Borrowers and Their Legal Status PDF

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(N O T FO P R RIN C T O A M B M LE ER C CO IA P L Y PU R PO SE CHAPTER 7 ) THEIR LEGAL STATUS BORROWERS AND 7-1 BORROWERS AND THEIR LEGAL STATUS 7. BORROWERS AND THEIR LEGAL STATUS Learning Outcome At the end of the chapter, you will be able to: Identify the different types of legal borrowers and the laws governing them. ) SE Key Topics PO In this chapter, you will be able to read about: The Legal Relationship between the Bank and the Borrowing Customer R L Y PU Borrower Entities and their Legal Status: Types of Borrowers IA P C CO Individual Personal Borrowers Registration of Business Borrowers M LE Co-Operative Societies Clubs and Societies M B ER Government Organisations O A C T Assessment Criteria R RIN During the exam, you will be expected to: FO P Distinguish the different borrowing entity types and their distinct characteristics. Recognise the legislation governing the various types of borrowing entities and its implications. T O 7.1 THE LEGAL RELATIONSHIP BETWEEN THE BANK AND THE BORROWING CUSTOMER (N The bank is a public institution that collects deposits and acts as a financial intermediary in the economic system, performing collection and remittance roles for its customers and other financial institutions. The borrowing customer obtains a loan from the financial institution with the obligation to repay with appropriate interest and fees. This in turn enables the financial institution to meet obligations to its depositors and counterparties. The extension of a loan is not without risk, and an extensive credit risk evaluation is conducted to satisfy the bank that the credit risk is acceptable. The extension of the credit will be formalised within the regulatory framework with necessary legal documentation to capture the customer’s obligations to the financial institution. If the customer defaults, the financial institution is in a position to enforce its legal rights to recover the outstanding loan amount. CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-2 The first essential step is to identify the loan applicant and its legal status. This sets the pace for the request of information and subsequent credit risk assessment. Loan applicants may have different legal statuses which have different risk impact and different legal documentation requirements. 7.2 BORROWER ENTITIES AND THEIR LEGAL STATUS: TYPES OF BORROWERS ) Borrower entities can be in the following forms: SE an individual and personal borrower without a business; PO a sole proprietor and as an individual with a business; a partnership, i.e. normal partnership or limited liability partnership; R L Y a company i.e. a limited liability company or an unlimited liability company; PU IA P co-operatives; C CO clubs and societies; or government corporations and agencies. M LE There are different legal implications for each borrower statuses above. This gives M B ER rise to varying legal risks as a certain legal action initiated to recover a loan may not O A be effective to deal with all the different legal statuses. C T R RIN 7.3 INDIVIDUAL PERSONAL BORROWERS FO P Personal borrowers can be individuals or joint individuals. To borrow legally, the individual must be at least 18 years of age under the Age of Majority Act 1971 as at 1 January 2006. A person under the age of 18 is deemed a minor and cannot enter into a contract, as stated under Section 11 of the Contracts Act 1950 as at 1 July 1974. Contracts entered into by minors are prima facie void except for T contracts for necessaries (e.g. food and clothing suited to the minor’s condition in O life); otherwise the loan might be considered as non-enforceable and the lending (N bank risks a loan loss. Lending to an individual is termed consumer lending as it is not tied to any business activity or business purpose. The needs of personal borrowers are diverse and vary from financing asset acquisitions to personal consumption. Examples of asset acquisition are investments in properties, vehicles, and company shares. A personal consumption loan may be requested to meet peak expenditure periods, for example, during festive seasons and for educational expenses, or for emergencies such as medical treatment. An individual borrower obtains a loan in personal name and is personally responsible for repayment. If two or more individuals borrow a loan jointly, both individuals are responsible. It is possible for more than two individuals to obtain a loan and agree to be jointly responsible to make the repayment, as long as the financial institution is satisfied with their ability to meet the loan servicing obligation. CERTIFICATE IN CREDIT 7-3 BORROWERS AND THEIR LEGAL STATUS There are no legal restrictions on the number of joint borrowers for a loan, and the bank’s lending policy shall be the main guideline. Some exceptions apply in considering the eligibility of personal borrowers. Details are given in Table 7.1: Table 7.1: Exceptions to the Eligibility of Personal Borrowers ) Category Description SE Age is an important factor when lending to personal customers. PO The minimum legal age limit to borrow is set at 18. Meanwhile, Minors credit cards can only be issued to a person who is at least 21 R L Y years of age, as stipulated by Bank Negara Malaysia (BNM). PU IA P C CO In addition to minors, mentally disabled persons are deemed not competent to enter into contracts, as per Sections 11 M LE and 12 of the Contracts Act 1950 (Revised 1974). It is unlikely Mentally M B that a mentally challenged person will have the capacity to ER disabled O A individually apply for a credit facility, but this may be possible C T for joint applications with another person. In this case, due R RIN care must be exercised by the credit officer. FO P Individuals adjudicated bankrupt by the High Court are not eligible to obtain a loan, as bankrupt individuals have no legal capacity to borrow. The bankrupt status of the individual provides the bank with an indication of high risk of default. The credit officer needs to conduct a bankruptcy search to ensure Bankrupt T the applicant is not a bankrupt. A discharged bankrupt is a O person who has settled his previous liabilities and has been (N released from bankruptcy status by the Director General of Insolvency. The lending policy of the bank will indicate if lending to a discharged bankrupt is permitted. 