independent directors are appointed in order to protect the interests of such minority shareholders. Where most major shareholders would have directors representing them in a companys board of directors, the minority shareholders usually do not have any representation in the board. Under Para 1.01 of the Bursa Malaysia Securities Bhds Listing Requirements, an independent director must be independent of management and free from any business or other relationship which could interfere with the exercise of independent judgement or ability to act in the best interests of an applicant or a listed company. The Malaysian Code of Corporate Governance also emphasizes independence as independence from management and independence from a significant shareholder. As such, the Listing Requirements excludes the following persons from being appointed as an independent director: a. An executive director of the company. b. An officer of the company, as defined under Section 4(1). The independent director must not have served, within the last two (2) years prior to his appointment, as an officer of the company. Nevertheless, if he has served as a non-executive director, he qualifies for appointment as independent director. c. A major shareholder of the company or related companies. d. A relative of any executive director, officer or major shareholder. Relative means a spouse, parent, sibling, child (include adopted or step child) and the spouse of such sibling or child. e. A nominee or representative of any executive director or major shareholder of the company or related companies. f. A professional adviser who is engaged by the company or related companies to give professional advisory services. If the professional adviser is a firm or another corporate body, then its partner, director or major shareholder cannot be appointed as an independent director of the company. g. A person who is engaged personally in any transaction, the value of which exceeds RM250,000/-, with the company within the last two (2) years. If this person is a firm or another corporate body, then its partner, director or shareholder cannot be appointed as an independent director of the company.
The Listing Requirements also require a public listed company to have at least two independent directors, or at least one-third of its board to consist of independent directors (whichever number is the higher). Like other non-executive directors, the role of an independent director is also to be a watchdog on the board of directors as a whole. Being independent from the management or major shareholders, they are in a position to provide independent, objective, balanced views during boardroom deliberations. Independent directors of a public listed company usually act as the Chairman or key members in board committees. They are expected to critically evaluate and monitor board decisions, and to provide independent views and opinions pertaining to conflicting issues in the company.
2.9.
OTHER TYPES OF DIRECTORS
There are other types of directors, some of whom may not appear on official or statutory records as the directors of the company. A de facto director is one such person. This is especially where a company holds out, i.e. makes it known to outsiders, a person as its director, or where that person claims or allows himself to be held out as a director. He may not have been validly appointed as a director and may not appear on record as a director. Yet, the company would be bound by his acts, just like how the company is bound by the actions of the actual directors. A shadow director is a person whose instructions or wishes are customarily followed by the other directors Re Hydrodam (Corby) Ltd [1994] 2 BCLC 180. To establish that a person is a shadow director, there is a need to show that the actual directors, i.e. the de jure directors, as a matter of custom or habit, look to the shadow directors for directions or instructions on decisions to be made for the company. A governing director is usually the founder of a company that is incorporated to take over a family business. E.g. a sole-proprietor who later on incorporates a private limited company, whose shareholders comprise his own family member with minimal shareholdings. He would usually be the majority shareholder and be given wide powers of management. He is effectively in full control of the company. His position as a director is usually for life and his shares carry weighted votes.
2.10. BOARD COMMITTEES The board of directors may establish board committees and delegate specific powers to them. Some of these committees are required to be established by the relevant regulations governing the particular company. A board committee may only exercise powers within scope of the powers delegated to it.
2.10.1 . Audit Committee In the case of public listed companies, the Listing Requirements require each company to establish an Audit Committee, which must comprise no fewer than three (3) directors. An alternate director cannot a member. The Chairman and a majority of the committee members must be independent directors. Pursuant to the Revised Malaysian Code of Corporate Governance 2007, audit committee should comprise only non-executive directors. Under the Listing Requirements, at least one director must: (i) (ii) be a member of the Malaysian Institute of Accountants (MIA); or if he is not a member of the MIA, he must have at least three (3) years working experience and; - he must have passed the examinations specified in Part I, First Schedule of the, Accountants Act 1967 or - he must be a member of one of the associations of accountants specified in Part II, First Schedule of the Accountants Act 1967; or must have a degree/masters/doctorate in accounting or finance and at least three (3) years' post qualification experience in accounting or finance; or must have at least seven (7) years experience being chief financial officer of a corporation or having the function of being primarily responsible for management of the financial affairs of a corporation.
(iii) (iv)
The audit committees basic functions are to monitor the companys financial positions and to ensure that the company maintains a proper system of internal control and establish prudent financial practices and procedures. It shall assist the board in discharging their responsibilities for financial reporting and internal control. It has a duty to report promptly to Bursa Malaysia matters which it has earlier reported to the board but which in its view, has not been satisfactorily resolved and now results in a breach of the Listing Requirements.
2.10.2 . Remuneration Committee This committee is responsible for making recommendations to the board on the remuneration of executive directors. It is composed wholly or mainly of non-executive directors.
2.10.3 . Nominating Committee This committee is responsible for nominating to the board new candidates for directorships. It also conducts regular appraisal of the performance of the directors. It shall compose wholly of non-executive directors, with the independent directors being in the majority.
3. 3.1.
APPOINTMENT, DISQUALIFICATION, TERMINATION AND REMUNERATION APPOINTMENT OF DIRECTORS
Under Section 122(1) of the Companies Act 1965, a company must have two (2) directors who have their principal or only place of residence within Malaysia. This excludes alternate directors. A director must be a natural person and be of full age. A director must lodge a statutory declaration in Form 48A stating that he consents to being a director and that he will not be acting in contravention of sections 125 and 130. The first directors of a company, when the company is being incorporated, are named in the companys Memorandum and Articles of Association. Subsequently, additional directors may be appointed by the general meeting - Articles 66 In the case of appointment of directors of a public company, s 126(1) provides that the appointments of directors are to be made by separate resolutions. Appointments by a single resolution may be made only if all shareholders unanimously agree to appoint the directors in a single resolution. Where there is a casual vacancy in the board, e.g. through resignation, death or inability to continue to act, the board may appoint additional directors, who shall hold office until the next following annual general meeting (AGM). They are to retire at the AGM but they may be re-elected. The Articles also provide for the duration of appointment of directors. Article 63 to 65 provides for retirement of directors by rotation, but the directors may be re-elected.
3.2.
DISQUALIFICATION
3.2.1. Share qualification Under Section 123(1), in some public companies having a share capital, the Articles may provide for a share qualification clause. Share qualification refers to the minimum number of shares that a director must hold in order to be appointed. Where a share qualification is required, every director must obtain the necessary qualification shares within two (2) months after appointment or within the period fixed by Articles. If the director fails to obtain or maintain his share qualification shares, he must vacate his office and is incapable of being re-appointed as director until he has obtained his qualification.
3.2.2. Age limit for Directors This applies to a public company or a subsidiary of a public company. Section 129 provides that a person of or over the age of seventy (70) years shall not be appointed as a director in such companies. His office shall become vacant at the conclusion of the annual general meeting (AGM) that comes after he attains the age of 70 years. Nevertheless, his acts as a director shall be valid even if it is later discovered that his appointment was defective or has been terminated owing to this provision. Under Section 129(6), he may be re-appointed or be authorized to continue as a director if a general meeting is held and pass a resolution re-appointing him. - The length of days of the notice for this meeting is the same as that required for an annual general meeting - The resolution is passed by a majority of not less than three-fourths (3/4) of members present and voting in person or by proxy. He shall hold office until the next AGM of the company The provisions of the Articles on retirement by rotation of directors shall not apply to a director who is re-appointed under this section. The Articles may also require any director to vacate his office at an age that is less than 70 years.
3.2.3. Bankruptcy Under Section 125(1), every person who is an undischarged bankrupt cannot act as a director or directly or indirectly take part in or is concerned in the management of any company He cannot act as a director without the leave or approval of the court. Penalty: Imprisonment for five (5) years or fine RM100,000/- or both.
3.2.4. Disqualification of directors of insolvent companies Under Section 130A, a person may be disqualified by the court from being a director or in any way directly or indirectly be concerned or take part in the management of a company if the court is satisfied that: - He is or has been a director of a company which has at any time gone into liquidation, whether while he was a director or subsequently; and - He is or has been a director of such other company which has gone into liquidation within five (5) years of the date on which the first company went into liquidation; and - His conduct as a director of those companies makes him unfit to be concerned in the management of a company. Upon the application of the Registrar of Companies or the Official Receiver, the court may make order to disqualify the director for five (5) years from date of court order. As an illustration:
Dato X was a director of Syarikat Alpha, which went into liquidation in 2003, when he was still a director. Dato X later became a director of Syarikat Beta, which went into liquidation in 2006, when he was also still a director. If the court makes an order to disqualify Dato X in 2008, Dato X shall not serve as a director for 5 years from 2008.
He cannot act as a director without the leave or approval of the court. Penalty: Imprisonment for three (3) years or fine RM10,000/- or both. During the disqualification period, the disqualified director may apply for leave to act as a director, but his application may be opposed by the Registrar. Under this section, a company goes into liquidation if it is wound up by the court on the date of the winding-up order or it is wound up voluntarily on the date that a resolution for voluntary winding-up is passed.
3.2.5. Disqualification of directors convicted of offences
Section 130 of the Companies Act 1965

Under Section 130(1), a person is disqualified from being a director or promoter or in any way concerned or taking part in the management of a company if he is convicted within or outside Malaysia of the following offences: - offences in connection with the promotion, formation or management of a company; or - offences involving fraud or dishonesty, punishable by imprisonment for three (3) months or more; or - offences under Section 132, 132A or 303. Such a person will be disqualified for five (5) years after his conviction, or if he is sentenced to imprisonment, disqualified for five years after his release from prison. As an illustration:
He cannot act as a director without leave or approval of the court. Penalty: Imprisonment for five (5) years or fine RM100,000/- or both. During the disqualification period, the disqualified director may apply for leave to act as a director, but his application may be opposed by the Registrar.
Dato X was convicted in Singapore of criminal breach of trust and sentenced to five (5) years imprisonment. He was released in 2008. Dato X shall not serve as a director for 5 years from 2008.
Section 318 of the Capital Market and Services Act 2007 (CMSA)
This section of the CMSA deals with the disqualification of chief executive or director of listed companies. Under Section 318(3), the Securities Commission may apply to the court to remove any chief executive or director of a listed company from office or bar them from holding these positions for a period of time as may be determined by the court. This is where the Securities Commission finds that the person is unfit to be concerned in the management of the listed company as he: (a) has been convicted of an offence under a securities law; (b) has had an action taken against him under section 199, 200, 210, 211, 354, 355 or 356 or subsection 201(5) or (6) or section 360 of CMSA; or (c) has been compounded for an offence under section 373.
The court may make an order that the chief executive or director be removed from office from the date set out in the court order. The order of removal will take effect even if the removal affects the limitations in the companys Memorandum and Articles, or any limitation as to the minimum or maximum number of directors in that listed company. A Chief executive or director who is removed from office shall cease to hold office from the date of the court order. He shall not thereafter hold any other office or be concerned with the affairs of that listed company. Under Section 318(2), the disqualified director may apply for leave to act as a director of another listed company. The Securities Commission will be made a party too. It may oppose the application or even apply to the court to disqualify him for such longer period exceeding five (5) years.
3.3.
TERMINATION OF OFFICE
Termination of a directors office may occur in the following ways: - vacation of office - resignation - retirement - removal
3.3.1. Vacation of Office Vacation is where the office of a director becomes vacant. There are three (3) circumstances in which the directors position may be vacated: - by death of the director - by virtue of the provisions in the Companies Act 1965 and Capital Market and Services Act 2007 regarding a directors disqualification (as discussed earlier); and - by virtue of the provisions in the companys Articles of Association. Article 72 of Table A provides for eight (8) circumstances in which the directors office becomes vacant: (a) (b) he ceases to be a director by virtue of the Companies Act 1965 . he becomes bankrupt or makes any arrangement or composition with his creditors generally. He cannot continue as a director unless he obtains the leave of court.
(c) (d) (e) (f) (g) (h)
he becomes prohibited from being a director by reason of any order made under the
Companies Act 1965.

he becomes insane or of unsound mind. he resigns by notice in writing to the company. he is absent for more than six (6) months from board meetings held during that period, without the permission of the directors he holds any other office of profit under the company without the consent of the general meeting, except the office of a manager or managing director. he is directly or indirectly interested in any contract or proposed contract with the company and he fails to declare his interest in the manner required by the Act.
3.3.2. Resignation A Director is entitled to resign at any time from his position, by giving a notice in writing to the company - Table A, Article 72(e). If he has a contract of service and he resigns at a short notice, he will have to pay damages. His resignation is effective even if the necessary form, Form 49 has not been lodged with the Companies Commission of Malaysia. Under Section 122(6), a director cannot resign or vacate his office if, in consequence, the number of directors in the company is reduced to below two (2) persons, the minimum number required by law. Such purported resignation or vacation is deemed to be invalid. For e.g., a company is left with two (2) directors, Dato X and Dato Y. If Dato X resigns,
An exception to this prohibition is where he has not obtained his qualification shares or he is disqualified under the Act or any other law. Here, he is required to resign or vacate his office even if it will result in the company being left with only one director.
only Dato Y is left remaining in the company. Here, Dato Xs resignation is deemed to be invalid unless steps are taken to appoint another director so that the company is not left with only one (1) director.
3.3.3. Retirement This depends on the companys Articles. Table A, Article 63 provides that at the first annual general meeting (AGM) of the company, all directors shall retire form office. Thereafter, at every subsequent AGM, one-third or the number nearest one-third of the directors shall retire by rotation. The directors to retire in every year shall be those who have been longest in office since their last election. A retiring director is eligible for re-election.
In the case of public listed companies, the Articles must provide for election of directors every year. All directors are to retire at least once in every three (3) years, and are eligible for re-election. In the case of private companies, some directors, especially the founding directors, may be appointed for life, for an indefinite term or a fixed term. In such situation, if a director is appointed for a particular term, his appointment terminates at the expiration of that term. Under Section 122(6), a director cannot retire from his office if, in consequence, the number of directors is reduced to below two persons. 3.3.4. Removal of Director The removal of a director is subject to the provision in a companys Articles. Table A, Article 69 provides that a company may by ordinary resolution remove any director before the expiration of his term. It may also by ordinary resolution appoint another person in place of the director so removed (the replacement director). The replacement director shall be subject to retirement at the same time as if he had become a director on the day on which the original director was previously elected. Although a company cannot be restrained from altering its Articles, if it were to act on the amended Articles and remove a director, this shall amount to a breach of contract, for which the company would have to pay damages Southern Foundries (1926) Ltd v Shirlaw [1940] 2 AER 445.
Director of a private company

There may be modifications made to the Articles, whereby some directors, especially the founding directors, may be permitted to hold office for life. Such directors cannot be removed unless the Articles are first altered to delete or amend the provision on their life directorships. Some Articles also give the board the power to remove any director.
Director of a public company

Section 128 provides that a public company may by ordinary resolution remove a director before the expiration of his term, regardless of any contrary provisions in the Memorandum and Articles or in any agreement with the director. In the case of a director appointed to represent the interests of a particular class of shareholders or debenture holders, the resolution to remove him shall not take effect until a successor is appointed. This is to ensure that that particular class is represented all the time.
The procedure to be taken in removing a director of a public company: i. ordinary resolution is to be passed in a physical general meeting, and not by circular resolution ii. Special notice is required of a resolution to remove the director or to appoint some person in his place at the same meeting. iii. When the company receives a notice of an intended resolution to remove a director, it shall forthwith send a copy to the director concerned. iv. The director concerned may make representations in writing, not exceeding a reasonable length and request that the company notifies the members. v. The company shall, in any notice of the resolution on the directors removal, state that representations have been made. vi. The company shall also send a copy of the representations to every member, whether before or after the receipt of the representations by the company. vii. If a copy of the representations is not sent out, the director may require that the representations be read out at the meeting. He is also entitled to be heard orally on the resolution at the meeting. viii. The company or any other aggrieved person may apply to the court to disallow the release of copies of the representations to all members and the reading out of the representations at the meeting. ix. The vacancy created after the director is removed may be filled at the same meeting, or filled by the board as a casual vacancy. Where a company is left with only two directors, one of the directors may still remove the other one, as long as he (the sole continuing director) takes step to appoint another director within the grace period of six (6) months as allowed by the Act. Removal of a director may be made notwithstanding any provision or restrictions to the contrary in the Memorandum and Articles, or under a separate agreement Tuan Haji
Ishak Ismail & Ors v Leong Hup Holdings Bhd [1996] 1 MLJ 661.
Nevertheless, under Section 128(7), the removed director can be entitled to damages for breach of contract arising from the termination. Under Section 128(8), a director shall not be removed by any resolution or notice from the board of directors.
3.3.5. Suspension of Director A director who is under inquiry for misconduct or possible breach of duties, and who faces possible removal may at times be suspended by the board of directors, pending the outcome of inquiry. The boards power to suspend the director must be provided for in the companys Articles. If the Articles do not provide for such power, the board may not do so.
3.4.
REMUNERATION OF DIRECTORS
In absence of a contract of service, a directors remuneration must be specifically provided by the Articles of Association. Table A, Article 70 provides that the directors remuneration shall from time to time be determined by the company in general meeting. The directors may also be paid all traveling, hotel and other expenses properly incurred by them in attending board meetings, committee meetings or general meetings, or in connection with the companys business. If a companys Articles allows the board to grant a special remuneration to a director for services beyond the ordinary duties of a director, e.g. helping secure huge business contracts, only the board can authorize such remuneration. Neither the Chief Executive Officer nor a committee of the board can authorize this Guinness PLC v Saunders [1990]
1 AER 652.
If directors are often paid excessive remuneration, and yet dividends are not paid or paid in small amounts for the shareholders despite the company having made profits, this may be considered an oppressive or prejudicial conduct. A member may make an application for relief under Section 181 of the Companies Act 1965. In the case of a public listed company, its Remuneration Committee should consist wholly of independent directors in order to recommend remuneration for the executive directors. The board as a whole shall recommend remuneration for the non-executive directors, which is subject to the approval of the general meeting. Information on the directors total remuneration must be disclosed in the financial statements laid down before the general meeting during a companys annual general meeting (AGM). The information is on the total amounts paid for services to the company or its subsidiaries include bonuses, compensation for loss of office and retirement benefits received. The information only provides for the aggregate amount paid to the directors and not the individual amounts paid to each director.
3.4.1. Prohibition of tax-free payments to directors Under Section 136, a company shall not pay to a director, whether as a director or otherwise, remuneration that is free of income tax. Neither should it be paying remuneration that is otherwise calculated by reference to or varying with his tax amount. Any provision of the companys Articles, any contract or any resolution of the company or the directors, should provide expressly for payment as a gross sum subject to income tax. Where there is a breach of this section, the company and every officer in default shall be guilty of an offence. Penalty: Imprisonment for 3 years or a fine of RM10,000/-. 3.4.2. Payments to director as compensation for loss of office Section 137(1) prohibits a company from making any payment to a director: o as compensation for loss of office as officer of that company or of a subsidiary of that company; or o as consideration for or in connection with his retirement from any such office; or o in any connection with the transfer of the whole or part of the companys undertaking or property. The company may make such payment only if: - particulars of the proposed payment, i.e. the exact amount and purpose of payment, have been disclosed to the members; and - the payment is approved by the company in general meeting by way of an ordinary resolution. Consequences if the procedure is not followed: The payment is unlawful and the amount received by the director shall be deemed to have been received in trust for the company, i.e. the company is still the beneficiary of the sum paid out and the director will have to return the money received. Director here refers to any person who has any time been a director of the company or a related company. In a takeover bid, another company (called the offeror) will offer to buy the shares of the existing shareholders of a company (called the offeree). This is called the takeover offer. The offerees directors must send a notice of the takeover offer to the shareholders. In such a situation, if a director of the offeree is to receive payment in connection with the takeover offer, he must ensure that the particulars of the payment are mentioned in any notice of the takeover offer. If he fails to do so, any sum received by him is deemed to have been received by him in trust for any shareholder who has sold his shares as a result of the takeover offer.
Similarly, if a director is to be paid a higher price for his shares compared to other shareholders, the excess price shall also be deemed to be a payment made to him by way of compensation for loss of office or in connection with his retirement form office. There are exemptions in Section 137(5), whereby the following payments shall not be considered payments to a director as compensation for loss of office or in connection with his retirement: (a) any payment under an agreement entered into before the commencement of the relevant repealed written laws; (b) any payment made under an agreement, which has been disclosed and approved by a special resolution of the company; (c) any bona fide (good faith) payment as damages for breach of contract; (d) any bona fide payment as pension or lump sum payment for past services, including any superannuation or retiring allowances, gratuity or similar payment. The amount or value of the payment must not exceed the total emoluments of the director in the three (3) years immediately before his retirement or death; or (e) any payment to a director pursuant to an agreement made between the company and the director, as a consideration for him agreeing to serve the company as director. In the above situation, prior approval of the general meeting would not be required. If a contract of service provides for payment upon severance of contract, this payment may be regarded as a remuneration and not as a compensation for loss of office. In such situation, prior approval of the general meeting is also not required.
4.
POWERS OF DIRECTORS
Under Section 131B(1) & (2) of the Companies Act 1965, the business and affairs of a company must be managed by or under the direction of the board. The board shall have all necessary powers for managing, directing and supervising the management of the companys business and affairs, subject to the modification, exception and limitation contained in Companies Act 1965 and its Memorandum and Articles. The Articles of Association shall regulate the boards exercise of powers through board meetings. Once the powers are delegated to the directors, the general body of shareholders may not interfere with their exercise of those powers. The powers may be taken back only by way of alteration of the Articles. Powers are delegated to the directors collectively as a board. The board must exercise the powers as a whole. In turn, the board may delegate powers further.
Examples of powers of the directors given by the Articles: o Exercise borrowing powers of the company, issue debentures or charge company assets o Sign, draw, accept or endorse all cheques and promissory notes. Article 77 all negotiable instruments are to be signed or endorsed by any two (2) directors or in such manner as the board directs. o Pay the debts of the company and give receipts on behalf of the company. o Allot shares when approval has been given by the general meeting under s 132D. In private companies, regard must be had to the restrictions in s 15(1). o Power to make calls over partly-paid shares o Approve share transfers or declining to register transfers o Suspend registration of transfers during closure of books. This must be for periods not exceeding thirty (30) days in a year. o Declare interim dividends and recommend the quantum of final dividend to be declared by the general meeting. o Instruct the company secretary to convene annual general meeting (AGM) or extraordinary general meetings (EGM). Minutes must be signed by the Chairman of the meeting or of the next succeeding meeting. Minutes are to be taken as evidence of the proceedings of the meeting o Delegate to a board committee, an individual director, employees and attorneys, and to authorize further delegations. Those who are delegated powers must adhere to the instructions imposed by the board. Under Para 15.04 of the Listing Requirements, in the case of listed companies, each director has the following rights: - Right to resources that are necessary for the performance of his duties. - Full and unrestricted access to any information pertaining to the company - Full and unrestricted access to the services of the company secretary - Right to independent professional advice and to charge to the company a reasonable sum for the costs incurred in obtaining such advice.
4.1.
BOARD MEETINGS
Directors exercise their powers by making decisions and passing resolutions at board meetings. The powers can be exercised only at board meetings. Due notice and the agenda must have been given to the directors, and a quorum must be present at the meeting. Although a meeting convened without any notice at all is a nullity, the Court has discretion under s 355 to validate the proceeding despite the irregularity, if there is no substantial injustice.
Informal meetings may be held also if all directors agree to waive the requirements as to notices and procedure. The board may also pass a resolution in writing, called circular resolutions which shall be as valid an effectual as if passed at a meeting of directors properly held - Article 90. Article 80 - Board resolutions are passed by a majority of directors who are present and voting. In an equality of votes, the Chairman shall have a second or casting vote. Under s 131A, a director who is directly or indirectly interested in a contract shall be counted only to make the quorum at board meetings. He shall not participate in any discussion while the contract is being deliberated upon and shall not vote on that contract. This requirement does not apply to a private company, unless it is a subsidiary to a public company. It also does not apply to a private company that is a wholly-owned subsidiary of a public company in respect of proposed contracts between related companies. The requirement also does not apply to contracts in which a director is a surety or indemnifier 4.2. DIVISION OF POWERS BETWEEN THE BOARD AND THE GENERAL MEETING
There is a clear division of powers between the board of directors and the general meeting of the company. Under Section 131B(1) & (2) of the Companies Act 1965, the business and affairs of a company must be managed by or under the direction of the board. The board shall have all necessary powers for managing, directing and supervising the management of the companys business and affairs, subject to the modification, exception and limitation contained in Companies Act 1965 and its Memorandum and Articles. Similarly, Table A, Article 73 provides that the business of a company shall be managed by the directors. Since the powers of management are vested with the board, the general meeting cannot interfere in respect of those powers and cannot direct the board to reverse its decisions Automatic Self-Cleansing Filter Syndicate Co v Cunninghame [1906] 2 Ch 34 and John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113. If the general meeting is dissatisfied with the directors management of a company, the option is to remove the directors. Members are not permitted to sue the directors themselves, since if there is any wrong that has been done to a company, only the company may sue in respect of that wrongdoing this is the rule in Foss v Harbottle [1843] 67 ER 189.
Under an exception to this rule, if the directors refuse to commence proceedings on behalf of the company because they themselves are in breach of their duties, only then members may sue on behalf of the company. There are also several statutory provisions that provide that prior approval of the general meeting is required in certain decisions. For instance: s 137 prohibits payment to be made to a director by way of compensation for loss of office as a director or in connection with his retirement. The payment must be approved by the company in a general meeting, with full disclosure of the amount to be made. s 132C prohibits the directors from entering into a transaction for the acquisition of an undertaking or property of a substantial value, or the disposal of a substantial portion of a companys undertaking or assets. The transaction must be approved by the company in a general meeting. s 132D prohibits the directors from exercising any power to issue shares without prior approval of the company in a general meeting. In the case of listed companies, the Listing Requirements also provide that the informed approval of shareholders in the general meeting is needed for certain transactions of the company. E.g. transaction between a listed company and related parties and acquisition or disposal of assets with a value exceeding twenty-five percent (25%) of the companys share capital.
4.3.
CONTRACTUAL CAPACITY OF DIRECTORS AND THE TURQUANDS RULE
Directors are the corporate agents for a company and thus, they owe fiduciary and other statutory duties to the company. Where the directors act in excess of their authorities, they breach their duties to the company. If the directors breach their duties, the question that arises now is the effect of this breach on the contractual capacity of the company, i.e. whether the company as a principal is bound by the acts of these directors as corporate agents. A distinction must be drawn between a companys lack of capacity and the agents lack of authority. Lack of capacity is where the company has entered into transaction that is not authorized by its objects clause. The legal position on a companys lack of capacity is seen in s 20(1) and the exceptions in s 20(2)(a) to (c). An agents authority can be actual (express & implied) or ostensible. Lack of authority is where the agents or directors have exceeded their powers as provided in the companys Memorandum and Articles.
4.3.1. The Turquands Rule In the case of outsiders to a company, they are protected by the rule in Royal British Bank v Turquand [1856] 119 ER 886, which is also known as the Indoor Management rule. The principles are as follow: 1. An outsider is deemed to have notice of a companys registered documents, i.e. those documents lodged with the Registrar. If the transactions are not contrary to the registered documents, there is nothing wrong or irregular. 2. An outsider is not obliged to inquire into the internal proceedings of a company, i.e. whether the rules have been complied with or not. He can assume that all acts of internal management have been properly carried out.
The Turquands rule can apply where there are defects in the appointment of directors and
officers of a company. Under s 127, the acts of a director or manager or secretary are valid notwithstanding any defect that may later be discovered in his appointment or qualification.
4.3.2. Exceptions to the Turquands Rule In the following situations, an outsider cannot rely on the Turquands rule: The transaction is clearly in contravention of the company Memorandum and Articles KL Engineering Sdn Bhd v Arab Malaysian Finance Berhad [1994] 2 MLJ 201. Even if the outsider did not read the Articles, he is deemed to have notice of its provisions. Where the claimants have actual notice of the irregularity of internal rules, e.g. they are directors of the company itself Howard v Patent Ivory Manufacturing Co [1888] 38 Ch D
156.
Where the outsiders have been put on inquiry because of suspicious circumstances. Even if the transactions do not appear to contradict the registered documents, the outsiders should have made the investigations. Underwood v Bank of Liverpool [1924] 1 KB 775,
Woodland Development Sdn Bhd v Standard Chartered Bank; PJTV & Densun (M) Sdn Bhd (Third Party) [1986] 1 MLJ 84 and Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen [1998] 1 CLJ 793.
Where the outsiders have not read the Articles of a company, they cannot try to rely on it to argue that the agents of the company have such powers under the Articles and that the transactions should be valid. An illustration is Heng Wan Co Ltd v Selangor Rice Mill Co Ltd [1967] 2 MLJ 44 Held: the manager of a rice mill could only buy rice as it was necessary for the business of the company. Even if the Articles had allowed him to buy other goods unrelated to the companys business, e.g. sugar, if the seller did not know of such power, it could not later on argue that the agent had such powers. Where there has been a fraud: Ruben v Great Fingall Consolidated [1906] AC 439 Here, the signature on the share certificate of a company was forged by its Secretary.
4.4.
HOLDING OUT A PERSON AS A DIRECTOR
This is where a person is not a director, but who carries out the acts of a director. The question that arises is whether the company is bound by his acts. If the actual directors hold out this person as a director, when he is not, they cannot later argue that company should not be bound by that persons acts, on the grounds that he is not a director. For e.g. a person claims himself to be the managing director of a company, but is never appointed as such. Here, if the rest of the directors of the board do not so deny, they are holding him out as their managing director. Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 For an outsider to bind the company for holding out, the following must be shown: i. There has been a representation made to the outsider that the person (who acts as a director without having been appointed as such) has the authority to enter into the contract in question, on behalf of the company. ii. Such representation was made to the outsider by a person or persons who had the actual authority to manage the business of the company, either generally or in respect of those matters to which the contract relates. This would refer to the board of directors of a company. iii. The outsider has in fact relied on the representation and changed his position to his detriment. iv. The transaction does not contradict the Memorandum or Articles of the company. The company is not deprived of its capacity either to enter into a contract of the kind or to delegate authority to enter into a contract of that kind to a director.
5.
DIRECTORS DUTIES
Since directors are entrusted with the powers to manage, direct and supervise the management of a company, they owe duties to the company. There are broadly three (3) types of duties: - Fiduciary duties - Duty of skill, care and diligence - Statutory duties in relation to directors disclosure of interests and selfdealings Pursuant to the Companies (Amendment) Act 2007, there have been a few sections inserted to the Companies Act 1965 that emphasize and formalise a few common law duties of directors. 1. Fiduciary Duties Section 132(1) - Director to exercise his powers for a proper purpose, in good faith in the best interest of the company. These involve: i. Duty to act bona fide in the interests of the company ii. Duty to exercise powers for the proper purposes and not for any collateral purposes. iii. Duty to retain discretion Section 132(2) - Prohibition against improper use of a companys property, position, corporate opportunity or competing with the company. Primarily, this is a duty to avoid conflict of interests between a director and the company. 2. Duty of care, skill and diligence Section 132(1A) -Director to exercise reasonable care, skill and diligence which may reasonably be expected of him. This involves the duty to be careful, skillful and be diligent. Section 132(1B) - Business Judgment Rule. Section 132(1C) - Reliance on information provided by others. Section 132(1D)- Reliance on reasonable grounds good faith and independent assessment of information received. Section 132(1E) - Responsibility of a nominee director. Section 132(1F) - Responsibility for actions of delegate. Section 132(1G)- No responsibility if reasonable delegation and directors reasonably believed delegate will exercise powers within his authority and that delegate was reliable and competent.
3. Other statutory duties Section 131 Section 131A Section 134 Section 135 Section 132C Section 132D Section 132E Section 132F Section 133 Section 133A Section 167 Section 169 Disclosure of interest in contracts, properties and offices Interested director not to participate or vote Register of directors shareholdings, etc. General duty to make disclosure of interest in shares, debentures, participatory interest, rights, options and contracts Approval of company required for disposal by directors of companys undertaking or property. Approval of company required for issue of shares by directors Substantial property transactions by director or substantial shareholder Exception and definition. Loans to directors Loan to persons connected to a director Responsibility for ensuring accounts are kept for proper audit Profit and loss account, balance-sheet and directors report
5.1.
FIDUCIARY DUTIES
A fiduciary relationship exists between a director and the company of which he is a director. Fiduciary relationship is the relationship that exists between a person in a position of trust (this is called the fiduciary) and the person for whose benefit the fiduciary acts (this is called the beneficiary). A fiduciary is someone who has undertaken to act for or on behalf of another in circumstances which give rise to a relationship of trust and confidence. He must thus act in good faith and not make profits for his own benefit or for a third person without the informed consent of his principal The Board of Trustees of the Sabah Foundation v Datuk
Syed Kechik bin Syed Mohamed [1999] 6 MLJ 497.

