INTRODUCTION

There are three main forms of business organisations. i.e

i. Sole Proprietorship
ii. Partnership
iii. Company a) Limited
b) Unlimited.

A Sole Proprietorship
The simplest economic and legal unit is the sole proprietor that is, an individual carrying on
business either entirely alone or employing others. As an economic unit he is very vulnerable since he
can be made personally bankrupt for his business trade. i.e one person in business for himself.

Partnership
Partnership is the relation of two or more persons carrying on a business in a common view to make
profit. Partnership is a form of contract involving principles of commercial agency. These two types of
business organisations are referred to as unincorporated associations.

The above-mentioned types of business organisations have no separate legal existence apart from
the persons who conduct the business. A man may set aside property for the purpose of business,
but in law that property is still his. He may run up debts or incur liabilities in the name of the business,
but the law still fixes him with the obligation to discharge those debts and liabilities.

In contrast, a company is an incorporated association. Once it is formally incorporated, it becomes a

separate legal person. An incorporated company may own property on its own name; once the
property is transferred by the corporators to a company, those corporators cease to own the property.
A company may incur debts and liabilities on its own behalf; the members will not be liable in respect
of those debts and liabilities. It may be sued on its own name and sue on its own name.

UNINCORPORATED

No Separate existence apart from the persons who conduct the business. Here man may set aside
property for his business but in law the property is still his. Incur liability in his name of business but
the law still fixes him with the obligations of paying these liabilities.

CORPORATE BODIES

In contrast, a company is an incorporated association. Once it is formally registered it becomes a

separate legal entity / legal person Salomon v Salomon & Co Ltd (1897). It has an existence apart
from the person who formed it. The company can own it own property. It also can incur liabilities and
can sue and be sued in its own name.

Number of Member

Sole proprietor one member

Partnership - between 2 to 20 people. The upper limit is 20 because as per section 14(3): Partnership
with more than 20 members should be registered as a company unless it is an association or
partnership formed for the purpose of carrying on any professional .

Company On the other hand, a company must have a minimum number of 2 persons. Section 36
Company Act makes it an offence for a company to carry on business for more than 6 months after
the membership has fallen below 2.

Ability to Hold Property

Company hold its own property and the companys assets are not legally own by the members. On
the other hand in a sole proprietorship, the assets are that of the sole proprietor and in partnership,
these are owned by the partners.

Members liability for debts.

In the case of unincorporated association, the members are ultimately responsible for all the debts of
the firm. If the firms assets are insufficient to discharge the firms liabilities, the members must
contribute towards those assets until the liabilities are discharged. The liability of the members to pay
the firms debt is unlimited, and cannot be limited.

Mode of taking legal proceedings.

An unincorporated association has no legal personality. Therefore, any legal proceedings in which the
firm may be involved are brought or defended in the name of the members of the firm, and not in the
name of the firm. However according to the Rules of High Court 1980 Ord 77 do allow a person to sue
and be sued using the firms name. In contrast an incorporated company must sue and be sued on its
own name, the members have no right to do so.

Duration and dissolution

A sole proprietor can give up his business at anytime he wants. A partnership may be dissolved by
agreement amongst partners. An unincorporated association dies when the members die but an
incorporated organisation may live on regardless even without business, without directors , without
members.

Classification of a Company

Limited and unlimited Company

The companys own liability for its debt is never limited. A company must pay off every single cent it
owes to the creditors. The question of members liability becomes relevant when the company goes
into liquidation, and debts cannot fully be discharged out of its assets.

Unlimited company is one, which the liability of the members is not limited in anyway. Generally
speaking, when a company is wound up every present and the past member is liable to contribute to
the assets of the company an amount sufficient for the payment of its debt and liabilities and the costs
charges and expenses of the winding up and for the adjustment of the rights of the contributories
among themselves.[1]

In the case of a limited company, the liability of the members to contribute towards the assets of the
company is limited.

According to Section 14 of the companys Act - a company can be :-

Limited by shares
Limited by Guarantee
Limited by both shares and guarantee
Unlimited

However as per Section 14A (since 1985) no company can be formed which is limited by guarantee
with share capital.

Public and Private Company

The name of a public company must end with the words public limited company. Its memorandum
must state that it is to be a public company and it must have at least two directors. A company that is
not a public company is a private company. The important distinguishing features of a public company
is that the general public may be invited to buy its shares and other securities.

The securities of a private company cannot be listed on the Stock Exchange; it will be an offence for a
private company to issue an advertisement offering its securities to the public.[2]

A listed company is a public company but not all public company is a listed company.