7.4 REGISTRATION OF BUSINESS BORROWERS Under the Registration of Businesses Act 1956 (Revised 1978), businesses must be registered at the CCM. The CCM was created following the merger of the Registrar of Business and CCM in 2003. The CCM administers provisions under the Companies Act 2016 and the Registration of Businesses Act 1956 (Revised 1978). CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-4 A business can be registered as a sole proprietorship, a partnership, a limited liability company, an unlimited liability company or a limited liability partnership. When a business is registered, a Notice of Registration is issued. Under CA 2016, the notice of registration is conclusive that the company is duly registered (Section 19). The CCM may issue a certificate of incorporation only upon an application by the company and payment of the prescribed fee. The following sections examine the different type of business categories in Malaysia. ) SE 7.4.1 Sole Proprietorship PO The most basic business type in Malaysia is a sole proprietorship, which is a R L Y business with a single owner or sole proprietor. In terms of loans, the borrower PU IA P can choose to apply for credit facilities in personal name or business name. If C CO the loan is given under the business name, the sole proprietor remains liable for the outstanding debt. M LE Under Malaysian law, the sole proprietor and the business are the same entity, as there is no legal distinction between the two. The sole proprietor cannot M B ER avoid responsibility for the business liabilities. O A C T Table 7.2: Advantages and Disadvantages of Sole Proprietorship R RIN SOLE PROPRIETORSHIP FO P Advantages Disadvantages Simple to form, inexpensive and All losses are solely borne by the quick operational setup owner T All profits go directly to the The owner is personally O owner responsible for unpaid debts to (N Management decisions are the bank or suppliers easy to make No advice or check and balance No elaborate regulatory in management decisions requirements such as audit and Limitation when increasing filing of accounts capital No succession plan or ability to afford professional managers A Certificate of Registration of Business is issued by the Registrar upon the registration of the sole proprietorship under the Registration of Businesses Act 1956 (Revised 1978)1956. It must be renewed upon expiry, whereupon a renewal certificate will be issued. A business that continues without such renewal is technically an illegal business. CERTIFICATE IN CREDIT 7-5 BORROWERS AND THEIR LEGAL STATUS All sole proprietorship businesses carry their registered names without any indication of limited liability (i.e. Berhad [Bhd.] or Sendirian Berhad [Sdn. Bhd.]). This means that there is no limit on the business’ liability to pay outstanding debts and its owner is personally liable. A business loan to a sole proprietorship should take the following into consideration: ) The sole proprietor assumes full responsibility for the liabilities of the SE business. All personal assets and wealth are at risk, which may offer lenders some degree of comfort. However, it is likely that a sole proprietorship PO will be a small business entity and the personal wealth of the owner is insignificant. R L Y As a sole proprietorship, there is no legal requirement for regular audits PU IA P and the filing of financial statements with authorities. The accounting and C CO financial records of the sole proprietorship may be limited, which presents a serious weakness and risk factor for the loan. M LE A sole proprietor of a business is fully responsible for all debts outstanding. A guarantee from the sole proprietor for debts owned by the business is M B ER superfluous as owner is guaranteeing own debts. If needed, a guarantee O A must be obtained from a third party. C T R RIN 7.4.2 Partnership FO P A partnership is an association of two or more persons to jointly conduct a business with a view to profit. Like a sole proprietor, the business entity is not distinct from the partners, and must be registered under the Registration of Businesses Act 1956 (Revised 1978). Current law permits a partnership to have up to 20 partners. A business with more than 20 partners is required T to incorporate or register as a limited liability company. Legal firms and O professional practices may have unlimited partners because all partners are (N jointly liable for any unpaid debts. Partnership businesses are governed in Malaysia by the Partnership Act 1961 (Revised 1974). The Partnership Act provides for, among other things, equal responsibilities and distribution of profits and losses among partners regardless of their roles and capital contribution. In addition to the provisions of the Act, it is common practice for firms to draw up their own Partnership Deed (i.e. a partnership agreement). The partnership agreement provides details of the partnership including the capital contribution of each partner, profit sharing arrangements, and drawings from the business as salaries or in other forms. In the absence of a deed, the Partnership Act 1961 (Revised 1974) will prevail. CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-6 Where there is a deed, but the deed is not revealed to the lender, the lender need not concern itself with its provisions. However, if it is revealed, then the lender is put on notice and must be guided by it. Table 7.3: Advantages and Disadvantages of Normal Partnership NORMAL PARTNERSHIP ) SE Advantages Disadvantages PO Able to raise more capital with A partnership is not a legally more partners separate entity and has no R L Y Risk and