Under Section 132(1) of the Companies Act 1965, a director of a company shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company. Under s 132(3), the consequences of breaching the duties in s 132(1), (1A) to (1G) are that the director shall be liable for the profits made or damages suffered by the company. He is also guilty of an offence against this Act. Penalty: Imprisonment for five (5) years or RM30,000/- fine.
Under s 132(6), officer refers to a person who at any time has been an officer of the company. "Director" also includes the Chief Executive Officer, Chief Operating Officer, chief financial controller or any other person primarily responsible for the operations or financial management of a company, by whatever name called. Broadly speaking, a director owes four (4) types of fiduciary duties to his company: i. Duty to act bona fide in the interests of the company ii. Duty to exercise powers for the proper purposes and not for any collateral purposes. iii. Duty to retain discretion iv. Duty to avoid conflict of interests. 5.1.1 Duty to act bona fide in the interests of the company Generally, directors must exercise their powers and discretion bona fide (in good faith), in what they consider to be the interest of their company. They must not act for any collateral purposes Re W&M Roith Ltd [1967] 1 AER 427. If anyone elses interest, e.g. his spouse or family members, is made more important than that of the company, the director will be in breach of his duty to the company Walker v
Wimborne [1975] 137 CLR 1.

The Court applies an objective test of what a reasonable man would have decided as the interests of a company. Thus, if the directors decision turns out to be wrong, it does not necessarily mean there is a breach of his fiduciary duty to the company.
5.1.1.1. Duty to members or shareholders

Directors do not owe fiduciary duties to individual members or shareholders of a company Percival v Wright [1902] 2 Ch 421. The interest of the company refers to the collective interest of the members of the company Greenhalgh v Arderne Cinemas Ltd [1951] Ch 286. In the case of different classes of shareholders, directors must decide what would be considered fair as between the classes of shareholders.
5.1.1.2. Duty to employees of a company

Directors do not owe fiduciary duties to employees of a company. In Parke v Daily News Ltd [1962] Ch 927, it was held that after disposing off the companys business, the directors were not permitted to distribute the proceeds of the sale among the companys employees.
Nevertheless, under s 19(1)(c) of the Companies Act 1965, a limited company which is registered with the word Berhad as part of its name shall have powers set forth in the Third Schedule. Para 7 of the Third Schedule empowers a company to establish trusts or funds to benefit its employees.
5.1.1.3. Duty to companies in a group

Since each company is a separate legal entity, when directors of one company exercise their powers, they must act in the interest of that company. In the case of a group of companies, directors of any one company in the group may take into account the wider interests of the group. This is especially where the groups welfare is closely tied up with the welfare of the individual company Intraco Ltd v MultiPak
(Singapore) Pte Ltd [1995] 1 SLR 313.

However, the directors must ensure that no individual companys welfare is intentionally sacrificed in carrying out financial transactions or movement of assets within the group Also, where companies are not members of the same group of companies but have common directors, these common directors may not treat the companies as part of one group of companies Walker v Wimborne [1975] 137 CLR 1.
5.1.1.4. Duty owed by a nominee director

A nominee director refers to a director who is appointed to the board of directors to represent a particular group of major shareholders or creditors in a company. A nominee director is potentially in a position of conflict, i.e. whether he should always act in the best interest of the company that appoints him (nominator) or the company on whose board he now serves as a director (main company or investee company). Under Section 132(1E), a director who is appointed by virtue of his position as an employee or representative of a shareholder, employer or debenture holder, must act in the best interest of the main company on whose board he serves. This is also seen in common law cases like Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 WLR 297 : When a nominee director sits on the board of an investee company, he cannot give priority to his nominator/principals interests over that of the investee company.
If the information received is confidential, the nominee may not disclose the information to his nominator/principal. The nominee directors relationship with his nominator/principal is still a fiduciary one. Despite this, the nominator/principal cannot be made vicariously liable if the nominee director breaches his duty and cause loss to a third party. A nominee director can act in the interest of his nominator/principal if he honestly believes that the interests of both parties are identical or that the Articles expressly or impliedly authorizes him to act in the interest of his nominator/principal. In the absence of conflict, a nominee director cannot be excluded from participating in the companys affairs or prevented gaining access to its books and records.
5.1.1.5. Duty to creditors of a company

Directors do not owe fiduciary duties to the creditors of a company. Creditors may not take action against the directors personally in order to recover the debts incurred by a company Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 WLR 297. However, when insolvency sets in, whereby a company is unable to pay its debts as they fall due, the directors need to take into account the interests of the creditors Walker v
Wimborne [1975] 137 CLR 1. The affairs of a company must be properly administered and its property not dissipated wantonly so as to prejudice the rights of the creditors Winkworth v Edward Baron Development Co Ltd [1987] 1 AER 114. Similarly, when recommending dividends, directors need to have a proper set of accounts
in order to be cognizant of the companys financial position. Failure to do so would result in a breach of duty Hilton International Ltd v Hilton [1988] 4 NZCLC 96.
. Where the directors have failed to take into account the interests of the creditors in an
insolvency, the general meeting is not able to absolve or release such directors from breach of their duties Kinsela v Russell Kinsela Pty Ltd (In liquidation) [1986] 4 ACLC 215 . There are various provisions in the Companies Act 1965 that require directors to take into account the interests of the creditors of a company.
Under Section 303(3), in the course of the windingup of a company, if it appears that an officer was a party to the contracting of a debt when there was no reasonable or probable expectation of the company being able to repay the debts, the officer shall be guilty of an offence against this Act. Penalty: Imprisonment for one year or RM5,000/ fine. Under s 304(1), in the course of the windingup of a company, if it appears that a person was knowingly a party to the carrying on of the companys business with intent to defraud creditors or for any fraudulent purpose, the liquidator or any creditor may apply to the Court to hold the person personally responsible, without any limitation of liability, for all the debts of the company. Under s 305(1), in the course of the windingup of a company, if it appears that a person has misapplied, retained or become accountable for any money or property of the company or is guilty of any misfeasance or breach of trust towards the company, the liquidator or any creditor may apply to the Court to compel him to personally repay or restore the money or property or to contribute to the assets of the company. Under this section, a promoter, director or any past or present liquidator may be held responsible. Under s 368, it is an offence where a person has done the following while he is still being an officer of a company: (a) induced a creditor to give credit to the company by deceitful or fraudulent or dishonest means; or (b) made or caused to be made any gift, transfer, charge or execution on the companys property with intent to defraud creditors; or (c) concealed or removed any part of companys property within two (2) months before the date of any judgment for payment of money obtained against the company. Here the judgment is still unsatisfied, and the act is done with intent to defraud the creditors. Penalty: Imprisonment for 10 years or RM250,000/- fine or both.
5.1.2. Duty to exercise powers for proper purposes and not for collateral purposes A director is under a duty to exercise his powers for proper purposes Re Duomatic Ltd It is not sufficient for him to be acting honestly in what he considers to be his companys interests. For e.g. although the director of a company may be entitled to use its funds, they may not do so to promote their re-election as directors. Similarly, the directors may not give away the companys assets to another company for no consideration.
[1969] 2 Ch 365.
Issue of shares
In the case of an issue of shares, even if the directors have been dulyauthorized by the company in a general meeting, the issue must be for a proper purpose, e.g. to raise capital for the companys benefits. It is improper to issue shares in order to maintain the directors control of the company or to create a new majority shareholder. This is impermissible even if the directors honestly believe their acts to be in the best interest of the company Howard Smith Ltd v Ampol
Petroleum Ltd [1974] AC 821.

In a case where powers are exercised for mixed purposes, i.e. there are two or more competing purposes, there will be a breach of directors duty where, if the impermissible purpose had not been present, the power (e.g. allotment of shares) would not have been exercised Whitehouse v Carlton Hotel Pty Ltd [1987] 11 ACLR 715.
5.1.3. Duty to retain discretion Directors have a duty to exercise their discretion in the interest of the company. As such, they may not limit or fetter their own discretion, e.g. by entering into agreements to vote in a certain way to benefit other persons.
5.1.4. Duty to avoid conflict of interests A director must not place himself in a position where his duty to the company and his own personal interest conflict. Under Section 132(2), a director or officer of a company shall not, without the consent or ratification of a general meeting(a) use the property of the company; (b) use any information acquired by virtue of his position as a director or officer of the company; (c) use his position as such director or officer; (d) use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company; or (e) engage in business which is in, competition with the company, to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company.
If a director obtains a benefit or profit while still being a director in a company, in the circumstances where there could have been a conflict of interests, he is accountable to the company for that benefit or profit obtained. This is unless if he has disclosed the benefit or profit and obtained the approval of the company to retain the benefit or profit Aberdeen
Railway Co v Blaikie Brothers [1843-60] AER 249.

It is not on its own a breach of fiduciary duty if a director is in a position of conflict. What amounts to a breach of fiduciary duty is the failure to disclose material facts to the company members and to obtain their sanction or approval for the director to retain the benefit or profit obtained from his position. This is because directors are strictly not allowed to pursue private advantage while they are still managing and directing the companys affairs in a fiduciary capacity Furs Ltd v
Tomkies [1935] 54 CLR 583.

In The Board of Trustees of the Sabah Foundation v Datuk Syed Kechik bin Syed Mohamed [1999] 6 MLJ 497, it was held that the Court confirmed the common law position that there are three (3) rules relating to conflict of interests that must be adhered to by any director, and breach of any of these rules would mean a director has breached his fiduciary duties: - the no profit rule - the misuse of trust knowledge rule - the no conflict rule Instances of Conflict:
5.1.4.1. Where a director obtains personal profits arising from his acting as director
A director may not make use of his position, i.e. the fact that he is a director, to obtain a profit for himself. If an opportunity to make a profit or obtain a benefit comes to a person because he is a director of that company, that profit or benefit must be disclosed to the company and approved. In absence of any such disclosure and shareholders approval, the director is accountable to the company for that profit or benefit, even if he has not been guilty of any moral wrong doings Regal (Hastings) Ltd v Gulliver [1942] 1 AER 378. In the case of bribes and undisclosed benefits, if a director receives any of these as an inducement to act in a certain way in relation to the companys affairs, this will be a breach of the directors duty. The company as the principal may sue to recover the amount of the bribe or sue the director or third party (that has given the bribe) for damages Mahesan v Malaysian Government Officers Co-operative Housing Society
[1978] 1 MLJ 149.
5.1.4.2. Where a director misuses company funds and confidential information

In the case of company funds, directors cannot mix the companys funds with their own funds, as this amount to a theft, embezzlement or criminal breach of trust. It is not sufficient for the directors to argue that the funds were lent to them, since a company is generally prohibited from making loans to directors, except under the provisions in s 133(1)(a) (c). In the case of confidential information received by a person by virtue of him being a director of a company, he cannot use the information to make a profit for himself.
5.1.4.3. Where a director competes with his own company

Generally, it is not on its own a breach of fiduciary duty for a director to be a director of competing companies, as long as the potential conflict is disclosed to the companies and the relevant consents are obtained for the crossdirectorships Shanghai Hall Ltd v Chong
Mun Foo [1967] 1 MLJ 254.

In such circumstances, the director must identify clearly the perceived conflict and to take a proper course of action, for instance, by not participating in boardroom discussion and voting. If there is no other way to deal with the conflict, his only option is to resign from all the directorships Fitzsimmons v R [1997] 23 ACSR 355. It would be a breach of fiduciary duty for an executive director of a company to set up a competing company while still being employed by the company Personal Automation Mart Pte Ltd v Tan Swee Sang [2000] MSCLC 97.
5.1.4.4. Where a director takes up a corporate opportunity that properly belongs to his company
A director may not take up a corporate opportunity, e.g. a business contract or tender, that properly belongs to his company in order to make a profit for himself. The director breaches his fiduciary duties even if the company suffers no loss in turn. This is because the opportunity should belong to his company, for which it has been negotiating. Such act of taking up the corporate opportunity would amount to an appropriation of the companys property, which is considered a fraud on the minority Cook v Deeks [1916] If a director has committed a fraud on the minority, such action cannot even be ratified or put right by the company in a general meeting. The director is not released from his obligation to account to the company.
1 AC 554.
The following principles are held in Regal (Hastings) Ltd v Gulliver [1942] 1 AER 378: 1. Directors incur liability if what the directors did was so related to the affairs of the company that it can be properly said to have been done in the course of management and in utilization of their opportunities and special knowledge as directors, and what they did resulted in a profit to themselves. 2. Once the directors have been found to have made use of the corporate opportunity and made a profit out of it, they have breached their fiduciary duty. It is irrelevant that the directors acted sincerely in what they thought were in the companys best interest. 3. Directors should obtain the sanction of the general meeting in order to take up the corporate opportunity, and if they fail, they have to let the opportunity pass. Directors may not take up a corporate opportunity by arguing that their company itself cannot have succeeded in getting the business opportunity, since their liability to account does not depend on whether the company has suffered any loss Industrial Development Consultants v Cooley [1972] 2 AER 162. Directors are not permitted to resign from their company in order to take up a corporate opportunity in a situation where their resignations can be said to have been prompted by their wish to obtain the business advantage for themselves. This would be a breach of duty Industrial Development Consultants V Cooley [1972] 2 AER 162; Canadian Aero Service
Ltd v OMalley [1973] 40 DLR 371.

However, it is not a breach of duty if a directors resignation is for an unrelated reason and his company was not actively seeking out the contract in question at the point of his resignation Island Export Finance Ltd v Umunna [1986] . Also, it is not a breach of duty if a director takes preparatory steps to set up a competing business, as long as he does not actually compete against the company before his resignation Universal Westech (S) Pte Ltd v Ng Thiam Kiat [1997] 2 SLR 139. Where the board of directors of a company rejects a corporate opportunity on its behalf, this decision must have been made in good faith in the interest of the company. It is impermissible for one or a few directors to participate in the boards decision to reject a business opportunity so that they can take it up themselves. Full and frank disclosure of a directors interests must be made, so that the board has full knowledge of all the material facts. The board must also be able to act independently. Once the board has rejected in good faith a corporate opportunity on behalf of a company, a director is then allowed to take up that opportunity for himself. He will not be in breach of his duty, especially if his intention to do so is made known to the board Peso Silver
Mines Ltd (NPL) v Cropper [1966] 58 DLR 1, Queensland Mines Ltd v Hudson [1978] 18 ALR 1.
5.2.
DUTY OF CARE, SKILL AND DILIGENCE
This duty relates to a directors competency and his manner of exercising his powers in a company. Directors should be reasonably competent and must not be negligent in carrying out his obligations. Although a company may take action against its directors for negligence, the individual members may not do so, as they would be prevented by the rule in Foss v Harbottle [1843] 67 ER 189. Para 15.09 of the Listing Requirements provides that in the case of directors of public listed companies, it is now compulsory for directors to undergo a Mandatory Accreditation Programme that is conducted by Bursa Malaysia. Every year, directors must also participate in Continuing Education Programmes. The objectives of these trainings are to increase the directors awareness on corporate governance, to get the directors updated on the legal and regulatory developments in the country and to enhance their understanding of their responsibilities, role and liabilities as directors. 5.2.1. The position at common law At common law, a director needs not possess any skill for his job as a director, thus the fact that he is unskillful is not a breach of his duty to the company Re Brazilian Rubber
Plantations and Estates Ltd [1911] 1 Ch 425.

Three (3) propositions were laid down in Re City Equitable Fire Insurance Co Ltd [1925] Ch 407: i. A director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. ii. A director is not bound to give continuous attention to the affairs of his company. His duties are of an intermittent nature, to be performed at periodical board meetings and committee. He is not, however, bound to attend all such meetings, only whenever in the circumstances he is reasonably able to do so. iii. When delegating his duties to an official of a company, in the absence of grounds for suspicion, a director is justified in trusting that official to perform such duties honestly. As an illustration, in Dorchester Finance Co v Stebbings [1989] BCLC 498, directors who signed blank cheques were held liable for their negligence.
Nevertheless, in Re DJan Of London [1994] 1 BCLC 561, a director who completed an insurance policy proposal form carelessly was held to be negligent, but he was released from liability. The courts have gradually moved away from the common law position, resulting in a higher, objective standard of care being imposed directors, as seen in Daniels v Anderson [1995] ACSR 607 (also known as the AWA case). 5.2.2. The new position after the Companies (Amendment) Act 2007 The Companies (Amendment) Act 2007 inserts a few new statutory provisions into the Companies Act 1965 to regulate the duty of care, skill and diligence of company directors. Under Section 132(1A), a director of a company is required to exercise reasonable care, skill and diligence with(a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and (b) any additional knowledge, skill and experience which the director in fact has. Thus, a director is now expected to display the same knowledge, skill and experience that may be possessed by a director having the same responsibilities. This is in addition to his own knowledge, skill and experience. The new provisions deal with the following: The business judgment rule Directors reliance on information provided by others Directors responsibility for actions of delegatees
5.2.3. Business Judgment Rule Where an officer has made business judgment, he may be relieved from liability under certain circumstances. This is commonly referred to as a safe harbour principle. Under Section 132(1B), a director who makes a business judgment is deemed to fulfill his duty under s 132(1A) and the duties under the common law if the director-
(a) makes the business judgment in good faith for a proper purpose; (b) does not have a material personal interest in the subject matter of the business
judgment;
(c) is informed about the subject matter of the business judgment to the extent the director
reasonably believes to be appropriate under the circumstances; and (d) reasonably believes that the business judgment is in the best interest of the company. S 132(6) defines "Business Judgment" as any decision on whether or not to take action in respect of a matter relevant to the business of the company.
5.2.4. Directors reliance on information provided by others Under Section 132(1C), a director, in exercising his duties as a director, may rely on certain information prepared by certain persons. The information includes professional or expert advice, opinions, reports or statements including financial statements and other financial data. The director may rely on the information prepared, presented or made by the following persons: (a) any officer of the company whom the director believes on reasonable grounds to be reliable and competent in relation to matters concerned; (b) any other person retained by the company as to matters involving skills or expertise. The director believes on reasonable grounds that the matters are within the person's professional or expert competence; (c) another director. This is in relation to matters within the director's authority; or (d) any committee to the board of directors on which the director did not serve. This is in relation to matters within the committee's authority. Under s132(1D) - The director's reliance made under subsection (1C) is deemed to be made on reasonable grounds if it was made in good faith and after the director has made an independent assessment of the information he receives from any of the above persons. The reliance must also be based on the director's knowledge of the company and its complexity of the structure and operation.
5.2.5. Directors responsibility for actions of delegatee Under Section 132(1F), directors may delegate any power of the board to any board committee, director, officer, employee, expert or any other person. The delegation may be made unless prohibited by the Companies Act 1965, the companys Memorandum and Articles of Association, any resolution of the board or any resolution of the shareholders. Where the directors have delegated any power, they remain responsible for the delegatees exercise of such power as if such power had been exercised by the directors themselves. Nevertheless, under s132 (IG), the directors are not responsible for the delegatees actions in the following circumstances: (a) the directors believed on reasonable grounds at all times that the delegatee would exercise the power in conformity with the duties imposed on the directors under this Act and the companys Memorandum and Articles; and (b) the directors believed on reasonable grounds, in good faith and after making a proper inquiry, that the delegatee was reliable and competent in relation to the power delegated. Here, if the circumstances indicated a need for the inquiry, the directors must have made a proper inquiry and concluded that the delegate was reliable and competent.
5.3.
OTHER STATUTORY DUTIES OF DIRECTORS
Directors owe other duties as prescribed by the Companies Act 1965. The main duties are pertaining to directors disclosure of interests and restrictions on self dealings by directors. At times, directors duties to a company arise not because of the directors own interests, but because of the interests of persons who are connected in some ways to them. Such a person is known as a person connected to a director. For the purpose of this section, the company on whose board a director serves shall be referred to as the main company.
Persons connected to a director Under Section 122A(1), the following persons may be considered as a person connected to a director: (a) a member of that directors family; (b) a body corporate which is associated with that director; (c) a trustee of a trust under which that director or a member of his family is a beneficiary. This is other than a trustee for an employee share scheme or pension scheme; (d) a partner of that director or (e) a partner of a person connected with that director. s 122A(2): A member of that directors family includes a spouse, parent, child, brother, sister and the spouse of his child, brother or sister. A child includes an adopted and stepchild. s 122A(3): A body corporate which is associated with a director refers to another company in which: (a) the body corporate and/or its directors are accustomed to or are under a formal or informal obligation to act in accordance with the instructions or wishes of the director of the main company; or (b) the director of the main company has a controlling interest in the body corporate; or (c) the director or other persons connected with him are entitled to exercise not less than fifteen percent (15%) of the votes attached to voting shares in the body corporate.
5.3.1. Section 131 - Disclosure of directors interest in contracts, property and offices Section 131 A director must disclose his interest if he Has interest in Contracts/Proposed Contracts of the company Possess property (that may create a conflict) holds Office (that may create a conflict)
Under Section 131(1), a director must declare his interest where he is directly or indirectly interested in a contract or proposed contract with the company. He must declare the nature of this interest at a board meeting as soon as practicable after he knows the relevant facts of the contract. A director need not make the relevant disclosure or he is not deemed to be interested in any of such contracts or proposed contract in the following situations: - where the director is a member or creditor of another company that is interested in a contract with the directors company. Here, the director needs not disclose unless he has a material interest in this other company. - where the contract or proposed contract relates to a loan given to the company, and the director has guaranteed or is a co-guarantor for the repayment of the loan, - where the director is a director of related companies and the contract or proposed contract is to be entered into between the related companies. A director is considered to have made a sufficient declaration of interest if the following are done: - He gives a general notice to the other directors: to the effect that he is an officer or member of a specified corporation or a member of a specified firm, and he is to be regarded as interested in any contract that may be made with such company after the date of the notice. - In the notice, he must also specify the nature and extent of his interest in the specified corporation or firm. - The general notice must be given at a meeting of directors or the director takes reasonable steps to ensure it is brought up at the next meeting of directors. S 131(5) applies where a conflict is created when a director holds any office or possesses any property. - This conflict may be created directly or indirectly with his interests or duties as director of the company. - As such, he must declare the conflict at the first meeting of the directors held as soon as he becomes a director or after he starts to hold the office or possesses the property. - He must declare the nature and extent of the conflict.
The Secretary shall record every declaration in the minutes of the meeting at which it was made. s131(7A) provides that where a directors spouse or child (including adopted child or stepchild) has an interest in the companys shares or debentures, this interest shall be treated as an interest in the contract and proposed contract of the company. The spouse or child must not be themselves a director of the company. In such circumstances, if the company is entering into a contract with the directors spouse or child, or the companies controlled by the spouse or child, the director is also considered to be interested in the contract and must make the same declaration of interest as stated above. Under s 131(7B), the company may avoid, i.e. render void, a contract or proposed contract entered into in contravention of s131. However, the contract may still be enforced by any person dealing with the company for any valuable consideration and without any actual notice of the contravention. The penalty for contravention of this section: Imprisonment for seven (7) years or RM150,000/- fine or both. 5.3.2. Section 131A - Interested director not to participate or vote Under Section 131A(1), a director of a company who is directly or indirectly interested in a contract or proposed contract to be entered into by the company shall be counted only to make the quorum for the board meeting. He cannot participate in any discussion while the contract or proposed contract is being considered at the meeting and cannot vote on the contract or proposed contract. He has such obligations, unless the interest is one that needs not be disclosed under s 131. The above prohibitions do not apply to (a) a private company, unless it is a subsidiary to a public company; (b) a private company which is a wholly-owned subsidiary of a public company. Here, the contract or proposed contract is between the private company and the holding company or with another wholly-owned subsidiary of the same holding company; (c) any contract or proposed contract of indemnity in which the director is a surety for the company; (d) any contract or proposed contract entered into by a public or private company (which is a subsidiary of a public company) with another company. In this other company, the directors interest consists solely of his qualification shares or his interest is not more than 5% of the paid-up capital.
Under s 131A(3), the company may avoid, i.e. render void, a contract or proposed contract entered into in contravention of s131A. However, it may not do so if the contract is in favour of any person dealing with the company for any valuable consideration and without any actual notice of the contravention. Under s131A(4), a director who knowingly contravenes s 131A shall be guilty of an offence, Penalty: Imprisonment for five (5) years or RM150,000/-fine or both.
5.3.3. Section 135 Directors general duty to make disclosure of interest in shares and debentures of a company Under Section 135(1), a director is obliged to give a notice in writing to the company of such particulars of: (a) shares, debentures, participatory interests, rights, options and contracts as are necessary for the company to comply with s134. (b) any change in respect of the particulars which have earlier been given by notice in writing, including consideration received (c) such events or matters affecting himself as are necessary for the company to comply with this Act; and (d) the date on which he attains the age of seventy (70), if he is a director of a public company or subsidiary of a public company. The relevant disclosures must be made within fourteen (14) days after: - the date he becomes a director, or - the date he acquires an interest in the shares, debentures, rights and contracts, or - the occurrence of the event giving rise to the changes. If there is a contravention of s 135, penalty: Imprisonment for three (3) years or RM15,000/- fine. The company, upon receiving the above notice from the director, must: - make the relevant entries in its Register of Directors shareholdings, interests and debentures within 3 days - send a copy of that notice to every other director within seven (7) days. Penalty: RM10,000/-. Default penalty: RM500/ Under s 134(1), the company shall keep a Register showing the particulars of each directors shares, debentures, participatory interests, rights, options or contracts in the company or a related corporation.
In the case of a public listed company, a director or Chief Executive has additional duties to disclose his interests in the securities of the company, pursuant to Section 317 of the
Capital Market and Services Act 2007.

