• INTRODUCTION-which of the following

represents a company?
A Farmasi Ibrahim
B Melor Enterprise
C Zali Sdn Bhd
D Perniagaan Itikmas & Adik Beradik
E Bank Islam Malaysia Berhad
F Klinik Rahim, Said dan Wong
 Companies
• The dominant form of business
organisation
• Over half a million companies in Malaysia
• Created through a process of registration
under statute – an “artificial legal person”
• Have special legal characteristics
(discussed in Lecture 3)
 What is the purpose of
companies?
• Traditionally, a means by which a large
group of people with capital and
management resources could come
together to conduct an enterprise on an
ongoing basis
• Now also widely used for small business
and by individuals
 Small and large companies
• Most companies are small businesses
• In 2001, there were 809 companies listed
on the Kuala Lumpur Stock Exchange
(KLSE). (Listed companies are
companies in which you can buy or sell
shares through the KLSE.)
 The architecture of companies
• Capital structure
– equity capital (shares)
– debt capital
• Management structure
– board of directors and other officers
– members (shareholders)
• Choice of form of business association
• Types of companies
• Registration of companies
• Listing on the KLSE
• Corporate groups
 Choice of form
• Distinguish between:
– incorporated entities; and
– unincorporated entities.
• Incorporated entities (corporations) are
separate legal persons
• Unincorporated entities have no legal
personality separate from their participants
 Incorporated entities
• “Corporation” is the general term.
Definition in sec 4 of the Companies Act
• May be formed:
– by special Act of Parliament
– under an Act of Parliament conferring power
on some person to create corporations, eg.
the Companies Act 1965
 Unincorporated entities
• sole trader
• general partnership
• limited partnership
• non-profit associations and clubs
• trusts
• syndicates and joint ventures
• Some distinction between company,
partnership and sole proprietorship

• -refer the notes

 Relevant considerations –
choice of form
• In deciding the appropriate form, consider:
– profit or non-profit
– limited or unlimited liability
– limits on size
– ability to raise capital
– formalities and expense
– audit and reporting requirements
– tax treatment
 Choosing a company (cont)
• Advantages:
– can have more than 20 members (outsized
partnerships prohibited by sec 14)
– limited liability
– may be easier to raise capital
– different tax treatment
– company law as standard form contract
– flexibility
 Choosing a company (cont)
• Disadvantages:
– arguably, greater expense in formation and
compliance
– publicity
• The decision must always depend on the
individual circumstances of the business
 Types of companies
• Corporations formed under the Companies
Act are “companies”
• Companies are classified:
– by reference to basis and extent of the
members’ liability (sec 14(2))
– as public or private
• Some provisions of the Companies Act
apply only to certain types of companies
(sec 14A)
Types of companies
 Classification by reference to
members’ liability
• Company limited by shares (sec 214(1))
• Company limited by guarantee (sec 14A)
• Unlimited company
• No liability company
 Classification as public or
private
• Private companies
– section 15:
• no more than 50 members
• no fundraising activity requiring a disclosure
document under Part IV, Division 3, SCA
– may be a company limited by shares or an
unlimited company with share capital – sec 15
– may be an exempt private company – sec
4(1)
 Classification (cont)
• Public companies:
– everything other than private companies
– section 4:
• companies limited by guarantee and no liability
companies are always public companies
• companies limited by shares and unlimited
companies with share capital may be public
companies
 Registration of companies
• Lodge a Form 13A with ROC containing
prescribed information
• Register the memorandum and articles
(if any)
• Note restrictions on names.
• Pre-registration conduct – promoters can
act for the company before it is registered –
sec 35
 Corporate groups
• Often different aspects of the business are
owned or carried out by different
companies in a group
• Holding companies, subsidiaries and
related bodies corporate – sec 6
• Controlled entities – sec 5(2)
• Circumstances where law recognises
corporate groups
 Company Law – Lecture 3
• Definition of corporation – sec 4 of the
Companies Act 1965
• The company as a separate legal entity
• Corporate capacity
• The doctrine of limited liability
 The separate legal entity
doctrine
• The company is a legal person separate
from its participants
• This means that:
– its obligations and property are its own and
not those of its participants
– its existence continues unchanged even if the
identity of the participants changes
 Merits of incorporation
• Limited liability
Limited liability
Limited liability
 Salomon v Salomon (1897)