losses can be shared continuity of existence PU IA P among the partners Profits and losses are shared C CO Broader management expertise among partners Minimum regulatory The possibility of disputes M LE requirements arising among partners Unlimited liability of all partners, M B ER unless agreed otherwise O A C T R RIN The personal guarantee of partners is redundant, as all partners are liable for the total debt load of the partnership. FO P A partnership changes its status each time a partner is admitted or has retired. A new partnership comes into existence every time there is a change of partners, even if the number of partners remains the same. For the lending bank, this is important as it imposes new risks and changes the legal liabilities of the partners. T O In dealing with partners in a partnership firm, consent from all partners is required at all times. However, depending on the provisions of the Partnership (N Agreement, individual partners can be given a mandate to act on behalf of the entire partnership, and it is sufficient for the credit officer to deal with the authorised person/s. a. Incoming Partner It is common practice for a new partner to be admitted to increase the capital or add specific expertise to the business. It should be noted that an incoming partner is only liable for debts incurred after admission as a partner. Therefore, if the new partner is expected to assume a share of the debt liability, the lender should obtain a letter of undertaking from the new partner to accept the liabilities of the partnership’s existing debts, subject to certain considerations. CERTIFICATE IN CREDIT 7-7 BORROWERS AND THEIR LEGAL STATUS This is especially useful for non-revolving facilities such as term loans. However, for revolving facilities such as overdrafts, it should be treated in such a way that any new credits in the account will go towards the settlement of earlier debts, as per the ruling in “Clayton’s Case”. New debits into the account are thus considered as new loans, for which the new partner will be liable. ) CASE STUDY: Clayton’s Case SE Clayton’s Case refers to the ruling in an 1816 court case (Devaynes v PO Noble), which created a rule in relation to the distribution of monies from a bank account. The rule is based upon the notion of “first-in, R L Y first-out” to determine the effect of payments from an account and will PU IA P normally apply without evidence of any other intention. Payments are C CO presumed to be appropriated to debts in the order in which the debts are incurred. In other words, any new receipts by a company must go M LE towards paying the earliest debts. M B ER O A b. Outgoing Partner C T It is common for partners to be removed from the original agreement due R RIN to death, retirement, or resignation. The liabilities of the outgoing partner will be determined as at the date of death, retirement or resignation, provided the lender is given notice. FO P The outgoing partner is not liable for new debts incurred after the said date. While it may be easy to determine the amount of the outgoing partner’s liability for a non-revolving facility such as a term loan, it becomes more difficult for revolving facilities such as overdraft. As above, incoming credits T will repay the earliest debits but the outgoing partner is absolved from O liability of any debits incurred after said date. (N For this reason, personal guarantees are taken from partners to prevent the rule in Clayton’s case from operating to the lender’s disadvantage, though the partners’ personal guarantee may seem redundant as all partners are anyway jointly and severally liable for the entire debts of the partnership. 7.4.3 Limited Liability Partnership (LLP) The LLP is a hybrid of a normal partnership and a registered limited liability company. The LLP is a legal entity under the Limited Liability Partnerships Act 2012 (Act 743) (as at 1 March 2017). A registered LLP must have its name to include “Perkongsian Liabiliti Terhad” or PLT. An LLP business must be registered with the Registrar of Limited Liability Partnerships and a Certificate of Registration issued to that effect. CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-8 All LLP partners have limited liability protection similar to a limited liability company registered under the CA 2016. At the same time, every partner is an agent of the LLP for any commitment made, if authorised to do so by the other partners. LLPs have an unlimited capacity to hold property under the company’s name, unlike partnerships that are not allowed to be registered owners under the NLC 1965. LLPs have perpetual succession, and the LLP can change its partner ) composition without having to dissolve and reconstitute the business entity SE (unlike normal partnerships). There is no requirement for a statutory audit of its financial accounts, albeit financial statements must be prepared in PO compliance with the accounting standards issued by the MASB. R L Y PU IA P 7.4.4 Limited and Unlimited Liability Companies and Corporate C CO Structures Under CA 2016, companies can generally be classified as: M LE 1. limited and unlimited companies; and M B 2. public and private companies. ER O A Section 10(1) CA 2016 states that a company may be incorporated as “(a) C T a company limited by shares; (b) a company limited by guarantee; or R RIN (c) an unlimited company.” Where the company is limited by shares, the members liability is limited to the amount unpaid on their shares, and where the company is a company limited by guarantee, the members liability is FO P limited to the amount they agreed to contribute in the event the company is wound up. There is no limit placed on the liability of a member of an unlimited company. To differentiate an unlimited company from the others, section 25(1) CA 2016 provides that the name of an unlimited company shall end with the word “Sendirian” or the abbreviation “Sdn”. T O A company can also be classified as either a private or a public company. (N Under the CA 2016, a private