****************************
[1] Section 214(1) CA 1965
[2] Section 15 CA 1965
LEGAL PERSONALITY

NATURE AND FORMATION OF COMPANIES

The law relating to companies in Malaysian is contained in the Companies Act, 1965. This Act is
based on the English Companies Act 1948 and the Australian Uniform companies Act 1961. It is due
in these historical ties, that the English and Australian Law has some significance on Malaysian
Company Law. This is why you will see English and Australian judicial precedents being referred to,
and applied in interpreting certain provisions of the Malaysian Companies Act.

It must be stressed here that since this Act is a piece of legislation that has its provisions constantly
amended to keep up with the times, there may be slight changes to company law from time to time. It
would be very helpful for you to ensure that the Act you refer to is the latest amended version.

NATURE OF COMPANIES

A company is a corporate body of a corporation. A corporation is an artificial legal person. The law
sees it as separate and independent of the persons who are members of that corporate body. The
legal recognition given to the company is provided by S.16(5) of the Companies Act, 1965. it says:
On and from the date of corporation specified in the of incorporationthe subscribers to the
memorandum together with such other person as from time to time become members of the company
shall be a body corporate by the name set out in the memorandum

in other words, after fulfilling all the requirement of the Act incorporate the company, and the
Companies Commission of Malaysia (CCM) issues a certificate of incorporation, a new legal entity
comes into existence. The company, an artificial person, is born out of the process of law. This new
entity is separate from its members. Like a natural person it has its own name and can own property.

This means that the company can use own name to enter into transactions and need not go through
its members, and that the companys assets do not belong to the members. The reason for creating
the legal fiction of the separate legal personality has been said to be a matter of convenience. The
separate legal personality concept is useful in large companies where there are many shareholders,
and these shareholders are frequently changing. If the company does not have a separate legal
personality, it would mean that a change among the shareholders would require a transfer of the
companys assets.

Liabilities and contract form the former group of shareholders to the present group. It would entail a lot
of difficulties to deal with multiple transfers. On top of that it would be difficult to keep up with the
frequent transaction of shares on the market.

PRE-INCORPERATION DOCUMENTS

After the name of the company has been approved, the persons responsible must submit to the CCM
the pre-incorporation documents together with the required fees, and a copy of the approval letter for
the use of the name. The pre-incorporation documents are:

(i.) The memorandum and articles of association

(ii.) A statutory declaration by persons before appointment as director, or by a promoter
(iii.) A declaration by the person who has agreed to be the company secretary

The application for the registration of the company must be made within the three months of the
application for the reservation of the name of the company.

CERTIFICATE of INCORPORATION

Once the CCM is satisfied that all the incorporation documents are in order, the CCM will issue the
Certificate of Incorporation to the company. This certificate is the birth certificate of a company. Once
a company has been registered, it is recognized as a separate legal entity.

TYPES OF COMPANIES

Companies in Malaysia are classified according to (i) liability, (ii) private or public status.
Companies classified according to liability.
Types of companies.
company limited by shares
company limited by guarantee
company limited by share and guarantee
unlimited company

COMPANIES LIMITED BY SHARES

S.4 defines company limited by shares as 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 them. This is the most common form of company. The liability of a member of this company
will depend on whether his shares are fully paid or not. If he holds fully paid shares, he has no further
liability to the company. If the company becomes insolvent he cannot be made to contribute to the
assets of the company. Only if his shares are partly paid, he will be liable to contribute to the
companys assets, up to the amount still unpaid on his shares.

COMPANY LIMITED BY GUARANTEE

A company limited by guarantee id defined by section 4 as a company in the principle of having the
liability of its members limited by the memorandum to such amount as the members may respectively
undertake to contribute to the assets of the company in the event of its being wound up.

This type of company does not have a share capital and so does not require the members is specified
in the memorandum of association. If the company is wound up, then a person who has been its
member may be required to contribute up to his amount of guarantee towards payment of debts
incurred by the company while he was a member. This liability extends to those who has left the
company but was a member within a year before the company wound up.

Although this type of company does not have a share capital, it is a separate legal entity. It is not
normally used for trading, but is often formed to run clubs and other organizations that is maintained
by subscription, social activities and donations.

CLASSIFICATION AS PRIVATE OR PUBLIC COMPANIES

Classification according to status
Private Company
According to S.15(1)
restrict right to transfer shares
 limit number of members to no more than 50
prohibit invitation or offer of shares or debentures to public
prohibit invitation or offer public to deposit money with company

According to S.15(1), a company is classified as a private company if its memorandum or articles:

restrict the right to transfer shares. There is no prescribed form of restriction. The articles can have
restrictions such as giving of pre-emption to other members before shares can be transferred to other
persons, or there is to be no transfer of shares unless the directors approve. These restrictions will
discourage membership as then the share would be difficult to sell.

Limit the number of members to not more than 50. If shares are jointly held they are considered as
held by one person. Employees of the company or its subsidiaries who are not members are not
counted.