shoe business

Salomon
cash, debenture Pty Ltd
company

20,001 shares

family 6 shares
 Salomon (cont)
• Issue – was Mr Salomon entitled to priority
under the debenture over other,
unsecured creditors of the company?
• Depends on whether the company and its
controller are separate legal entities, and
not agents or trustees for each other
• Court said yes
 Characteristics of companies
• Important features of companies arising
from their separate legal personality
– can incur obligations and hold rights, and sue
and be sued, in their own name
– can contract with their controllers
– have perpetual succession
– are separate taxpayers
– participants (may) have limited liability
 Companies are separate from
their controllers
• Lee v Lee’s Air Farming Ltd: issue –
could Mr Lee be both the controller of a
company and its employee?
• Macaura v Northern Assurance: issue –
was Mr Macaura the “owner” of property
that belonged to a company controlled by
him?
 Companies can enforce rights
• Vu Siew Chin v Wong Fah Yoon
– issue : can incur liabilities and be sued
• Foss v Harbottle
– issue : enforce rights in its own name
• Lifting the veil/ exceptions
• Some time the above principle can produce unsatisfactory results-
thus there are exceptions:
• Number of members below 2-the person is personally liable
• Responsibility for fraudulent trading-the person who knew the fraud
is personally liable
• Publication of a name-when the name of the co is not published-the
person would be personally liable
• Taxation-nationality of members may affect the national status of the
co
• Holding and subsidiary co-the 2 co are separate legal entities,
however decisions show that they may also be treated as a single
entity
• Evasion of legal obligation
• To do justice-eg the director making secret profit
 Exceptions – piercing the
corporate veil
• At common law (rare)
– just and equitable ground – Tan Guan Eng &
Anor v Ng Kwong Hee
– corporate form used to avoid an existing legal
duty – Gilford
– company is the agent or partner of the
controller – Smith, Stone & Knight
– principles underlying a particular law require
the veil to be pierced – Re Darby
 Exceptions (cont)
– position of group of companies – People
Insurance Co Sdn Bhd v People Insurance Co
Ltd
• Under the Companies Act, in the insolvent
trading provisions in sec 304 and sec 36
• Other statutory exceptions:
– sec 67(5) – financial assistance
– sec 167 – profit and loss account
 Exceptions (cont)
– sec 121 – publication of name
– sec 140(1) – Income Tax Act 1967
Constitution of company
 Company Law – Lecture 5
• “Internal governance rules”/constitution
comprising :
(a) memorandum of association; and
(b) articles of association
• Legal effect of the memorandum and
articles of association.
 Constitution of company
• Sample memorandum
• Sample Article
 What are “internal governance
rules” ?
• Rules agreed between the members to govern
the internal workings of the company
• Typically deal with appointment, powers and
removal of officers, meetings, classes of shares,
dividends, transfer of shares, inspection of
books
• Where can we find the internal governance rules
for a company?
– in the company’s memorandum and articles of
association
 Constitution
• A company can adopt a constitution
• Constitution contains customised internal
governance rules for that particular
company called:
(a) The Memorandum of Association; and
(b) The Articles of Association.
 Adopting a constitution
• Memorandum must be lodged at the time
of incorporation.
• Articles of Association can be lodged
when the company is registered, or not.
• Adopting, amending or repealing the
articles requires a special resolution.
• Memorandum may be altered by special
resolution unless provisions therein state
otherwise
 Model Articles of Association
• Table A, Fourth schedule of the
Companies Act 1965
• Sec 30 of the Companies Act 1965
• Listed companies must have an articles of
association that is consistent with the
Kuala Lumpur Listing Requirements,
Chapter 7
 Legal effect of the
memorandum and articles of
association
• Section 33 – statutory contract
– interpretation
– rights of members and officers to enforce
– consequences of non-compliance
 Legal effect of the
memorandum and articles of
association (Cont)
• Not a contract with outsiders
• Unenforceable by outsiders
• Raffles Hotel
 Company Law – Lecture 10
• Types of directors
• Board composition
• Appointment, resignation, removal &
disqualification of directors
• How boards operate in practice
 Types of directors
• Every company must have at least two
directors, resident in Malaysia.
• Executive directors
– CEO / managing director
– Others (eg finance director)
• Non-executive directors
– may or may not be “independent”
 Types of directors (cont)
• Chairperson
• Governing director
• Nominee director
• Alternate director
• “De facto” and “shadow” directors
– sec 4
– Standard Chartered Bank v Antico
Malaysian Boards for listed
companies