company is required to have the following characteristics: It is a company limited by shares (s42(1)) It has not more than 50 shareholders (s42(1)) It restricts the transfer of its shares (s42(2)) It cannot allot shares or debentures with a view of offering them to the public (s43(1)). It cannot invite the public to deposit money with the company (CA 2016 s43(1)). CERTIFICATE IN CREDIT 7-9 BORROWERS AND THEIR LEGAL STATUS Other than the above characteristics, s25(1) of CA 2016 mandates that the name of a private company should end with the words “Sendirian Berhad” or its abbreviation “Sdn Bhd”. In the case of a public company, its name should end with the word “Berhad” or its abbreviation “Bhd”. A public company may have one or more of the characteristics imposed on a private company. For example, most public companies are limited by shares. ) SE Apart from the name, the other main differences between private and public companies, prescribed in the CA 2016 are as follows: PO ▶ The statutory minimum number of resident directors for a private company R L Y is only one, whereas a public company is required to have at least two PU IA P resident directors. C CO ▶ Only a private company may pass a written resolution (s290). ▶ Only a public company is mandated to hold its annual general meeting M LE (s340). ▶ Certain categories of private companies are exempted from having its M B ER accounts audited (s255 (3)), CA 2016. In August 2017, the CCM issued O A Practice Directive 3/2007 exempting three categories of private companies, C T namely dormant companies, zero revenue companies and threshold- R RIN qualified companies. a. Incorporation of a Company under the Companies Act 2016 FO P Under the CA 2016, the process of incorporating a company is simplified. The Act introduces a super form for incorporation. Section 15 provides that the CCM will assign a registration number to the company and issue the notice of registration upon compliance of the procedure and payment of the appropriate fee. T O The notice of registration is conclusive evidence that the company is duly (N registered (section 19). The CCM may issue a certificate of incorporation only upon an application by the company and payment of the prescribed fee. A pre-incorporation contract is defined in s65(1) CA 2016 as “a contract or transaction that purports to be made by or on behalf of a company at a time when the company has not been formed.” Section 65(1) provides that the person who signs the pre-incorporation contract will be personally liable on the contract or transaction accordingly. Unlike their previous position under the CA 1965, they cannot exclude their liability. Nevertheless, the position of the company with regard to its liability under the pre-incorporation contract remains the same. Section 65(2) permits the company to ratify the contract after its incorporation. If the company does ratify the contract, “the company shall be bound by the CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-10 contract or transaction as if the company has been in existence at the date of the contract or transaction and had been a party to the contract or transaction”. b. Substantial Shareholders Section 137 of the CA 2016 imposes an obligation on individuals and corporations that have an interest in 5% or more of the voting shares of a Malaysian incorporated public company (whether listed or unlisted) ) to disclose that interest to the relevant public company and to the CCM. SE “Voting shares” means, for the purposes of these disclosure requirements, PO an issued share to which there is attached a right to vote. According to Section 136 of the CA 2016, a substantial shareholder is R L Y defined as: PU IA P C CO ▶ A person who has an interest in one or more voting shares in a company and the number or the aggregate number of such shares is not less than 5% of the total number of all the voting shares included in the company; M LE or M B ▶ Being a company, the share capital of which is divided into: ER O A i. two or more classes of the shares, if the person has an interest in or C T more voting shares include in one of those classes; and R RIN ii. the number or the aggregate number of such shares is not less than 5% of the aggregate number of the total number of all the voting FO P shares included in that class of shares. On the occasion of a transaction that changes a shareholder’s status of interest as a substantial shareholder as defined in Section 137-139 of the CA 2016, the shareholder must use the appropriate form to notify the subject T company (in the original), as follows: O ▶ In the case of a company whose shares are quoted on a stock exchange (N within three days after the person becomes a substantial shareholder (notwithstanding that the person has ceased to be a substantial shareholder before the expiration of the notice period), acquires or disposes of voting shares, ceases to be a substantial shareholder in the company (Form29-A); ▶ In any other case, within five days after the person becomes a substantial shareholder, acquires or disposes of voting shares, ceases to be a substantial shareholder (Form 29-A); ▶ Sending copies of the notification, in each case, to the CCM, per Section 141 of the CA 2016. While the holder continues to own 5% or more of the voting shares before entering upon a new transaction, reporting is required for each change CERTIFICATE IN CREDIT 7-11 BORROWERS AND THEIR LEGAL STATUS or cessation of substantial shareholdings within the time frame described above. Under Sections 137(5), 138(4) and 139(3) of the CA 2016, the penalty for non-compliance with the substantial shareholding disclosure is a fine not exceeding MYR 1 million, upon conviction, and the penalty for continuing offense is a fine not exceeding MYR1,000 for each day of non-compliance after the conviction. ) SE Additionally, under Section 591 of the CA 2016, it is an offense to make or authorise the making of a statement that a person knows is false or PO misleading and that person may be