Nature of Registered Companies

Nature Of Registered Companies

ICSA IQS – Corporate Law 1

CHAPTER 1

NATURE OF REGISTERED COMPANIES

Chapter objectives

After the completion of this chapter you should be able to understand amongst other

things:

• The legal and non legal sources of Malaysian Corporate law;

• That Malaysian Corporate law is not static and reforms are underway;

• That various bodies regulate registered companies;

• That upon registering a company a registered company will become a corporation

and in consequence of that the registered company has a distinct legal personality

from that of its members and controllers;

• That there are advantages and disadvantages in using a registered company as a

medium to transact business;

• That registering a company so as to create a business corporation requires due

compliance with formalities as prescribed by the Companies Act 1965;

• That upon registering a company the registered company, its members and

controllers will be subject to the effects of incorporation;

• That limited liability of members has nothing to do with the corporate personality

of a registered company but instead it is a privilege accorded by parliament to

members of a limited company;

• That the corporate personality of a registered company can at times be abused and

therefore the Companies Act 1965 as well as the common law allows for the lifting

or piercing of the corporate veil;

Nature Of Registered Companies

ICSA IQS – Corporate Law 2

AN INTRODUCTION TO MALAYSIAN CORPORATE LAW

1.1 Corporate law is that body of law that deals specifically with the functioning of a

corporation. A company that is registered with Companies Commission of

Malaysia (hereinafter referred to as CCM) in accordance to the Companies Act

1965 (hereinafter referred to as CA) is a body corporate and therefore a

corporation.

1.2 The CA provides among other things that upon the successful registration of a

company as evidenced by its certificate of incorporation that is issued by the

CCM the registered company shall become a body corporate and it shall be

capable forthwith of exercising all the functions of an incorporated company: s

16(5)

1.3 The registered company (herein after referred to as company) being a body

corporate and therefore a corporation is bestowed with corporate personality. A

fundamental attribute of corporate personality is that the law regards the company

to be a separate legal person from its members and controllers. This proposition of

• That when the courts lift or pierce the corporate veil the court is in fact ignoring

the corporate personality of the registered company;

• That lifting the corporate veil is not to be regarded as a general principal of

Malaysian Corporate Law but instead it is an exception;

• That where a registered company is used to perpetrate fraud or some kind of

impropriety the court will not hesitate to lift the corporate veil;

• That related corporations (companies that have a holding and subsidiary

relationship) are separate entities; and

• That there exist differences between a partnership and a registered company;

Nature Of Registered Companies

ICSA IQS – Corporate Law 3

law was established in 1897 in the English House of Lords case of Salomon v A

Salomon &Co Ltd.

1.4 A registered company is therefore a legal person in the eyes of the law and a

subject of rights and duties. As we shall discuss later, a company being a legal

person can among other things own property, sue and be sued in its name and can

also enter into contracts that from which it can acquire enforceable rights and

obligations.

1.5 The separate legal existence of the company from its members and controllers

cause companies to be used as a vehicle to transact business. This is because the

corporate personality of a registered company enables its members or controllers

to allocate to the company any the risk of failure that is associated with the

business that is being conducted through the medium of a registered company.

1.6 Registering a company for this purpose does not mean that the company is being

used for an illegitimate purpose as efficient allocation of risk to the company is in

fact one of the reasons as to why parliament intended the company to be a body

corporate. Support for this argument can be found in Salomon v A Salomon &Co

Ltd.

1.7 Yet at times there are instances when the corporate personality of a registered

company can be used to perpetrate wrongs against others. Companies can be

registered so as to defraud creditors or other persons. When faced with this kind

of situation the court may ignore the corporate personality of the company by

lifting or piecing the company's corporate veil.

1.8 A registered company can either be classified into a limited company or an

unlimited company. Members of a limited company enjoy the benefit of limited

liability in that the extent of contribution that a member of limited company must

make towards the company's liability is limited. Members of limited company

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ICSA IQS – Corporate Law 4

having share capital are however subjected to the rigours of the doctrine of capital

maintenance. This doctrine embodies the rule that a limited company so long it is

a going concern is prohibited from returning capital back to its members except

otherwise allowed by the law. This doctrine among other things ensures that the

issued capital of the limited company will provide a reserve to creditors in the

event the company is not able to pay its debt.

1.9 Currently any two or more persons can register a company in Malaysia: s 14 (1)

Companies Act 1965. To register a company in accordance to the CA formalities

as set out in the CA must be strictly complied with. Prior to registering a company

the promoters of the company must among other things lodge with CCM the

prospective company's memorandum of association and articles of association.

1.10 These two separate documents make up the registered company's constitution and

also set's out how the company is to be governed. Further, upon registering the

company's memorandum and articles the company's memorandum and articles

shall have contractual effect between the company and its members and between

the members inter se: s 33 (1) Companies Act 1965. The company's articles

usually provide members