90% with
2 or more

Independent NED
Board composition in Australia’s
largest companies
 Appointment of directors
• Who can be appointed ?
– someone who consents
– human, not company
– minimum 18 years old
– not disqualified
– if 70 years or older in a public company,
special rules apply
 Appointment of directors (cont)
• New companies
– directors named in application
• Existing companies
– check company’s articles of association
(see Lecture 7)
 Resignation / removal of
directors
• Resignation
– director needs to notify the company
• Removal
– by other directors
• maybe in private companies (check articles)
– by members
• private companies – check articles : Art 69
• public companies – sec 128
 Disqualification of directors
• Grounds (reasons) :
– automatically due to certain offences
where the person must obtain leave of
court
– where court orders disqualification of
directors of insolvent companies
– where the Securities Commission
disqualifies under the SIA.
 How boards operate
• Delegation of powers to :
– Board committees :
• eg audit, remuneration, nomination
– CEO / managing director
– Director, employee or other person
• Directors’ access to information :
– common law (“information” – broader)
– company’s books, in relation to legal
proceedings.
 How boards operate (cont)
• Meetings of directors
– usually called “board meetings”
– all directors must be told (“receive notice”)
– a quorum requirement: articles of association
– use of technology (e.g. video conf.,
telephone)
– “paper meetings”
• Art 90
 Company Law – Lecture 11
• Duties of directors and other officers
– Summary of the duties
– Who owes the duties?
– To whom are the duties owed?
– Who enforces the duties?
– Consequences of breaching a duty
– The duty of care
Summary of the duties
 Who owes the duties?
• General law duties
– Directors
– Senior executive officers
– Why? Because they are “fiduciaries”
• Statutory duties
– All statutory duties apply to directors
– This includes “de facto” and “shadow”
directors (see Lecture 10)
– Most statutory duties apply to “officers”
(sec 9) but not sec 132(1)
 To whom are the duties owed?
• Answer = the company
• In exceptional circumstances, a duty will
be owed to an individual shareholder
– Brunninghausen v Glavanics
 Who enforces the duties?
• Statutory duties – Suruhanjaya Syarikat
Malaysia (Companies Commission of
Malaysia)
• Common law duties – the company (or
liquidator if company is being wound up)
What are the consequences of
breaching a duty?
• Discussed in Lecture 13
• Breach of statutory duties may result in :
– a disqualification order
– an order to pay a penalty
–an order to pay compensation to the
company = 132D(7)
– an injunction = 132C, 132E
– imprisonment
 What are the consequences of
breaching a duty? (cont)
• Breach of a common law duty may result
in the person paying compensation to the
company, damages for breach of duty or
giving an account of profit.
 Duty of care, skill & diligence
• Sources of the duty :
– section 132(1)
– common law
– contract of employment – for executive
directors and other executive officers
• A director or other officer breaches this
duty if he or she is “negligent”
 Duty of care (cont)

• Statutory duty – sec 132(1)