Prohibit any invitation or offer to the public to subscribe for shares in or debentures of the company.

Prohibit any invitation to the public to deposit money with the company.

A private company may have a share capital with limited or unlimited liability. As private companies
do not seek funds from public, they enjoy certain privileges that are not given to public companies. A
private company may be distinguished from a public company in having the word Sendirian or the
abbreviation Sdn. as part of its name. If the company is a limited liability company then this word
should come before the word Bhd. e.g. the name of Syarikat Dua Lima, a private limited company,
will appear as Syarikat Dua Lima Sdn. Bhd.

THE RELATIONSHIP OF LEGAL PERSONALITY TO LIMITED LIABILITY

It has been said that the most popular reason why a company is formed is to take advantages of the
limited liability principle. However, it must be remembered that although a company is a separate
legal personality, it can have unlimited liability. In order words, the shareholders may still be liable for
the companys debts.

A corporate body with limited liability means the shareholders of a company limited by shares are not
liable for more than what they have to contribute for the shares they get. If the company is limited by
guarantee, they are not liable for more than amount they have agreed to contribute to the assets on
winding up.

The limited liability of a company has been said cost involved in the separation of ownership of the
shares and control of the company. However, this may be true only for public companies. This has
been said as a company has limited liability, it reduces the need to monitor management and other
shareholders. Limited liability together with free transfer of shares, will also facilitate the market for
control.

This is considered as an incentive for the management to perform efficiently. Apart from that, and
other than making the shares marketable, limited liability would increase the volume of transactions
that would improve the information fed to the market place. Limited liability also allows shareholders
to diversity their shareholdings. Lastly, limited liability will result in a positive attitude to risk taking and
so would facilitate investment decisions.

SEPARATE LEGAL ENTITY AND THE CONSEQUENCES THAT FLOW FROM IT.

The legal recognition given to the company is provided by s.16(5) of the Companies Act, 1965. It
says:
On and from the date of incorporation specified in the certificate of incorporation the subscribers to
the memorandum together with such other persons as from time to time become members of the
company shall be a body corporate by the name set out in the memorandum.

Apart from recognizing the company as a legal entity, s.16(5) states the effect of incorporation are:
shall be a body corporatecapable forthwith of exercising all the functions of an incorporated body
and of suing and being sued and having perpetual succession and a common seal with power to hold
land but with such liability on the part of the members to contribute to the assets of the company in
the event of its being wound up

Thus you can see the effect of incorporation as follows:

a body corporate comes into existence capable of exercising all the functions of an incorporated
company;
it has the ability to sue and be sued;
it enjoys perpetual succession;
it has the power to hold property; and
the liability of the members depend on the type of company

A Body Corporate

A body corporate is a legal person that is created and given recognition by the law. This legal person
is actually a legal fiction. It is an artificial legal person unlike human individuals who are known as
natural persons. According to s.4(1) a corporation is any body corporate wherever formed and
includes any foreign company.

A company is a type of corporation that is recognized by the law as having powers and liabilities like
an individual. The courts first recognized the company as an individual having a separate legal
personality in the case of:

Salomon v A. Salomon & Co. Ltd. (1897) AC 22

Salomon was a boot and shoe manufacturer. He ran his business as a sole trader. In 1892 Salomon
formed a limited liability company. He gave his wife and children one share each in the company. He
then sold his shoe and boot business to the company for f39, 000. In consideration for the business,
the company paid him partly in cash, partly in 20, 000 f1 shares, and partly in f10, 000 debentures
issued by the company. By being a debenture holder, Salomon becomes a secured creditor of the
company.

Salomon continued to run the business as one-man company. The business did not do well and after
some time became insolvent. What was left of the assets of the company were not enough to pay off
the creditors. It was mostly used to pay off the debenture held by Salomon. The other creditors tried
to claim that Salomon had no right to the remaining assets as the sale of this business to the
company was a sham, and that his wife and children were merely his nominees, and that Salomon
and the company were in fact one and the same.

The House of Lords held that the incorporation process made Salomon and his company two
separate persons. Even if the business were the same as before, and it was still managed by
Salomon himself, the company was not an agent or trustee for the members. Although Salomon
beneficially owned all the issued shares of the company, the court also recognized him as a separate
person who can be a secured creditor with enforceable rights against the company.

The principle establishing the separate legal personality of the company from the members was
applied in the case of:
Lee v Lees Air Farming (1961) AC 12

Lee formed Lees Air Farming Ltd. and held all the shares, except for one. The company was formed
to undertake the business of aerial crop spaying. Lee was employed as the companys pilot. He was
killed in an accident while carrying out his work. His wife claimed workmens compensation under the
New Zealand law, and she could only succeed if she could show that Lee was in effect an employee.

