Company Law Lecture #1

a company is a form of business organization and a type of corporation. Defined under s4(1) of CA 1965 as a company incorporated pursuant to this Act or pursuant to any corresponding previous enactment. S14(3) of the CA 1965 prohibits the formation of an unincorporated association or partnership for the purpose of carrying on any business to acquire gains, unless; it is an association or partnership formed for the purpose of carrying on any profession or calling declared by the Minister to be customarily carried out by an association or partnership under the CA 1965 It consists of not more than 20 members It is incorporated under CA1965 It is formed in pursuance of some other written law of letterpatent.

Sole prop: The term is used to describe individual carrying on a business in his own name. There is no separation between the business and personal assets or obligations of the person conducting the business, The sole prop signs all contracts under personal capacity and will be personally liable for it. Advantage: less formalities in terms of its formation and registration. In term of tax payment: the income generated by the business is the income of the proprietor, the proprietor is the taxpayer. The business’ losses or profits can be offset against the proprietor’s other income.

Partnership: It is an association of people carrying on business in common with a view of profit. The relationship between partners & partners, partners & third parties are governed by PA1961. In term of formation: no need to take any formal legal steps to form partnership – if recorded terms are stipulated in ‘partnership agreement’. Rules in s26 and s27 of PA1961 binds partnership unless otherwise agreed in Partnership Agreement. There is no separate legal entity Like sole prop. The individual partners must own assets of and incur the obligations relating to the partnership ‘s business personally and in their own names. Partners do not have limited liability – unlike shareholders. Partners are agents for each other with respect to the conduct of the business. If the identity of the partners changes the original partnership is dissolved and a new one is formed. EG; a partner resigns or a new partner joins.

Effect of Incorporation General: Effect of incorporating a company is provided under s16(5). It technically means that a company is an artificial person composed of natural person. This body corporate: Can exercise all the functions of an incorporated company Can sue and be sued Has perpetual succession; and Liabilities of its members may be limited. Hence, an incorporated company has the status of a natural person.

The doctrine of separate legal entity: Case: Sunrise Sdn Bhd v First Profiel (M) Sdn Bhd & anor [1997] 1 CLJ 529, FC The law treats a company as an independent legal person, separate and distinct from its individual members and directors. This doctrine of separate legal personality was firmly established by HOL in Solomon v A. Solomon & Co. Ltd (1897) AC 22, HL

Facts: Solomon was a boot and shoe manufacturer trading as a successful sole trader. As a result of the pressure from his children, he formed a limited liability company and sold his business to the company. The requirement in the company legislation at that time to form a limited company was that there must be at least 7 members. He gave 1 share each to his family members as his nominees (6 persons) and Solomon took the rest of the shares. The company paid Solomon part of the purchase price for the business and agreed to pay the remainder over time. To secure its obligation to pay, the company gave Salomon security over its assets in the form of a company charge. The effect of the charge was that the company’s assets has to be used to pay out Salomon in full before they could be applied to pay out the company’s other unsecured creditor. Legal issue: When the company’s business failed, the value of the assets was insufficient to pay out Salomon and other creditors. The creditors argued that Salomon should not receive the benefit of the charge because the degree of control he has over the company, he would have been required to indemnify the company for the debts it had incurred. Court at first instance: The company was merely Solomon’s nominee acting as hid agent and therefore Solomon had to indemnify the company’s creditors personally. Court of appeal: Rejected the appeal – affirmed the presiding court’s decision. HOL: Reversed Court of Appeal’s decision. Solomon & Co Ltd was different from Salomon as an individual.

Other cases applying Salomon’s case: Lee v Lee’s Air Farming Ltd [1961] AC 12, PC PC held that Lee and the company were separate legal persons and it was possible for Lee to enter into a contract of employment with the company. Also applied in the case of holding and subsidiaries companies: People’s Insurance Co. (M) Sdn Bhd v People’s Insurance Co. Ltd & Ors Zakaria yatim J quoted Chen LJ in Ebbw Vale Urban District Council v South Wales Traffic Are Licensing Authority: ‘Under the ordinary rule of law, a parent company and subsidiary company, even a 100% company, are distinct legal entities…’

Liability of members to contribute in the event of winding up. Two types of members’s liability: limited and unlimited. Unlimited: despite of separate legal entity, members may still have unlimited liability for the co’s debts – no limi to their liability. Limited: Re Application of Yee Yut Ee Where it is limited by shares, the member is liable for the amount unpaid on their shares. Where it is limited by guarantee, the member is laible to contribute to the company upon winding up up to the amount that he agreed to guarantee.

A company’s obligations and liabilities are its own, and not those of its participants to be discussed later

A company can sue and be sued in its own name. Members of the company cannot sue on behalf of the company as they do not have the right to do so – the rights of the company and its duties are enforceable only by the company itself. Rule in Foss v Harbotle or the proper plaintiff rule – which means that the proper plaintiff in an action in respect of wrong alleged to be done against the company is the company itself.

A company has perpetual succession A company continues to exist until it is dissolved or properly wound up or until it is struck off the register. It survives the death of its members/directors. Change in the shareholding of the company will not affect its existence. Abdul Aziz Atan v Ladang Rengo Malay Estate Sb Re Noel Tedman Holdings pt Ltd [1967] Qdr (Supreme Court Queensland)

A company’s property is not the property of its participants Macaura v Northern Assurance Co. Ltd [1925] AC 619 (HL): assets of the company belong to the company and not to the shareholders of the company or its members.

A company can contract with its controlling participants A company has the power to hold land