– A director shall at all times act
honestly and use reasonable diligence
in the discharge of his duties
– Re City Equitable Fire Insurance
• The duty of care and skill
• Use reasonable diligence
• Can directors’ delegate?
 Duty of care (cont)
• What is the standard of care ?
– Originally, under the common law, the
courts used a largely “subjective” test :
• Took into account the background, skills and
experience of the director concerned
• A director with little knowledge of his/her
company’s business, and little skill, was judged
against the standard of someone with the same
(poor) knowledge and skill
 Duty of care (cont)
• What is the standard of care? (cont)
– Now :
• Daniels v AWA Ltd – common law
• There is no “uniform” standard for all directors
• But it is no longer a largely subjective test
• The standard of care required of director “X” is
the care that a reasonable person doing X’s
job in X’s company would exercise (a largely
“objective” test)
 Duty of care (cont)
• Under the modern standard, is there any
minimum requirement for all directors?
– Yes (Daniels v AWA Ltd). Every director must :
• Obtain a basic understanding of their company’s
business
• Keep informed about and monitor the company’s
activities and regularly attend board meetings
• Monitor the company’s financial position
 Duty of care (cont)
• Higher standards are expected of some
directors :
– Those with special skill
– Executive directors in relation to the time
spent on company matters, compared to
non-executive directors
 Duty of care (cont)
• Delegation and reliance
– Delegation
• Re City Equitable Fire Insurance
• Directors may delegate any of their powers to any
person, unless the articles restricts delegation
• If delegate is negligent, director will be liable
unless directors have monitored or supervised and
use reasonable care to appoint a competent
person
 Other duties
• Duty to act in good faith in the best
interests of the company
• Duty to act for a proper purpose
• Duty to retain discretion
• Consequences of breach of duty
Duty to act in good faith in the
best interests of the company
• Section 132(1) – also a common law
duty
• What is meant by good faith?
– Director must act honestly
 Duty to act in the best
interests of the company
•
(cont)
What are the company’s interests? Possibilities
are :
– Members
– Company as a commercial entity separate
from its members
– Creditors
– Other companies within a group of
companies
– Employees, customers, suppliers and the
community
 Duty to act in the best
interests of the company
(cont)
• What are the company’s interests? (cont)
– Members
. Interests of company are generally those of its
members
. But interests of members may conflict and directors
must balance interests
– Company as a commercial entity separate
from its members
. Conflicting court decisions
Duty to act in the best interests
of the company (cont)
• What are the company’s interests? (cont)
– Creditors
. Common law principle – when a company is
insolvent or nearly insolvent, its interests are those
of its creditors, not its members
. Kinsela v Russell Kinsela Pty Ltd
Duty to act in the best interests
of the company (cont)
• What are the company’s interests? (cont)
– Corporate groups

A Ltd

50%+ (or “control”) 50%+ (or “control”)

B Ltd C Ltd
• Can the directors of B cause B to enter a transaction
that benefits A or C, but does not directly benefit B ?
 Duty to act in the best
interests of the company
(cont)
• What are the company’s interests?
(cont)
– Corporate groups (cont)
. Walker v Wimborne
- High Court : directors must put their
company’s interests before the group’s
interests
 Duty to act in the best
interests of the company
(cont)
– Corporate groups (cont)
. Test
– Whether a person in the position of the director
could have reasonably believed the decision would
benefit the company: Charterbridge
. Equiticorp Finance v BNZ
– Directors can approve a transaction that benefits the
group (or another group company) if their company
will benefit indirectly
Duty to act in best interests of
the company (cont)

– Employees, customers, suppliers and

the
community
. Do not receive priority over interests of members
. Parke v Daily News Ltd
Duty to act for a proper purpose
• Section 132(1) – also a general law duty
• Even if directors actions are in company’s
best interests, may still be a breach of duty
if power not exercised for a proper
purpose
 Duty to act for a proper
purpose (cont)
• Two questions :
– Question of law : what are the proper
purposes for which the power in question
may be exercised?
– Question of fact : for what purpose was the
power actually exercised?
• If more than one purpose, use “but for” test –
Whitehouse v Carlton Hotel
 Duty to act for a proper
purpose (cont)
• eg The power to issue shares
– Normally a power of the board of directors
– Proper purposes include :
• to raise capital
• for an employee share scheme
• as consideration for purchase of an asset
– Improper purposes include :
• to entrench the existing board of directors
• to fight off a hostile take-over bidder
• to make a majority member a minority member
Duty to act for a proper purpose
(cont)
• Powers other than issuing shares
– Kwality Textiles (M’sia) Sdn Bhd. v Arunachalam &
Ors
– Lim Koei Ing v Pan Asia Shipyard & Engineering Co.
Pte Ltd
– Permanent Building Society (in liq) v Wheeler
 Duty to retain discretion
• Directors cannot undertake or agree that
they will not exercise powers given to
them in the company's articles of
association or under the Companies Act
1965
• This would be against the duty to act in the
best interests of the company.
 Consequences of breach of
duty
• Section 132(1)
– Fine or imprisonment or both
• Common law duties
– Company has civil remedies such as
compensation, damages for breach of
duty
 Company secretary
• See p 40, 33, 144
 Auditors
• An auditor must be registered under the
Companies Act – sec 8
• Special rules apply to appoint or remove
auditors, which are designed to protect their
independence from management : sec 9
• Auditors owe duties to the company, and
may owe a duty of care to others :
sec 174(1)
 Company Law – Lecture 16