The Privy Council held although Lee was the controller of the company, personally he was separate
from the company. He could enter into a contract with the company, and could be an employee.

Can Sue and be Sued

As the company is a separate legal entity, it can sue and be sued in its own name. It can sue in
respect of rights that it has, and if it has liabilities, others may sue against it. The members of the
company generally cannot take any legal action on behalf of the company. Only the company itself
can enforce its rights. This is called the proper plaintiff rule and it was established in the case of:

Foss v Harbottle (1843) 2 Hare 461

Two shareholders of a company brought action against directors of the company for misapplication
and improper use of the companys property.

The court held that as the injury complained of was injury to the company and not to the members. As
such the members could not take action. Only the company had the right to sue.

Perpetual Succession

After a company is incorporated, it continues to exist until it is dissolved according to the law or it is
struck off the register. Even if the membership changes, or all the original members die, the company
does not come to an end. This continuous life of the company is said to be perpetual succession.

In the case of Re Noel Tedman Holdings Pty Ltd. (1967) QdR 561;

The company had a husband and a wife as its only shareholders. They were also the companys
directors. They died in an accident, leaving behind an infant child. After their death the company still
existed. The problem that arose was, as the shareholders and directors had died, the shares could
not be transferred as according to the will of the deceased to the infant child.

The court thus allowed the personal representative of the deceased to appoint directors of the
company, so that these directors could allow the transfer of the shares to the child.

Power to Own Properly

S. 19 mentions that a company has the power to hold land. This can be taken to mean that a
company can own other types of property too. The property of a company is its own, and not that of
its members. Even if a member holds almost all the shares of a company, he does not have any
proprietary interest in the companys property. Once a person has sold or given his property to the
company he no longer has any right over it. The property belongs to the company, and the member
no longer has any right or interest.

Macaura v Northern Assurance Co. Ltd. (1925)AC619;

Macaura owned an estate and he sold all the timber one the estate to company called Irish Canadian
Sawmills Ltd. All the shares in the company were owned by him or his nominee. Macaura had insured
the timber that he sold to the company in his own name. After the insurance was taken, a fire broke
out destroying the timber. When Macaura claimedn the insurance company refused to pay.

The House of Lords agreed that Macaura had no right to claim, because when he sold the timber to
the company, he had given up his interest in it. The timber was the property of the company and
Macaura no longer had insurable interest in it.

Liability of the Members

Once a company is incorporated it is liable for its own debts and obligations. The members are not
responsible for it. This is one of the advantages of a company that has limited liability. In a company
limited by shares, the members will make a contribution to the capital and he will be given shares. If
the company should suffer losses, the shareholder is not liable to contribute any more to the company
if he has fully paid for his shares. His actually loss would be the amount he has paid for the shares.
Creditors of the company cannot be take any action against the members, because the members are
separate from the company.

In the case of In the Application for Re Yee Yut Ee (978)2 MLJ 142

Yee was the secretary of a company that was a wholly-owned subsidiary of an American corporation.
The company had retrenched their staff and dispute arose as to the retrenchment benefits. The
matter was brought to the Industrial Arbitration Court where an award was made in the companys
absence. As the company did not comply with the award, the Arbitration Court ordered that Yee be
personally liable as he had been appointed director by then.
The High court held that a director is nor liable for the companys debts.

LIFTING THE VEIL OF INCORPORATION

The veil of incorporation is a fiction created by law separating the company as a legal personality from
the people behind it. Once a company is incorporated, this veil comes down separating the company
from the members. Normally the courts would not look beyond the corporate veil to see who is
behind the company and why the company was established. As you have seen from the effect of
incorporation, the shareholders of a company cannot be personally sued for the companys debts and
obligations.

Sometimes the strict application of the separate legal entity principle, does have its disadvantages.
We have seen in Macauras case where the application of the separate legal personality principle
caused hardship to the one who owned almost all the shares of the company, who cannot claim for
insurance taken under his own name. There are also cases where third parties suffer. Where a
company is limited liability company, the creditors will suffer if the company incurs debts which it is
unable to pay, as the shareholders are not liable beyond the amount they have contributed in full for
their shares.

Due to some of the undesirable consequences of incorporation, company law recognizes a number of
exceptions to the principle of veil of incorporation. Under these exceptional circumstances, the law
looks at the situation and will ignore the separation between the company and its members or officers.
This is called Lifting the veil. When the court lifts the corporate veil, the members or officers will be
made liable for the companys obligations. The corporate veil is lifted under situations provided by
statue, and also according to the judicial decision under the common law.
[1] Section 36 CA 1965
[2] Section 44(2) CA 1965
[3] Section 48(4) CA 1965
[4] Section 121(2) CA 1965