Here, a director or Chief Executive who has an interest in the securities of such listed company or its associated companies shall notify the listed company in writing of the nature and extent of his interests in the company at the time. The spouse, child or parent of the director or Chief Executive has the same obligations to disclose their interests in the securities of the company too.
5.3.4. Section 132C Approval of company required for directors disposal or acquisition of companys undertaking or property Section 132C(1) provides that notwithstanding anything in a companys Memorandum or Articles of Association, directors of the company shall NOT carry into effect any arrangement or transaction for: (a) the acquisition of an undertaking or property of a substantial value; or (b) the disposal of a substantial portion of the companys undertaking or property, unless the arrangement or transaction has been approved by the company in a general meeting In the case of a public listed company, under s 132C(1A), the term substantial value or substantial portion means the same value prescribed by the provisions in the Listing Requirements which relates to acquisitions or disposals by the company or its subsidiaries and which would require the approval of shareholders at a general meeting. In the case of other companies, under s 132C(1B), the companys undertaking or property is considered a substantial value or substantial portion if: - its value exceeds 25% of the companys total assets and the net profits amount to more than 25% of the companys total net profit, or - its value exceeds 25% of the companys issued share capital. The highest value shall be taken into account. s 132C(2): Any member of the company may apply to the Court to restrain the directors from entering into a transaction that contravenes s 132C.
s 132C(3) provides for the effect of an arrangement or transaction that contravenes s 132C. Such transaction shall be void, i.e. not valid. However, it may still be enforced by any person dealing with the company for valuable consideration and without actual notice of the contravention. s 132C does not apply to a disposal of a companys undertaking or property that is made by a receiver and manager appointed privately or by the court and a liquidator appointed in a voluntary winding-up. Any director who contravenes s 132C shall be guilty of an offence. Penalty: Imprisonment for five (5) years or RM30,000/- fine or both. "Director" includes the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or any other person primarily responsible for operations or financial management of a company, by whatever name called.
5.3.5. Section 132D Approval of company required for issue of shares by directors Under Section 132D(1), directors shall not issue shares without prior approval of the company in general meeting. The approval of the shareholders may be specific or general, and may be unconditional or with conditions. The approval shall be in force until the conclusion of the annual general meeting commencing next after the date of the approval. The shareholders may revoke or vary any approvals given previously. Under s 132D(6), any issue of shares in contravention of this section shall be void, i.e. not valid, and the consideration given for the shares shall be recoverable accordingly. Prior approval of the general meeting is not required where the shares are to be issued as a consideration for the acquisition of shares or assets by the company. The members must be notified of the intention to issue those shares at least fourteen (14) days before the date of issue of those shares. Under s 132D(7), any director who knowingly contravenes or authorizes the contravention of this section must compensate the company and the persons to whom the shares were issued for any loss or damages which they might have suffered.
5.3.6. Section 132E Substantial property transaction by director or substantial shareholder Under Section 132E(1), a company shall not carry into effect any arrangement or transaction where a director or substantial shareholder or a person connected with such director or substantial shareholder: (a) acquires shares or non-cash assets of the requisite value, from the company, or (b) disposes of shares or non-cash assets of the requisite value, to the company. The section applies to a director, substantial shareholder of the company or its holding company, and a person connected with such a director or substantial shareholder. Under s132E(2), an arrangement or transaction carried into effect in contravention of s132E shall be void, i.e. not valid, unless there is prior approval of the arrangement or transaction by a resolution of the company at a general meeting or by a resolution of the holding company at a general meeting A resolution of the holding company is required if the arrangement or transaction is in favour of a director or substantial shareholder of a companys holding company or person connected with such director or substantial shareholder. During the general meetings of the company or its holding company (if applicable), the director, substantial shareholder or person connected with such director or substantial shareholder, as the case may be, must abstain from voting on the resolution on whether or not to approve the arrangement or transaction. Where an arrangement or transaction is carried into effect by a company in contravention of s 132E, that director, substantial shareholder or person connected and any director who knowingly authorized the arrangement or transaction shall be liable (a) to account to the company for any gain which he had made from the arrangement or transaction; and (b) jointly and severally to indemnify the company for any loss or damage resulting. Additionally, the director, substantial shareholder or a person connected or a director who knowingly authorized the company to carry out such arrangement or transaction shall be guilty of an offence against this Act. Penalty: Imprisonment for seven (7) years or RM250,000/- fine or both. Any member or director of a company may apply to the Court to restrain the company from carrying into effect an arrangement or transaction in contravention of s 132E(1).
In the case of a public listed company, under s 132E(7)(b), the term requisite value means the same value prescribed by the provisions in the Listing Requirements which relates to acquisitions or disposals by the company or its subsidiaries and which would require the approval of shareholders at a general meeting. In the case of other companies, under s 132E(7)(c), non-cash asset is of the requisite value if, at the time of the transaction: - its value exceeds RM250,000/- or, - if its value does not exceed RM250,000/-, it exceeds 10% of the company's asset value, provided it is not less than RM10,000/-. Here, the value of the company's assets is determined by reference to the accounts prepared in respect of the last financial year prior to the arrangement or transaction or where no accounts have been so prepared and laid, the amount of the company's called up share capital. "Non-cash asset" means any property or interest in property other than cash. "Director" includes the Chief Executive Officer, Chief Operating Officer, Chief Financial Officer or any other person primarily responsible for operations or financial management of a company, by whatever name called. Exception under Section 132F S 132E shall not apply to an arrangement or transaction for the acquisition or disposal of a non-cash asset in any of the following circumstances: (a) a company enters into transaction with any of its wholly-owned subsidiaries, or with its holding company (which hold all the shares of the company) or with another whollyowned subsidiary of the same holding company. (b) the company is being wound-up, unless it is a members voluntary winding-up. (c) the transaction is an acquisition or disposal of an asset in the companys ordinary course of business and is on terms not more favourable than those available to the public or employees of the company. (d) such transaction does not involve transfer of cash or property and must be approved at a general meeting or by a relevant authority. (e) the transaction is made in pursuance of a scheme of arrangement approved by the Court under s 176; (f) the transaction is in connection with a takeover offer made in accordance with the relevant laws that apply.
5.3.7. Section 133 Loans to Directors Under Section 133(1), a company, whether private or public, cannot provide: - Loans to a director of the company or related company; - Guarantee or security in connection with a loan made by any other person to such a director. The exceptions in which loans can be made to a director are as follow: 1. Exempt private companies may give loans to its directors. 2. The company may provide a loan to a director to meet expenditure incurred by him for the purposes of the company or to enable him to properly perform his duties as an officer of the co. Here, the loan can be made to any director of the company. 3. The company may provide a loan to a director to meet expenditure incurred by him in purchasing or acquiring a home. Here, the loan can be made to a director engaged in full-time employment of the company or its holding company only. 4. The company may make a loan to a director in accordance with a scheme for the making of loans to employees of the company. The scheme must have been earlier approved by the general meeting. Here, loans can be made to a director engaged in full-time employment of the company or its holding company only. s 133(2) provides for the following conditions to be fulfilled: (a) Prior approval of the company at a general meeting, whereby purposes of the expenditure, amount of loan or extent of guarantee or security must be disclosed, or (b) If approval is not given at or before the next following annual general meeting (AGM), the loan shall be repaid or liability under guarantee or security shall be discharged within six (6) months from that AGM. Under s133(3), where approval is not given as required, directors who authorize the loan or the entering into guarantee or security must indemnify the company against any loss that arises. Where the company contravenes this section, any director who authorizes the making of any loan or the entering into guarantee or security shall be guilty of an offence. Penalty: RM10,000/- fine.
Under s133(5), the company may recover the loan amount or the amount it becomes liable under any guarantee or security entered into. In Co-operative Central Bank Ltd v Feyen Development Sdn Bhd [1995] 3 MLJ 313, the court held that charge transactions which breached Section 133 of the Companies Act 1965 did not give rise to civil consequences, despite the company being prohibited from giving security for loan.. Thus, any loan or charges created will still be valid and the company remains liable.
5.3.8. Section 133A Loans to persons connected with directors Under Section 133(1), a company, whether private or public, cannot provide: - Loans to any person connected with a director of the company or its holding company; - Guarantee or security in connection with a loan made by any other person to such person connected. The above prohibition does not apply to the following: 1. Exempt private companies may give loans to persons connected with its directors. 2. Loan made or guarantee or security given in relation to a loan made to a related company. 3. A company whose ordinary business is in lending money or giving guarantees, or to anything done by the company in the ordinary course of its business, if the activities of that company are regulated by any written law relating to banking, finance companies or insurance. 4. Loans made to a person connected with a director who is engaged in the full-time employment of the company or its related corporation: - For the purpose of the person connected to meet the expenditure incurred in purchasing or acquiring a home or - In accordance with a scheme for the making of loans to employees, approved by the company in general meeting. Under s 133A(3), a company may recover the loan amount or the amount it becomes liable under any guarantee or security entered into in contravention of this section.
Where the company contravenes this section, any director who authorizes the making of any loan or the entering into guarantee or security shall be guilty of an offence. Penalty: RM10,000/- fine. In Co-operative Central Bank Ltd v Feyen Development Sdn Bhd [1995] 3 MLJ 313, the court held that charge transactions which breached Section 133 of the Companies Act 1965 did not give rise to civil consequences, despite the company being prohibited from giving security for loan.. Thus, any loan or charges created will still be valid and the company remains liable.
5.3.9. Directors statutory duties in relation to accounts of a company Under Section 167, the directors and managers of a company shall ensure that proper accounting and other records are kept so as to sufficiently explain the transaction and financial position of the company. This is to enable true and fair income statement, balance sheet and any documents required to be attached to the accounts to be prepared from time to time. Directors shall ensure those records are kept in such manner as to enable them to be conveniently and properly audited. Directors shall ensure that appropriate entries are made in the accounting and other records of the company within sixty (60) days of the completion of the transaction. The records shall be kept at the registered office of the company or such other places as the directors think fit and shall at all times be open to inspection by the directors. If there is non-compliance of this section, the company and every officer in default shall be guilty of an offence. Penalty: Imprisonment for six (6) months or RM5,000/- fine or both. A director may apply to the Court for an order that a companys accounting and other records be open to inspection by an approved company auditor acting for the director. The auditor must give an undertaking that the information acquired during inspection shall not be disclosed by him except to that director. Under Section 168, the directors of a holding company must ensure that the financial year of each subsidiary coincides with that of the holding company within two (2) years after the subsidiary becomes a subsidiary of the holding company.
Under Section 167A, in the case of a public company or a subsidiary of a public company, the directors shall have in place a system of internal control that will provide a reasonable assurance that the companys assets are safeguarded against loss from unauthorized use or disposition. The internal control system shall also provide assurance that all transactions are properly authorized and that they are recorded as necessary to enable the preparation of true and fair income statements and balance sheets and to give a proper account of the assets. Penalty: six (6) months imprisonment or RM10,000/- fine or both. Under Section 169, the directors have a responsibility to lay the audited accounts before the company at its annual general meeting (AGM). The audited accounts are made up to a date not more than six (6) months before the date of the AGM. The accounts are to be laid out at some date not later than eighteen (18) months after a companys incorporation. Thereafter, this is to be done once at least in every calendar year, at the intervals of not more than fifteen (15) months. A copy of the income statement, balance sheet, directors report and statement by directors, statutory declaration by a director and the auditors report must be circulated to every person entitled to receive the notice of the AGM at least fourteen (14 )days before the AGM, unless waived by members in the general meeting. The general meeting shall then pass a resolution to receive and adopt the audited accounts. The accounts of a company must comply with the requirements as to the contents as set out in Ninth Schedule of the Companies Act 1965. This is to ensure that the accounts contain a certain degree of detail and entirety. The income statement of a company must give a true and fair view of the profit or loss of the company for that period, while the balance sheet must give a true and fair view of the state of affairs of the company as at the end of the period respectively. The directors report must contain the information stipulated in s169(6) and must be signed by at least two (2) Directors. Under s 169(15), the directors must attach a statement of true and fair view. This is a statement of the directors opinion that: - the Income Statement gives a true and fair view of results of the companys business or that of the group - the balance sheet or consolidated balance sheet gives a true and fair view of state of affairs of the company or that of the group, and - the accounts or consolidated accounts have been made out according to approved accounting standard.
If the accounts do not give a true and fair view of the profit and loss of the company and the state of affairs of the company, the directors may be prosecuted. This is especially if there are non-disclosures and misleading figures in the accounts in order to deceive customers and other persons dealing with the company. Under s 169(16), there must be a statutory declaration by a director in charge of financial management that is attached to the accounts. This statutory declaration sets his opinion as to correctness of the income statement and balance sheet. In the case of public listed companies, the Listing Requirements require such director to be either a member of an accounting professional body or have passed the relevant accounting professional examinations specified in the Accountants Act 1967. He must have at least three (3) years working experience and is primarily responsible for financial management in a company. For public listed companies too, additional statements must be made in their annual reports, as follow: - statement explaining the boards responsibility for the preparation of the audited accounts - statement on the state of internal control of the listed company or as a group - a narrative of how the company has applied the principles of the Malaysian Code on Corporate Governance (the Code), extent of the companys compliance with the Best Practices in the Code, reasons for non-compliance and other alternatives adopted.
5.4.
REMEDIES AGAINST DIRECTORS FOR BREACH OF DUTIES
Where a director has breached his duties, the remedies are as follow: He is liable to the company for profits made or any damages suffered. Section 132(3) provides that an officer who commits a breach of the duties under s 132 shall be liable to the company for any profit made by him or for any damages suffered by the company as a result of the breach. For loans made to a director or a person connected to a director in contravention of Section 133 and 133A, the company may recover the amount of any loan or amount for which it becomes liable. Under s 132(3), he is also guilty of an offence under the Act. Penalty: Imprisonment for five (5) years or RM30,000/- fine. He is liable to restore the property of his company. The company may apply for an order of the Court to restore its property. The company may exercise the equitable remedy of tracing because a director is a fiduciary. The company may rescind or refuse to ratify the contracts entered into with the director, a person connected or a third party, on the ground that the contract was induced because the director has an interest in the contract but has failed to disclose. For certain contracts, e.g., contracts entered into in contravention of s 132E, these are void, until approved by the company in a general meeting. The company may choose not to approve such contracts. For contracts entered into in contravention of s 131, the contract shall be voidable at the instance of the company except if they are made with third parties who deal with the company in good faith, without notice of the contravention and for any valuable consideration. Additionally, where the board or any director has contravened the Companies Act 1965, certain persons aggrieved by the actions of the board or any director may obtain an injunction (i.e. a court order prohibiting the doing of an act) to restrain further contravention of the Act. This is provided in Section 368A.
SECTION 368A GRANT OF INJUNCTIONS Under Section 368A(1), where a person (the person) has or is engaged in conduct that constituted, constitutes or would constitute a contravention of the Companies Act 1965, the Registrar or a person whose interests are affected by this conduct (the affected person) may apply to the Court for an injunction to restrain the first-mentioned person from engaging in the conduct or requiring that person to do any act or thing. The offence also covers any attempt, aiding or abetting the contravention of the Act. S.368A(2) If the person refused or failed to do an act that is required by this Act, the Registrar or any affected person may apply to the Court for an injunction requiring the first-mentioned person to do that act. The Court may grant an injunction whether or not: - the person has previously engaged or intends to continue to engage in conduct of that kind, and whether or not there is an imminent danger of substantial damage to any person. - the person has previously refused or failed or intends to refuse again to do that act and whether or not there is an imminent danger of substantial damage to any person. The Court has further powers: to grant an injunction by consent of all parties, to grant an interim injunction, to revoke or vary an injunction granted or to order the person to pay damages to any affected person, either in addition to or in substitution for the injunction.
5.5.
PROTECTION FOR DIRECTORS IN CARRYING OUT THEIR DUTIES
5.5.1. Section 140 - Provisions Indemnifying Directors or Officers Under Section 140(1), the Articles or any contract may not contain any provision that try to exempt officers from liability in case liability arises. If there are such provisions, these shall be void. Nevertheless, the Articles or any contract may contain any provision that indemnifies a director in case he is acquitted or has judgment given in his favour.
5.5.2. Section 368B Protection to certain officers who make dislosures Under Section 368B(1), where in performing his duty, an officer of a company has reasonable belief that a matter which may constitute a breach or non-observance of the Companies Act or a serious offence involving fraud or dishonesty, has been or is being committed against the company by other officers, he may report the matter in writing to the Registrar. The company shall not remove, demote, discriminate against, or interfere with the lawful employment of such officer. The officer shall also not be sued or subject to any tribunal process, including disciplinary action if he has submitted any report in good faith and in the intended performance of his duties.
5.5.3. Section 354 Courts power to grant relief Where a director apprehends (i.e. anticipates) that a claim might be made against him, he may apply to the Court for relief, to be relieved from liability. Under Section 354, a director may be granted relief if it appears to the Court that he has acted honestly and reasonably and the Court is of the view that he ought fairly to be excused. Additionally, the company in general meeting may also condone (i.e. excuse) a breach of duty or ratify an act which causes the breach of duty, in the following situations: defective acts owing to procedural irregularities transaction between a director and the company a director acting in excess of his powers but which may still be ratified by the general meeting breach of duties of care and skill where the director derived no profit. The general meeting cannot ratify a fraud committed on the minority, e.g. when there has been a misappropriation of the companys property.
6.
COMPANY SECRETARIES
Under Section 4(1) of the Companies Act 1965, officers of a company include the secretary of the company. As such, the Secretary is similarly subject to the statutory duties of officers under s 132. s 139(1) provides that every company is required to have at least a secretary, who shall be a natural person, of full age and having a principal or only place of residence in Malaysia. 6.1 APPOINTMENT OF A COMPANY SECRETARY
The first secretary of a company is named in its Memorandum and Articles of Association s.139(1A). Under s 139(3), appointment of a company secretary is done by the board of directors, which shall pass a board resolution. Every secretary, before being appointed, must sign Form 48F, which contains declarations that he is qualified to act pursuant to s 139A, not disqualified under s 139C and that he consents to act as the secretary of the company. If there is a change of the Secretary and also the registered office of the company, Form 49 and Form 44 must be within one (1) month, and the particulars of change of Secretary must be entered into the Register of Directors, Managers and Secretaries. The office of a Secretary must not be vacant for more than a month s139(1B). A director may act as both a director and also a secretary. However, he may not act in respect of matters which are required by the law to be done by a director and a Secretary. E.g. the counter-signing of the companys common seal. A large public listed company usually has an in-house Company Secretary, who is also a full-time employee of the company. In the case of small and medium companies, an external Company Secretary is often engaged from a professional secretarial firm. A partner of the firm often acts as a Secretary for many other companies. The Secretary must be present at the companys registered office in person or represented by his agents. 6.2 QUALIFICATION OF A COMPANY SECRETARY
Under s 139A, a person may act as a secretary of the company if he has any of the following: a. He is a member of a prescribed professional body. This includes professional bodies like MAICSA, MIA, MICPA, MACS, Malaysian Bar, Sabah Law Association and Advocates Association of Sarawak. b. He is licenced by the Registrar to act as a company secretary, pursuant to s 139B.
Under s 139C, a person shall be disqualified to act as a secretary if: He is an undischarged bankrupt, He is convicted within or outside Malaysia of any offence mentioned in s 130(1); He ceases to be a member of the prescribed professional body under s 139A He ceases to hold a valid licence issued under s 139B. Under s 127, the acts of a secretary shall still be valid notwithstanding any defects that may afterwards be discovered in his appointment or qualification. However, only the act is validated and the appointment remains invalid. 6.3 RESIGNATION
A Secretary may resign by giving a reasonable notice. The board shall pass a resolution to accept the resignation and to appoint a new Secretary. Form 49 must be lodged with the Companies Commission of Malaysia to reflect the change of secretary. Form 44 is lodged if there is a change of registered office also. The Register of directors, managers and secretaries must be updated also. Under s 139(1B), the office of the company secretary may not be left vacant for more than one (1) month. 6.4 VACATION OF OFFICE
Under s 139(1C), where none of a companys directors can be communicated with at their last known residential address, the secretary may lodge Form 48E, notifying the Registrar of that fact and of his intention to vacate his office. He shall cease to be the secretary on the expiry of one (1) month from the date of Form 48E. However, he is not relieved from liability for any acts or omission done before his vacation of office. 6.5 DUTIES AND RESPONSIBILITIES
A company secretary undertakes duties as provided in the Companies Act as well as the companys Articles of Association. Sometimes, he may be assigned additional duties according to his contract of service or as instructed by the directors. The secretarys primary duties are as follow: - To maintain the companys registered office in accordance with s 119. - To ensure that the statutory returns are lodged with the Companies Commission of Malaysia within the prescribed time limits - To ensure that the statutory registers are maintained, properly kept and updated
- To certify or authenticate copies of resolutions - To prepare letters of allotment and arrange for the issue of share certificates. - To keep safe custody of the common seal and supervise the affixing of the seal onto important documents. - To ensure the disclosure of the interests of directors and substantial shareholders are duly made and notified to the relevant authorities - To ensure that the companys accounts are sent for audit and the relevant reports are prepared in the form and within the time prescribed by the Companies Act 1965. - To prepare notices of meetings, board papers and proxy forms - In listed companies, the secretary shall prepare and release announcements to Bursa Malaysia - To organise meetings, attend the meetings, advise the Chairman on the meeting procedure and to take down minutes - To ensure lodgment of the companys annual return with the Companies Commission of Malaysia in accordance with s165. Under s 370(3), an officer in default includes any officer of the company who knowingly and wilfully is guilty of the offence or authorises or permits commission of offence. Thus, where the company has committed any default in compliance with the Act, the secretary may be held liable as an officer in default. 6.6 POWER AND AUTHORITY
Previously, the secretarys role was thought to be merely clerical and ministerial, a mere servant of the company Barnett, Hoares & Co v South London Tramsways Co [1887] 18 However, today, the status of the company secretary is greatly enhanced. He is now considered a chief administrative officer, compliance officer and even chief governance officer of a company. Even though his position has been greatly enhanced, he is still not part of the management and is thus not involved in the management or business of the company. Although he has no power to make any business decisions, any acts carried out by him within the scope of his express or implied authority will bind the company. For instance, a Secretary had the necessary authority to issue notice of requisition of shares because he was carrying out the directors instructions Wong Kim Fatt v Leong & Co Sdn The secretary has an ostensible authority to enter into contracts concerning administrative matters of the company Panorama Development v Fidelis Furnishing Fabrics Ltd [1971] 2 QB 711 and Mohamed bin Othman [1987] 2 MLJ 695. This is particularly if the acts are performed with board resolution.
QBD 815.
Bhd [1976] 1 MLJ 140.
6.7.
WHISTLE BLOWING PROTECTION FOR COMPANY SECRETARY
Under s 368B(1) of the Companies Act 1965, where in performing his duty, an officer of a company has reasonable belief that a matter which may constitute a breach or non-observance of the Companies Act or a serious offence involving fraud or dishonesty, has been or is being committed against the company by other officers, he may report the matter in writing to the Registrar. The company shall not remove, demote, discriminate against, or interfere with the lawful employment of such officer. The officer shall also not be sued or subject to any tribunal process, including disciplinary action if he has submitted any report in good faith and in the intended performance of his duties. In the case of the secretary of a listed corporation, there is a similar protection in s 321 of the Capital Market and Services Act 2007. Under s 321(1) CMSA 2007, where the secretary of a listed corporation has in the course of the performance of his duties, a reasonable belief of any matter which may amount to a breach of the securities laws or rules of a stock exchange or any matter which may materially and adversely affect the companys financial position, he may submit a report to the relevant authorities. The secretary is protected from reprisal actions by the listed corporation or any other civil action for any report submitted in good faith and in the intended performance of his duties.
7. 7.1
AUDITORS QUALIFICATIONS
Under s 9(1) of the Companies Act 1965, a person may act as auditor of a company if he is: an approved auditor; not indebted to the company, its holding company or subsidiaries in an amount exceeding RM2,500/-, not an officer of the company; not a partner, employee or employer of an officer of the company; not a partner or employee of an employee of an officer of the company; or not a shareholder or his spouse is a shareholder of a corporation whose employee is an officer of the company; not responsible for or being a partner, employee or employer of a person responsible for the keeping of the companys Register of members or the register of debenture holders An approved auditor means a person approved as an auditor by the Minister of Finance, and the approval has not been revoked. He must have the necessary qualifications, has applied to Minister of Finance and been granted approval to act on grounds of good character and competence to perform the duties. The approval is renewable every 2 years. The qualifications required to be an auditor: o Must have passed the final examination in accounting of one of the institutions specified in Part 1, First Schedule of the Accountants Act 1967, or o Alternatively, must be a member of one of the specified professional bodies under Part II, First Schedule, Accountants Act 1967, and o must ordinarily be registered as a public accountant with the Malaysian Institute of Accountants (MIA) under Accountants Act 1967. To be registered, he must be: - at least 21 years old - in the opinion of the council of the Malaysian Institute of Accountants (MIA), a fit and proper person to be admitted 7.2 APPOINTMENT
Under s 172(1), at any time before the first annual general meeting (AGM) of a company, the directors or the company in a general meeting may appoint an auditor who shall hold office until the conclusion of the first AGM Under s 172(2), thereafter, the company shall at each AGM appoint or reappoint an auditor to hold office until the conclusion of the next AGM.
The directors may appoint an auditor to fill any casual vacancy by reason of death or incapacity. While such vacancy continues, the surviving or continuing or remaining auditor may act. A person may only be appointed if he has consented in writing before the appointment s 9(6). Under s 172(11), a person cannot be appointed auditor of a company at its AGM unless: a. He held office as auditor of the company immediately before the meeting, or b. prior notice of his nomination as auditor is given to the company by a member not less than twentyone (21) days before the meeting. Upon receipt of the notice of nomination, the company must send the notice to each auditor and to each person entitled to receive notice of general meetings of the company, at least seven (7) days before the AGM. 7.3. REMUNERATION OF AUDITORS
Under s 172(16), where an auditor is appointed by the company at a general meeting, his fees and expenses are fixed by the general meeting or, if the directors have been authorised by the members at the last AGM, by the directors. In the case of services other than auditing services, pursuant to s 173(1), members may serve notice to request for a statement of all emoluments or remuneration paid by the company or any subsidiary to the auditor or any partner, employer or employee of the auditor. At least five percent (5%) of the members of the company or holders of 5% of the companys issued share capital may give such notice. The company in turn must do the following: prepare a statement showing the particulars of all emoluments paid to the auditor and of the services rendered during the financial year immediately preceding the notice. forward a copy of the statement to all persons entitled to receive notice of general meetings; and Lay the statement before the company in general meeting.
7.4.
REMOVAL OF AUDITORS
The procedure for removal of an auditor is as provided in s 172(4) to (8). Under s 172(4), an auditor may only be removed by resolution of the company at a general meeting, of which special notice has been given. A member must give the company a special notice of his intention to move the resolution at least twenty eight (28) days before the meeting. When the company receives the notice of resolution, it shall send a copy of the notice to the auditor and to the Registrar Within seven (7) days after receiving the notice, the auditor may make representations in writing to the company and request a copy to be sent by the company to every member of the company to whom the notice of the meeting is sent. Under s 172A, the auditor shall, within seven (7) days of submitting the written representation to the company, submit a copy of the written representation to the Companies Commission of Malaysia (CCM) and to Bursa (where applicable). The company shall send a copy of the representations as requested and the auditor may also require that the representations be read out at the meeting. He also has the right to be heard orally during the meeting. Where an auditor is removed from office at a general meeting, notice in writing of the removal must be lodged with the CCM. 7.4.1. Appointment of an auditor in place of the auditor removed Under s 172(7), where an auditor is removed from office at a general meeting, the company may, at that meeting itself, appoint another auditor. The resolution must be passed by a majority of not less than three-fourth (3/4) of members entitled to vote in person or by proxy. Alternatively, the meeting may be adjourned to a date not earlier than twenty (20) days and not later than thirty (30) days after the earlier meeting. A notice to nominate another auditor must be received by the company at least ten (10) days before the adjourned meeting. The auditor appointed shall hold office until the conclusion of the next AGM of the company. 7.5. RESIGNATION OF AUDITORS
Under s 172(14), an auditor of a company may resign only: - if he is not the sole auditor of the company or - at a general meeting of the company.
Under s 172A, an auditor shall within seven (7) days of submitting his notice of resignation as auditor to the company, submit a copy of his written explanation of his resignation to the Companies Commission of Malaysia (CCM) and to Bursa (in case of a publiclisted company). If an auditor gives notice in writing that he wishes to resign, the directors shall call a general meeting of the company as soon as practicable for the purpose of appointing another auditor. Any member may nominate a person who is an approved auditor and who has given his consent to act under s 9(6) to be the auditor, by giving not less than twentyone (21) days notice to the company. Upon receipt of the notice of nomination, the company must send the notice to the person nominated, to each auditor and to each person entitled to receive notice of general meetings of the company, at least seven (7) days before the meeting. On appointment of another auditor, the resignation shall take effect s 172(15)
7.6.
STATUTORY RIGHTS
OF AUDITOR
The statutory rights of an auditor may be found in s 174(4) to (7): He has a right of access at all reasonable times to the accounting and other records, including registers of the company. He is entitled to require from an officer of the company and any auditor of a related company such information and explanation as he desires for the purpose of carrying out audit. An auditor of a holding company also has a right of access to the accounting and other records of any subsidiary. He is entitled to require from any officer or auditor of any subsidiary, at the expense of the holding company, such information and explanations in relation to the affairs of the subsidiary as he requires for purpose of reporting on the consolidated accounts. He is entitled to receive all notices of general meeting. An auditor or his authorized agent is entitled to attend any general meeting of the company. He is entitled to be heard at any general meeting on any business that concerns him in his capacity as auditor.
Under s174(9), an offence is committed by any officer of a company who fails or refuse without lawful excuse to: - allow access to any accounting and other records and registers in his custody or - give any information or explanation as and when required or - otherwise obstructs or delays an auditor in the performance of his duties or powers Similarly, an offence is committed if an auditor of a subsidiary refuses to allow an auditor of its holding company access to the records or information required. Auditor of a listed company has the right to request for a meeting with the Audit Committee, without the presence of the executive directors.
7.7.
DUTIES OF AUDITOR
An auditors function is to carry out an audit of a companys accounts and to present an independent report on the companys accounts and financial position. He also needs to be extra vigilant in the detection of error or fraud that might have been committed by the management of a company. Nevertheless, auditors are watchdogs and not bloodhounds Re Kingston Cotton Mill (No. 2) [1896] 2 Ch 279. 7.7.1. Duty to report on accounts Under s174(1), an auditor shall report to the members on the accounts required to be laid before the company in general meeting. He also needs to report on the companys accounting and other records relating to those accounts. In case of a holding company, the auditor shall also report to the members on the consolidated accounts. The auditors report must be attached to the accounts or the consolidated accounts, and be available for inspection by any member at any reasonable time and if required by the members, be ready before the companys general meeting s 174(6). S 174(2) sets out matters which must be contained in an Auditors Report to the members: i. In his report, he must state, whether in his opinion, the accounts (balance sheet and Income Statement) and any consolidated accounts are: - properly drawn up - so as to give a true and fair view of the companys affairs, profits and loss, and - is properly prepared in accordance with the provisions of the Act and the applicable approved accounting standards.
ii. S 174(2)(b) He must also examine and form an opinion on whether the accounting and other and registers of the company have been properly kept in accordance with the Act. iii. If in his opinion, the accounts or consolidated accounts have not been drawn up in accordance with the approved accounting standard, the report must state: 1. Whether the accounts, if it had been drawn up in accordance with the approved accounting standard, would have given a true and fair view of the matters required by s 169 to be dealt with in the accounts or consolidated accounts, 2. his reasons for holding opinion that the accounts would not, if so drawn up, have given a true and fair view of those matters. 3. His opinion on particulars of quantified financial effect under s 166A(5) as given by directors. Under s 174(3), where there is any defect or irregularity in the accounts and any matter not set out in the accounts, resulting in a true and fair view of the matters not being able to be obtained: - the auditor must state, in his report the particulars of any deficiency, failure or shortcomings. - the auditor must form opinion as to whether: he has obtained all information and explanation required; the company has kept proper accounting, other records and registers as required by the Act, the returns received from branch offices are adequate the procedures and methods used by a holding company or a subsidiary in arriving at the amount taken into any consolidated accounts were appropriate to the circumstances of the consolidation. In the case of consolidated accounts, the auditors report must contain - names of subsidiaries of which he has not acted as auditor, - whether he has considered the accounts and the auditors report of the subsidiaries, and - whether he is satisfied that the accounts of the subsidiaries that are consolidated with other accounts are of proper form and content. - if he is not satisfied as to any of the above, this must be stated in the report, with reasons.
7.7.2. Duty to report breach or nonobservance of the provisions of the law Under s 174(8) of the Companies Act 1965, an auditor must forthwith report in writing to the Registrar, if in the course of performance of his duties as auditor, he: - Discovers any breach or non-observance of Act; and - The circumstances are such that in his opinion, the matters have not or will not be adequately dealt with by comment in his report on the accounts or consolidated accounts or by bringing to the Board. Penalty for failure to report: Imprisonment for two (2) years or fine of RM30,000/- or both.
7.7.3. Duties of auditors of public company S174(8A) (8C) lay down the duties of auditors of public company. An auditor shall report in writing to the Registrar if in the course of performance of his duties as auditor of a public company or a company controlled by a public company, he is of the opinion that a serious offence involving fraud or dishonesty is being or has been committed against the Company or against this Act, by the companys officers. Penalty for failure to report: Imprisonment for seven (7) years or fine of RM250,000/- or both. He is not regarded to have contravened his duty by reporting in good faith to the Registrar. A company is presumed to be controlled by a public company if the public company controls not less than fifteen percent (15%) of its voting shares. A Serious offence involving fraud or dishonesty means an offence punishable with imprisonment for not less than two (2) years or the value of the assets derived or any loss suffered by the company/member/debenture holder exceeds RM250,000/-. This includes offences under s 364, 364A, 366 and 368. There are similar obligations imposed on the auditor under s 128 and s 320 of the Capital Market and Services Act 2007, wherein he is to report breaches of securities laws or irregularities that may adversely affect the property or financial position of the company.
7.7.4. Reporting to Trustees for Debenture Holders Under s 175 of the Companies Act 1965, where there is a trustee for debenture holders, the auditor of a borrowing company must furnish to the trustee within seven (7) days any balance sheet or income statement or report, certificate or other documents which he has sent to the borrowing company. Where in the performance of his duties as auditor of a borrowing company, if the auditor becomes aware of any matter which, in his opinion, is relevant to the exercise and performance of the powers and duties imposed on the trustee, the auditor shall, within seven (7) days after becoming aware of the matter, report the matter in writing to the borrowing company and the trustee. Penalty for failure to report: RM1,000/-. Default penalty. There are similar obligations imposed on the auditor under s 276(1) and (2) of the Capital Market and Services Act 2007,
7.8.
LIABILITIES OF AUDITOR
An auditor who fails to exercise reasonable care and skill would be liable in damages to the company for breach of contract. The auditor may in turn argue contributory negligence on the part of the management of the company, e.g. failure to establish an adequate system of internal control, resulting in massive losses to the company. The auditors contractual liability is only to the company and not to individual shareholders or outsiders. Thus, the individual shareholders or outsider may not take an action in contract. They may nevertheless take an action in the tort of negligence. It must be established that the auditor owes them a duty of care during the audit and reporting process and that the auditor has failed to exercise the appropriate standard of care.
7.9.
QUALIFIED PRIVILEGE AND OTHER PROTECTIONS FOR AUDITOR
There are several provisions under the Companies Act 1965 and the Capital Market and Services Act 2007 that offers protection to the auditor in the performance of his duties. Under s 174A, an auditor shall enjoy qualified privilege in certain circumstances: - He shall not, in the absence of malice on his part, be liable to any defamation suit of any person, in respect of any oral or written statement which he makes in the course of his duties as auditor. A publisher of documents prepared by the auditor is also protected. - He shall not be liable to be sued in any court or be subject to any criminal or disciplinary proceedings for any report under S.174 submitted in good faith and in the intended performance of his duty. - This provision does not limit any other rights, privileges or immunity that an auditor has in defending himself in a defamation suit. The auditor has similar protections under s 128(2), 276(4) and 320(2) of the Capital Market and Services Act 2007, whereby he shall not be liable to be sued in any court in respect of statements made or report submitted to the relevant authorities in good faith and in the intended performance of his duty.
QUESTIONS 1. 2. Explain who is considered a director of a company. (5 marks)
Explain how a director may be removed from his position in a public company. (5 marks) Syarikat Maju Sdn Bhd (Maju), a company, wishes to remove Nila, a director, whose service contract runs till 2009. Can Maju do so? Assume that Table A of the Companies Act 1965 applies. (5 marks) Describe the effect of Section 127 of the Companies Act 1965. (5 marks)
3.
4. 5.
Robert is a director in Syarikat Muhibbah Sdn Bhd (the company). Muhibbahs directors have now discovered that Robert has previously been a director of two companies, Robe Spare Parts Sdn Bhd (Robe) and Berto Motor Sdn Bhd (Berto). Robe went into an insolvent liquidation three years ago, while Berto was wound up six months ago. Discuss whether there are any grounds on which the Registrar may disqualify Robert from acting as a director. (5 marks) Explain whether payment can be made to a director for loss of office, and the procedure to be followed in order to make the payment valid. (5 marks) Ahmad is a shareholder of Syarikat Pembangunan Mewah Sdn Bhd (Mewah). Six months ago, Mewahs board decided to purchase a piece of land (the land) at Bandar Baru, a prime area for business. However, at a board meeting last week, the directors decided not to go ahead with the purchase the land. Ahmad is dissatisfied. He wishes to know if he could insist that the board purchase the land. Advise Ahmad. (10 marks) Explain the Turquands rule and the exceptions to this principle. (10 marks)
6.
7.
8. 9.
Explain a directors duty to act in the companys interests. Explain whether duty is owed by a director to the individual members, creditors, employees and the group of companies. (5 marks) Kwan is the managing director of Syarikat Best Health Foods Berhad (the company). Explain whether Kwan is in breach of his duties as a director of the company in relation to the following three incidents:
10.
a.
During a recent board of directors meeting, it was decided that the contract to supply air-conditioners for the companys headquarters be awarded to Syarikat Cool Cond Sdn Bhd (Cool Cond). After the meeting, it was discovered that Cool Cond was managed by Kwans brother-in-law, Wong. Kwan also owned 40% of the shares in Cool Cond. (10 marks) Kwan has also taken his family for an expensive holiday in Australia, using the money belonging to the company. (5 marks) Kwan sold off a piece of land owned by the company at a price way below its market value. (10 marks)
b.
c.
11.
Explain the rule that a director must not place himself in a position where his duty and his interest conflict. (5 marks) Susan is the managing director of Syarikat Pembangunan Maju Sdn Bhd (Maju), which was involved in property development. Her friend, Francis, offered a few acres of land located in Segambut, which was a well-developed area. However, Majus board, after discussion, decided against the purchase as Maju was facing severe financial problems. Susan decided to take the corporate opportunity for herself without informing Maju. Discuss whether Susan has breached her duty. (10 marks) In March 2008, Lionel, a director of Syarikat My-Way Sdn Bhd (My-Way), negotiated on its behalf a supply contract with Syarikat Sing-Way Sdn Bhd (SingWay) for a three-year supply of vitamin B complex worth RM500,000/- per annum. It has now been discovered that in the process of negotiation, Lionel received RM20,000/- as a gift from Datuk Merlion, the managing director of SingWay. Explain whether My-Way can recover the gift of RM20,000/- which Lionel received from Datuk Merlion. (5 marks) Expplain when a company may make loans to its directors. (5 marks)
12.
13.
14. 15.
Explain the consequences where a company giving a guarantee for a loan taken by a director in breach of Section 133 Companies Act 1965. (5 marks)
COMPANY SECRETARY 1. 2. 3. 4. 5. Explain the qualifications required to be a Company Secretary. When will a person be disqualified to act as a Secretary? Explain how a Secretary may vacate his office as secretary. Describe any FIVE (5) duties of a Secretary. (5 marks) (5 marks) (5 marks) (5 marks)
Syarikrat Megah Auto Berhad (Megah), a public-listed company, runs a business in the manufacture and distribution of cars under the Auto trademark. Dato Chong (Chong) is Megahs in-house company secretary. He has been a licensed company secretary for the past ten (10) years. In April 2008, Chong entered into a contract with Syarikat Hun Dae Motors Berhad (Hun Dae) for the purchase of eight (8) units of Hundae cars. The cars were meant for the use of Megahs eight directors. The contract was authorized by Megahs board resolution. Megah now refuses to be bound by the contract. Discuss whether it can avoid the contract on the grounds that Chong was not authorized to contract on its behalf. (5 marks)
6.
Explain the protections given by law to a Secretary who wishes to report on a companys breach of several provisions of the law. (10 marks)
AUDITORS 1. 2. Explain who may be an auditor of a company. (5 marks)
Explain who appoints an auditor of a company and for how long does an auditor hold office. (5 marks) Describe the persons who may demand for a company to reveal the particulars of emoluments paid to an auditor for non-audit services. Explain the actions that the company must take upon receipt of this demand. (5 marks)
3.
4.
The board of Syarikat Megah Berhad (the company) wishes to replace their present auditor, Messrs Beat & Co with Messrs Earnest & Co. Discuss the following issues: a. b. The procedure for removal of the present auditors. (10 marks)
The appointment of the new auditor in place of the auditor removed. (5 marks)
5. 6.
Explain the statutory rights of an auditor.
(5 marks)
Describe an auditors duty to report to the members of a company, as prescribed under S.174(1) of the Companies Act 1965. (5 marks) Describe an auditors duty to report breach or nonobservance of the provisions of the law. (5 marks) Explain the duties of an auditor of a public company. Explain an Auditors duty to the Trustee for debenture holders. (5 marks) (5 marks)
7.
8. 9. 10.
Explain whether an auditor has any liability to individual shareholders of the company and outsiders. (5 marks) Explain what is meant by an auditors qualified privilege. (5 marks)
11.
Chapter 6
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SHARES, PREFERENCE SHARES AND DEBENTURES LEARNING OBJECTIVES After reading this chapter, you should be able to: Understand the meaning of shares and how capital is divided in a company. Explain the difference between ordinary shares and preference shares. Understand the meaning of debentures and other alternative financing for a company. Describe the statutory prohibitions in order to maintain a companys capital. Understanding the concept and importance of being a member and a substantial shareholder.
1. THE MEANING OF SHARES Shares represent the investment of a person in a company. People who invest money in a company expect returns in the form of dividends, which are calculated with reference to the shares held by the investors. A share is therefore the interest of a shareholder in the company, which is measured by a sum of money. This shall define his liability to the company and also his interest in the company Borlands Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279. By owning shares in a company, a shareholder gets a right of participation in the company, following the terms as laid down in the companys Articles of Association. Shares signify the mutual covenants entered into by all shareholders among themselves. Where a company is wound up, shares give the owner a right of participation in the companys remaining assets after payment of all its debts. Section 98 of the Companies Act 1965 states that the shares or other interests of any member in a company shall be movable property, and not in the form of immovable property. Once shares are issued to the shareholders, they represent the capital of the company.
2.
CAPITAL OF A COMPANY
The capital of a company may be divided into different types. Capital structure of a company
Authorized Capital: RM1 million
Issued: 500,000 shares of RM1/- each - this is the issued capital of the company i.e. RM500,000/-
Balance of 500,000 shares of RM1/- each - this is the companys unissued capital - whenever the company requires more funds, new shares will be issued.
- if the issued shares are fully-paid for, the paid-up capital of the company is RM500,000/-
- if the issued shares are partly-paid, then some shares are uncalled
E.g. only 70 cent is paid up per share - total RM350,000 is collected - this is the paid-up capital
balance of 30 cent is unpaid per share - RM150,000 is to be called in future - this is the uncalled or reserved capital
2.1.
Authorised capital
This refers to the maximum capital a company is allowed to raise, as seen through the maximum value of shares that it is permitted to issue. This is stated in the capital clause of a companys Memorandum of Association, which must be registered with the Companies Commission of Malaysia. A company thus may not issue and allot more shares than that stated in its Memorandum. To issue more shares, the company will have to pass a resolution to increase its capital beyond the authorized or registered capital. Within fourteen (14) days after the resolution, the company must lodge with the Registrar a notice of the increase in Form 28.
2.2.
Issued and Unissued capitals
Issued capital refers to the shares issued by the company, to be sold to persons who are keen to invest in the company. A company is not obliged to issue the full number of shares in its authorized capital, although the shares may be high in demand. It may instead retain some shares to be issued in future, when it needs more funds. The unissued portion of shares is called the unissued capital.
2.3.
Paidup and Uncalled capitals
Paidup capital refers to the amount paid up by the shareholders or investors, as per the requirements of the company. A company may at times issue shares and not receive the full payment for the full face value (called the par value) of the shares. The shares are therefore partlypaid. These partlypaid shares represent the uncalled or reserved capital of the company.
2.4.
Premium shares and market value of a companys shares
When shares are issued by a company, a nominal or face value, also known as the par value, is usually attached to each share. This value does not change unless the company wishes to do some alteration to its capital. The term issue price generally refers to the price at which the company fixes for each of those shares. The price may be according to the shares par value or at a premium. Where shares are issued above their par value, the shares are considered issued at a premium. E.g. a RM1/- share may be issued at RM3/- per share. So investors who wish to buy the shares need to pay RM3/- per share. The par value of the share however remains at RM1/-. The term market value refers to the value of the shares based on market demand. The shares are not bought directly from the company, but from existing shareholders who wish to sell off their shares. The price to pay therefore depends on whether the potential investors find the shares of a particular company valuable and attractive. If a share is valued at RM10/-, then an investor will have to pay RM10/- per share. The money is paid to the shareholder who is selling his shares, not to the company. The par value of the share however remains at RM1/-.
3. 3.1.
ORDINARY SHARES TYPES OF SHARES IN A COMPANY
Shares in company may be divided into different types: - Ordinary shares - Preference shares - Deferred shares - Special classes of shares 3.2. ORDINARY SHARES
Ordinary shares, or equity shares, are the most common shares in a company. Features of ordinary shares: - Such shares have no fixed rate of dividends. Dividends are payable only if a company has profits. - They have no priority in payment of dividends - They carry an entitlement to share the balance profits after dividends have been distributed among the different class of shareholders. - They rank behind the preference shares in the return of capital in a winding-up. - They carry an entitlement to participate in any surplus assets in a voluntary winding-up of a company. - They carry voting rights in a companys general meetings. Under Section 55 of the Companies Act, in a poll at a companys general meeting, all equity shares must confer the right to one vote and one vote only for each ringgit or part of a ringgit that has been paid up. Public companies limited by shares and subsidiaries of such public companies may not issue equity shares that have no voting rights.
4. 4.1.
PREFERENCE SHARES MEANING OF PREFERENCE SHARES
Preference shares are shares that give the shareholders some preferential rights over other shareholders in a company. E.g. a right to a fixed and cumulative dividends, and which is paid out of the companys profits in priority to other shareholders. Section 4 of the Companies Act 1965 defines a preference share as a share which does not entitle the holder to the right to vote at a general meeting or to any right to participate beyond a specified amount in any distribution, whether by way of dividend or redemption, in a winding up or otherwise. Thus, generally, preference shareholders are not entitled to get surplus profits or surplus assets, beyond their preferential dividends, unless the Articles expressly give them such entitlement. Under Section 66(1), where a company allots preference shares, its Memorandum and Articles of Association must set out the rights of the preference shareholders with respect to: - Repayment of capital; - Participation in surplus assets and profits; - Cumulative or non-cumulative dividends; - Voting; and - Priority of payment of capital and dividend in relation to other shares or other classes of preference shares. If there is non-compliance, the company and every officer in default shall be guilty of an offence. Penalty: RM2,000/-. In case of public listed companies, the total nominal value of issued preference shares must not at any time exceed the total nominal value of issued ordinary shares. Once stated in the Memorandum or Articles of Association, the rights of preference shareholders will be treated as exhaustive and no further rights would be implied Will v
United Langkat Plantations Co Ltd [1914] AC 11.
Under Section 148(2), the preference shares in a company must carry the right to attend any general meeting. Although generally, preference shares do not carry a right to vote, in a few situations below, there will be a right to vote on a poll: - When the preferential dividend remains unpaid from a date not more than twelve (12) months after the due date of the dividend; - Upon a resolution which varies the rights attached to the preference shares; or - Upon any resolution for the winding up of the company. The preference shareholders in the above situations will have the right to at least one vote for each ringgit or part of a ringgit that is paid up on each share.
4.2.
TYPES OF PREFERENCE SHARES
A company may issue different types of preference shares: Participating preference shares: such shares carry a right to receive a further dividend if any surplus profit remains after dividends have been paid earlier on to them and to the ordinary shareholders. Cumulative preference shares: such shares carry a right to a dividend at a fixed rate even where the dividend may not be paid in a year, owing to lack of profits. This deficit is made up in later years. Non-cumulative preference shares: such shares carry a right to a dividend at the fixed rate only in the year where the company makes a profit that enables such dividend to be paid. If there is lack of profits and the company does not pay the dividend, this deficit is not carried on to the next year. Convertible Preference shares: such shares carry a right to be converted to another class of shares, e.g. ordinary shares, at the option of the holder. Redeemable Preference shares: such shares carry a right for the holders to be repaid their capital at a specified date, on terms and conditions as provided by the Articles. A company may issue such shares only if authorized by its Articles. Redemption of the shares can only be duly effected if the shares are fully paid up and they are redeemed out of profits of the company or out of proceeds of a fresh issue of shares made for this redemption purpose. The redemption is not to be taken as reduction of the companys authorized share capital.
4.3.
DISTINCTION BETWEEN ORDINARY SHARES AND PREFERENCE SHARES
There are five (5) distinctions between ordinary shares and preference shares: In case of dividends: - Ordinary shares: do not carry a fixed rate of dividend. If a company does not declare profits for one year, the dividends are not accumulated to the following year. If the company declares dividend, the ordinary shareholders rank behind the preference shareholders in getting the dividend. - Preference shares: entitled to a fixed rate of dividend, based on a percentage of the nominal value. Usually their dividends are cumulative, unless otherwise expressly stated. The holders also enjoy a priority in getting the dividend that is declared by a company. In case of participation in surplus profits: - Ordinary shares: carry an entitlement to share the balance profits after dividends have been distributed among the different class of shareholders. - Preference shares: generally, the shareholders are not entitled to get surplus profits or surplus assets, beyond their preferential dividends, unless the Articles expressly give them such entitlement. In case of priority as to the return of capital in a winding-up: - Ordinary shares: rank behind the preference shares in the return of capital. - Preference shares: have a priority in the return of capital In case of participation in any surplus assets in a voluntary winding-up: - Ordinary shares: entitled to any surplus assets. - Preference shares: usually cannot participate in surplus assets, unless expressly permitted by the Articles. In case of voting rights: - Ordinary shares: carry voting rights in a companys general meetings. - Preference shares: carry no voting rights unless in a winding up or in a variation of the rights of those shares.
5.
OTHER TYPES OF SHARES
Apart from ordinary shares and preference shares, there may be other types of shares in a company. 5.1. DEFERRED SHARES
These are usually owned by the promoters or founders of the company, sometimes referred to as founders shares. They rank behind the ordinary shares in payment of dividend. Such shares are usually entitled to most profits remaining after the other shareholders (preference and ordinary shareholders) have received their dividends. 5.2. SPECIAL CLASSES OF SHARES
These shares may carry only a stated rate of dividends and limited voting rights and no right of participation in surplus assets in a winding up of a company. Alternatively, these shares may carry weighted votes, which may be exercised in certain circumstances stipulated in a companys Articles of Association. Usually, these class shares carry class rights, which are usually set out in a companys Memorandum or Articles of Association. Class rights refer to rights like voting rights, entitlement to dividends and the percentage, priority as to the payment of dividends, priority as to repayment of capital and right of participation in surplus assets upon winding-up. Class rights may only be altered in accordance with the procedure stipulated in the Memorandum or Articles of Association. Variation of class rights Where class rights are found in a companys Memorandum of Association, such rights are rather entrenched. Under Section 21(1B), such rights may not be altered or deleted, unless there is a provision for variation in the Memorandum itself. Where class rights are found in a companys Articles of Association, any variation must be in accordance with the procedure laid down in the Variation of Rights clause in the Articles. Article 4 provides procedure for variation of class rights, i.e: - Consent in writing of the holders of three-fourths () of the issued shares of that class, or - A special resolution is passed at a separate class meeting for the shareholders of that class.
If the above procedure is complied with and the class rights are to be varied, Section 65(1) allows the holders of not less than 10% of the shares of that class to apply to the Court to have the variation cancelled. The application must be made within one (1) month from the date of the consent or resolution. Once application is made to the court, the Variation will not take effect until the Court confirms the variations. Court will disallow variation if it will unfairly prejudice the shareholders of that class. This is where the majority of the shareholders of that class did not exercise their votes for the benefit of the class as a whole, but for their own individual interests. Under Section 65(5) and (6), the issue of more preference shares ranking equally with the existing preference shares shall be deemed to be a variation of rights of the existing preference shareholders. Nevertheless, if the Articles has authorized the further issue of such preference shares, then this will not be considered a variation of rights.
6.
DEBENTURES
A companys capital may consist of share capital and loan capital. Loan capital or loan finance is where the company raises its funds by borrowing from creditors. The alternative methods of raising financing for the company are to issue: i. Redeemable preference shares, with restricted rights as stated in the Articles. ii. Warrants or call options. These give rights to the holders to exercise the redemption by subscribing for new shares in the company at a future date, at a fixed price. iii. Debt securities in the form of debentures, which may be secured by a fixed or floating charge on the companys undertakings. iv. Bonds, which are without any security. They are also known as simple debenture.
The differences between share capital and loan capital are: - Shareholders are members of the company, while lenders are creditors of the company. - For shares, dividends can only be paid from profits. In case of loans, the interests can be paid from the companys capital.
- Shares may not be issued at a discount unless the requirements of s 59 are complied with. In case of loans, a company may issue loans at a discount and may redeem the loans in accordance with terms of the loan. - Share capital is subject to strict rules relating to its maintenance. For loan capital, the rules on maintenance of capital do not apply. Generally, all limited companies with the word Berhad as part of their names will have the powers listed in the Third Schedule of the Companies Act s 19(1)(c). The powers include the powers to borrow money, to issue debentures and to give security for loans. A company should not borrow money for a purpose that is outside its objects clause, as this will be an ultra-vires borrowing. Nevertheless, under s 20, such loan transactions would still be binding on the company, unless the lender knows that the company directors, who negotiate with the lender for the loan, are borrowing for the purpose that is outside its objects clause. The lender will be considered to have knowledge of the directors lack of authority.
6.1.
THE MEANING OF DEBENTURES
Under Section 4(1), a debentures includes debenture stock, bonds, notes and any other securities of a corporation, whether constituting a charge on companys assets or not. Under s 4(5), a debenture also includes any document that is issued by a company acknowledging, evidencing or constituting an acknowledgement of the companys indebtedness in respect of any money that is deposited with or lent to the company. A debenture is thus a document which either creates a debt or acknowledges the debt, and any document which fulfils either of these conditions is a debenture Levy v Abercorris
Slate & Slab Co [1887] 37 ChD 260.