liable, upon conviction, to imprisonment for a term not exceeding ten years or to a fine not exceeding MYR3 million R L Y or both. PU IA P C CO c. Director’s Liabilities Section 213(1) of the CA 2016 provides that a director must at all times exercise his powers for a proper purpose and in good faith in the best M LE interest of the company. Section 213 (2) CA 2016 further states that a M B director of the company shall exercise reasonable care, skill and diligence ER O A with: C T ▶ the knowledge, skill and experience which may reasonably be expected R RIN of a director having the same responsibilities; and ▶ any additional knowledge, skill and experience which the director in fact FO P has. Section 214 of the CA 2016 also provides that a director who makes a business judgment is deemed to meet the requirements of his duty as a director, if he: T ▶ makes the business judgment for a proper purpose and in good faith; O ▶ does not have a material personal interest in the subject matter of the (N business judgment; ▶ is informed about the subject matter of the business judgment to the extent that he reasonably believes to be appropriate in the circumstances; and ▶ reasonably believes that the business judgment is in the best interest of the company. While there are many matters a director must focus upon, one of the most important concerns is the financial statements of the company. CA 2016 has a myriad of compliance requirements for accounts, record keeping, disclosures and filing of annual returns for which a director is responsible, with criminal sanctions in any event of breach of duty. CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-12 The limited liability afforded by a limited liability company only applies to its shareholders rather than its directors. A director may be personally liable if he fails to meet his responsibilities, such as: ▶ A breach of the director’s general duties owed to the company, including to account to the company for profits made from transactions where a conflict of interest was present or did not declare an interest as required ▶ Failing to comply with specific duties such as making unlawful ) SE distributions ▶ Any false or misleading reporting in which the company suffers a loss PO ▶ Being under insolvency law such as for any fraudulent or wrong trading ▶ Unable to pay debts R L Y PU ▶ In case of any disqualification proceedings, a contribution order is made IA P C CO against the director Dividends can only be paid out of profits if the company satisfies the M LE solvency test, which generally relate to its cash flow solvency and balance sheet solvency. Under the solvency test, a director has to ensure that the M B ER company would be solvent immediately after the dividend is paid. O A Under the CA 2016 (S213 (3)), a director who breaches his duties commits C T R RIN an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding RM3 million or to both. The breaches include improper use of company’s property, opportunities, FO P information acquired by virtue of position, or engaged in business which is in direct competition with the company. Section 289 CA 2016, inter alia, provides that a company may indemnify its director for costs in defending a legal action if judgment in the action is T given in their favour or where the court action is discontinued. In addition, O the company may with the approval of its board of directors, effect an (N insurance policy to cover its director’s liability. d. Directors’ Remuneration or Loans to Directors Section 230 CA 2016 provides that the fees of the directors, and any benefits payable to the directors of a public company, or of a listed company and its subsidiaries, shall be approved at a general meeting. However, for a private company which is not a subsidiary of a listed company, the directors’ fees and benefits may be approved by the board unless the company’s constitution states otherwise. Section 225 CA 2016 stipulates that a company (other than an exempt private company) shall not: ▶ make a loan to any person connected with a director of the company or of its holding company; or CERTIFICATE IN CREDIT 7-13 BORROWERS AND THEIR LEGAL STATUS ▶ enter into any guarantee or provide any security in connection with a loan made to such person by any other person. Section 2 CA 2016 defines “exempt private company” as a private company in the shares of which no beneficial interest is held directly or indirectly by any corporation and which has not more than twenty members none of whom is a corporation”. ) e. Capital Structure of Limited Companies SE In general, the different classes of shares can be categorized into ordinary shares and preference shares under the CA 2016. ”Preference shares” is PO defined in s2(1) to mean a share by whatever name called, which does not entitle the holder to the right to vote on a resolution or to any right to R L Y participate beyond a specified amount in any distribution whether by way PU IA P of dividend, or on redemption, in a winding up, or otherwise. C CO S.69 of the CA 2016 states that subject to the constitution of the company, shares in a company may: M LE ▶ be issued in different classes; M B ER ▶ be redeemable preference shares (RPS); O A ▶ confer preferential rights to distribution of capital or income; C T R RIN ▶ confer special, limited or conditional voting rights; or ▶ not confer voting rights. FO P Under S.71 CA 2016, a share in a company, other than preference shares, confers on the holder the right to: ▶ attend, participate & speak at a meeting; ▶ vote in a show of hands on any resolution of the company; T ▶ one vote for each share on a poll; O ▶ an equal share in the distribution of surplus assets of the company; or (N ▶ an equal share in dividends. However, right to dividends may be negated, altered or added to by the constitution of the company or in accordance with the terms on which the share is issued. In order to do so, a company must be expressly authorised by its constitution. This requirement in effect means that