• Share capital
• Membership
 Shares
• What are shares? (sec 4(1))
• Classes of shares
– generally
– preference shares
• Conversion of shares into stocks – Table
A (Art 36 - 39)
 What are shares?
• Claims against a company to which
particular rights attach, in particular:
– distribution rights (interim and final)
– control rights (eg information, voting)
• A “chose in action” – a form of personal
property – sec 98
• Not an interest in the company’s assets
(compare with a trust)
 What are shares? (cont)
• Borland’s Trustee v Steel Bros & Co Ltd
(nature of shares)
 Classes of shares
• Shares can be created with different rights
attaching : sec 18(1)(c)
• Power to issue shares in the hands of the
directors, but the issue of shares in a new
class may require shareholder approval if:
– amendment to the constitution is required
– the issue varies existing class rights
– Table A, Art 2
 Classes of shares (cont)
• Typically classes of shares have differing:
– entitlement to dividends
– priority in relation to payment of dividends
– voting rights
– priority in repayment of capital on a winding up
– right to share in surplus assets on a winding up
• Contrast “preference shares” and “ordinary
shares”
 Preference shares
• Usually carry:
– fixed dividend
– priority for repayment of capital
– limited voting rights
– no right to share in surplus
 Membership
• A person can become a member by
subscribing for new shares, or acquiring
already issued shares from another
person
• A person ceases to be a member by
transferring their shares, or having them
cancelled
 Shareholder rights
• Voting rights
• Distribution rights
• Information rights
• Class rights
 Variation of class rights (cont)
• Certain actions taken to vary class rights
• Section 65(1): rights of dissenting
members where the variation, cancellation
or modification does not have unanimous
consent. Members holding at least 10% of
the class can apply to the Court for
change to be set aside & the change is
effective with confirmation by the Court.
 When is sec 65 applicable?
• Section 65(1) requires that :
– The company has different classes of shares
– The articles (eg. Art 4) or memorandum
provides for a method to vary the class rights
– The proposal is a variation
 What is variation?
• Change /alteration of the rights: sec 65(1)
• Deletion /abrogation of the rights: sec
65(1)
• See Greenhalgh v Arderne Cinemas
• Issue of new preference shares ranking
equally or pari passu with existing
preference shares: sec 65(6)
• Alteration of the ‘modification of rights’
clause: sec 65(7)
 Method of variation under sec
65
• Company must call separate class
meeting only of shareholders whose rights
are being affected by the variation
proposal
• At least 75% of these shareholders must
approve
 What if sec 65 not applicable?
• Variation procedure depends on where the
rights are stated
• If the rights are given in the articles of
association: sec 31
• If rights given in memorandum: sec 21(1B)
 Introduction to members’
remedies
• Members’ remedies may be available
where officers have breached their duties
• But sometimes members can also obtain a
remedy even though there has been no
breach of officers’ duty
• Members have statutory and common law
remedies
 Introduction to members’
remedies (cont)
• Why do minority members need
remedies?
– Directors and majority shareholders can use
their power to harm minority shareholders
– Not always possible for a shareholder to sell
their shares
• This explains why the oppression remedy is most
commonly sought by shareholders in private
companies rather than public companies
 Members’ statutory remedies

