Chapter 2: General Principles of Corporate Compliance PDF

## Chapter 2: General Principles of Corporate Compliance **Learning Outcomes** At the end of this topic, you should be able to: - describe companies - differentiate types of companies - describe incorporation and constitution ### 2.1 An Overview of Companies Act 2016 - The new Companies Act 2016 (...

## Chapter 2: General Principles of Corporate Compliance **Learning Outcomes** At the end of this topic, you should be able to: - describe companies - differentiate types of companies - describe incorporation and constitution ### 2.1 An Overview of Companies Act 2016 - The new Companies Act 2016 (CA 2016) was passed by Parliament on 28 April 2016, replacing the Companies Act 1965 (CA 1965). - The CA 2016 was enforced on 31 January 2017, along with the Companies Regulations 2017. - The objectives of the CA 2016 are to reform and modernise company law in Malaysia with global practice. ### 2.2 Definition of Company - The CA 2016 defines company to mean a company incorporated. - According to the Oxford Dictionary, a company is a body of a person combined for a common (especially commercial) object. - In law, a company has its own distinct and separate legal personality from its members. Thus, a company can sue and be sued and can own property in its own right and name. It can even sue and be sued by its own members. A company also exists in perpetuity if no action is taken to wind up or strike off the company. The members of a company enjoy limited liability from the company's debt and liabilities. ### 2.3 Basic Requirement of a Company Section 9 CA 2016 defines the essential requirements of a company as having: - A name; - One or more members having limited or unlimited liability for the obligations of the company; - In the case of a company limited by shares, one or more shares; and - One or more directors (section 196 (1)(b) requires a public company to have at least two directors). ### 2.4 Types of Registered Companies There are two (2) types of registered companies such as private and public companies. These companies can be classified as follows: #### 2.4.1 Company limited by shares - A company limited by shares is formed on the principle of having a limit to the liability of its members. - This limitation is stated in the constitution, if the company has one, or by s 10 (2) CA 2016 so that creditors of a company limited by shares have only limited right to recover from the shareholders in the event of the company going into winding up. Once the shares are fully paid, the shareholder is relieved of liability to contribute on a winding up. #### 2.4.2 Company limited by guarantee - A company limited by guarantee is one formed on the principle of the member liability for the company's debts being limited to such an amount as they undertake to contribute in the event of a winding up. #### 2.4.3 Unlimited company - An unlimited company is one formed on the principle that there is no limit placed on the liability of its members. Companies of this type are virtually partnerships with unlimited obligations placed on the members to pay towards the assets of the company. ### 2.5 Private and Public Company #### 2.5.1 Private company characteristics under CA2016 1. It is a company limited by shares, refers to section 42 (1). 2. It has not more than 50 shareholders. 3. It restricts the transfer of its shares. 4. It cannot offer its shares or debentures to the public. 5. It cannot allot shares or debentures with a view of offering them to the public. 6. It cannot invite the public to deposit money with the company. #### 2.5.2 Public company characteristics under CA2016 1. It can be a company limited by shares or guarantee, or it can be an unlimited company (section 11(2)). 2. It can have more than 50 shareholders. 3. It need not restrict the transfer of its shares. 4. It can offer its shares or debentures to the public. 5. It can allot shares or debentures with a view of offering them to the public. 6. It can invite the public to deposit money with the company. ### 2.6 Incorporation and its Effects - **Incorporation** A company is an artificial person. Once it is incorporated by complying with the prescribed procedure, it comes into being a separate legal entity from its members and officers. #### 2.6.1 Pre incorporation procedure The person undertaking the incorporation of the company is required to input the following information (section 14(3)): - The name of the proposed company; - The status of the proposed company, that is, whether it is a private or public company; - The nature of business of the proposed company; - The proposed address of the registered office of the proposed company; - The details of the members, directors and secretary of the proposed company; - If the company is limited by shares, the details of the class and number of shares to be taken by the members; - If the company is limited by guarantee, the amount the member undertakes to contribute in the event the company is wound up. #### 2.6.2 Post incorporation requirement - Under the CA2016 a private company can commence business immediately upon the issuance of the notice of registration. - However for a public company, it can do so only after it has complied with additional steps and has lodged with the ROC a statutory declaration of compliance of the matters prescribed in section 190(1). #### 2.6.3 Effects of incorporation - **When a company is incorporated** According to section 18(1) a company is incorporated on the date specified in the notice of registration issued under section 15. After the company has been issued with the notice of registration, it may so wishes apply to ROC for its certificate of registration. The certificate of incorporation is optional (section 17). - **Body corporate with perpetual existence and separate legal entity** According to section 20, the body corporate enjoys a separate legal entity with an existence that does not depend on the identity of its members. A company incorporated under this Act is a body corporate and shall: (a) Have legal personality separate from that of its members, and (b) Continue its existence until it is removed from the register. - **Unlimited capacity** Section 21(1) CA 2016 provides that a company shall be capable of exercising all functions of a body corporate and have the full capacity to carry on or undertake [any] business or activity. - **Sue and be sued** The company can sue for any wrongs committed against it. It can also be sued for its wrongful act or omission. If a wrong has been committed against the company, even its members have no cause of action against the wrongdoers. - **Power to hold land** A company is also entitled to hold land (section 21(1)(b)). - **Capacity to enter into transactions** In order for the company to carry on any business or activity, it must enjoy the capacity to do any act or enter into transactions. - **Liability of members** According to section 192 (1), a member shall not be liable for an obligation of a company by reason only of being a member of the company. - **Registered office** The registered office of the company shall also be that stated in the application for incorporation (section 18(4)). - **Appointment of directors and secretary** The person named as director or secretary of the proposed company in its application for incorporation shall also be deemed to have been appointed to that office when the company is incorporated (section 18 (5)). ### 2.7 Separate Legal Entity - A company is a separate legal entity from its members and officers. Thus, the members and officers are not liable for the debts incurred by the company. Salomon v Salomon (1837) - If a wrong has been committed against the company, only the company can take legal action against the wrongdoer. Foss v Harbottle (1843) - However, there are exceptions to the said principle. - There are statutory provisions which lift the veil of incorporation to make the officer or member liable for the debt of the company or wrong committed by the company, as fraudsters may incorporate a company to commit fraud and hide behind the veil of incorporation. - With the enactment of the CA2016 section 65(1), it provides that the person who signs the pre incorporation contract will be personally liable for the contract or transaction. ### 2.8 Constitution - Under the Company Act 2016 (CA 2016), a private company may be incorporated without a constitution. The term “Memorandum and Articles of Association” is no longer used, but instead "constitution” is used. - The constitution shall contain provisions relating to: - The objects of the company; - The capacity, rights, powers or privileges of the company if the provisions restrict such capacity, rights powers or privileges; - Matters contemplated by the Act to be included in the constitution; - Any other matters as the company wishes to include in its constitution; - Under CA 2016 the “Memorandum” is merged as constitution; - It sets out the essential details of the company's existence and governs the fundamental basis which the company operates; - The constitution also contains the "Articles" that govern the day-to-day administration of the company affairs that adopt a constitution; - If a company does not have a constitution, the act shall govern the internal administration of a company.