It is not necessary for a debenture to be secured by a charge, although this is usually the case. Under s 38, in case of a public company that issues invitations to the public to lend money or to deposit money with it, it must issue a document that acknowledges the companys indebtedness in respect of those loan or deposit, in the form of: - an unsecured note or an unsecured deposit note - a mortgage debenture or certificate of mortgage debenture stock; or - a debenture or certificate of debenture stock
Before a public company may offer or invite for subscription in its debentures, it must also obtain the approval of the Securities Commission. No such approval is required if the offer or invitation is excluded from the definition of debenture under Section 2(1) of the Securities Commission Act 1993. A prospectus is also not required if the offer or invitation falls within the definition of excluded offers or excluded invitations under Schedule 2 of the Securities Commission
Act 1993.
6.2.
TYPES OF DEBENTURES
There are a few types of debentures that may be issued by a company: 1. Mortgage debentures these are secured on a companys properties and undertaking. Fixed and floating charges are created over those assets. 2. Debenture stock it is usually issued by a public company to a large group of lenders. A single debenture stock is issued, to be divided among the holders in accordance with their entitlement. 3. Bonds These are bare debentures that are issued without security. Thus, the bond holders are unsecured creditors. 4. Convertible debentures this is also known as notes. It gives the holders an option to convert the debentures into equity shares either at a future date or if they exercise the option within the period stated in the condition of issue. 5. Loan stock It is normally issued by a public listed company and constituted by a trust deed, with a trust company being the trustee to enforce rights of the debenture holders. Loan stocks may be coupled with certain rights, e.g.: A right to convert into equity shares at a future date. These are convertible loan stocks. A right to subscribe for equity shares at a future date. This where the loan stock comes with attached warrants. Common loan stocks issued by public listed companies: Convertible Unsecured Loan Stock (CULS) and Irredeemable Convertible Unsecured Loan Stock (ICULS).
7. MAINTENANCE OF CAPITAL The capital of a company is to be maintained for the benefit of its creditors. The Companies Act 1965 contains two provisions that prohibit: - reduction of a companys share capital, as provided by Section 64 - purchase and financing of a companys own shares, as provided by Section 67. Apart from the above, a company may wish to make alterations to its share capital. 7.1. ALTERATION OF SHARE CAPITAL
Under Section 62(1), if authorized by its Articles, a company may in general meeting alter its capital in any of the following ways: (a) increase its share capital by the creation of new shares of such amount as it thinks expedient (b) consolidate and divide all or any of its share capital into shares of larger amount than its existing shares; (c) convert all or any of its paid-up shares into stock and re-convert that stock into paid-up shares of any denomination; (d) sub-divide its shares or any of them into shares of smaller amount than is fixed by the Memorandum; or (e) cancel shares which have not been taken by any person as at the date of the resolution and diminish the amount of its share capital by the amount of the shares so cancelled. This shall not be deemed to be a reduction of share capital. A company may do the above by passing an ordinary resolution. This resolution is passed by a simple majority of members present and voting on a show of hands or by a poll, at a meeting of which notice of not less than fourteen (14) days must have been given. Where a company has passed the resolution to increase its share capital beyond the registered capital, it shall within fourteen (14) days after the resolution lodge with the Registrar a notice of the increase in Form 28. Fees are payable for the increase of authorized capital, i.e. the difference between the fees for the increased authorized capital and the existing authorized capital.
7.2.
REDUCTION OF SHARE CAPITAL
Under Section 64, if authorized by its articles and subject to confirmation by the Court, a company may by special resolution reduce its share capital in the following ways: (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid-up; (b) cancel any paid-up capital which is lost or unrepresented by available assets; or (c) pay off any paid-up share capital which is in excess of the needs of the company. The Memorandum shall be altered to reduce the amount of the companys share capital and its shares. Where the proposed reduction of share capital involves either the diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital, every creditor of the company is entitled to object to the reduction. If the Court is satisfied that the consent of the creditors to the reduction has been obtained, or their claims have been discharged or secured, it shall make an order confirming the reduction on such terms and conditions as it thinks fit. When an office copy of the Court Order has been lodged with the Registrar, the resolution for reducing share capital shall take effect. Section 64 shall not apply to an unlimited company, but such company may reduce its share capital in any way, including any amount in its share capital account.
7.3.
PURCHASE AND FINANCING OF A COMPANYS OWN SHARES
Under Section 67(1), a company is prohibited from doing the following: - Purchase, deal in or lend money on its own shares. - Lending money to anyone for the purpose of or in connection with a purchase of any shares in the company or its holding company. - Provide a guarantee or security to assist anyone in securing loans for the purpose of or in connection with a purchase of any shares in the company or its holding company. Thus, a company is prohibited from purchasing its own shares since it cannot be a member of itself Trevor v Whitworth [1887] 12 App Cas 409. Similarly, it cannot be a member of its holding company, as prohibited by Section 17(1). As such, a holding company cannot give direct or indirect financial assistance to its subsidiary to enable the subsidiary to purchase the holding companys shares. Compliance and Statutory Forms 176
A company also cannot provide financial assistance to anyone to purchase its own shares. Financial assistance can be in the form of: - The company providing a loan to the shareholder, or - The company gives a guarantee or a security to enable a person to acquire the shares of the company A companys purchase of its own shares or providing direct or indirect financial assistance to anyone for this purpose is prohibited as this is an indirect reduction of a companys capital. Any reduction of capital must be authorized by the court, as provided in s 64. Under s 67(3), where there is a contravention of this section, the company is not guilty of an offence, but each officer in default shall be guilty of an offence against the Act. Penalty: Imprisonment for five (5) years or RM100,000/- fine or both. The convicted person may also be ordered to pay compensation to the company or any person who suffers loss as a result of the contravention. The company or any person may recover the amount of any loan made in contravention of this section or any amount for which the company becomes liable. Any loan, guarantee or security transaction that is in contravention of s 67(1) shall still be enforceable by a third party, despite the contravention - Perumahan Wira Sdn Bhd v Hong Leong Finance Berhad [1999] 3 AMR 3142 and Lori (M) Bhd v Arab-Malaysian Finance
Bhd [1999] 1 MLJ 81.

Nevertheless, there are exceptions to the above prohibitions: - Exceptions under s 67(2) - Share buy-back conducted by a public listed company in accordance with s 67A. - Redemption of redeemable preference shares under s.61. - Redemption of shares for the purpose of cancellation under s 64. - Shares purchased in accordance with s181(1)(2)(c).
7.3.1. Exceptions under Section 67(2) Under s 67(2), the following are not prohibited: (a) the lending of money by a company whose ordinary business includes lending money. Here, the lending is made in the ordinary course of its business.
(b) where the company provides money for the purchase of fully-paid shares in itself or its holding company in accordance with any scheme for the time being in force in the company. Here, the purchase is made by the trustee of that scheme, to be held by or for the benefit of the employees and any salaried directors of the company or a subsidiary of the company. (c) the giving of financial assistance by a company to employees, other than directors, of the company or a subsidiary of the company, in order to enable them to purchase fullypaid shares in the company or holding company. Here, the shares are to be held by the employees themselves.
7.3.2. Share buy-back by public listed companies under Section 67A Under Section 67A(1), a public company with a share capital may, if authorized by its Articles, purchase its own shares. The pre-requisites are as follows: - The company is solvent at the date of the purchase and will not become insolvent by the buy-back. - The purchase is made through Bursa Malaysia and in accordance with the rules of the stock exchange. - The purchase is in good faith and in the interests of the company. Share buy-backs are usually done in order to arrest the falling or fluctuating prices of a companys shares. The company may use the funds in its share premium account to conduct the buy-back. The purchase must be authorized by an ordinary resolution of the general meeting Para
12.03 of the Listing Requirements.