• Oppression remedy
• Court-ordered winding up
• Statutory injunction
• Statutory right to inspect company books
• Other protection :
– Variation of class rights (Lecture 7)
– Transactions affecting share capital
(Lecture 17)
Oppression remedy – sec 181
• Court can give a member a remedy where :
– the conduct of the company’s affairs or,
– the directors’ powers are being exercised,
– in an oppressive manner, or
– in disregard of members interests including himself
(181(1)(a))
OR
– an actual or proposed act or omission by or on behalf of
the company, or
– a resolution, or a proposed resolution, of members or a
class of members is either
– unfairly prejudicial to, or
– unfairly discriminatory against members (181(1)(b))
 Oppression remedy (cont)
• What types of companies can the remedy
apply to ?
– In theory, any company
– But in practice, most oppression actions are
brought by members of private companies
• which have only a few participants, and
• in which members are also involved in
management
 Oppression remedy (cont)
• What are the tests ?
– Was directors’ decision one that no board of
directors acting reasonably would have made?
– Not necessary for directors / majority
shareholders to have acted dishonestly or
intended to harm the minority – it is a question
of impact – is the conduct oppressive in effect ?
– “Reasonable expectations”
 Oppression remedy (cont)
• Examples of oppressive conduct
– Diversion of business opportunities
– Improper exclusion from management
• Does member have a “reasonable expectation”?
– Unfairly restricting dividends
– Oppressive conduct of board meetings
– Share issue for improper purpose
– Breaches of directors’ duties
 Oppression remedy (cont)
• What orders can the court make ?
– Any order “it thinks appropriate”
– e.g.
• winding up
• regulating the company’s affairs
• purchase of oppressed member’s shares
• appointment of a receiver
• restraining someone from doing something, or
requiring someone to do something
 Statutory injunction
• Court order to stop someone breaching
the Companies Act
• Specific provisions : sec 132C , sec 132E
or sec 28.
• Who can apply ?
– Any member of the company
Statutory right to inspect books
• Section 157 – Member can apply to court
for authorisation to inspect company
books
– Court can authorise either the member or their
representative
– Member must be acting in good faith and for a
proper purpose
 Foss v Harbottle
• Also known as the “proper plaintiff” rule
• The person who can enforce a wrong
against the company is the company itself
and not any individual shareholder
 Exceptions
• Where members’ personal rights are
infringed
• Where the proposal requires special
resolution but passed by simple resolution
• Ultra vires transaction: objects clause
• Where there is fraud on the minority
• Where the justice of the case so requires
 Fraud on the minority
• There must be “wrongdoer control”
– Control may be because of majority
shareholding
• The wrongdoer obtained benefit/
advantage at the company’s expense
• The wrongdoer prevents the company
from suing or enforcing the company’s
rights
 Company Law – Lecture 8
• Member meetings
– types of meeting
– calling meetings
– conducting meetings
– voting
• Decision-making without a meeting
• Procedural irregularities
 Annual and extraordinary
general meetings
• All companies must hold an annual
general meeting: sec 143
• All public companies must hold its
statutory meeting: sec 142(1)
• Other meetings are called “extraordinary
general meetings”
• Rules governing meetings are set out in
the Companies Act and the articles of
association
 Calling a meeting
• Usually, meetings are called by the board.
Art 44 authorises a single director or board
collectively to call meetings.
• The Court may order a meeting on
application of a director or member if it is
impractical to call otherwise: sec 150
 Calling a meeting (cont)
• Directors must call a meeting when requested to
do so by members holding not less than 10% of
paid up capital: sec 144. If the directors fail to
call the meeting within 21 days, the members
can do so and the company must pay their
reasonable expenses
• Two or more members with at least 10% of
issued share capital or 5% in number of
members may call a meeting, at their expense:
sec 145
 Agenda
• Only matters that have been included in the
notice of meeting can be considered at the
meeting – other than matters stated in Art 46 of
Table A
• Usually, where the directors are calling a
meeting, they will determine the agenda
• Members can request the inclusion of
resolutions for consideration by the meeting:
sec 151
 Member resolutions
• Section 151 allows members with at least 5% of
the votes, or numbering at least 100, to give
notice to the company of a resolution they
propose to move at the next general meeting
held more than two months after the notice is
received
• Copies of the resolution and a members’
statement are distributed, usually with the notice
of meeting
 Notice of meeting
• General rule – 14 days. Consent to short
notice is possible: sec 145(3)
• For passing special resolution: sec 152
(21 days)
• Notice must be given to members,
directors and auditor
• Contents of notice: sec 152 and Art 46.
 Notice of meeting (cont)
• Notice must contain sufficient information to
enable members to decide whether or not to
attend the meeting and how to vote
• Must not be misleading, and must “fully and
fairly inform and instruct the shareholder
about the matter on which he or she will
have to vote”: Devereaux Holdings
• Need to balance information presented:
Fraser v NRMA
 Conduct of meetings
• Quorum
• Use of technology
• Proxies and corporate representatives
• Conduct (role of the chair)
 Voting
• Members’ entitlement to vote
– Section 148(1)
– Section 148(2): preference shareholders
• Voting by proxies
• Voting (show of hands and poll)
• Demanding voting by poll
• Ordinary and special resolutions
 Disqualification from voting
• Companies Act, articles of association and
KLSE Listing Requirements prevent
interested parties from voting their shares
in certain circumstances, including:
– related party transactions
– Interested director in relation to sec 131
 Decision-making without a
meeting
• Private companies may use “shareholders
written resolution”, in which all members
entitled to vote must sign a document
agreeing to the resolution: sec 152A
• Formality may be waived by all members
under ratification
• Section 145(3)
 Procedural irregularities
• Section 355 – decision may be valid
despite irregularity – but there must be no
“substantial injustice”
 DEBENTURES