a company that proposes to issue RPS is required to adopt a constitution. Preference shares shall be redeemable only if the shares are fully paid up and the redemption shall be out of: CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-14 ▶ profits; ▶ a fresh issue of shares; or ▶ capital of the company (NEW under CA 2016). Further, S 72(6) CA 2016 makes the redemption out of the capital subject to: ▶ all the directors having made a solvency statement under S.113 CA 2016; ) and SE ▶ company lodging a copy of the statement with the CCM PO In terms of S.85 CA 2016, subject to the constitution, where a company issues shares as to voting or distribution rights, those shares shall first be R L Y offered to the holders of existing shares in a manner which would, if the PU IA P offer were accepted, maintain the relative voting and distribution rights C CO of those shareholders. Under S.85(2) CA 2016, an offer shall be made in a notice specifying the number of shares offered & the timeframe within M LE which the offer, if not accepted, is deemed to be declined. M B Under S.74 CA 2016, all shares issued before or upon the commencement of ER O A this Act shall have no par or nominal value. All subscription money received C T by a company will be credited to Share Capital Account. It eliminates the R RIN need for a company to maintain a share premium account and reserves. Introduction of the no par value shares (NPV) regime will not affect the FO P existing rights of a company to issue redeemable preference shares (RPS) (S.72 CA 2016). In the NPV environment, shares are issued at a price to be determined by the directors. The NPV regime replaces the regime under the CA 1965 that required a company to determine the par value or the nominal value T of its shares. Previously, under the CA 1965, the company must state its O authorised share capital and minimum/nominal/par value for each share, (N and the number of shares issued by the company must not exceed its authorised share capital. Under the CA 2016, a newly incorporated company is not required to state its authorised share capital or the nominal value of its shares; these concepts are no longer applicable. Consequently, shares issued at a discount, shares issued at a premium, and the share premium account have become redundant. A company shall not be required to issue a share certificate unless an application by a shareholder for a certificate relating to the shareholder’s shares has been received or otherwise provided by its constitution (S.97(1) CA 2016). In such instance, S.98(3) CA 2016 requires issuance of certificate within 60 days of receiving application of a shareholder. CERTIFICATE IN CREDIT 7-15 BORROWERS AND THEIR LEGAL STATUS CA 2016 retains the law under CA 1965 that allows a company to issue shares as partly paid. The rules under the former Table A of CA 1965 are now stated in CA 2016 under S.82 and S.83. The provisions deal with the procedure for calls to be made, the consequences of non-payment, and the procedure for forfeiture of the share. Having regard to the NPV concept, S.618 (6) of the CA 2016 provides that the shareholders remain liable for money unpaid on shares for shares issued ) prior to the CA 2016, whether for the premium or the nominal value of the SE shares. The amount unpaid shall be the difference between the price of PO issue, excluding the premium, and the amount paid on the shares. Subject to the constitution, where the shares are not fully paid up, the company is R L Y entitled to a lien over (S.111(1)): PU IA P ▶ the shares; and C CO ▶ any dividend payment on the shares. The company may also sell the shares in any manner that the directors M LE consider appropriate (S.111(2)). The directors have the discretion to refuse M B to register a transfer of shares over which the company has a lien, unless ER O A the constitution provides otherwise. C T f. Corporate Shareholding Structures R RIN As companies are legal persons unto themselves, they possess the right to own interests in other companies. These are termed corporate FO P shareholdings, which may have an impact on credit risk. Where corporate shareholding exists, a group corporate structure is created. Within a corporate group structure, various companies are identified as: ▶ A holding company T ▶ An ultimate parent company O ▶ A subsidiary company (N ▶ An associate company ▶ A related company ▶ An investment company Legal definitions are provided in Sections 3 to 7 of the CA 2016. The illustration (Figure 7.1) shows the relationships between various companies within the AHC Group. All paid-up share capital is assumed to be made up of ordinary shares. CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-16 AHC Sdn Bhd is a holding AHC sdn is the holding company of RC Bhd holding company HC Sdn Bhd holding AHC Sdn 26 million shares (52%) in RC 300,00 shares (75%) in HC Bhd RC Bhd is thus a subsidiary HC Sdn Bhd is thus a of AHC Sdn Bhd subsidiary of AHC Sdn Bhd AHC Sdn Bhd is also the ultimate holding company of ) SE SC sdn Bhd HC Sdn Bhd RC Bhd PO Issued and Issued and Paid Paid up Share up Share Capital Capital of of 50,000,000 R L Y 400,000 shares shares PU IA P C CO H C Sdn Bhd is the holding SC Sdn Bhd is a company of SC Sdn Bhd subsidiary of HC Sdn Bhd Holding 510,000 shares (51%) in SC M LE HC Sdn Bhd M B ER Issued and Paid O A up Share Capital of 400,000 C T shares R RIN ASSOC Sdn Bhd is an SC Sdn Bhd is a corporate Associated Company of SC shareholder of ASSOC Sdn Bhd FO P Sdn Bhd holding 4 million ASSOC shares (20%) ASSOC Sdn Bhd Issued and Paid up Share Capital of 20,000,000 T shares O (N Figure 7.1: Corporate structure of AHC Group of Companies A holding company is defined as the majority shareholder of another limited company with a shareholding of more than 50%. As a holding company, it may consolidate all revenues, income, assets, and liabilities of the various companies it controls. Figure 7.1 shows that AHC Sdn. Bhd. is the holding company for both HC Sdn. Bhd. and RC Bhd., a public listed