The company must then make a declaration as per Regulation 18A of the Company Regulations 1966 and lodge a copy with the Companies Commission and Bursa Malaysia. The company cannot purchase its own shares or hold them as treasury shares if this will result in the aggregate of the shares purchased to exceed 10% of the companys paid-up capital. Where a company has purchase its own shares, the directors may resolve to: - cancel the shares bought back - retain the shares bought back as treasury shares - retain part of the shares as treasury shares and cancel the remainder. The directors may distribute the treasury shares as share dividends to the shareholders or to resell the treasure shares on the stock exchange in accordance with the rules of the stock exchange. Compliance and Statutory Forms 178
8. 8.1
BEING A MEMBER IN A COMPANY DIFFERENCE BETWEEN A MEMBER AND A SHAREHOLDER IN

A COMPANY
The terms member and shareholder are often used to refer to those who have invested money in return for shares in a company. There are however, differences in these two terms. Although a person may be a shareholder, it does not mean he is also a member of the company. A person usually becomes a shareholder where he agrees to purchase shares issued by a company. It may also be by way of a share transfer, i.e. where shares, previously held by a shareholder, is transferred to him. A shareholder does not become a member until his name is inserted in the companys Register of Members s16(6). Similarly, in case of the subscribers to the companys Memorandum, as soon as the company is incorporated, they shall become members of the Company s16(6).. If the shareholders name is not inserted in the companys Register of Members or is omitted from the said Register, he is not a member. If he is not a member, he cannot assert or exercise any members rights. He will also not be liable for any members duties and responsibilities. In case of a company limited by guarantee, such company is without a share capital. Thus, the members there are not shareholders.
8.2.
THE SIGNIIFICANCE OF BETING A MEMBER OF A COMPANY
Members are entitled to receive dividends as declared by the general meeting, in accordance with each members entitlements Article 105 Table A. Members are also entitled to participate and share in the surplus assets of a company in a voluntary winding-up. This is provided all debts have been paid up first. Members or their proxies are entitled to attend and vote at a companys general meetings Article 54, Table A. This gives them the power to vote to remove inefficient and ineffective directors.
Members may also enforce the provisions of the Articles of Association against the Company or against another member. The Articles create a statutory contract by virtue of s 33(1). Nevertheless, enforcement must be in respect of their rights as members only. A member who claims to be oppressed or unfairly prejudiced against may petition the Court for a remedy under s 181 and 181A to E of the Act.
8.3.
SUBSTANTIAL SHAREHOLDING IN A COMPANY
Where a shareholder holds a large percentage of shares in a company, he will be considered a substantial shareholder in the company. This term is important in case of public companies, as certain disclosures of shareholding will have to be made. Under Section 69D, the circumstances in which a person will be deemed a substantial shareholder are when the person acquires: - An interest in not less than five percent (5%) of the total nominal amount of all voting shares in a company or - Where a company has different classes of shares: he acquires an interest in not less than five percent (5%) of the voting shares of a class. Section 69B limits the operation of substantial shareholding to that of listed and non-listed public companies or a company or body declared by the Minister to be a Company to which Division 3A CA 1965 applies. S.69E requires a substantial shareholder to notify the company of his interest. This disclosure of shareholding applies to all public companies, whether listed or unlisted. Any change or cessation of interest must also be notified, by lodging the relevant forms. The requirement of disclosure of interest applies equally to substantial shares held by nominees in favour of non-residents as beneficiaries. Where a nominee holds substantial voting shares that are beneficially-owned by a non-resident, the nominee must, within fourteen (14) days, give notice to the non-resident, to notify the non-resident of the requirement to disclose the substantial interest. The company in turn must keep a Register of Substantial Shareholders. This disclosure requirement does not apply to a bare trustee, e.g. an authorized nominee of a beneficiary.
QUESTIONS 1. 2. 3. 4. Explain the meaning of shares. State five (5) differences between an ordinary share and preference share. (2 marks) (5 marks)
Define a preference share under Section 4(1) of the Companies Act 1965. (5 marks) What rights must be set out in the Memorandum and Articles of Association of a company that issues preference shares? (5 marks) Under what circumstances may a non-voting preference shareholder in a listed company be entitled to voting rights? (5 marks) Explain what redeemable preference shares are. (2 marks)
5.
6. 7.
Explain the various ways in which capital of a company can be altered and the required resolutions. (5 marks) Explain the circumstances in which a companys share capital can be reduced and the procedure that must be complied with. (10 marks) Explain alternative methods of raising financing for the Company. Explain what are meant by debentures. Explain what are meant by loan stocks and convertible debentures. (5 marks) (5 marks) (5 marks)
8.
9. 10. 11.
Chapter 7 ______________________________________________________________________________ SHARE CERTIFICATES, TRANSFER AND TRANSMISSION LEARNING OBJECTIVES After reading this chapter, you should be able to: Understand how share certificates are issued and their importance. Explain how shares are issued and allotted in private and public companies. Understand how shares change hands through transfer and transmission process in private and public companies. Explain the rights of parties in a forged transfer.
1. SHARE CERTIFICATES A shareholder in a private company and a non-listed public company will be issued a share Certificate. On the contrary, in case of a listed public company, a shareholder or depositor (i.e. a person who deposits money with the company) is not issued any share certificate for the shares in his securities account. This is because shares of companies listed on Bursa Malaysia are traded on a scripless basis (no share certificates), using the Central Depository System (CDS). Under Section 100 of the Companies Act 1965, a share certificate is a prima facie (i.e. on the surface) evidence of a shareholders title (i.e. ownership) to the shares specified in the certificate. It is often described that two (2) kinds of estoppel arise in respect of the share certificate:. - That the person named in the certificate is a member of the company who is entitled to the number of shares mentioned in the certificate; and - That the paid-up amount of the shares is as shown on the certificate An estoppel is a rule that prevents a person from denying the truth of a statement or representation that he made to another person. This is especially where the other person has relied on the representation, changed his position and suffered a detriment as a result of relying on what the first person represented.
By the act of issuing the certificate, the company is considered to have made the two representations and will be estopped (prevented) from later on denying the truth of those statements. If, however, the certificate turns out to be a forgery, then the estoppel rule shall not apply Ruben v Great Fingall Consolidated Co Ltd [1906] AC 439.
1.1.
FORM OF SHARE CERTIFICATES
S 100(2) provides that every share certificate shall be under the companys common seal and shall state the following information as at the date of the issue: The name of the company and the authority under which the company is constituted; The address of the registered office of the company in Malaysia or the branch office; and The nominal value, the class of shares and the extent to which the shares are paid up. The certificate usually contains other information like the authorized capital of the company, the division into units of shares, the date and the certificates serial number. The particulars of the shareholder shall be inserted into the certificate, i.e. the full name, title, identification number and address. In case of joint owners of shares, the certificate would contain the full names of all joint holders, and only the address of the first-named holder. The certificate shall be signed by either two directors or by a director and the secretary. The Articles nevertheless may provide for mechanical signatures. 1.2. SHARE CERTIFICATES OF UNLISTED PUBLIC COMPANY
In case of unlisted public company, there are many shareholders and thus, many certificates to be issued. The company would usually employ the service of an issuing house and a share registrar. The certificates would be prepared by way of a mechanical method, in which a share seal and mechanical signatures will be used. 1.3. TIMELIMIT FOR ISSUING A CERTIFICATE
Under s 107(1), a company has a duty to issue and have the relevant share certificates ready for delivery within a certain timelimit. In case of an allotment of shares, the company shall do so within two (2) months) of the allotment. In case of a transfer of shares, the company shall do so within one (1) month after the date on which the transfer is lodged with the company. Compliance and Statutory Forms 183
If the section is not complied with, the company and every officer in default shall be guilty of an offence. Penalty: RM1,000/ with default penalty. Under s 105(1), in case of a transfer, if a company, especially a private company, refuses to register the transfer, it shall, within one (1) month after the date on which the transfer is lodged with the company, send to the transferor and transferee a notice of the refusal. It is thus important that the company takes active steps to either issue a share certificate or issue a notice of refusal within one (1) month after a transfer is lodged with it. This is because under S. 107(3), when the one-month time-limit has expired, the person who is entitled to have the certificate delivered to him may serve a notice to require the company to issue the share certificate within ten (10) days after the service of the notice. If the company again fails to do that, the person may apply to the court, which may make an order directing the company and any officer to issue the certificate within a specified time. The order may also provide that the company or any officer is to bear all costs of and incidental to the application. 1.4. REPLACEMENT OF SHARE CERTIFICATES
Where a share certificate has been lost, defaced or worn out, the owner may apply to the company for a duplicate certificate to be issued. Where the certificate is still in existence but merely defaced or worn out, the owner should return the certificate to the company to be cancelled before a new duplicate certificate is issued in its place. The company may charge a nominal fee according to the Articles. Where the certificate has been lost, extra precautions must be taken by the company in order to minimize instances of fraud. The owner would be required to furnish the following to the company: i. a Statutory Declaration that the certificate has been lost; ii. a written undertaking that the certificate would be returned to the company if it is found again; and iii. a letter of indemnity. This will compel the owner to indemnify the company in the event the company suffers any losses or there are claims resulting from the issue of the duplicate certificate.
On the companys part, the secretary would place an advertisement in a newspaper to announce that the certificate of such serial number has been lost. Details of the lost certificate shall be entered in a controlled list. This is to prevent lost certificates from being used for a subsequent transfer.
2. 2.1.
ISSUE AND ALLOTMENT OF SHARES THE MEANING OF ISSUE, ALLOTMENT AND TRANSFER OF SHARES
Issue refers to the process where a person acquires shares directly from a company. The company first invites the interested investor to subscribe for (i.e. buy) the shares at a predetermined price. After his application is accepted, the companys board of directors shall pass a resolution to allot the shares. The purchase price is paid by the investor to the company. Allotment refers to the act of the company in appropriating, i.e. setting aside, a certain number of shares to a specified investor. This act of allotment creates a binding contract under which the investor is now bound to take that particular number of shares. Upon an allotment, a return of allotment of shares in Form 24 must be lodged with the Companies Commission of Malaysia. This form shall show the particulars of the allottees and the number of shares allotted. Transfer refers to the change of the legal ownership of shares. This is usually done voluntarily by the owner, either through a sale or by a gift or as a security (i.e. collateral) for a loan. In case of a sale, the purchase price is paid to the owner, not the company. The price is determined in accordance with the contract between the owner and the purchaser. 2.2. AUTHORITY TO ISSUE SHARES
Before shares may be issued by the directors of a company on its behalf, the directors must first obtain the approval of the shareholders in a general meeting. Under Section 132D, the directors may not exercise any power to issue shares without the prior approval of the company in general meeting. The approval may be specific or general and may be unconditional or subject to conditions.
Any issue of shares in contravention of s 132D shall be void and the consideration given for the shares shall be recoverable by the person to whom the shares were issued (i.e. the allottee). Any director who knowingly contravenes or authorize the contravention of this section shall be liable to compensate company and the allottee, for any loss, damages or costs sustained. Under s 63, where an issue or allotment of shares is invalid due to a breach of the Act, other laws or the Memorandum and Articles of the company, the company or a shareholder or a creditor may apply to the court for an order validating the issue, and the shares shall then be deemed to have been validly issued. Court may exercise its discretion to validate the issue, if it is satisfied that in all the circumstances, it is just and equitable to do so. The act of issuing or allotting must be an act attributed to the company, and is merely irregular in form. If for instance, the issue is done by people who are not directors of the company, or that there was a forgery, then the issue of shares cannot be validated under s 63 Ruben v Great Fingall Consolidated Co Ltd [1906] AC 439.
2.3.
ALLOTMENT FOR CONSIDERATION OTHER THAN CASH
Shares must be allotted for a consideration, i.e. for some real value in money or moneys worth. The company must receive payment that is equivalent to the nominal or face value (called the par value) of the shares. If a company does not receive such payment, the shares are deemed to be partly paid, and in a windingup, the shareholder remains liable to pay up the amount unpaid on his shares. Shares may also be allotted for consideration other than cash, e.g. by way of property or services given to the company. When shares are allotted in this manner, Form 25, i.e. a statement containing particulars of shares allotted otherwise than for cash, must be lodged.
2.4.
ALLOTMENT OF SHARES AT A DISCOUNT
A company may not allot shares at a price below its nominal value and release the shareholder from liability to pay the difference. Where shares are not paid in full, in a windingup, the shareholder remains liable to pay up the amount unpaid on his shares.
Under s 59, shares may be issued at a discount if the following conditions are complied with: The shares must be of a class already issued; The issue is authorized by a resolution passed in general meeting of the company and the resolution specifies the maximum rate of discount at which the shares are to be issued; The issue is confirmed by order of the court; The shares are issued within one (1) month after the date of confirmation by the court. At the date of the issue, not less than one (1) year has elapsed since the date on which the company was entitled to commence business The company must first offer the shares to every existing shareholder of that class proportionately to the number of those shares held by him. The notice of offer must specify the number of shares to which he is entitled and the time-limit of not less than twenty-one (21) days for acceptance. If this section is not complied with, the company and every officer in default shall be guilty of an offence. Penalty: RM1,000/- with default penalty.
2.5.
ALLOTMENT OF SHARES AT A PREMIUM
A company should try to issue its shares at a premium, i.e. a price that is in excess of its nominal value, if there is a great demand for its shares. Under s 60(2), where the company receives a premium for its shares, whether in cash or in the form of other valuable consideration, a sum equal to the value of the premium must be transferred to a share premium account or capital reserve. This premium will be regarded as a paid-up share capital for purpose of reduction of capital. . Under s 60(3), the share premium account may be applied for the following purposes: in paying up unissued shares to be issued to members as fully-paid bonus shares in paying up in whole or in part the balance unpaid on shares previously issued to members; in the payment of dividends if such dividends are satisfied by the issue of shares to members; in writing off the preliminary expenses of the company or the expenses or discounts in connection with any issue of shares of the company. in providing for the premium payable on redemption of redeemable preference shares.
In case of public-listed companies, the share premium account may be utilized for a share buy-back exercise, i.e. purchase of its own shares from Bursa Malaysia under S.67A(3). The company must not become insolvent as a result of the buy-back. The share premium account may not be used for other purposes than that stated above, as this would be deemed unauthorized reduction of capital.
3.
ISSUE OF SHARES IN A PUBLIC-LISTED COMPANY
A listed company that seeks to raise capital is usually called an issuer. It may issue securities, which may consist of either shares or debentures (i.e. a document that acknowledges a companys indebtedness). There are many ways in which the securities of a public-listed company may be issued. 3.1 PUBLIC ISSUE
Generally, listed companies will conduct a public issue of their securities, i.e. they invite applications from the public to subscribe (i.e. purchase) for their securities. The securities will be allotted directly to the public. The company is required to publish a prospectus (i.e. a document giving certain information about the company). The issue of shares must also be underwritten by merchant banks and stock-broking companies. Underwriting is a process where merchant banks and stock-broking companies will take up the shares of an issuer, and the issuer pays them a commission of not more than ten percent (10%) of the issue price. This process enables the issuer to receive full subscription for its securities, while the underwriters will absorb any loss that arises from unsubscribed securities. 3.2. OFFER FOR SALE
An offer for sale is usually made by the existing holders or allottees of securities that are already issued. The offer will be made to the public, who may then purchase the securities from these existing holders/allottees. Usually, a listed company will first issue securities to a group of merchant banks or stockbroking companies. These companies will then invite the public to purchase the securities from them. An offer for sale is different from a public issue.
- Offer for Sale: the existing holders or allottees offer to sell their securities to the public.
The purchase price is received by these existing holders or allottees, not the issuer.
- Public Issue: the issuer will issue and allot the securities to the subscribers, usually
members of the public, who are known as subscribers. The purchase price is received by the issuer. 3.3. RENOUNCEABLE RIGHTS ISSUE
This refers to a subsequent issue of new shares in a listed company. The company shall offer these new shares to its existing members. Under the Listing Requirements, a listed company that issues new equity shares must first offer the shares to the existing members. The shares shall be offered in proportion of the members shareholdings. It is not compulsory for the members to subscribe for these new shares. They may transfer their rights (to these new shares) to third parties who may be non-members. 3.4 OTHER METHODS
Placement is a method where an issuer first approaches several potential buyers, usually large investing institutions, with a view to get their willingness to buy some portions of its new securities. If these institutions are willing to buy, the securities will be placed to them, i.e. allocated to them. These securities will not be offered to the public. Book-building is a special placement method in which an investment bank, acting on behalf of an issuer, seeks information from the selected potential buyers (usually large investing institutions), on the number of securities that they are willing to buy. The buyer shall also nominate the offer price. The investment bank will then notify the issuer and the appropriate offer price shall be fixed in that way. Tender is where the existing shareholders in a listed company invites interested buyers to submit tenders to purchase their securities. The securities shall be sold at a striking or highest price. 3.5 THE CENTRAL DEPOSITORY SYSTEM (CDS)
Transactions relating to shares and securities of listed companies are conducted using the Central Depository System (CDS). This is a computerized system that performs share transfers by way of book entries. The CDS is operated by Bursa Malaysia Depository Sdn Bhd (Bursa Depository), a subsidiary of Bursa Malaysia.
Under the CDS, all physical share certificates of companies listed on Bursa Malaysias Main Board and Second Board are prescribed, i.e. stored, into Bursa Depository. Thus, any transfer of shares may be done electronically without the need for issue of share certificates or signing of transfer forms. Before an investor can buy or sell shares of a listed company, he must open a CDS account with an Authorised Depository Agent (ADA), i.e. a stock-broking company that is a participating organisation of Bursa Malaysia. Only then can he give instructions to his broker or remisiers in buying or selling shares. Although an individual investor can open only one CDS account with a Depository Agent, he may open other CDS accounts with other Depository agents.
4. 4.1.
TRANSFER OF SHARES MEANING OF TRANSFER AND TRANSMISSION OF SHARES
Transfer refers to the process where shares change hand through sale or gift. It involves a voluntary act on the part of the owner in transferring his rights to his shares to another person. In case of shares in a private company or a non-listed public company, a proper document, i.e. Form 32A, must be executed and delivered to the company. A transfer may be distinguished from a transmission. In a transmission, shares change hand by operation of law. Usually this is due to unforeseen events, e.g. death or bankruptcy of the owner. The person next entitled to the shares shall give a notice in writing to the company to register the shares in his name. 4.2. RESTRICTION ON TRANSFER
In a private company, the right to transfer shares is to be restricted. This is as provided by s 15(1). There are two ways to restrict the right to transfer shares in a private company: 1. By giving the existing members a pre-emption right. 2. By the companys Articles of Association giving the directors the power to refuse to register share transfers. For e.g., Table A Article 22 provides that the directors may decline to register any transfer of shares which are not fully paid shares to a person of whom they do not approve. For listed companies, there is usually no restriction on share transfers.
4.2.1 Pre-emption right An article in a private companys Articles may provide that a member may not sell his shares without first offering his shares to the existing members. This is known as a pre-emption clause. A pre-emptive clause will provide for the steps to be taken and if the member does not comply, the transfer would be invalid Mohamad Yahaya v MS Ally Sdn Bhd [1985] 1
MLJ 243.
As such, the directors may refuse to register a transfer that does not comply with a preemption clause. 4.2.2. Directors discretion to refuse to register transfer of shares Where the Articles give the directors an absolute discretion to refuse to register a share transfer, the directors may refuse without having to give any reasons. If the directors refuse to register a transfer, they must pass a board resolution to this effect within a month after the transfer instrument (Form 32A) is lodged (i.e. submitted) with the company. A notice of refusal of transfer must be forwarded to both the member and proposed transferee. Silence is not considered a refusal to register the transfer. If the directors fail to indicate their refusal to transfer within a month from the date of lodgment of the transfer instrument, the proposed transferee may take an action to compel the directors to issue him the share certificate and to register his name in the register of members s 107(2) & (3) While the transfer is not yet registered, the member remains as the registered shareholder, holding shares in trust for the purchaser. The seller (transferor) is still liable for unpaid calls, and if dividends are paid, he must account to the buyer for any dividends paid, while the buyer (transferee) must indemnify the seller for any obligations incurred after the contract date. The decision of the directors will not affect the contract between member and the proposed transferee, since such contract often provides for the sale being subject to the approval of the directors. Generally, the court would not interfere with the directors decision. Nevertheless, where reasons are provided by the directors for their refusal, the court may evaluate whether the reasons are sufficient Lim Ow Goik v Sungei Merah Bus Co Ltd [1969] 1 MLJ 101. In deciding whether to register a share transfer, the directors must act in good faith and consider the companys best interests. They must not act for any collateral purpose Kesar
Singh v Sepang Omnibus Co Ltd [1964] MLJ 122.

The directors must not have improper motives and must not act arbitrarily or capriciously Allied Properties Sdn Bhd v Semua Holdings Sdn Bhd [1988] 3 MLJ 185. Compliance and Statutory Forms 191
On the transferees part, if he delays in applying for the registration of the share transfer, he may be barred from doing so later on by the doctrine of laches (i.e. a delay that affects legal rights of a person). In case of a share transfer to a foreigner, the company must additionally obtain the approval of the Foreign Investment Committee (FIC).
4.3.
PROCEDURE FOR TRANSFERS
4.3.1. Procedure in private companies In a transfer of shares in a private company, the transferor will execute an instrument (i.e. document) of transfer called Form 32A. He shall then deliver it together with the share certificates to the transferee. The transferee would lodge those documents with the company secretary, who shall in turn forward these to the board of directors. Within a month after the transfer documents are submitted to the company, the board of directors must pass a resolution to either approve or reject the transfer. If the transfer is refused, the secretary shall send a notice of refusal to both the transferor and transferee. If the transfer is approved, the secretary would issue new share certificates and get the directors to sign the certificates. The companys seal would be affixed onto the certificates and the transferors name would be replaced with the transferees name in the companys register of members. Sometimes, registration of transfers may be suspended, e.g. if the register of members is closed for certain events like issue of bonus shares, rights issues or dividend payment (these are known as entitlements).
4.3.2. Procedure in non-listed public companies The procedure for share transfers in a non-listed public company is similar to that in a private company. The transferor and transferee usually deal with the companys share registrar. A registration fee is also charged.
4.3.3. Transfer of Shares in public-listed companies Transactions relating to shares and securities of listed companies are conducted using the Central Depository System (CDS). This is a computerized system that performs share transfers by way of book entries done electronically. The sellers name would be replaced with the purchasers name. Unlike in private companies, there is no movement of scrips, and transfers need not be registered. Nevertheless, the register of members must be updated by the listed company liaising with Bursa Malaysia Depository Sdn Bhd (Bursa Depository). Two types of transfers may be performed in a listed company. i. In case of an ordinary transfer, the investor shall approach his Authorised Depository Agent (ADA) to fill up a request to for ordinary transfer of securities and pay the relevant fees. The ADA shall key in the transfer information into the CDS. The shares will then be credited into the recipients account, and a transfer advice will be sent by Bursa Depository to the transferor and transferee. ii. In a trading of securities, investors would be selling or purchasing securities from the stock exchange. Brokers acting for sellers and purchasers would key in sell and buy prices into a trading system maintained by Bursa Securities. If a sell order matches a buy order in terms of price, that is the point of transaction (sale). The sellers CDS account will be debited and the purchasers CDS account will be credited with the shares purchased on the 3rd market day of the sale. Payment must be settled by the 3rd market day also. This transfer formula is known as T+3.
4.4.
FORGED TRANSFERS
Transfers may sometimes be forged, e.g. through a forged signature on Form 32A, the instrument of transfer. The form is void and the shares are not considered transferred. A company should take precautions to protect itself against forged transfers by for e.g. writing to the registered owner of the shares to seek confirmation that he is transferring his shares. However, if the owner does not response, it does not amount to a confirmation, and he may later on seek to assert his title to his shares - Barton v London & North Western
Railway Co. [1889] QBD 77.
4.4.1. Rights of the registered owner In a forged transfer, the registered owner is entitled to get back his shares because the transfer is a nullity. Under the nemo dat principle, a person who does not have a good title may not similarly pass on a good title. Thus, a forged transfer does not result in a good title or rights being passed on to the transferee. Where another person is registered in his place, the owner may still compel the company to replace him with a similar number of shares with equal rights, together with any lost dividends owing to the forged transfer.
4.4.2. Rights of a bona fide purchaser for value without notice of any fraud or forgery A complex situation may arise where shares of the original owner are fraudulently transferred to a transferee who has no knowledge of the forgery. The transferee may in turn transfer those shares to a third party who might purchase the shares bona fide (in good faith) and for valuable consideration. This is where the purchaser may rely on the doctrine of share certificate estoppel (refer to page 1), which applies whenever a company issues a share certificate. By the operation of the share certificate estoppel doctrine, the company is estopped from denying the truth of its representation as against a person who has changed his position in relying on the statement Re Bahia & San Francisco Railway Co [1868] LR 3 QB 584. Thus, in this forged transfer situation, the company will have to pay damages (i.e. compensation) to the third party purchaser who suffers loss in reliance on the companys representations in the certificate Daily Telegraph v Cohen.
4.4.3. Rights of the company The company may in turn recover damages from the transferee who has lodged the forged transfer. Usually, in a transfer, the transferee is required to provide an indemnity against any loss or liability which the company may suffer as a result of registering the transfer Sheffield
Corporation V Barclay [1905] AC 392, Yeung Kai Yung v Hong Kong and Shanghai Banking Corporation [1981] AC 787.
The company may take out an insurance policy to cover losses that arise from forged transfers.
4.4.4. When the doctrine of share certificate estoppel does not apply The above doctrine of share certificate estoppel does not apply in the following situations: i. Where the transferor has committed a fraud by presenting a forged transfer. In this situation, he cannot take advantage of the estoppel even though a certificate is issued in his name. ii. Where the share certificate is forged. There is no estoppel in this case because there is no representation made by the company Ruben v Great Fingall Consolidated [1906]
AC 439.
iii. Where the issue of the share certificate is unauthorized as the relevant board resolution is not valid. iv. Where the share certificate is not produced for a purchaser at the time of purchase of shares. Here, it would appear that he does not rely on the share certificate Re Bahia
& San Francisco Railway Co [1868] LR 3 QB 584.