• What are debentures? – sec 4(1) and

sec 38(11)
• A loan or advance to a company may be
secured or unsecured
 Debentures
• Definition – sec 4(1) and sec 38(11) of the
Companies Act, sec 4 of the SCA
• Companies may choose to raise finance
through issuing debentures to the
investing public
• More common for finance companies
• Debentures are “securities” and may be
quoted on the KLSE
 Sources of law governing debt
finance
• Contract – the loan agreement
• Property – securities
• Company law – priorities, registration of
charges, winding up, creditor protection
 Secured debt
• Repayment of the debt is secured by a
charge over some or all of the company’s
assets
• Security gives the lender the right to apply
the charged property to satisfy the debt in
the event of a default
 Fixed and floating charges
• Definition of “charge” – sec 4
• Fixed charge – security over a specific
asset (eg land). Company cannot dispose
of the asset without the consent of the
lender
 Fixed and floating charges
(cont)
• Floating charge – “floats” over the assets,
allowing the company to dispose of them
in the normal course of business and
replace them with others of the same class
until crystallisation
• Yorkshire Woolcomber Association
 Floating charges
• Company’s power to give a floating charge
is contained in Art 13, Third Sch of the
Companies Act
• Useful device enabling companies to give
security over trading stock and book debts
• Free to deal with charged assets in the
normal course of business, until
“crystallisation”
 Crystallisation
• Charge crystallises automatically on the
company ceasing to carry on business or
on winding up
• Charge document may provide for
crystallisation on the happening of
specified events (“events of default”) eg
– breaching debt/equity covenants
– selling a major asset
 Crystallisation (cont)
• On crystallisation, the charge effectively
becomes a fixed charge over the assets at
that time and any later acquired assets
 Registration of charges
• Section 108 of the Companies Act
requires registration of certain charges
• Most charges created by companies must
be registered with the ROC: sec 108(1)
• Duty of companies to register charges :
sec 109
• Includes all charges as specified in
sec 108(3)
 The registration process
• Company must lodge a notice containing
prescribed information within 30 days of
creation of the charge : sec 108(1)
• Provisional registration permitted, to allow
for stamping
• What is “stamping”?
• Notice of variation and notice of
satisfaction and withdrawal
 Priority
• A company may create two or more
charges
• “Priority” refers to the order in which the
charges are satisfied
• Order of registration determines priority for
registrable charges
• Note that priority can be altered by
agreement between the chargees
 Priority (cont)
• Generally give priority to the first
registered charge, unless the chargee had
actual or constructive notice of an earlier
unregistered charge : common law
principles
• Does not affect priority as between
registered and unregistrable charges
 Unenforceable charges
• The Companies Act makes some
charges unenforceable
• Charges that should be registered, but
are not, cannot be enforced against a
liquidator or creditors
• Certain other charges created within six
months of winding up in insolvency :
sec 294
• Effect of floating charge
 Winding up
• Involves a “liquidator” selling off
company’s assets and distributing the
proceeds among creditors (and members
if any surplus remains)
• Also known as liquidation
• Provisional liquidator
• A process where the company is brought to an end, and
the assets and property of the company are
redistributed.
• DEREGISTRATION-CO MUST HAVE NO DEBT
(REASONS-NO BUSINESS, NOT ACTIVE)
• VOLUNTARY WINDING UP-A RESOLUTION PASSED
IN AGM-(REASONS-NO BUSINESS, NOT ABLE TO
PAY ITS DEBT, DIRECTORS ONLY CONCERNED