company. HC Sdn. Bhd. is also the holding company for SC Sdn. Bhd. The holding company dominates the policy setting and strategy formulation of the subsidiary. ▶ An ultimate holding company is a holding company that owns more than 50% of the paid-up capital of another holding company. In the above illustration, AHC Sdn. Bhd. is the ultimate holding company of SC Sdn. Bhd., because it is the holding company of HC Sdn. Bhd. CERTIFICATE IN CREDIT 7-17 BORROWERS AND THEIR LEGAL STATUS ▶ A subsidiary is a company whose majority of its paid-up share capital is owned by another company, which becomes the holding company. Generally, the policies and operations of a subsidiary are under the influence and control of the holding company. ▶ An associate company is a company where another company holds between 20 to 50% of its paid-up share capital. In the above example, SC Sdn. Bhd. has a 20% share in ASSOC Sdn. Bhd., making that company ) an associate of SC. The company that holds shares in an associate SE company cannot consolidate the revenue and profits or assets of the associate company. Accounting rules permit the investing company to PO account in its financial statements for a share of the profits or losses of an associate company. Shareholding in an associate company may R L Y allow board representation but no major influence on the policies and PU IA P strategies of the associate. 7.5 CO-OPERATIVE SOCIETIES C CO M LE All co-operative societies must be registered under the Co-operative Societies Act M B ER 1993 as at 1 June 2006. A registered co-operative society may make loans to its O A members, employees, and subsidiaries, or to another registered society that has C T R RIN obtained the approval of the Registrar-General as prescribed by the rules. The co-operative societies in Malaysia operate under the supervision of three FO P authorities, namely: The Farmers Organisation Authority (FOA), which consolidates and merges agro- based co-operatives Department of Co-operative Development, which supervises urban and non- agro-based co-operatives T O Fisheries Development Authority (MAJUIKAN), which supervises fishing co- (N operatives Housing co-operatives were formed in 1949 to provide housing finance for their members at a more reasonable cost and on softer repayment terms than those offered by major financial institutions. Most housing co-operatives raised additional funds from lenders by charging their housing schemes. Borrowing requirements of other co-operatives could either be for working capital or asset financing. 7.6 CLUBS AND SOCIETIES Clubs and societies are unincorporated bodies, which mean that they have no legal status of their own. They are formed by persons grouping together and agreeing to CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-18 form a club or society of which they are members. The members then draw up and adopt rules and by-laws that become the constitution of the club or society. While societies must be registered with the Registrar of Societies, clubs do not need to be registered. Section 9(c) of the Societies Act 1966 (As at 1 January 2006) provides that a registered society may sue or be sued in the name of a member registered with the Registrar of Societies as a public officer of the society. If no such person is registered, the society ) may sue or be sued in the name of any office-bearer of the society. SE Societies and clubs may be dissolved in the same way they were formed, where PO all members agree to the dissolution. The Registrar can also deregister a society if it does not comply with the law. The court, upon the application of its members R L Y or any other person, may also order the dissolution of a club or society. Clubs and PU IA P societies are run by committees elected by the members. The committees cannot C CO act outside the scope given to them by the general body of members. All borrowings by a club or society must be supported by a resolution passed by its M LE committee members. However, the loans are extended in the individual names of M B the committee members, such as the president or treasurer, as a club or society has ER O A no legal status of its own. C T Assets acquired by the society or club will be registered in the name of trustees who R RIN may be committee members. In taking such assets as security, lenders must ensure that: FO P the power to borrow on behalf of the members is present in the constitution; the signatories to the charge documents are authorised; and the purpose for the borrowing is within the authority of the trustees, committee, or board. T Trustees may enter into contracts on behalf of the existing members of the society O or club. New members joining after the contract date are not bound by the contract (N unless they give their consent. For any recovery of debts from societies or clubs, legal proceedings must be taken against the committee or principal office bearers. However, judgment can only be enforced against the property of the society as per Section 9(e)(i) of the Societies Act 1966 (As at 1 January 2006). Office bearers can become personally liable only if they extend their personal guarantee. The liabilities of club members are restricted to the amount of their subscriptions. Once a society or club ceases to exist, existing assets will be distributed amongst its members or their next of kin. CERTIFICATE IN CREDIT 7-19 BORROWERS AND THEIR LEGAL STATUS 7.7 GOVERNMENT ORGANISATIONS Government departments and agencies are bodies created and supervised by the government through various ministries to undertake specific functions and objectives, such as the promotion of citizen welfare or the improvement of economic activities in a specific location. Examples include the Accountant-General’s Office, the State Education Department, the Malaysian Rubber Development Board, and RISDA (Rubber Industry Small Holders Development Authority). ) SE Government departments also include local district administrative bodies, such as city and municipal councils, for