v. Where only a transfer form is relied upon. The company will not be responsible for representations made in a transfer form. Simm v Anglo-American Telegraph Co
[1879] 5 QBD 188.
Forged Transfer and Share Certificate Estoppel
Certificate is stolen by Charles Owen Owen entitled to restoration Forged transfer is a nullity
Charles Charles sells shares to Thomas Share Certificate is genuine Signature on Form 32A is forged
Transferee lodges Form 32A Company requires him give indemnity Company issues new Share Certificate Company Thomas Thomas next sells shares to Peter Share Certificate is genuine Signature on Form 32A is genuine
Share Certificate Estoppel Company must indemnify Peter
Peter
* Co will ultimately claim on the indemnity from Thomas, the 1st Transferee
5.
TRANSMISSION OF SHARES
Transmission refers to a change of ownership of shares that takes place automatically, by operation of the law, as opposed to by voluntary acts of the parties. E.g. in a death, insanity, bankruptcy or liquidation of a corporate shareholder. 5.1. DEATH OF AN INDIVIDUAL SHAREHOLDER
In case of a deceased individual shareholder, his personal representative (PR) shall be recognized as a person who is entitled to his share. His personal representative must first obtain a grant of probate or letters of administration Gan Tuck Meng v Ngan Yin Groundnut Factory Sdn Bhd [1990] 1 MLJ 227. In case of a shareholders death, different documents are needed for appointment of the personal representative, depending on whether there is a will or no will: i. There is a will (dies testate) with an executor who is able and willing to act here, the executor must produce a grant of probate. ii. There is no will (dies intestate) here, an administrator must be appointed and must produce a letter of administration. iii. There is a will but there is no executor who is able and willing to act here, an administrator must be appointed and must produce a letter of administration with a will annexed.
Death of an individual shareholder Dies with a will (dies testate) The will has two Executors /Executrixes who are able and willing to act The will has no Executors /Executrixes who are able and willing to act Dies without a will (dies intestate)
They will apply for Two next-of-kin must apply to get Two next-of-kin must apply to get Grant of probate Letter of administration Letter of Administration with will annexed They will be the Administrators/Administratrixes
After the personal representative obtains a grant of probate of will or a letter of administration (where relevant), he may make a written application for the transmission of shares. Under Section 103(1), he may apply for registration as a member since the right to the shares of the company has been transmitted to him by operation of law. The personal representative can elect either: i. To give a notice in writing to the company to register himself as a personal Representative, and entitled to the same rights of a member. ii. To execute a transfer form, whereby the personal representative carries out a direct transfer from the name of the deceased member to the name of a nominee. Under s 103(2) and Article 25 a transfer by a personal representative is valid as though it had been done by a member. Nevertheless, the directors have the discretion to refuse to register the transfer. 5.2. JOINT HOLDERS OF SHARES
Where shares are held jointly, the death of a joint shareholder (who is not a bankrupt at death) will result in his shares passing on to the surviving joint holder - Article 24. The company will require an evidence of death, i.e. a death certificate. The company also requires proof of a personal representatives capacity to act, i.e. by way of a grant of probate or a letter of administration. 5.3. BANKRUPTCY OF SHAREHODLERS
During his lifetime, if an individual shareholder becomes a bankrupt, his shares shall vest in the Director General of Insolvency (DGI). The Director-General shall produce to the Company a copy of the court order of his appointment or a copy of the Gazette that advertises his appointment. The company shall obtain an authenticated copy of his signature for record purposes and for verification of signatures. Where an individual shareholder is a bankrupt at death, his shares pass on to the DirectorGeneral of Insolvency (DGI). Similarly, if a joint shareholder is a bankrupt at death, his shares pass on to the DGI and not the surviving joint holder. The Director-General may elect to do any of the following: i. He can have the shares registered in his name by giving a notice in writing to the company. This is especially if there are no liabilities outstanding on the shares,. . ii. He can disclaim the shares. This is if there is any liability on the shares, e.g. partly paid shares. The company may prove in bankruptcy for the amount unpaid. Compliance and Statutory Forms 197
iii. He can also elect to execute a transfer form to a beneficiary nominated by him. Nevertheless, the companys board of directors has the right to decline or suspend registration. 5.4. WINDING-UP OF A CORPORATE SHAREHOLDER
The liquidator is required to produce to the company evidence of his appointment: In a compulsory liquidation, he is to produce the court order by which he was appointed. In a voluntary liquidation, he is to produce a certified copy of the resolution for windingup and deed of appointment. 5.5. INSANITY OR LUNACY
In case of insanity or lunacy of a shareholder, a receiver shall be appointed. He shall produce to the company a court order confirming his appointment. The receiver shall then be able to deal with the shares in accordance with the court order. Where a joint shareholder becomes insane in his lifetime, his interest does not pass to the surviving joint holder. Similarly, if the joint shareholder is insane at death, his interest does not pas to the survivor.
QUESTIONS 1. Explain the significance and effects of the issue by a company of a Share Certificate. (5 marks) Explain the doctrine of share certificate estoppel that applies to a companys act of issuing share certificates. (5 marks) Explain how share certificates may be replaced in the following situations: a. b. 4. 5. 6. Where the certificate is lost. Where the certificate is badly defaced. (5 marks) (5 marks) (5 marks) (5 marks)
2.
3.
What is the meaning of issue, allotment and transfer of shares? Describe how shares are issued and allotted in a private company.
In relation to the issue and allotment of shares, explain the consequences of an allotment in breach of Section 132D of the Companies Act 1965. (5 marks) How may an improper issue of shares be validated? (5 marks)
7. 8.
State the various ways of issuing shares and other securities in a public-listed company. (5 marks) Explain the differences between a transfer and transmission of shares. Explain what is meant by pre-emption rights. (5 marks) (5 marks)
9. 10. 11.
Two weeks ago, Timothy purchased shares in Syarikat Maju Sdn Bhd (the company) from Steve, a member. Timothy has also applied to be registered as a member. However, he is not well liked by the companys directors. a. Explain the principles governing directors discretion to refuse registration of a share transfer. (10 marks) Explain what happens if one month passes and the directors have not decided on whether to register or refuse to register the share transfer. (5 marks) (5 marks)
b.
12.
Explain how shares of a public-listed company are transferred.
13.
Ernest, a member of Syarikat Megah Sdn Bhd (the company), complains to the company that his name has been improperly removed from the companys register of members, following a share transfer that was supposedly made on 30-4-2008. According to Ernest, he deposited his share certificate No. 060 with his uncle, Brown. Ernest insists that he has never signed any transfer form to transfer away his 10,000 shares. He claims that Brown must have forged his signature in the transfer form. Brown has since absconded and cannot be traced. Meanwhile, the transferee, Francis, claims that he has no knowledge of any forgery that might have taken place. He has in turn sold off the 10,000 shares to another purchaser, Graham. Explain the rights and liabilities of Ernest, Francis, Graham and the company in the above situation. (10 marks)
14.
Thilla, a sole owner of 20,000 fully-paid up shares in Syarikat Bahagia Sdn Bhd (the company), passed away last month. Her will states that the shares are to be given to her only son, Velappan. The executor named in Thillas will is Warren. Explain the steps that Warren should take in order for the transmission of Thillas shares to take place. (5 marks) Musa, a shareholder of 5,000 shares in Syarikat Bahagia Sdn Bhd (the company), has just been declared a bankrupt. Explain what happens to his shares. (5 marks)
15.
Chapter 8
CHARGES LEARNING OBJECTIVES After reading this chapter, you should be able to: Understand the meaning of a charge. Explain the differences between a fixed charge and a floating charge. Explain the advantages and disadvantages of both types of charges. Describe how floating charges crystallize and understand the mechanisms for the protection of a floating chargee. Explain the consequences of registration and nonregistration of charges. Describe the rules of priority of charges. Explain the rights and remedies of debenture holders. 1. WHAT IS A CHARGE?
Whenever a company borrows money from a creditor, it is usually required to give a security. How much security the company is to provide would depend on its commercial standing and credit rating. When a company takes loan from a creditor, it would usually issue a debenture, i.e. a document that acknowledges the companys indebtedness in respect of any money that is lent to the company. To secure the debenture, the company can give any type of security by way of a charge over its assets or a guarantee given by its directors. A charge is an encumbrance created over a property whenever that property is to be used to secure a debt. For e.g., if a bank loans money to a company upon the security of the companys land in Kuala Selangor, then a charge is created over that piece of land. Once a charge is created, the land is encumbered, and the company can no longer deal freely with the land without the consent of the chargee, i.e. the bank. Nevertheless, the company remains the owner of the land and the land shall remain in its possession until a default occurs. The company is the chargor, while the bank is the debenture holder and the chargee.
In National Provincial and Union Bank of England v Charnley [1924] 1 KB 431, it was held that a charge was created where both the chargor and chargee evince an intention that the chargors existing or future property would form a security for the payment of a debt. Although the creditor did not get legal title (ownership) over the property, it would have a right to the property by an order of the court upon the chargors default. Company charges, i.e. charges created by a company, may be fixed charges or floating charges. 2. FIXED CHARGE
A fixed charge may be created over specific assets of a company, e.g. land, plants, machinery and goodwill on uncalled capital. 2.1. CHARACTERISTICS OF A FIXED CHARGE
The characteristics of a fixed charge may be described as follow: It attaches to specific assets from the time it is created. After a fixed charge is created, a company cannot deal with those properties without the consent of the chargee. Even if the properties were to be disposed of, the properties would still be subject to the charge, unless it has been earlier discharged. In case of future assets, a fixed charge may be created as long as the assets are capable of being ascertained. There must be no doubt that the property is caught by the fixed charge. 2.2. ADVANTAGES OF A FIXED CHARGE
A fixed charge gives greater security to the chargee since it attaches to the properties that are subject to the charge. A fixed charge prevents a chargor from disposing off the charged properties or assets without the chargees knowledge and consent. Even if the properties are disposed off, they are still subject to the fixed charge. Generally, a fixed charge ranks higher in priority over other charges, e.g. a floating charge, regardless of when it is created. 2.3. DISADVANTAGES OF A FIXED CHARGE
A fixed charge does not give flexibility to a chargor, since it (the fixed charge) restricts the chargors freedom to deal with the charged properties. The chargor may not sell off the charged properties in the ordinary course of his business. The charged properties or assets are still subject to fluctuations and depreciations in value, thus ultimately, the chargee may not recover as much of its debts as desired. Compliance and Statutory Forms 202
3.
FLOATING CHARGE
A floating charge may be created over other classes of assets in a company, e.g. stocks, inventories and book debts. In Illingworth v Houldsworth [1904] AC 355, a floating charge was described as a charge that is ambulatory and shifting in nature, hovering over a class of properties which the charge is intended to affect until some event occurs which causes the charge to settle and fasten on the class of properties within the reach and grasp of the charge. 3.1. CHARACTERISTICS OF A FLOATING CHARGE
The characteristics of a floating charge may be described as follow: A floating charge does not relate to any specific assets, but created over a class of assets of a company. It may be created over the companys present and future assets. It shall hover over the class of assets of the company, which may change from time to time in the companys ordinary course of business. The company remains free to deal with the particular class of assets, i.e. to sell those assets and to buy new ones. On the happening of an event called the crystallizing event, the floating charge shall then settle down and attaches itself on the assets of the company that are within the class at the time of crystallization. The charge ceases to float and crystallizes to a fixed charge. These assets are said to be subject to a fixed charge and the chargor cannot deal with those assets from that moment on. A crystallizing event occurs when a chargee becomes entitled to enforce his security or where it gives a notice in writing pursuant to the terms of the charge instrument. There are many events that may trigger crystallization, e.g. a default in the payment of principal or interest, a breach of covenant, appointment of a receiver for the chargor company or winding-up of the chargor company. Whether a particular charge is a fixed or floating charge, the label of the charge instrument is not important. Much would depend on the wordings of the instrument, the intention of the parties involved and whether the charge concerned has the relevant characteristics. Where a chargor is prevented from dealing freely with the assets, this would strongly indicate that the assets are subject to a fixed charge. In the case of book debts for instance, the debts may be subject to either a fixed charge or a floating charge.
In Siebe Gorman & Co Ltd v Barclays Bank Ltd [1979] 2 Lloyds Rep 142, it was held that a fixed charge might be created over book debts where it was created over a definite asset, i.e. book debts in this case, and it attached onto the asset. The debtor company was required to pay the collection of the debts into an account with the chargee bank. That prevented the company from dealing freely deal with those debts without the chargees prior consent. The case may be contrasted with Re Brightlife Ltd [1987] 2 WLR 197. Here, the chargor company was not prevented from collecting and paying the debts into its own account. As such, the book debts were held to be subject to a floating charge. 3.2. ADVANTAGES OF A FLOATING CHARGE
A floating charge is ideal where the assets to be used as security are numerous and of little value if they were taken individually. Further, it allows the chargor to continue to deal with the assets in the course of its business. This is particularly if the assets are the stocks inventories of the company. It would have been impractical for the assets to be subject to a fixed charge since this would have prevented sale of those assets. A floating charge gives flexibility to the chargor company in providing security in such a manner where a sole trader or partnership would not be entitled to. 3.3. DISADVANTAGES OF A FLOATING CHARGE
Since a floating charge gives flexibility and freedom to a chargor to continue to deal with the assets, a floating charge is thus vulnerable as a form of security. It presents several risks and disadvantages to the chargee. A chargor company may dissipate the assets subject to the charge in the ordinary course of the companys business. The company is not prohibited from creating further charges over the same, wider or narrower class of assets that are originally subject to the floating charge. The subsequent charges may even rank higher (e.g. if a fixed charge) or in pari passu (of the same level) with the earlier floating charge. Another risk is that the charged assets may be subject to distress proceedings. Distress proceeding is conducted where a landlord of the chargor proceeds to seize and sell the assets of the tenant for non payment of rent. If a distress proceeding is commenced before crystallization of the floating charge, a Landlord would have priority over the chargee and may proceed with the sale of assets seized from the chargor - Re Roundwood Colliery Co [1897] 1 Ch 373. Compliance and Statutory Forms 204
Nevertheless, where a floating charge has crystallized completely prior to the distress proceeding, the landlord may not seize the assets that are subject to the charge Haw Par
Brothers International Ltd v Overseas Textiles Co Ltd [1978] 2 MLJ 75.

A creditor may have obtained a court judgment against a debtor. Such creditor, called a judgment creditor may then proceed with an execution, i.e. an enforcement of the court judgment in order to recover the debt owed. In an execution, there is a risk that charged assets may be seized. Where a judgment creditor, also known as execution creditor at this stage, has sold off the charged assets prior to the charge being crystallized, the execution creditor is entitled to retain the proceeds of the sale Evans v Rival Granite Quarries Ltd [1910] 2 KB 979. If however an execution creditor has not completed an execution against the charged assets charged before the charge crystallizes, then the chargee retains its priority - Re Standard Manufacturing Co [1891] 1 Ch 627. Charged assets may occasionally be subject to the claims of the original seller, who might have inserted a retention of title clause in the contract of sale. Such retention of title clause, also know as a Romalpa clause refers to a term in the contract of sale between a seller and a buyer, under which the seller stipulates that the ownership of the assets does not pass to buyer until they are paid for Aluminium Industrie Vassen BV v Romalpa Aluminium Ltd [1976] 2 AER 552 . Such a clause enables the seller to regain possession of assets sold if the chargee tries to take possession of the charged assets. Another disadvantage of a floating charge is that charged assets may be subject to a set-off of the chargor companys mutual debts with a third-party. This may be done where the mutual debts arises before the charge crystallizes Rother Iron Works Ltd v Canterbury Precision Engineers Ltd [1974] QB 1. If the floating charge were to crystallize before the mutual debts arose, then the chargee retains its priority - NW Robbie & Co Ltd v Witney Warehouse Co Ltd [1963] 3 AER 613. On the chargees part, it may collect a debt due to the chargor company by off-setting the companys debt against that of the third party West Street Properties Pty Ltd v Jamison [1974] 2 NSWLR 435. Charged assets may also be subject to a counter-claim of the chargor companys mutual debts with a third party Company. This may be done if the counter-claim arises before the charge crystallizes William H. Parsons v Sovereign Bank of Canada [1913] AC 160. Charged assets may also be subject to a lien. Where a lien is imposed on a companys assets by law, the lien holder shall gain priority over the chargee George Barker (Transport) Ltd
v Eynon [1973] 3 AER 374.
3.4.
FURTHER DISADVANTAGES OF A FLOATING CHARGE UNDER THE COMPANIES ACT 1965
Under the Companies Act 1965, in a receivership, certain debts shall be paid out of assets subject to a floating charge in priority to claims under the charge. Section 191 provides that where a receiver is appointed by a debenture holder (who is also a chargee in this case), or the debenture holder is taking possession of any property comprised in a floating charge, the receiver shall pay, out of the assets realized, any debt which are considered preferential debts in a winding up. The preferential debts, as defined in s 292 and referred to by s 191, include the following: a. all wages or salary, including any allowances or reimbursement under any contract of employment or award, of any employee not exceeding RM1,500/- in respect of services rendered by him within a period of four months before the date of appointment of the receiver. b. All amounts due in respect of workers compensation accrued before the date of appointment of the receiver. c. All remuneration payable to any employee in respect of vacation leave accrued in respect of any period before the date of appointment of the receiver. d. All amounts due in respect of contributions payable by the company, as the employer under any written law relating to employee superannuation, provident funds or retirement benefits, during the twelve (12) months before the date of appointment of the receiver. e. The amount of all federal tax assessed under any written law before the date of appointment of the receiver. f. Any money advanced by a person for the payment to any employee on account of wages, salary or vacation leave. g. Any money received by the company from an insurer under a third party insurance policy shall be paid to the third party where liability has been incurred by the company.
4.
CRYSTALLISATION OF FLOATING CHARGE
A floating charge will become a fixed charge when an event triggers its crystallization. There are a few ways in which a floating charge shall crystallize: a. Where a receiver is appointed by the court or by the debenture holder. b. Where a debenture holder takes steps to enforce the debenture or to take possession of the assets comprised in the charge. c. When the company goes into either a voluntary or compulsory winding-up. d. Where the instrument that creates the floating charge allows a creditor the option of crystallizing the charge by giving notice to the company. e. When the company ceases to carry on its business. Crystallization of a floating charge will not enhance the priority of the charge over other charges that are in existence at the time of crystallization. There are a few mechanisms available for the protection of a floating chargee. 4.1. NEGATIVE PLEDGE CLAUSE
The debenture may contain a term that prohibits a chargor company from creating further charges that rank in priority (i.e. a fixed charge) or in pari passu (i.e. a floating charge) with the existing floating charge. By this term or clause, the company gives a pledge (undertaking or promise) not to create further charges. Thus the clause is known as a negative pledge clause. Notice of this negative pledge should be given to potential creditors. Form 34, i.e. a form containing particulars to be lodge with a charge, now contains an item, item seven (7), which provides a statement as to whether the creation of subsequent charges is prohibited or not. By the lodgment of Form 34, which contains item seven, with the Companies Commission of Malaysia, any potential creditor who conducts a search will therefore be presumed to have notice of such clause. In Kay Hian & Co Pte Ltd v Jon Phua Ooi Yong [1989] 1 MLJ 284, the Singapore court held that a subsequent chargee who asserted priority over an earlier registered floating charge must prove that it had no knowledge of a negative pledge clause in the earlier charge.
4.2.
AUTOMATIC CRYSTALLIZATION CLAUSE
The debenture may contain a term which provides that the floating charge will crystallize automatically on the happening of a specified event. This is known as an automatic crystallization clause Re Manurewa Transport Ltd [1971] NZLR 909. There are a few events which will lead to automatic crystallization of a floating charge: a. Where the company attempts to create another charge in breach of a negative pledge clause. b. Where a receiver is appointed by the court or another debenture holder c. Where an execution creditor attempts to conduct execution against the charged assets. d. Where the company defaults in its payment of interest for a specified period of time e. Where the value of charged assets of the company declines below a minimum amount. f. Where the company ceases to deal with the charged assets in the ordinary course of its business. An automatic crystallization clause shall give priority to the claims of the floating chargee over that of other creditors - Silverstone Marketing Sdn Bhd v Hock Ban Tin Sdn Bhd
[1998] 2 MLJ 695.
5.
REGISTRATION OF CHARGES
A charge, in order to be effective and binding, must be registered with the Companies Commission of Malaysia. Where it is created over landed properties, the charge must also be registered with the relevant land authorities. Under Section 108(1), where a charge is created by a company, a statement of the prescribed particulars of the charge in Form 34 must be lodged with the Registrar within thirty (30) days after the creation of the charge. A charge is created on date of execution of instrument of charge. Thus, registration is independent of when money is advanced or disbursed by the creditor. If s 108(1) is not complied with, the charge shall be void against the liquidator and any creditor of the company. As a result, in a liquidation, the debenture holder does not hold any security over the companys property or undertaking and shall remain an unsecured creditor.
Under s 108(3), some of the charges that must be registered are as follow: - a charge to secure any issue of debentures; - a charged on uncalled share capital of a company; - a charge on shares of a subsidiary of the company which are owned by the company; - a charge on land or any interest in the land; - a charge on a companys book debts; - a floating charge on a companys undertaking or property; - a charge on calls made but unpaid; - a charge on a ship or aircraft or any share in a ship or aircraft; and - a charge on the credit balance of the company in any deposit account The purpose for registering charges is to enable a potential creditor to check whether a company has already given a charge over its assets and the extent to which the assets are charged. Also, registration would determine the priorities of creditors as against each other in getting repayment out of the assets of the company.
5.1.
DUTY TO REGISTER CHARGES
Under Section 109(1), a company has the duty to lodge the documents and required particulars of a charge for registration in accordance with s 108. Following s 108(1), the documents and required particulars must be lodged with the Registrar within thirty (30) days after the creation of the charge. If s 108 is not complied with, the company and every officer in default shall be guilty of an offence. Penalty: RM1,000/- default penalty. The documents may also be lodged by any person interested in the documents, e.g. the creditor or debenture holder. That person shall be entitled to recover from the company any registration fees paid. Under s 115(1), a company must keep a copy of the instrument creating the charge at its registered office. The company must also keep a register of charges at its registered office, which shall be open for inspection by members and existing creditors. Any person may also apply to inspect the register and to take a copy of the instrument of the charge upon payment of the prescribed fees. If s 115 is not complied with, the company and every officer in default shall be guilty of an offence. Penalty: RM2,000/- default penalty.
5.2.
SIGNIFICANCE OF REGISTRATION OF CHARGES
Under Section 111(2), upon the registration of a charge, the Registrar shall issue a certificate of registration. The significance of this certificate is that it is conclusive evidence that the requirements as to registration of the charge have been complied with. This is to protect the chargee who may then be assured that its charge is validly registered and shall not be later set aside by other creditors - National Provincial and Union Bank of
England v Charnley [1924] 1 KB 431.

Thus, a charge is considered to have been validly registered even if there may have been some irregularities that take place during the registration process, e.g.: a. Particulars of the charge may have been submitted to the Registrar beyond the timelimit of thirty (30) days. Here, once the Registrar issues a certificate, the charge is considered validly registered - R v Registrar of Companies exp Central Bank of India
[1986] 1 AER 105.

b. The documents that create the charge may have been falsely dated or changed in order to make it appear as though the charge is still in time for registration Re Eric Holmes (Property) Ltd [1965] 2 AER 333 and Re CL Nye Ltd [1971] Ch 442. c. Where particulars of a charge are delivered to the Registrar within the prescribed time limit of thirty (30) days, the charge is considered validly registered even if the Registrar issues a certificate after the expiry of the timelimit for registration. There are nevertheless exceptions to the above rule. The conclusiveness of the certificate issued by the Registrar relates only to the fact of registration. It is conclusive only as to the fact that a charge has been duly-registered. If a charge is ineffective for some reason other than non-registration, it will still remain invalid - R v Registrar of Companies exp Central
Bank of India [1986] 1 AER 105.

For instance, the particulars contained in the charge are not conclusive: a. If a charged property is mis-described, the chargee may produce evidence to show the exact property that is supposed to be covered by the charge - National Provincial and
Union Bank of England v Charnley [1924] 1 KB 431.

b. If the amount to be secured by the charge is misstated, the chargee may produce evidence to show the exact amount and it may enforce the charge for that amount Re
Mechanisation (Eaglescliffe) Ltd [1966] Ch 20.