WITH PERSONAL GAINS AS OPPOSED TO THE
MEMBERS). A LIQUIDATOR IS APPOINTED TO
ASSESS/COLLECT/SELL/CARRY OUT
INVESTIGATION AND PAY CREDITORS DEBT.
• CREDITORS’ WINDING UP-IF IN THE VOLUNTARY WINDING UP
CREDITORS FEEL THAT COMPANY IS INSOLVENT,
CREDITORS CAN CALL CREDITORS’ MEETING AND WINDING
UP NOW BECOMES CREDITOR WINDING UP.
• COURT-ORDERED WINDING UP-BEGINS WITH COURT ORDER
ON THE APPLICATION OF ONE OR MORE PARTIES.
PETITIONER MUST ESTABLISH THE COMPANY IS INSOLVENT-
EG FAILURE TO MEET STATUTORY DEMAND (DEBT MORE
THAN RM 500-THE FORM IS SERVED ON THE COMPANY BUT
THE COMPANY FAILED TO PAY IN 3 WEEKS TIME)-SEC 218. A
LIQUIDATOR IS APPOINTED OR IF NOT THE OFFICIAL
RECEIVER BECOMES LIQUIDATOR. CAN BE APPLIED BY
COMPANY, CREDTORS ETC.
 Types of winding up
• Voluntary winding up (sec 254)
– Members’ voluntary winding up : sec 4(1) and
sec 258 - 263
– Creditors’ voluntary winding up : sec 260 - 263
(Part X, Division 3)
• Compulsory winding up (Part X, Division 2
– sec 217)
– In insolvency
– On another ground
 Voluntary winding up
• Members’ voluntary winding up
– Only possible for solvent companies
– Commences when members pass a special
resolution
– declaration of insolvency
• Creditors’ voluntary winding up
– Similar to members’ voluntary winding up,
except that the company is insolvent
 Compulsory winding up in
insolvency
• Begins with a court order
• Company must be “insolvent”
– Unable to pay debts as and when they become
due and payable: sec 218(2)(b)
– Most common way to prove insolvency is via
the “statutory demand” procedure
• Who can apply to court? (sec 217(1)(a)-(g))
– Several people, but most often it is a “creditor”
 Compulsory winding up on
grounds other than insolvency
• Grounds are set out in sec 218 – eg:
– Company has not commenced business
within one year from incorporation
– Just and equitable – see Lecture 16
• Who can apply to court? – sec 217(1)(a)-
(g)
– Several people including creditors and
members
 Effect of a winding up
• Secured creditors’ rights unaffected
• Other creditors cannot take action
• Company cannot carry on business except
for the purposes of the winding up
• Company management by the liquidator,
not the directors
 Liquidator’s functions
• Collect assets
• Realise assets
• Work out what debts are payable by
company, and what is owed to the
company
• Distribute proceeds of realised assets
among creditors
• If any surplus, distribute among members
 Liquidator’s duties
• Specific duties under the Companies Act –
sec 227, sec 233, sec 235 and sec 281
• Fiduciary duties
• Duties as an “officer” – sec 4
 Funds available for distribution
• Assets owned by company at time of
winding up, excluding any charged assets
• Assets that come into company’s
ownership after winding up starts, eg:
– Compensation recovered under insolvent
trading provision – sec 304
– Funds recovered by liquidator under “voidable
transactions” provisions
– Funds recovered from holders of void charges
 Voidable transactions
• Certain transactions entered into in period
leading up to winding up
• Liquidator can apply to court to have a
voidable transaction “undone” – so that
funds available for distribution are
increased
 Void charges
• Certain floating charges created shortly
before winding up – sec 294
• Unregistered charges – sec 108(1)
 How are funds distributed?
• The general order is:
– Secured creditors, then
– Expenses of winding up, then
– Unpaid wages, unpaid superannuation
contributions, and other employee
entitlements, then
– Unsecured creditors, then
– Members (assuming there is a surplus)
 Deregistration
• Deregistration brings company’s
existence to an end – sec 308
• Three types:
– Deregistration following winding up : sec 240
– Voluntary deregistration : sec 272
– Deregistration initiated by ROC : sec 308
• Effect of deregistration
• Reinstatement