example, DBKL (Dewan Bandaraya Kuala Lumpur) PO and MBPJ (Majlis Bandaraya Petaling Jaya). R L Y Generally, all government departments and agencies are restricted in their borrowing PU IA P activities, as the Ministry of Finance or its nominated authority controls their finances. C CO Borrowings are subject to the provision of General Orders issued by the Treasury, and individual department borrowings are uncommon. Major borrowings are made by the Government of Malaysia or by the state government with approval from the M LE Federal Government. These are known as sovereign borrowings and are pegged to M B the country risk rating assigned by foreign lending and ratings institutions. ER O A The government may also privatise some of its administrative and economic units, C T incorporating them into companies such as the Securities Industry Development R RIN Corporation (a company limited by guarantee), Tenaga Nasional Bhd, FELDA and Global Ventures Holdings Bhd. When these entities become companies under the FO P CA 2016, the rules of management and borrowings under the law will apply as with any other limited liability company. Government guarantees are no longer expected, as these companies are expected to run privately as commercial enterprises. There are statutory bodies established under statute in Malaysia. These include the Armed Forces Fund Board (Tabung Angkatan Tentera), the Malaysian Multimedia T O Commission, and RISDA. These bodies are allocated funds by the Malaysian government and undertake some self-funding activities other than borrowings. (N All borrowings must comply with directives from the relevant governing ministry or in accordance with the statute. It is highly unlikely for a statutory body to seek a loan on its own without clearance from the Ministry of Finance. Any borrowings requiring a government guarantee or support of any kind will need to be approved by the Ministry of Finance. CERTIFICATE IN CREDIT  BORROWERS AND THEIR LEGAL STATUS 7-20 PRACTICE QUESTIONS (INDICATIVE ANSWERS CAN BE FOUND IN THE TOPICS LISTED FOR THE RESPECTIVE QUESTIONS) 1. Explain why a person considered a minor is not allowed to borrow. (7.3) 2. What do you think is the risk of lending to a party that is not legally recognised as an eligible borrower? (7.3) 3. How are disputes resolved in a partnership? (7.4.2) ) SE 4. Explain how a partnership is formed and dissolved and describe the liabilities of the partners. (7.4.2 & 7.4.3) PO 5. Explain the Companies Act 2016 as the basic law for registered companies. (7.4.4) 6. Contrast the limited partnership structure with a normal partnership. (7.4.2 & 7.4.3) R L Y PU 7. Discuss how a shareholder is not a director of a company. (7.4.4 (b), (c)) IA P C CO 8. Describe and differentiate between ordinary and preference shares issued by a company. (7.4.4 (e)) 9. Explain the differences between a private company and a listed public company. (7.4.4) M LE 10. Explain the difference between an associate company and a related company. (7.4.4 (f)) M B ER O A Consider the following scenarios. As a credit officer, what do you think are some of the potential dangers represented within them, and what should you do to ensure that your C T R RIN lending risk is minimised? (There is no right or wrong answer in the following scenarios. Describe what you think is the best approach in each situation for questions 11 - 14). FO P 11. The director of ABC Sdn. Bhd., who is also the director for subsidiary XYZ Sdn. Bhd., comes to you and wants to take out a loan under XYZ Sdn. Bhd. He has a board resolution from XYZ Sdn. Bhd. agreeing to the loan. However, the purpose of the loan, according to the resolution, is to enable XYZ Sdn. Bhd. to pay a generous dividend to its owners. It also happens that ABC Sdn. Bhd., who owns 60% of the company, is experiencing liquidity issues. What must you consider in deciding on the loan? (7.4.4) T O 12. Mr. John Doe, a partner in a partnership firm comprising him and another owner, comes to (N you requesting a loan. He says he has a mandate from the firm authorising him to make borrowing decisions on behalf of the firm, but midway through the credit assessment process, you receive a call from the lawyer representing the other partner. The lawyer tells you that the two partners have had a falling out and ask you to stop any loan request by the firm. What is the best course of action and why? (7.4.2) 13. Company ABC Bhd. is requesting for a loan of RM500,000. Presently, its issued share capital is RM750,000, but it has RM300,000 in debts. Its Chief Financial Officer tells you that this is acceptable, because the company will be issuing a cash call soon for an additional RM400,000 and the majority shareholder has already agreed to inject additional funds. Theoretically, this will raise its issued capital by another RM400,000 to RM 1.15 million. What are some concerns that you may have as a credit officer? (7.4.4) 14. A club wishes to borrow funds to build some sports facilities for its members. Discuss the procedures and requirements for the proposal to be considered. (7.6) 15. A guarantor of a loan should not be the borrower. Comment. (7.3 & 7.4.1) CERTIFICATE IN CREDIT 7-21 BORROWERS AND THEIR LEGAL STATUS KEY TERMS Certificate of registration of business Nominee directors Chairman Non-executive directors Chief executive officer Ordinary shares ) SE Clubs and societies Paid-up share capital PO Common stock Partnership R L Y Companies commission of malaysia Partnership Act 1961 (revised 1974) PU IA P C CO Connected persons Personal borrowers M LE Cooperative societies Preference shares M B ER Defaults Private exempt status O A C T Directors Private limited R RIN Executive directors Public institution FO P Financial intermediary Public limited companies Golden shares Shareholders Issued share capital Societies act 1966 (as at 1 January 2006) T O Limited liability company Sole proprietorship (N Limited liability partnership Statutory audit Management shares Substantial shareholder CERTIFICATE IN CREDIT