In conclusion, the certificate is not conclusive as to the validity of the charge, the extent of the charge or the property that it covers. Registration merely gives notice of the existence of the charge, and not a notice of its validity.
5.3.
INVALID CHARGES
Although a charge may be registered according to s 108, it may still be invalidated under s 293 or 294 of the Companies Act 1965. This is where there has been a contravention of the laws on insolvency. Following the effect of s 293, a charge shall be void or voidable where it is created within six (6) months of the commencement of winding-up of a company, at a time when the company was insolvent. This is known as an undue preference, since the charge has an effect of giving priority to the floating chargee. The charge shall be void as against the liquidator and any other creditor and the floating chargee will stand as an unsecured creditor. Under s 294, a floating charge on a companys property or undertaking that is created within six (6) months of the commencement of the winding up of the company shall be invalid except to the amount paid (plus interest at 5% per annum) to the company at the time of the creation of the charge. The charge is invalid unless the floating chargee can prove that the company was still solvent immediately after the creation of the charge.
6.
PRIORITY OF CHARGES
Registration of a charge within the time-limit allowed gives the chargee a priority over the claims of other unsecured creditor. Where there is a conflict between two (2) or more charges that have been registered, the instruments creating the charges shall be considered and the normal rules of prioriy shall apply in order to determine which charge has priority over the other. Priority normally goes according to the order of the time and date that the charges are registered.
Where charges are dulyregistered, the general rules on priority are as follows: a. Between a fixed charge and another fixed charge, the first in time will prevail, i.e. an earlier registered fixed charge shall have priority over a subsequently registered fixed charge. b. Similarly, between a floating charge and another floating charge, an earlier registered floating charge shall have priority over a subsequently registered floating charge. c. Between a floating charge and a fixed charge, a fixed charge will have priority over a floating charge, regardless of when it is created, as long as the fixed charge is registered before crystallization of the floating charge. This is to say a subsequently registered fixed charge will still have priority over an earlier registered floating charge, as long as the fixed charge is registered before the floating charge crystallizes. There are nevertheless some exceptions to the above rules: - There may be two charges in competition with each other. A charge (the second charge) may have been created earlier but registered subsequent to another charge (the first charge). If the chargee holding the first charge has actual or constructive knowledge of the second charge, the second charge shall have priority although it might have been registered subsequent to the first charge. - Similarly, from the above example, if the second charge is created earlier but is unregistered, as long as the chargee holding the first charge has actual or constructive knowledge of the second charge, the second charge shall have priority.
- In case of competing floating charges, a subsequently registered floating charge (the second charge) shall have priority if an earlier registered floating charge (the first charge) permits the company to represent that the company is free to deal with the unencumbered assets Re Benjamin Cope & Sons Ltd [1914] 1 Ch 800. - In case of competing floating charges, where an earlier registered floating charge (the first charge) is created over the whole undertakings of a company, a subsequently registered floating charge (the second charge) shall have priority if it covers part or certain assets that are comprised in the first charge Re Automatic Bottlemakers Ltd [1926] Ch 412. - There are two (2) ways in which an earlier registered floating charge may have priority over a subsequently registered fixed charge, i.e. by having in the terms of the debenture a
negative pledge clause or an automatic crystallization clause. Compliance and Statutory Forms 212
7.
EFFECTS OF NON-REGISTRATION OF CHARGES
Under Section 108(1), where a charge is not registered within thirty (30) days after its creation, the charge shall be void against the liquidator and any creditor of the company. This is to say, if a company goes into liquidation and the charge is found to be void through non registration, the debenture holder is considered not to hold any security over the companys property or undertaking. As a result, it shall remain an unsecured creditor. There is nevertheless a protection given to the debenture holder, while the company has not gone into liquidation. The company still has an obligation to repay the money secured. S 108(2) provides that where a charge becomes void through non-registration, the money secured by the charge shall immediately becomes payable. Under s 108(10), where a second charge is created before the lapse of thirty (30) days after the creation of a prior unregistered charge, and covering all or any part of the property comprised in the prior charge, the second charge will be invalid. For the second charge to be valid, it must be proved to the courts satisfaction that the second charge was given in good faith for the purpose of correcting some material error in the prior charge, and not for the purposes of avoiding or evading the provision of s 108(1) regarding the time limit for registration.
7.1.
EXTENSION OF TIME FOR REGISTRATION
Where a charge is not registered, a company or any other person interested (e.g. the creditor or debenture holder) may apply to court under Section 114 for an extension of time to register the charge and to rectify the register of charges. The court must be satisfied of any of the following: - that the omission to register the charge was accidental, due to inadvertence or some other sufficient cause, or - that it is not of a nature to prejudice the position of creditors or shareholders, or - that on other grounds, it is just and equitable to grant such relief. The court may allow the charge to be registered, subject to such terms and conditions as seem to the court just and expedient. There may be a term imposed that the extension or rectification is to be without prejudice to any liability already incurred by the company or its officers in respect of the default. Thus, the court may order the charge to be registered but subject to the priority of other charges that might have been registered prior to the charge. Nevertheless, once winding-up has commenced in respect of the company, it would be impossible to get an extension of time to register the charge.
8. 8.1.
RIGHTS AND REMEDIES OF DEBENTURE HOLDERS RIGHTS OF DEBENTURE HOLDERS
A debenture holder is a creditor of the company having greater security than other unsecured creditors. He is not a member of the company and as such, does not enjoy rights as a member. Nevertheless, there are a few protections available under the Companies Act 1965 for debenture holders:
- Under s 20(2)(a), where a debenture is secured by a floating charge, the debenture holder may apply to court to restrain an ultra vires act in an attempt to prevent unauthorized disposition of the assets or undertakings of the company. However, the debenture holders would not be able to prevent so if the disposition of its assets is done in the ordinary course of the companys business. - Under s 181, a debenture holder may also apply to court for relief on the grounds that the affairs of the company are being conducted or the powers of the directors are being exercised in an oppressive manner, or in disregard of his interests. Another ground is that some act of the company has been done or threatened to be done or that some resolution has been passed or proposed to be passed which would unfairly discriminate or is otherwise prejudicial to the debenture holder. - Under s 28(5), holders of not les than 10% of a companys debentures may apply to court for the cancellation of an alteration of the companys objects clause.
8.2.
REMEDIES OF DEBENTURE HOLDERS
8.2.1. Appointment of a receiver A debenture holder enforces his debenture by appointing a receiver, who is to call in the assets subject to the floating charge, collect all receipts and realise the securities for benefit of debenture holder. Upon realizing the assets, the receiver shall pay all preferential debts first before paying the amount due to debenture holder and surplus (if any) to the company. The company is not necessarily wound-up although receivership very often leads to liquidation. The debenture holder needs not obtain a court order to appoint a receiver if the debenture provides for the appointment.
8.2.2. Appointment of a receiver and manager Another remedy is for the debenture holder to appoint a receiver and manager to manage the companys affairs for the benefit of the debenture holder. The difference between a receiver and a receiver and manager is that the latter can realize the security and can also manage the companys affairs. Usually the loan or charge documents would provide that if the company defaults, the debenture holder is given an express power to appoint a receiver and manager. Appointment can also be made by the court. 8.2.3. Debenture incorporated with charges In enforcing a debenture incorporated with charges over land, a question arises as to whether the debenture holder (chargee) needs apply for order for sale of the land, as is usually required under the provisions of National Land Code 1965. There are three (3) important court decisions on this issue: In Kimlin Housing Development S/B v Bank Bumiputera Malaysia Bhd [1997] 2 MLJ 805, the court held that a receiver and manager has no power to sell a charged land by private treaty (i.e. private sale) without going through the formal foreclosure proceedings as were provided under the National Land Code. Thus, the receiver and manager had to obtain a judicial sale and comply with the relevant provisions pertaining to notice and period of default. The charged land also had to be sold by public auction. Upon liquidation of the chargor company, the powers of the receiver and manager to carry on the companys business similarly ceased. He ceased to be the agent of the company. In Melantrans S/B v Carah Enterprise S/B [2003] 2 CLJ 86, a different decision was arrived at. The court held that there was a valid power of attorney contained in the debenture. As such, the receiver and manager was allowed to sell the charged land by private treaty without going through a judicial sale, since he was acting on behalf of the chargor. In K Balasubramaniam v MBF Finance Bhd [2005] 1 CLJ 793, it was held that despite the winding up of a company and appointment of a liquidator, the receiver and manager continued to have a right to take custody and control of all assets that are charged under the debenture. He was entitled to the possession of the charged assets and needed not surrender to the liquidator unless those assets were redeemed by the liquidator or if there was surplus proceeds from the sale of the assets. It was also held that where the immovable properties were not charged under the NLC, they needed not be sold by way of judicial sale.
QUESTIONS 1. 2. 3. Explain what a fixed charge is and its characteristics. Explain what a floating charge is and describe its characteristics. (5 marks) (5 marks)
Explain the advantages and disadvantages of floating charge as a form of security. (10 marks) Discuss the effect of registration of a charge, under Section 111(2) of the Companies Act 1965; in particular, the meaning of conclusiveness of the Registrars Certificate. (10 marks) On 1-6-2008, Syarikat Mudah Berjaya Sdn Bhd (the company) borrowed RM1.5 million from Bank Awam Bhd (the bank) and gave a fixed charge (the charge) over certain specified assets of the company. The bank now discovers that the charge has not been registered. The company is still solvent. a. Explain the consequences of the companys failure to register the fixed charge. (5 marks) b. Explain how Bank Awam may protect its interests. (5 marks)
4.
5.
6.
On 1-6-2006, Syarikat Malang Sdn Bhd (the company) borrowed RM1 million from Bank Awam Bhd (Awam) and gave, in favour of Awam, a floating charge over all the assets and undertakings of the company. The charge expressly stated that the company was prohibited from creating any fixed or floating charge over the same class of assets unless it obtained Awams prior consent. The floating charge was registered. On 1-12-2006, the company borrowed another RM1 million from Bank Bandar Bhd (Bandar) and gave, in favour of Bandar, another floating charge over all the assets and undertakings of the Company. This second floating charge was also registered. The company has now gone into liquidation. A few employees (the employees) of the company have not been paid their salaries from the month of January 2008 onwards. Each of them earns RM900/- per month. The liquidator now finds that the companys liabilities exceed its assets. Discuss the order of priority of the claims of Awam, Bandar and the employees, i.e. how their claims rank as against each other. (15 marks)
Chapter 9
PROSPECTUS Learning objectives: After reading this chapter, you should be able to: Explain what a prospectus is. Distinguish a main prospectus from supplementary and abridged prospectuses Explain how a prospectus is registered Describe the type of material information to be included in a prospectus Explain the civil and criminal liabilities for false and misleading statements or material omission in a prospectus Explain when a statement in lieu of prospectus is required to be issued. 1. 1.1. PROPECTUSES WHAT IS A PROSPECTUS
A prospectus is generally required when a public company seeks to raise capital from members of the public. It is a document that seeks to give information on the company to the public, so as to enable them to decide whether to invest in the company or not. It is therefore a disclosure-based document. Under s 4 of the Companies Act 1965 (CA 1965), a prospectus means any prospectus, advertisement, notice, invitation or circular that invites applications from the public to subscribe shares or debentures of a corporation. Under s 35 of the Securities Commission Act 1993 (SCA 1993), a prospectus is defined as a notice, circular, advertisement or document inviting applications or offers from the public to subscribe for securities (shares or debenture) of a corporation or a proposed corporation. It also includes a supplementary prospectus, shelf prospectus, short form prospectus, profile statement, supplementary shelf prospectus and abridge prospectus. A prospectus must be approved and registered by the Securities Commission (SC) under the SCA 1993. Additionally, the prospectus must be registered with the Companies Commission of Malaysia (CCM).
1.2.
TYPES OF PROSPECTUSES
A main prospectus is issued by a company when it is inviting the public to subscribe for its securities. For e.g., when the company engages in a public issue of its securities, especially in an Initial Public Offering (IPO). A supplementary prospectus (or a supplemental prospectus) is issued if after the registration of a main prospectus, but before its issue, the company which has lodged the main prospectus becomes aware of the following: - A significant new matter has arisen and it is a matter for which information would have to be disclosed if the matter had arisen during the preparation of the main prospectus - There has been a significant change affecting a matter disclosed in the main prospectus - The main prospectus contained a material statement or information that is false or misleading; or - There is material omission of fact in the main prospectus The purpose of issuing and lodging a supplementary prospectus is to update, change or correct the false or misleading statement or omission in the main prospectus. An abridged prospectus is required for a renounceable rights issue, i.e. subsequent issue of securities which are offered to the members and renounceable in favour of non-members. The company has made an application to quote these securities on Bursa Malaysia.
1.3.
WHEN A PROSPECTUS IS NOT REQUIRED
In certain cases, a prospectus is not required, for e.g
:
- In case of excluded offers and invitations: These are specified under Schedule 2 of the SCA 1993 or are made to a person or class of persons or in respect of securities or class of securities prescribed by the Minister to be an excluded offer. E.g. an offer/invitation to enter into an underwriting agreement, an offer/invitation in a non-listed public company by means of a rights issue or an offer/invitation of securities in a private company. - In case of excluded issues: These are specified in Schedule 3 of the SCA or made to a person or class of persons or in relation to securities or class of securities prescribed by the Minister to be an excluded issue. E.g. an issue made to an underwriter under an underwriting agreement, an issue of securities in a non-listed public company by means of a rights issue or an issue of securities of a private company. I Compliance and Statutory Forms 218
2.
REGISTRATION OF PROSPECTUS
Under s 41 SCA 1993, a company shall not issue, offer for subscription or make an invitation to subscribe any securities unless: - a prospectus in relation to the securities has been registered by the Securities Commission under s 42 - the prospectus complies with the requirements of SCA 1993, e.g. the prospectus accompanies any form of application for securities If s 41 is not complied with, this is an offence. Penalty: fine not exceeding RM10 million or imprisonment not exceeding 10 years or both. The Securities Commission now implements the post-vetting regime whereby prospectuses may be issued first and the Securities Commission shall vet later. This is to prevent delay in the issue of securities pending its approval. Under s 42, the Securities Commission shall refuse to register prospectus if: - the prospectus does not comply with any requirement or provision of SCA, - the issue, offer or invitation to subscribe for securities to which the prospectus relate does not comply with any requirement or provision of SCA or has not obtained the Securities Commissions approval, - the prospectus contains any statement or information that is false or misleading or that there is a material omission from the prospectus - the issuer has contravened any provisions of the securities law or the Companies Act 1965 and this casts a doubt as to whether the issuer is a fit and proper person to make this issue, offer or invitation. In registering a prospectus, a company (called the issuer) must submit: - a written application for registration together with - true copies of the required consents from any persons named in the prospectus as having made a statement in the prospectus and - true copies of all material contracts referred to in the prospectus The issuer must deposit the consents and every material contract at its registered office within three (3) days after the registration, for inspection by any person without charge Under s 44, the registration of a prospectus by the Securities Commission shall not be taken to indicate that the Commission recommends the securities or assumes responsibility for the correctness of any statement or information in the prospectus.
3.
MATERIAL INFORMATION TO BE INCLUDED IN A PROSPECTUS
An issuer must take reasonable care to include all material information in its prospectus. Material information refers to information that will assist prospective investors in making an informed decision as to whether to invest in the companys securities or not. Material information is determined by two (2) tests: general disclosure test and specific disclosure test. 3.1. THE GENERAL DISCLOSURE TEST
This refers to the issuers general duty of disclosure under s 45 SCA 1993. The prospectus must contain all such information that investors and their professional advisers would reasonably require and reasonably expect to find in the prospectus, for the purpose of making an informed assessment of: - The assets and liabilities, financial position, profits and losses and prospects of the issuer; - The rights attaching to the securities; and - The merits of investing in securities and the extent of the risk involved in so doing. Among the information that prospective investors would reasonably require and reasonably expect to find: director, promoter, the named maker of statement in the prospectus, named stockbroker or underwriter, auditor, banker and principal adviser The issuer must also have regard to the nature of securities, its business, the persons likely to consider acquiring such securities and the fact that certain matters may reasonably be expected to be known to a professional adviser. 3.2. THE SPECIFIC DISCLOSURE TEST
This refers to the contents of the prospectus as stipulated under s 44 SCA 1993. The prospectus must contain specific information like: - the date mentioned in a prospectus shall be deemed the date of issue - A statement to the effect that the prospectus has been registered and that this does not imply that the Securities Commission assumed responsibility for the correctness of any statement made or opinion expressed. - A statement to the effect that no securities will be allotted or issued on the basis of the prospectus later than such period specified by the Securities Commission. The contents must also include information, matters or reports that have been specified by the Securities Commission in its Guidelines. Compliance and Statutory Forms 220
3.3.
CRIMINAL AND CIVIL LIABILITIES FOR MISSTATEMENT OR OMISSION
There are criminal and civil liabilities for any false or misleading statements or omission of material facts from a prospectus. 3.3.1 Criminal liability under s 55 Under s 55, it would be an offence for a person to authorize or cause the issue of a prospectus which contains any statement or information that is false or misleading or which contains a material omission. Even if the statement is contained in a report or memorandum on the face of the prospectus or issued with the prospectus, the statement shall be deemed to be in a prospectus. If s 55 is contravened, it shall be an offence. Penalty: fine not exceeding RM10 million or imprisonment not exceeding 10 years or both. 3.3.2 Civil liability under s 57 Under s 57, a person who purchases securities of an issuer and suffers loss as a result of any false or misleading statement or any material omission may recover the amount of loss from the following persons: - The issuer and each director at the time of issue of prospectus - A person who consented to being named as a director in the prospectus - A promoter who was a party to the preparation of any relevant portion of the prospectus - A principal adviser - A person who consented to being named as maker of certain statements in the prospectus - A person who consented to being named as a stockbroker, underwriter, auditor or banker - A person who authorized or caused the issue of prospectus in contravention of s 55. The extent of the civil liabilities would depend on the responsibility for the whole or portions of the prospectus. For e.g. those who consented to being named as maker of a statement in the prospectus are liable only for their own statements. A defence would be to show that the alleged offences were committed without his consent and that he has exercised all reasonable due diligence. The investor may also exercise his contractual right to have the contract (purchase of securities) avoided on grounds of misrepresentation or fraud.
4.
STATEMENT IN LIEU OF PROSPECTUS
Under five (5) circumstances, a statement in lieu of a prospectus be issued: i. s 26(2)(b) Companies Act 1965 where a private company converts to a public company. ii. s 27(3)(c) CA 1965 where the court or the Companies Commission of Malaysia (CCM) determines that a company has ceased to be a private company. The company must, within 14 days after the date of the court order or the notice from the Registrar, lodge a statement in lieu of prospectus with the CCM. iii. s 50(1) CA 1965 where a public company having a share capital has not issued a prospectus on its incorporation and now wishes to allot shares or debentures, it must lodge a statement in lieu of prospectus with the CCM at least three (3) days before the first allotment of either shares or debentures. ii. s 52(2)(a) CA 1965 Where a public company having a share capital has not issued a prospectus inviting the public to subscribe for its shares and it wishes to commence its business or exercise any borrowing power. It must lodge a statement in lieu of prospectus with the CCM, in the process of obtaining a certificate of entitlement to commence business. v. s 58(1)(c)(ii) CA 1965 In an underwriting arrangement, where a listed company wishes to pay commission to an underwriter in consideration of its subscribing or agreeing to subscribe for the companys shares or procuring subscriptions for its shares, the commission paid must be disclosed in the statement in lieu of prospectus. The statement in lieu of prospectus must be lodged with the CCM before payment of the commission.
QUESTIONS 1. Explain what is meant by a prospectus and identify the instances when a Company is required to issue a main prospectus, a supplementary prospectus and an abridged prospectus. (5 marks) Name the authority which approves and registers a prospectus. (5 marks)
2. 3.
When must a prospectus in turn be lodged with the Companies Commission of Malaysia? (5 marks) In relation to the information to be included in a prospectus, explain what is meant by material information. Describe the general disclosure test and the specific disclosure test as provided by Section 44 and Section 45 of the Securities Commission Act 1993 respectively, in considering what amounts to material information. (10 marks) Describe the criminal liabilities involved for any misstatement or omission of statements in a prospectus. (5 marks) Describe the civil liabilities involved for any misstatement or omission of statements in a prospectus. (5 marks)
4.
5.
6.
Chapter 10
RECEIVERS AND MANAGERS Learning objectives: After reading this chapter, you should be able to: Distinguish a receiver from a liquidator. Distinguish a receiver from a receiver and manager. Explain how two (2) types of receiver are appointed: privately-appointed receiver and court-appointed receiver. Understand the effect of receivership on a company Understand the powers, duties and liabilities of a receiver 1. WHAT IS MEANT BY RECEIVERSHIP?
When a company takes loan from a creditor, it would usually issue a debenture, i.e. a document that acknowledges the companys indebtedness in respect of any money that is lent to the company. To secure the debenture, the company can give any type of security by way of a charge over its assets or a guarantee given by its directors. If the debenture is secured by a charge over the asset of the company, in a default or other breaches (i.e. non-compliance) of the debenture, enforcement of the debenture is by the appointment of a receiver. A Receivers function is to call in all assets of the company that are subject to the charge and to realize the assets in order to recover the sums owed by the company to the debenture holder. Another remedy for the debenture holder is to appoint a receiver and manager to manage the companys affairs. Usually, where the debenture gives a charge over the companys property or business, the debenture also gives an express power to the debenture-holder to appoint a receiver and managers if the company were to breach the conditions of the debenture. How a Receiver may be distinguished from a Receiver and Manager: A receiver has no power to run the business of the company. A receiver and manager is empowered to continue the companys business with the aim of turning it over and selling the company later on as a going concern. This may be done as long as no loss is incurred.
How a Receiver may be distinguished from a Liquidator: A receivership does not mean the company is wound-up, although most of the time it ends that way (in a liquidation). A liquidator is a person appointed to wind up the company by selling off all its assets, pay off the liabilities and to distribute the surplus, if any, to the members and other contributories. In case of a receivership, there may be successful turnover, and the receiver may be paid out. Once receivership ends that way, the company shall continue as before.
2. 2.1.
DISQUALIFICATION AND APPOINTMENT OF RECEIVERS D ISQUALIFICATION FROM BEING A R ECEIVER
Under s 182, the following persons are not qualified for appointment as receiver: - a corporation - an undischarged bankrupt. - a chargee of any property of the company - an auditor of the company - an officer of the company or of any corporation which is a chargee of the property of the company. - any person who is not an approved liquidator or the Official Receiver 2.2. TWO KINDS OF RECEIVERS
There are two (2) kinds of receivers: - a receiver appointed under a power contained in a debenture in order to enforce a charge given by the debenture or - a receiver appointed by the court. 2.2.1. Receiver appointed under a power in a debenture This is a privately-appointed receiver. He is appointed under a power in a debenture and thus, the debenture holder need not apply to court to appoint him. He is an agent of the debenture holder, who is liable as principal for contracts made by the receiver. In the absence of express terms in the debenture, he is not an agent of the borrowing company. The receiver should thus be indemnified by the debenture holder in order to protect himself from being personally liable.
2.2.2. Receiver appointed by court There are a few situations under which applications may be made to the court to appoint a receiver: - Where a public-listed company issues public debentures, there is usually a trust deed appointing the trustee for the debenture holders. If it is of the opinion that the assets of the borrowing company and the guarantor are insufficient to repay the amount secured under the trust deed, i.e. the security under threat, it may apply to the Securities Commission for directions. If the borrowing company fails to comply with the Securities Commissions directions, the trustee may apply to the court. - when it has become necessary to protect the security or any public debenture holders to whom the company needs to meet its obligations. - where it is just and convenient to do so - when the company defaults over several debentures Usually the Director-General of Insolvency shall be the court appointed receiver. A receiver appointed by the court is a officer of the court. As such, he may not be sued without the leave of court. His function is not to turn around the company, but to preserve the assets of the company, pending ultimate winding-up. He may apply to the court for directions in relation to the performance of his functions. He is personally liable for contracts made by him, and shall be indemnified out of the company's assets. 2.3. PROCESS IN THE APPOINTMENT OF A RECEIVER
A person who has the authority to appoint a receiver (e.g. a debenture holder or a trustee for the debenture holders) shall make the appointment or application to the court for an order to appoint. Within seven (7) days of appointment of a receiver, the appointer must give notice of the fact by lodging Form 59 with the Companies Commission of Malaysia (CCM). Under s 188, the receiver (or receiver and manager, where relevant) must send a notice of his appointment to the borrowing company. The receiver shall have the power to obtain information from the directors or the officers or employees of the company. Within fourteen (14) days after receiving the notice from the receiver, the company must deliver to the receiver a statement of affairs on Form 61, verified by an affidavit (i.e. a document containing statements made under oath) on Form 62.
The statement of affairs shall show, as at the date of the receivers appointment: - particulars of assets, debts and liabilities of the company - the names and addresses of its creditors; - the securities held by the creditor and the dates when the securities were given; and - such other information as may be prescribed. In all invoices and business documents of the company, a clause receivers appointed (or receivers and managers appointed) shall appear after or beneath the company name. Under s 189(2), the receiver may require reports to be submitted to him from the following persons: - present or former officers of the company - persons who take part in the formation of the company within one (1) year of the date of receivership - present or former employees within the past year. Within one (1) month after receiving Forms 61 and 62, the receiver must lodge a copy of the statements (Forms 61 and 62) with the CCM together with any comments. He shall forward a copy to the company (and the trustee for the debenture-holders, where relevant). After six (6) months have passed from the date of his appointment, the receiver must prepare and lodge with the CCM, within one (1) month, a detailed account of receipts and payments in Form 63, together with an affidavit verifying the accounts. The same thing must be done within one (1) month after the expiry of every six (6) months. The CCM may appoint an approved company auditor to audit the accounts. The receiver must furnish the relevant books of accounts, records, documents and other information as is required by the auditor. 2.4. REMUNERATION OF RECEIVER
In the case of a court-appointed receiver, the remuneration shall be fixed by the court. In the case of a privately-appointed (i.e. appointed by the debenture holder), his remuneration is out of the assets of the company. His remuneration shall have priority over the debenture holder. Although s 191 lays down the priorities of debts, the receivers remuneration ranks ahead of the claims of the companys employees in case of holiday pay and long service leave entitlements. Under s 184, the court has the power to vary the receivers remuneration upon a liquidators application.
2.5.
EFFECT OF APPOINTMENT
2.5.1. Effect on the company, directors and management The directors of the company remain in office and may deal with assets that are outside the scope of the charge. They may carry on with the business of the company using the other assets.. Directors may initiate litigation on behalf of the company without the receivers consent, but they will have to indemnify the company for any liability arising. Directors remain responsible for convening general meetings and lodging the relevant returns to the Companies Commission of Malaysia. The receiver must supply the directors with the necessary documents such as financial statements and working papers on the company management. Where a receiver and manager is appointed, the board of the company is deprived of all powers to enter into contracts in relation to the companys business or disposition of the properties under his control. 2.5.2. Effect on the employees of the company In the case of the appointment of a privately-appointed receiver, this does not automatically terminate the employment of the employees. They continue under the old contracts unless new contracts are entered into or if the companys business is sold. In the case of the appointment of a court-appointed receiver, the employment of the employees are terminated automatically and they are discharged.. 2.5.3. Effect on the contracts prior to receivership In the case of contracts entered into by the company prior to receivership, these contracts do not terminate automatically. The company is still liable, and the receiver is not personally liable unless he adopts those contracts. Any damages for the companys breach of contract shall rank as unsecured debts.
3.
POWERS OF RECEIVERS
The receivers powers are generally to call in the assets comprised in the charge and to realize those assets. The receiver has the power to dispose substantial property of the company without the approval of the general meeting. In the case of a receiver and manager, he shall have additional powers to - take possession of the assets subject to the charge, - carry on the company's business, - sell, lease or hire the property of the company - compromise with creditors, - execute any document on behalf of the company, or - take action or defend legal proceedings on behalf of the company From the proceeds he obtain from carrying on the business and/or realising the securities, the receiver will pay the expenses of the business, interest on prior charges, preferential debts and his own remuneration. He shall then pay to the debenture holders what is due to them by way of the principal amount and interest. Under s 183(1), the receiver is also liable for the contracts entered into during receivership and may seek indemnity from the debenture holder. The debenture holder may apply to the court for directions in relation to matters in connection with the performance of the receivers functions.
3.1.
EFFECT OF LIQUIDATION ON THE POWERS OF THE RECEIVER AND MANAGER
In Kimlin Housing Development Sdn Bhd v Bank Bumiputera Malaysia Bhd [1997] 2 MLJ 805, the court held that upon liquidation (winding-up) of the chargor company, the powers of the receiver and manager to carry on the companys business similarly ceased. He ceased to be the agent of the company. Where a property is charged under the National Land Code, a receiver and manager has no power to sell the charged land by private treaty (i.e. private sale) without going through the formal foreclosure proceedings as were provided under the National Land Code. Thus, the receiver and manager had to obtain a judicial sale and comply with the relevant provisions pertaining to notice and period of default. The charged land also had to be sold by public auction.
In Melantrans S/B v Carah Enterprise Sdn Bhd [2003] 2 CLJ 86, a different decision was arrived at. The court held that there was a valid power of attorney contained in the debenture. The receiver and manager was considered acting on behalf of the chargor. As such, the receiver and manager was allowed to sell the charged land by private treaty without going through a judicial sale. In K Balasubramaniam v MBF Finance Bhd [2005] 1 CLJ 793, it was held that despite the winding up of a company and appointment of a liquidator, the receiver and manager continued to have a right to take custody and control of all assets that are charged under the debenture. He was entitled to the possession of the charged assets and needed not surrender to the liquidator unless those assets were redeemed by the liquidator or if there was surplus proceeds from the sale of the assets.
4.
DUTIES OF RECEIVERS
A privately-appointed receiver is an agent of the debenture-holder. As such, he owes a duty to the debenture-holder and not to the company. When there is conflict in interests, the receiver may apply to court for directions S.183(3). A receiver must act in good faith for a proper purpose, i.e. for the sole purpose of securing repayment of moneys owing under the debenture. The court may review his decisions where the receiver is proved to lack good faith. There is no duty to sell the charged property. Nevertheless, if the assets are disposed of, the receiver must exercise his power in good faith and not to sacrifice the companys interests recklessly Roberto Building Material Pte Ltd v Overseas-
Chinese Banking Crop [2003] 3 SLR 217.

The receiver has a duty to take reasonable care to obtain the true market value of the property at the time of sale, and the sale must not be at under value Re SAMA
Corporation Sdn Bhd [1992] 2 MLJ 251.
4.1.
STATUTORY D UTIES
The statutory duties of a receiver or manager are as follows: Under s 188(1), the receiver must notify the company and other authorities of his appointment by serving the relevant notices within seven (7) days of his appointment. The receiver is to notify the companys bankers of his appointment, close all of the companys existing accounts and open a separate receivership account. Under s 190(1), he must prepare accounts of receipts and payment of the properties under his charge. This account must be lodged with the Companies Commission every six (6) months. Under s 191, the receiver must pay, out of assets realized, any debt which are considered preferential debts in a winding up. The preferential debts, as defined in s 292 and referred to by s 191, include the following: a. all wages or salary, including any allowances or reimbursement under any contract of employment or award, of any employee not exceeding RM1,500/- in respect of services rendered by him within a period of four months before the date of appointment of the receiver. b. All amounts due in respect of workers compensation accrued before the date of appointment of the receiver. c. All remuneration payable to any employee in respect of vacation leave accrued in respect of any period before the date of appointment of the receiver. d. All amounts due in respect of contributions payable by the company, as the employer under any written law relating to employee superannuation, provident funds or retirement benefits, during the twelve (12) months before the date of appointment of the receiver. e. The amount of all federal tax assessed under any written law before the date of appointment of the receiver. f. Any money advanced by a person for the payment to any employee on account of wages, salary or vacation leave. g. Any money received by the company from an insurer under a third party insurance policy shall be paid to the third party where liability has been incurred by the company.
5. 5.1.
LIABILITIES OF RECEIVERS LIABILITY FOR CONTRACTS
In the case of a court-appointed receiver, he is not an agent of the company, but an officer of the court. As such, he is personally liable for all contracts he enters into and can be indemnified out of the companys assets. In the case of a privately-appointed receiver, he acts as agent for the debenture holder. If he were to be an agent of the company, there must be express or implied terms in the debenture. Under s 183(1), a receiver is liable for debts incurred by him in the course of receivership, for services rendered, goods purchased or for property leased. The receiver may obtain indemnity from the debenture-holder (if he were the agent of the debenture-holder) or the company (if he were the agent of the company). If there is no indemnity provision, the receiver may apply to the court for an indemnity against all liabilities properly incurred in the course of carrying out his duties, excluding negligence. In the case of contracts entered into by the company prior to receivership, the receiver is not personally liable unless he adopts those contracts. He may repudiate these contracts, and since the company is still liable, any damages for the companys breach of contract shall rank as unsecured debts. The receiver may honour these contracts if this is necessary to protect the goodwill of the companys business.
5.2.
LIABILITY FOR TORTS
Receivers may be liable for tort committed in the course of receivership.. Nevertheless, if the receiver is negligent in securing the best price possible for the companys assets, he is not liable to the company for this loss since he owes no duty of care to the borrowing company or the guarantors Public Bank Bhd v Ng Chee Ping
[1998] 4 MLJ 449.
5.3.
LIABILITY FOR BREACH OF DUTIES
The liability for breach of duties would depend on whether a receiver is regarded as an officer of the company under s 4(1). An officer would include a privatelyappointed receiver and manager. It does not include: a receiver who is not also a manager (whether privatelyappointed or court appointed), or a courtappointed receiver and manager Even if a privatelyappointed receiver owes fiduciary duties as an officer, the extent of the duties are lesser. For e.g. he is not obliged to always act in the companys best interest, since his primary duty is to the debentureholder. His main duty is to effect a proper administration to ensure the best possible return on the enforcement of the securities. Under s 192(2), the court, on application by any creditor, contributory or liquidator may examine the conduct of the receiver. He may be liable to account for any money or property of the company if he is guilty of any misfeasance, misapplication or wrongful retention of the companys property, breach of trust or breach of duty to the company. Under s 354, he has a right to seek relief from the court from liability where he has acted honestly, reasonably and ought fairly to be excused. 6. TERMINATION OF RECEIVERSHIP
A receivership is not terminated, but may continue, when the company is placed in a liquidation. In the case of a court-appointed receiver, the court shall decide on the next course of action of the receiver, and whether the receivership is to end. Apart from that, a receivership may be terminated in the following ways: i. Where the assets are realized and the secured debts, including receivership debts, are paid off. The management of the company is returned to the board. ii. Where the debenture holders claims are satisfied and the receivership is withdrawn iii. Where the receiver is removed pursuant to the terms of the debenture. Where the receiver ceases to act, within seven (7) days, he must lodge a notice with CCM. Within one (1) month after he ceases to act, he must lodge a final and separate accounts of receipts and payments for the period of the last preceding accounts up to the date of cessation.
QUESTIONS 1. Explain the differences between liquidation and receivership for a company. (5 marks) 2. 3. What is the difference between a Receiver and a Liquidator? (5 marks)
Briefly distinguish the functions of a Receiver and a Receiver and Manager. (5 marks) Explain what is meant by a Receiver appointed by the debenture holders. (5 marks) Explain the powers of a Receiver appointed by a debenture holder. Explain the effects of an appointment of a Receiver on: a. b. c. the directors and management of a company. the employees of a company. contracts entered into by a company. (5 marks) (5 marks) (5 marks) (5 marks)
4. 5. 6.
Chapter 11
WINDING-UP Learning objectives: After reading this chapter, you should be able to: Explain the three ways of windingup a companys existence. Explain the differences between voluntary windingup and compulsory windingup. Explain the difference between members voluntary windingup and creditors voluntary windingup. Understand the powers and duties of a liquidator Understand how debts are paid and assets distributed in a windingup. 1. TYPES OF WINDING UP
3 ways of termination of a Companys existence Deregistration by CCM - s308 Compulsory Winding-up (By the Court) s 218 Voluntary Winding-up s 254
Members Voluntary Winding-up s 257 to 259
Creditors Voluntary Winding-up S.260 to 263
Windingup, also known as liquidation refers to a process in which a company is foldingup, i.e. on the way to dissolution. During the process, its assets will be sold in order to pay off the outstanding debts. If there is any surplus, this will be distributed among the members according to their priority in repayment of capital and entitlement to surplus assets. Usually, the company is already insolvent, i.e. unable to pay its debts as they fall due. Nevertheless, at times, it could be due to the members wishing to close down the company to start afresh elsewhere. At times, the company can also come to an abrupt end, i.e. when the court orders the company to be wound up on the ground of oppression of minority shareholders Section 181(2(e) and Section 218(1)(i).
Under Section 211 of the Companies Act 1965, there are two modes of winding-up, i.e. by the court or voluntarily. Differences between voluntary windingup and compulsory winding-up A voluntary winding-up is where the company passes a special resolution to wind-up. The date of commencement of voluntary winding-up is at the time of the passing of the resolution for voluntary winding-up s 255(6). A compulsory winding-up is where a creditor or a person entitled to present a petition to wind-up the company does present a petition to the court. The date of commencement of compulsory winding-up is deemed commenced at the time of filing of petition s 219(2).
2. VOLUNTARY WINDING-UP Under Section 254(1), there are three ways in which a company may be wound up voluntarily: i.e. o when a period fixed by the Memorandum or Articles expires, or o where the Memorandum or Articles provide for occurrence of the events in which the company is to be dissolved, and such event occurs; and the general meeting passes a resolution requiring the company to be wound up voluntarily; or o if the company so resolves by special resolution. There are two further classification of voluntary winding-up, i.e. a members' voluntary winding-up and a creditors' voluntary winding-up. The distinction between a members' voluntary winding-up or a creditors voluntary winding-up lies in the solvency of the company.
2.1.
MEMBERS VOLUNTARY WINDING-UP
A members' voluntary winding-up may be done when the company is solvent (able to pay off the debts of the creditors as the debts fall due). The creditors will be paid in full and any surplus assets will be distributed to the members. The members are fully involved in the liquidation process. The procedure for a members voluntary winding-up is as provided under s 257: 1. The directors are to make a declaration of solvency at a meeting of directors, i.e. they have made an inquiry to the companys affairs and are of the opinion that it will be able to pay its debts within a period not exceeding twelve (12) months after the commencement of voluntary winding-up. - The declaration of solvency must be made in Form 66, made about five (5) weeks before the passing of the members resolution. - The declaration must be attached with a statement of affairs of the company containing information in s 257(2), i.e. the assets and liabilities of the company and the estimated expenses of winding up, made up to the latest practicable date before the declaration. - The declaration must be lodged with the Registrar within seven (7) days before the date of sending out the notices of the general meeting (to pass resolution to wind up company). - If the company is unable to pay its debts, the directors are deemed to have no reasonable grounds to make the declaration, and will be guilty of an offence. Penalty: Imprisonment for three (3) years or RM10,000/- or both. 2. An extra-ordinary general meeting (EGM) of the company is to be held to pass a special resolution for winding-up. - The members are responsible for appointing the liquidator. - The Liquidator needs not be an approved liquidator, in fact, any officer can be appointed. 3. After the special resolution is passed, the following must be done: - A copy of the special resolution to be lodged with the Companies Commission of Malaysia (CCM) within seven (7) days. - Notice of the resolution is to be advertised within ten (10) days. - Three (3) months after each anniversary of the winding-up, the liquidator shall call for a meeting to lay the accounts of the transactions for the year
- When liquidation is complete, the liquidator shall call for a final meeting to lay the final accounts. - Six (6) days after the final meeting, the liquidator shall lodge with the CCM a return of the holding of the final meeting together with a copy of the accounts. - The company will be dissolved on expiration of three (3) months after lodgment of the return. 2.2. CREDITORS VOLUNTARY WINDING-UP
Unlike a compulsory winding-up, a creditors voluntary winding-up is not initiated by the creditors, although the company is insolvent. A members voluntary winding up will be converted to a creditors voluntary winding-up in any of the following two (2) ways: 2.2.1. Under Section 259 - After the members have appointed Liquidator This happens after directors have lodged a declaration of solvency, the shareholders have passed a special resolution to wind-up the company and a liquidator is appointed. After being appointed by the members, the liquidator forms an opinion that the company is unable to pay its debts in full. Pursuant to s 259(1), the liquidator must immediately convene a creditors meeting: - The notice summoning the meeting must draw the creditors attention to their right to retain same person as liquidator or to appoint another liquidator. - At the meeting of the creditors, a statement of the assets and liabilities of the company shall be laid. - The creditors may appoint the same person or some other person to be a liquidator - If some other person is appointed as liquidator, the liquidation shall then proceed as a creditors voluntary winding-up. - Notice must be given to the CCM and the Official Receiver within seven (7) days from the liquidators appointment. 2.2.2. Under Section 260 - Where directors are unable to file a declaration of solvency This happens where the directors are unable to file a declaration of solvency, i.e. it is unable to pay its debts in full. Pursuant to s 260, the following procedure must be taken:
1. An extra-ordinary general meeting (EGM) of the company is to be held to pass a special resolution for winding-up. -The company shall nominate a person to be the liquidator -The company shall also nominate five (5) representatives to be members of the Committee of Inspection. 2. The liquidator must then convene a meeting of its creditors - Notice of the creditors meeting is to be sent to the creditors simultaneously with the sending of notice of the EGM. - At least seven (7) clear days notice is to be sent by post to the creditors and notice must be advertised at least seven (7) clear days also, in a newspaper circulating generally throughout Malaysia. - The notice must be accompanied with statement showing the names of all creditors and the amounts of their claims. 4. The meeting of creditors is to be held on the same day or next day after the earlier members EGM (to pass the resolution for winding-up). - At the meeting of creditors, a statement of the companys assets and liabilities and a list of creditors and the estimated amounts of their claims shall be laid. - The directors shall appoint one director to attend the meeting together with the Secretary to disclose the companys affairs and the circumstances leading up to the proposed winding-up. - The creditors may then nominate either the same person or some other person to be the Approved Liquidator. - A director or member may apply to the court for order that the person nominated by the company be appointed either jointly or in place with the person nominated by the creditors. - The creditors shall decide the composition of the Committee of Inspection .
3. COMPULSORY WINDING-UP Compulsory winding-up is started by any person listed in s 217(1), who is entitled to bring a petition for winding-up. The petitioner (i.e. the applicant) must establish one of the grounds in s 218(1). After filing in the petition in the High Court, he must advertise the petition and notify the Companies Commission of Malaysia (CCM). Winding-up is therefore deemed commenced at the time of the filing of petition s 219(2).
3.1.
S.217(1) - PERSONS WHO ARE ENTITLED TO PETITION FOR WINDING-UP
Under Section 217(1), among the persons who are entitled to present a winding-up petition are: o the company; o any creditor, including a contingent or prospective creditor (i.e. a creditor whose payment is only due at a future date) o a contributory. Where he is deceased, he shall be represented by his personal representative, and if he is a bankrupt, he is represented by the Director-General of Insolvency o the liquidator o the Minister pursuant to S.205 (investigation of a declared Co) or based on S.218(1)(d) (members number reduced below two); o Bank Negara Malaysia (in the case of banks and finance companies under the purview of the Ministry of Finance) and o the Registrar of Companies on the ground in S.218(1)(m) (purpose unlawful, against security, public order or morality) or (n) (purpose prejudicial to national security or public interest). A person who has obtained judgment against the company is a judgment creditor. He may present the winding-up petition, unless the judgment is set aside or stayed (i.e. suspended) pending appeal. Under Section 4(1), a contributory refers to: - a person who is liable, as a member or past member, to contribute to the assets of the company in the event of winding-up; and - a holder of fully paid shares in the company. A contributory may bring a petition for winding-up if he can show that there are surplus assets available for distribution.
3.2.
GROUNDS FOR WINDING-UP
Under Section 218(1), the court may order the winding-up of a company on any of the following grounds: (a) The company has by special resolution resolved that the company be wound-up by the court. (b) If a public company with share capital fails to lodge statutory report or hold a statutory meeting.
(c)
The company does not commence business within a year from its incorporation or suspends its business for a whole year. the number of members is reduced below two. The sole continuing member who carries on business for more than six (6) months would be liable personally for the companys debts if he fails to find another member or apply to wind-up. This does not apply to a wholly-owned subsidiary, in which the parent company is the sole member. the company is unable to pay its debts. In conducting the affairs of the company, the directors have acted in their own interests rather than in the interests of the members as a whole, or in any other manner unfair or unjust to other members. an Inspector appointed under Part IX has reported that he is of opinion thati. the company cannot pay its debts and should be wound up; or ii. it is in the interests of the public, the shareholders or the creditors that the company be wound-up;
(d)
(e) (f)
(g)
(h) when a fixed term has expired or a specific event takes place which has been fixed by the Memorandum and Articles and which provides for the company to be dissolved; (i) the court is of opinion that it is just and equitable that the Company be wound-up;
(j) & (k) where a company carrying on the business of banking or holding such licences, has contravened the provisions of the Banking and Financial Institutions Act 1989 or the Islamic Banking Act 1983 (m) the company is being used for unlawful purposes or any purpose prejudicial to or incompatible with peace, welfare, security, public order, good order or morality in Malaysia.
3.3.
RESTRAIN OF WINDING-UP ACTION
The court will not make a winding-up order if the action was taken for an improper or illegal purpose, or is otherwise vexatious or an abuse of process of the court.
The court may grant an injunction (i.e. an order to prevent something from being done or compelling something to be done) to restrain an applicant from presenting a petition if: - The applicant is not a person entitled to bring a petition under s 217(1) - The application does not show any of the grounds in s 218(1). - it is vexatious or an abuse of process of the court. Similarly, under s 243(1), the court may make order to stay (i.e. suspend) the winding-up petition either totally or for a limited time. 3.4. PROVISIONAL LIQUIDATOR
A provisional liquidator is a liquidator appointed by the court under s 231, at any time after the presentation (i.e. filing) of the winding-up petition to before the making of the winding-up order. The purpose is to protect the companys assets from being dissipated or lost prior to the hearing. The provisional liquidator shall ensure that the status quo (i.e. the existing positions) remains until the court makes the winding-up order. He shall have the functions and powers of a liquidator subject to such limitations and restrictions imposed by the court. 3.5. THE MEANING OF U NABLE TO PAY ITS DEBTS
The most common ground for presenting a winding up petition is under s 218(1)(e), that the company is unable to pay its debts, after considering its contingent and prospective liabilities. Under s 218(2), the company is deemed unable to pay its debts in three (3) instances: - a creditor serves on the company a statutory demand under s 218(2)(a), demanding that a debt exceeding RM500/- be paid within twenty-one (21) days and the company fails to pay. - a creditor fails to obtain full satisfaction from the execution of a court judgment against the company - it is proved to the courts satisfaction that, after considering any contingent and prospective liabilities of company, the company is unable to pay its debts. Insolvency refers to the company being unable to pay its debts as they fall due, and that it does not have assets available to meet its current liabilities.
The companys entire financial position must be considered, not just a temporary lack of liquidity Lian Keow Sdn Bhd v Overseas Credit Finance (M) Sdn Bhd [1988] 1 MLJ 449. If the company has a bona fide disputed debt, the court will not grant a windingup order. Similarly, if it is clear that the company is insolvent, it will order winding-up.
3.6.
STATUTORY DEMAND TO BE MADE S.218(2)(a)
A statutory demand is a way for a creditor to prove that the company is insolvent. Pursuant to s 218(2)(a), where a creditor is owed a debt exceeding RM500/ and the debt is due, he can serve a demand on the company, requiring it to pay within twentyone (21) days from the date of the service of the demand. If the company fails to do so, it shall be deemed to be unable to pay its debts. The statutory demand must be in writing and should warn the company that a winding-up application will be made if the demand is not met. The demand must specify the precise amount due and payable, i.e. must exceed RM500/. Service of the demand must be made personally, and the demand must come to the notice of the person upon whom it is served. If a statutory demand is defective, e.g. with misstatement of amount, misdescription of debt or mis-description of a person/entity, it may be set aside and the petition, if brought, will be dismissed, unless the creditor can furnish other evidence of insolvency .
3.7.
BONA FIDE DISPUTED DEBTS
A bona fide disputed debt refers to the company disputing the debt in good faith, e.g. by proving that the debts did not exist or for an incorrect amount. The company may also try to claim a set-off or counter-claim against the creditor. If the amount is mis-stated and exceeds the sum actually due, the demand is still valid as long as the actual debt exceed the statutory amount of above RM500. The company needs to prove that there is a substantial bona fide disputed debt, as opposed to merely denying the existence of the debt. The court will set aside a statutory demand or dismiss a winding-up petition if the debt is disputed on substantial grounds Mark Jaya Engineering Sdn Bhd v LFY
Construction Sdn Bhd [1990] 1 MLJ 372.
4. 4.1.
EFFECTS OF WINDING-UP EFFECTS OF VOLUNTARY WINDING-UP
Under s 256(1), from commencement of the winding-up, the company shall cease to carry on its business, unless in the liquidators opinion, this is required for the beneficial winding-up thereof. Note: the date of commencement of voluntary winding-up is at the time of the passing of the resolution for voluntary winding-up s 255(6). The corporate state and corporate powers of the company shall continue until it is dissolves, notwithstanding its Articles. Under s 256(2), any transfer of shares after the commencement of the winding-up and any alternation in status of the members shall be void, unless it is a transfer to the liquidator or with his sanction. A voluntary winding up does mean dismissal or termination of the companys employees. They continue under a new contract, unless the company is insolvent.
4.2.
EFFECTS OF COMPULSORY WINDING-UP
A compulsory winding-up commences on the date of the presentation (filing) of the winding-up petition, and not on the date of the winding-up order. The following steps must be taken by the company directors and/or officers: 1. Under s 234, a statement of affairs must be filed. Persons who were directors or secretary at the time of winding-up order are required to prepare and submit to the liquidator or the Director-General of Insolvency a Statement of Affairs within fourteen (14) days of the winding-up order: Others who may be required: present or former officers, or persons who have taken part in formation of Co within a year of the winding-up. Statement of Affairs is to be prepared in accordance with Form 61, showing the affairs of the company as of the date of the winding up order: - particulars of assets, debts and liabilities of the company - the names and addresses of its creditors; - the securities held by the creditor and the dates when the securities were given; and - such other information as is prescribed or as the liquidator requires. 2. The directors and officers must deliver up any property, books and papers of the company that are under their custody or control.
4.2.1. EFFECT ON THE COMPANY , DIRECTORS AND MANAGEMENT The company continues to exist as a legal entity when windingup order is made and the liquidator is appointed. Its corporate state and corporate powers will continue until the company is finally dissolved. The company is prevented from carrying on its business except for t h e purpose of winding it up. The companys properties are not automatically transferred to the liquidator. Nevertheless, under s 223, any disposition of the property made after the commencement of winding up by the court shall be void. All documents and negotiable instruments issued or signed in the companys name must have the words in liquidation set out after or beneath the company name. In both types of winding-up (voluntary and compulsory), the directors powers to manage the companys affairs cease. 4.2.2. E FFECT ON THE COMPANY MEMBERS Under s 223, any transfer of shares or alteration in the status of the members made after the commencement of the winding-up by the court shall be void, unless with the order of the court. 4.2.3. E FFECT ON THE COMPANY E MPLOYEES In a compulsory winding-up, the employees employment will be terminated and they are dismissed, unless the liquidator wishes to continue their employment for a limited period. 4.2.4. E FFECTS O N C REDITORS Under s 222, at any time after the presentation of the winding-up petition till the winding-up order, the company or any creditor may apply to the court to stay or restrain further proceedings against the company. Thus, once the court grants this restraining order, no legal proceedings may be commenced or continued without the leave of court. Under s 223, any disposition of the property made after the commencement of winding up by the court shall be void, unless it is made by the liquidator or the court orders otherwise. The property can be recovered by the liquidator. Under s 224, any attachment, distress or execution against the company after the commencement of the winding-up by the court shall be void.
Under s 293, which deals with undue preference transactions, any transfer, delivery of goods, payments, execution or other acts relating to property done by or against a company shall be void or voidable for undue preference in the same manner like bankruptcy. Similarly, any transfer or assignment by company of all its property to trustees for benefit of all its creditors will be void. Under s 294, a floating charge on a companys undertaking or property, which is created within 6 months of the commencement of the winding-up will be invalid except to the amount of cash paid to the company, unless it can be proved that the company was solvent immediately after the creation of the charge. 4.2.5. E FFECTS O N RECEIVERS AND RECEIVER & MANAGER In the case of secured creditors like debenture-holders who have security of charges over a companys assets, they are still able to appoint a receiver. They have an option to step outside the winding-up process and to hold on to their security. Nevertheless, the Receiver or Receiver and Manager's power to retain and sell the secured assets may be affected by the liquidation. In Kimlin Housing Development Sdn Bhd v Bank Bumiputera Malaysia Bhd [1997] 2 MLJ 805, the court held that a receiver and manager has no power to sell a charged land by private treaty (i.e. private sale) without going through the formal foreclosure proceedings as were provided under the National Land Code. Upon liquidation of the chargor company, the powers of the receiver and manager to carry on the companys business similarly ceased. He ceased to be the agent of the company. In Melantrans Sdn Bhd v Carah Enterprise Sdn Bhd [2003] 2 CLJ 86, a different decision was arrived at. The court held that since there was a valid power of attorney contained in the debenture, the receiver and manager was allowed to sell the charged land by private treaty, as he was acting on behalf of the chargor. In K Balasubramaniam v MBF Finance Bhd [2005] 1 CLJ 793, it was held that despite the winding up of a company and appointment of a liquidator, the receiver and manager continued to have a right to take custody and control of all assets that are charged under the debenture. He was entitled to the possession of the charged assets and needed not surrender to the liquidator unless those assets were redeemed by the liquidator or if there was surplus proceeds from the sale of the assets.
4.3.
PRIORITY OF PAYMENT
The secured Creditors will have priority using the assets secured. As for the unsecured Creditors, priority is based on s 292: a. The costs and expenses of winding up b. all wages or salary, including any allowances or reimbursement under any contract of employment or award, of any employee not exceeding RM1,500/- in respect of services rendered by him within a period of four months before the date of appointment of the receiver. c. All amounts due in respect of workers compensation accrued before the date of appointment of the receiver. d. All remuneration payable to any employee in respect of vacation leave accrued in respect of any period before the date of appointment of the receiver. e. All amounts due in respect of contributions payable by the company, as the employer under any written law relating to employee superannuation, provident funds or retirement benefits, during the twelve (12) months before the date of appointment of the receiver. f. The amount of all federal tax assessed under any written law before the date of appointment of the receiver. g. Any money advanced by a person for the payment to any employee on account of wages, salary or vacation leave. h. Any money received by the company from an insurer under a third party insurance policy shall be paid to the third party where liability has been incurred by the company.
5.
LIQUIDATORS
A Liquidators function is to carry out the winding-up process, which leads to the eventual dissolution of the company. 5.1. APPOINTMENT
5.1.1. Voluntary winding-up In a members voluntary winding-up, the liquidator is appointed by the members at the extraordinary general meeting in which a special resolution was passed to wind-up the company.
In a creditors voluntary winding up, the appointment of liquidator depends on how the voluntary liquidation comes about: s 260 Where directors are unable to file a declaration of solvency: At the extraordinary general meeting in which a special resolution is passed for winding-up, the members may nominate a person as liquidator. Subsequently, at the meeting of creditors, the creditors may appoint the same person or some other person to be the liquidator. s 259 - After the members have appointed the liquidator: If the liquidator is of the opinion that the company is unable to pay its debts in full, he needs to convene a creditors meeting. The creditors may appoint the same person or some other person to be the liquidator.
5.1.2. Compulsory winding-up In a compulsory winding-up, the liquidator is appointed by the court when it makes a winding-up order. The Director-General of Insolvency shall act as provisional liquidator until an approved liquidator is nominated either by the meeting of creditors and contributories or by the court. The liquidator must give his consent in writing to act.
5.2.
QUALIFICATION & DISQUALIFICATION OF LIQUIDATORS
5.2.1. Who may be appointed as Liquidator A Liquidator appointed by the Court must be either be the Director-General of Insolvency or an approved liquidator. He is an officer of the court. In the case of a liquidator appointed in members or creditors voluntary winding-up, he may be director or secretary of the company. Under s 8, liquidators must be persons approved by the Minister of Finance. He must have experience and capacity to be a liquidator.
5.2.2. Disqualification s 10 Under s 10 the following persons are disqualified from being liquidators: o If he is not an approved liquidator o If he is indebted to the company or its related corporations in an amount exceeding RM2,500/-. o If he is - an officer of the company - a partner, employer or employee of an officer of the company; or - a partner or employee of an employee of an officer of the company. o If he becomes a bankrupt or makes an arrangement with his creditors o If he is convicted of an offence involving fraud or dishonesty, punishable by imprisonment for three (3) months or more. The above requirements shall not apply to: o a members' voluntary winding-up: or o a creditors' voluntary winding-up: if a majority of the creditors resolves (in a meeting held for this purpose) that these disqualifications shall not apply. Under s 266, the court may remove a liquidator on the grounds of the liquidators unfitness for office, e.g. lack of independence or impartiality or having conflict of interests which may interfere with his duties. Under s 268(1), the acts of a liquidator shall still be valid notwithstanding any defects that may afterwards be discovered in his appointment or qualification. Similarly, any conveyance, dealing or disposition of company's property by a liquidator shall be valid in favour of any person who acquires the property bona fide (in good faith) for value without notice of such defect.
5.3.
P OWERS OF L IQUIDATOR
A liquidator may exercise his powers as he sees fit in the management of the companys affairs and property. Under s 237(3), he may apply to the court for direction in relation to any particular matter under winding-up. He is regarded as an agent of the company and his actions will bind the company. He is not personally liable for contracts made on behalf of the company.
5.3.1. Statutory powers of liquidator under a compulsory winding-up Under s 236, among the powers of the liquidator are: - To carry on the business of the company so far as it is necessary for the beneficial winding-up of the company. - To pay any class of creditors in full, subject to the priorities set out in s 292 - To make any compromise or arrangement with creditors and contributories in relation to their claims, present or future - To bring or defend any action or legal proceedings in the companys name - To compromise any debt due to the company - To sell the immovable and movable property of the company by public auction or private contract. - To sign documents or indorse any bills of exchange in the name of the company and, where necessary, use the companys common seal - To raise money on the security of the companys assets - To appoint agent to do any business that the Liquidator is unable to do in person, and - To do such other things as are necessary for winding-up the affairs of Co and distributing its assets. Under s 252, certain powers of the court are delegated to the liquidator as an officer of the court: - The holding and conducting of meetings to ascertain the wishes of creditors and contributories - The settling of lists of contributories, rectifying the register of members by special leave of the court - The paying, delivery, surrender or transfer of money, property or books to Liquidator - The making of calls and adjusting the rights of contributories - The fixing of a time within which the debts and claims must be proved.
5.3.2. Powers of a liquidator in a voluntary winding-up Under s 269, In a members voluntary winding-up, a liquidator may exercise the powers given by s 236 if approved by a special resolution of the general meeting. In a creditors voluntary winding-up, the liquidator must obtain the approval of the court or committee of inspection. Under s 274(1), a liquidator, contributory or creditor may apply to the court to exercise all or any of the powers which the court might exercise if the company were being wound up by the court.
5.3.3. Other powers of the liquidator Under s 2.77(5), the liquidator may apply to court for an order to compel any contributory, trustee, receiver, agent or officer of the company to hand over the books and records to which the company is prima facie (i.e. on the face of it) entitled. Under s 296, the liquidator may disclaim onerous property, i.e. any estate or interest in land that is burdened with onerous covenants, shares in other corporations, unprofitable contracts or any other property that is unsaleable. Once disclaimed, the rights, interests and liabilities of the company is terminated from the date of the disclaimer.
5.4.
DUTIES
OF LIQUIDATORS
A Liquidator is an agent of the company, and thus, he owes fiduciary duties and duties of skill, care and diligence, just like directors. His main duties are to take possession and protect assets of the company, make a list of contributories, realize the assets and apply the proceeds in due course of liquidation. Although a liquidator may appoint agents, he must not delegate his duties totally. Among the duties of a liquidator: i. He must open a bank account, i.e. the liquidators general account, to which money received by him is deposited. ii. He must maintain a proper record of the winding-up, especially books recording minutes of meetings of contributories and creditors. iii. He must hold annual meetings. If a voluntary winding-up continues for more than one (1) year, he shall lay a summary of the statement of receipt and payments and a brief report on the liquidation. In the case of a members' voluntary winding-up: the annual meeting shall be held within three (3) months of each anniversary of the commencement of the windingup. In the case of a creditors' voluntary winding-up: the annual meeting of the company and creditors shall be held within three (3) months of each anniversary of the commencement of the winding-up.
iv He is to collect, preserve, realize and distribute the companys assets. Under s 233(1), he shall take into his custody or control all properties and things in action to which the company is entitled. v. He may invest surplus funds on general accounts if they are in excess of the amount required to pay off creditors demands. He may invest the sum in securities issued by the Government or deposit it with any bank. The interest received shall form part of Company assets. vi. In the case of unclaimed dividends or moneys arising from the property of the company, he shall pay to the Director General of Insolvency. vii. He is to report on breaches of the Companies Act, where it appears that persons connected with a company are guilty of offences, fraud, concealment of material facts or breach of duty. 5.5. REMEDIES
FOR BREACH OF DUTIES BY LIQUIDATOR
Under s 277, an application may be made by the Registrar or the Director General of Insolvency to the court to take action against the liquidator if it appears to them that a liquidator has not faithfully perform his duties or has not observed requirements of the Act, or a complaint is made by any creditor or contributory as to his conduct. If the company has suffered loss as a result of liquidators misfeasance, neglect or omission, the Liquidator may be ordered to make good that loss s 305.
6.
DISSOLUTION OF THE COMPANY
In compulsory winding-up, the company is dissolved in the following manner: o s 239 - After the companys properties have been realized and the final dividend has been distributed to its creditors and the rights of the members/contributories have been adjusted among themselves, a liquidator may apply to the court for an order that he be released and the company be dissolved. o s 240 When the court makes an order that the company be dissolved, the company shall be dissolved from the date of the order. o s 281 - Within one (1) month of ceasing to act, the liquidator must lodge with the Registrar and the Director-General of Insolvency an account of the conduct of liquidation, explaining the distribution of the companys property.
QUESTIONS 1. One of the grounds for winding-up under Section 218(1) of the Companies Act 1965 is when a company is unable to pay its debts. Explain the meaning of a company being unable to pay its debts. (5 marks) A statutory demand is required in order for a creditor to establish that the debtor company is insolvent. Explain the requirements on making a statutory demand under Section 218(2)(a) Companies Act 1965. (5 marks) Explain what happens if a company has a bona-fide disputed debts. (5 marks)
2.
3. 4.
Describe two (2) circumstances under which a provisional liquidator may be appointed, and the functions and powers of such Liquidator. (5 marks) In a compulsory winding-up, a liquidator must obtain leave of the court to act and he must consent in writing to act. State four (4) other circumstances in which a liquidator would be disqualified to act under Section 10 of the Companies Act 1965. (5 marks) Explain what is meant by: a. b. a members voluntary winding-up. a creditors voluntary winding-up. (5 marks) (5 marks) (10 marks) (10 marks)
5.
6.
7. 8.
Describe the powers of a Liquidator. Describe the duties of a Liquidator.
Chapter 12
REGULATORY BODIES LEARNING OBJECTIVES After reading this chapter, you should be able to: Identify the different regulatory bodies that regulate companies in Malaysia Explain the functions and roles of the Companies Commission of Malaysia Explain the functions and roles of the Securities Commission Explain the functions and roles of Bursa Malaysia
1.
EXTERNAL REGULATORY BODIES
There are three (3) main regulatory bodies that regulate companies in Malaysia: - The Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) - The Securities Commission (Suruhanjaya Sekuriti) - Bursa Malaysia At times, the regulatory bodies have overlapping jurisdiction over companies: - The Companies Commission of Malaysia incorporates all limited companies in Malaysia, but regulates primarily private companies and non-listed public companies - The Securities Commission regulates public companies, i.e. the non-listed and listed public companies - Bursa Malaysia regulates public companies that are listed in its stock exchange.
2.
COMPANIES COMMISSION OF MALAYSIA
The Companies Commission of Malaysia (Suruhanjaya Syarikat Malaysia) is a statutory body set up to regulates companies, partnerships and sole proprietorships. The CCM came into operation on 16 April 2002, as a result of a merger between the Registrar of Companies (ROC) and the Registrar of Businesses (ROB) in Malaysia. It is created under the Companies Commission of Malaysia Act 2001. Its main activities are to incorporate companies, register businesses and ensuring compliance with the business registration and corporate legislation.
Companies Commission of Malaysia CCM
Registrar of Companies (ROC) - Incorporation of companies
Registrar of Business (ROB) - Registration of a sole proprietorship & partnership firm
The CCM is managed by a board of commissioners. The Chief Executive Officer of CCM is the Registrar of Companies. The Commission is responsible for the administration and enforcement of: - Companies Act 1965 - Registration of Businesses Act 1956 - Trust Companies Act 1949 - Kootu Funds (Prohibition) Act 1971 - any subsidiary legislation made under the Acts specified above such as: Companies Regulations 1966 and Registration of Businesses Rules 1957.
2.1.
Functions of the CCM
i. To ensure that the provisions of the Companies Act 1965, Registration of Businesses Act 1956, Companies Commission of Malaysia Act 2001, and any other laws are administered, enforced and complied with. ii. to act as agent of the Government and to provide services in administering, collecting and enforcing payment of prescribed fees and other charges iii. To regulate matters relating to companies and businesses iv. To encourage and promote proper conducts amongst directors, company secretaries, managers and other officers of a company to ensure that all corporate and business activities are conducted in accordance with established good governance of a company. iv. To enhance and promote the supply of corporate information under any of the laws administered. v. To develop a facility for analysis of corporate information for supply to the public
vi. To commission studies on matters relating to corporate and business activities vii. To advise the Minister generally on matters pertaining to corporate and business activities viii. To carry out all such activities and do all such things that are necessary for the administration of the Commission.
2.2.
Powers of the CCM
to impose fees or charges for services rendered as prescribed by the Minister to appoint agents, experts or consultants to assist the Companies Commission in carrying out its functions; to carry out human resource development plans as well as cooperative and financing programmes for the effective implementation of its functions; to collaborate with any other organisations, bodies or agencies to form smart partnerships in implementing its functions.
3.
SECURITIES COMMISSION
The Securities Commission (SC) was established on 1 March 1993 under the Securities
Commission Act 1993.

It is a statutory body vested (i.e. given) with powers of investigation and enforcement. Section 15 of the SCA 1993 sets out the functions of the SC. Among its functions are: To ensure that the provisions of the securities laws are complied with. To supervise and monitor the activities of any exchanges, clearing house and central depositories. To register prospectuses of corporations other than unlisted recreational clubs It is the approving authority for corporate bond issues To regulate all matters relating to securities and future contracts To regulate the take over and mergers of companies To regulate all matters relating to unit trust schemes To oversee those who are involved in the broking business. To licence and supervise all licensed persons, To promote the development of securities and future markets in Malaysia including research and training in connection with these. To advise the Minister on all matters relating to securities and futures industries
The SCs ultimate responsibility is the protection of investors in the capital market. It actively investigates complaints from the public on improper conduct and other irregularities in the securities and futures markets to assess whether they disclose offences under the securities laws. E.g. investment scams for public money This is done by the Investor Affairs & Complaints Department of the Securities Commission (SC). The categories of complaints may be against public listed companies, licensed intermediaries, share registrars, issuing houses, stock exchanges, dealings in unit trust and dealings in securities and futures. Each complaint will be reviewed and evaluated for referral to the appropriate department within the SC. Once a possible breach of securities laws is detected, the matter will be investigated further by the Investigation Department of the SC.
4.
BURSA MALAYSIA
Bursa Malaysia is an exchange holding company approved under Section 15 of the Capital Markets and Services Act 2007. It was formerly known as the Kuala Lumpur Stock Exchange (KLSE). On 5-1-2004, the KLSE completed its conversion from a company limited by guarantee into a public company limited by shares. The conversion is done by the process of demutualisation, i.e. a conversion of a nonprofit organization into a profit-oriented company. After the demutualisation, Bursa Malaysia Berhad becomes an exchange holding company that owned Bursa Malaysia Securities Berhad, the entity that operates current stock exchange. The exchange offers a range of exchange-related services, i.e. trading, clearing, settlement and depository services in relation to securities. Bursa Malaysia is a self-regulatory organization with its own Memorandum & Articles of Association (M&A) and two sets of rules for its participatory organizations (previously known as member companies) in securities dealing. It issued its initial public offering of shares and was listed on the Main Board of Bursa Malaysia Securities Berhad on 18-3-2005 There are about a thousand (1,000) companies listed on Bursa Malaysia Securities Berhad. The companies with large capitalization are listed on the Main Board, while medium-sized companies are listed on the Second Board. In case of the MESDAQ Market, it lists high growth technology companies.
4.1.
THE SUBSIDIARIES OF BURSA MALAYSIA
Bursa Malaysia, through its subsidiaries, own and operate various businesses listed below. Bursa Malaysia Securities Berhad (BMSB) It operates and maintains the securities exchange for listing and trading of securities Bursa Malaysia Derivatives Bhd (BMDB) (formerly known as MDEX) It operates and maintains an exchange for the futures, options and derivatives market Bursa Malaysia Bonds Sdn Bhd (Bursa Bonds) It operates and maintains a registered electronic facility for the secondary bond market. Labuan International Financial Exchange Inc (LFX) It operates and maintains an offshore financial exchange. Bursa Malaysia Securities Clearing Sdn Bhd (BMSC), formerly known as SCANS it operates and maintains a clearing and settlement services for the securities traded on the stock exchange. Bursa Malaysia Derivatives Clearing Bhd (BMDC), formerly known as Malaysia Derivatives Clearing House Sdn Bhd it operates and maintains a clearing and settlement services for the futures and options exchange operated by Bursa Malaysia Derivatives Berhad Bursa Malaysia Depository Sdn Bhd (BMD), formerly known as Malaysian Central Depository Sdn Bhd it operates and maintains a central depository system for the depositing and transferring of securities without physical delivery of scrips. Bursa Malaysia Depository Nominees Sdn Bhd (Bursa Nominees) it acts as a nominee for the central depository (i.e. BMD), receiving securities that are deposited with it for safe custody and management. Bursa Malaysia Information Sdn Bhd it provides and disseminates information pertaining to prices of securities quoted on the exchanges.
4.2.
THE ROLES AND REGULATORY FUNCTIONS OF BURSA MALAYSIA AND ITS SUBSIDIARIES
Bursa Malaysia, through its subsidiaries, plays an important role in regulating the various exchange markets, the participants and companies listed on those exchanges. Its responsibilities are to ensure that The exchange markets are run smoothly, orderly and transparently The investors interests are safeguarded and protected, and The participants comply with the various listing requirements, listing rules and regulations issued by the exchanges, clearing houses and depository agencies. The regulatory functions of Bursa Malaysia are as follow: i) Overseeing the listing approval process of companies, based on the listing requirements of the Bursa Malaysia Securities Berhad (BMSB). ii) Monitoring publiclisted companies compliance with the BMSB listing requirements. It would take enforcement actions for any breach of the listing requirements. iii) Supervising activities of market intermediaries in the securities and futures markets. It enforces the rules and regulations applicable to these market intermediaries. iv) Conducting surveillance and investigation of market activities, especially unusual market activities, on the securities and futures markets. v) Ensuring proper risk management is undertaken of the risks faced by its subsidiaries. vi) Providing legal advisory services to its subsidiaries.
QUESTIONS 1. 2. 3. Describe the regulatory bodies that regulate companies in Malaysia. Explain the functions of the Companies Commission of Malaysia. (5 marks) (10 marks)
Explain FIVE (5) functions of the Securities Commission under Section 15 of the Securities Commission Act 1993. (5 marks) List down the various subsidiaries of Bursa Malaysia. Explain the regulatory functions of Bursa Malaysia. (10 marks) (10 marks)
4. 5.

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CERTIFICATE IN CORPORATE ADMINISTRATION (CertCA)

STUDY MANUAL COMPLIANCE AND STATUTORY FORMS

Compliance and Statutory Forms 1

Compliance and Statutory Forms 2

Compliance and Statutory Forms 3

BUSINESS ORGANIZATIONS IN MALAYSIA

DISTINCTION BETWEEN A LIMITED COMPANY AND A PARTNERSHIP

Compliance and Statutory Forms 5

Company: It is an artificial legal person, and has an entity (personality) that is

Compliance and Statutory Forms 6

Legal actions and proceedings

Company: Once incorporated, a company needs to comply with various provisions

Company: A company is able to raise capital by offering shares or borrowing money.

Partnership: The capital in a partnership is derived from the partners contributions

Companies Act 1965.

Classification of companies according to liability of members s 14(2) Companies Act 1965:

Compliance and Statutory Forms 8

Limited by shares and guarantee (no longer allowed)

Business Organisations SOLE PROPRIETORSHIP PARTNERSHIP COMPANIES UNDER CA 1965

Private Companies (Sdn Bhd)

Public Companies (Bhd)

Exempt private companies

Non-listed public companies

Listed public companies

Compliance and Statutory Forms 9

COMPANY LIMITED BY SHARES

COMPANY LIMITED BY GUARANTEE

Compliance and Statutory Forms10

Compliance and Statutory Forms12

Compliance and Statutory Forms13

Private company: After receiving its certificate of incorporation, it may commence

s 5(1) - When a Holding-subsidiary relationship exists: Syarikat H

Compliance and Statutory Forms15

Syarikat H hold all shares by itself or through nominees in

Syarikat Y (Syarikat Y holds all shares by itself or through nominees in Syarikat S

Compliance and Statutory Forms16

Compliance and Statutory Forms17

Compliance and Statutory Forms19

NAME SEARCH AND RESERVATION OF NAME

Compliance and Statutory Forms 20

Compliance and Statutory Forms 21

Compliance and Statutory Forms 22

Compliance and Statutory Forms 23

PROMOTERS AND PREINCORPORATION CONTRACTS

Compliance and Statutory Forms 25

CERTIFICATE OF ENTITLEMENT TO COMMENCE BUSINESS

Compliance and Statutory Forms 26

Compliance and Statutory Forms 27

Compliance and Statutory Forms 28

MAINTENANCE OF STATUTORY REGISTERS AND OTHER RECORDS

Compliance and Statutory Forms 30

Statutory Registers and other records

Register of Directors Managers & Secretary

Register of Option Holders

Register of Debenture Holders

Register of Substantial Shareholders

Register of Directors Shareholdings Interests and Debentures

Register of Participatory Interest Holders

REGISTER OF MEMBERS (S 158)

Compliance and Statutory Forms 31

REGISTER OF DIRECTORS, MANAGERS AND SECRETARIES (S 141)

Compliance and Statutory Forms 32

Compliance and Statutory Forms 33