COMPANY LAW LECTURE 4

1. COMPANY LAW LECTURE 4

2. INTRODUCTION • PROCEDURE OF INCORPORATION • EFFECT OF INCORPORATION • POST INCORPORATION REQUIREMENTS • DUTIES OF DIRECTOR AND OTHER OFFICERS -Company Director, Company secretary,Auditors,Receivers,liquidators • INSIDER DEALING • WHISTLE BLOWING • CODE OF CORPORATE GOVERNANCE • CO DIRECTOR’S CODE OF ETHICS

3. INTRODUCTION • Types of Business Organization • Sole proprietorship • Partnership • Company

4. COMPANY LAW IN MALAYSIA • The Companies Act 1965 and the Companies regulations 1966 form the core in the regulation of companies in Malaysia. • The Act is modeled on the English Companies Act 1948 and the Australian Uniform Companies Act 1961.

5. PROCEDURE FOR INCORPORATION • Pre-incorporation steps • 1. Reservation of names • - S.22(6) – before registration of the co, the applicant shall apply to the registrar for reservation of the proposed name.

6. Normally, the ROC will reply giving approval of the chosen name within one week but promoters often save time by submitting several names at the same time on Form 13Aof Companies Regulations 1996. • A separate form is required for each name with a separate filling fee also having to be paid.

7. 2. Documentation-among documents to be lodged with the Registrar:- • Memorandum of Association – signed by 2 subscribers, dated and witnessed, with each subscriber agreeing to subscribe for one share. • Article of Association – signed by the subscribers, dated and witnessed. • If no articles are lodge, the statutory articles in Table A will become the co’s articles.

8. Form 48A – Statutory declaration by a person before appointment as Director, or by a promoter before incorporation. • Form 6 – Statutory Declaration of Compliance • Declaration Statement – by the First Secretary that he/she is not a bankrupt & is qualified under S 139A.

9. 3. Fees • Fees for incorporation must be paid when documentation is lodged with the ROC. • ROC will certifies that the co is incorporated from the date specified on the certificate.

10. EFFECT OF INCORPORATION • S 16(5) – provides that on and from the date of incorporation specified in the certificate of incorporation, the subscribers of the memorandum, together with such other persons as from time to time become members of the company, are a a body corporate by the name set out in the memorandum. • i.e: after the necessary steps leading to incorporation have been taken and a certificate of incorporation has been issued by the Registrar, a new legal entity is created.

11. Body corporate – is a legal person created and recognized by the law. • The company is capable forthwith of performing all the functions of an incorporated company

12. The company is capable of suing and being sued in its own name. • it may enforce rights by suing and conversely it may incur liabilities and be sued by others. • Requires the co itself to be the person enforcing its rights.

13. The company has perpetual succession and shall have a common seal • A co does not exist for a specified period of time, it does not die but continues to exist until its name is struck off by the registrar of co. case: Re Noel Tedman Holdings Pty Ltd • Company seal – a co is required to have a common seal.

14. The company has power to acquire, hold and dispose of property • The property of the co is its own, not that of the members. Case: Macaura lwn Northern Assurance Co Ltd • The liability of the members may be limited • If a co has incurred obligation it is primarily liable because its debts are separate from the debts of its members. • Only when the co has insufficient assets to pay its debt that members may be liable.

15. The company as a separate legal entity • As long as the necessary formalities of incorporation are satisfied, a new entity comes into existence which is separate and distinct from its directors and shareholders.

16. Case: SALOMON V. SALOMON & CO LTD [1897] AC 22 • Facts: Salomon carried on business as a sole trader for 30 years,and his total assets were in excess of his liabilities. • He registered a co, S Ltd and transferred his business assets into the co. • Salomon took one share in the co and his wife and family took the other six(though holding them as niminee in a trust for S.

17. When the co got into financial difficulties, Salomon lent money to the co on a secured debenture (loan certificate). • When the co went into liquidation, creditors argued that Salomon could not recover the loan because he really was the co and the seven members were not independent of the registered co. • Held: the co has a legal existence separate from the members so S could be a creditor of the co with the priority rights as a consequence of the debenture.

18. Notes: Accordingly, while organizationally and operationally the business was managed solely by Salomon, in law he and the company were separate persons. • This separateness is an incident of the incorporation of a company, even if one person effectively owns and controls it.

19. In Islam - Separate legal entity? • In Islam is there is any concept of separate legal entity? • If there is so, what about the religion of this entity. Can we say that a company has a religion too??? • “Had We sent down this Quran on a mountain, verily, thou wouldst have seen it humble itself and cleave asunder for fear of God”. Al-Quran, surah al-Hashr:21

20. LIFTING THE VEIL OF INCORPORATION • The recognition that a co is a separate legal entity distinct from its shareholders is often expressed as ‘the veil of incorporation’. • Once a co is duly incorporated, the ct usually do not look behind the veil to inquire why the com was formed or who really controls it. • In certain situations a court will ignore the separate legal entity of a com and look to the members or the controllers of the com. • Referred to as lifting the veil.

21. This might be done to make the members of the controllers (primarily the directors) responsible for the act of the co. • Eg: the corporate veil has been lifted by the court – a com is used as a vehicle for fraud, to avoid a legal duty. • The Co Act makes an officer personally liable for debts incurred by the co. • Case: Aspatra Sdn Bhd v BBMB

22. POST INCOPORATION REQUIREMENTS Appointment of directors and secretary • S. 122(1) – every co must have at least two directors who must be natural persons. • Common seal • S 16(5) – every co is required to have a common seal; the co’s name must appear in legible characters on the seal.

23. Registers • S 141 – the co must establish a register of its directors, managers and secretaries • Minutes books • S 156(1) all the co must establish minute books in which the minutes of general meetings and of directors and managers meeting must be entered.

24. Allotment of shares • S 18(2) – co limited by shares requires each subscribers to the M & A state the number of shares he/she agrees to take. • Accounts and adults • S 167 – a co must establish and maintain accounting records in such manner enables a true and fair accounts • S 172(1) – a co’s director to appoint an auditor any time before the 1st AGM.

25. DUTIES OF DIRECTORS & OTHER OFFICERS • Introduction • 2 Organizations • I. BOD • 2. Members in general meeting • In practice, articles usually confer wide powers of management of a co’s affairs on the BOD.

26. COMPANY DIRECTOR • The definition of ‘director’ under – S 4(1) is wide. • A person occupying the position of directors even though he may described by another name. • The term used in the Act includes ‘shadow director’ – person who are not named as directors of the co but who act behind the scenes to exercise degrees of control over the co.

27. An alternate, associate or substitute director - in practice, they may be treated a less than full directors but are nevertheless regarded legally as directors within the meaning of the Act and are subject to directors’ duties and liabilities. • Clearly, the co cannot manage itself, the law demands that every co has at least two directors. (S 122)

28. The first directors of a co must be named in the memorandum or articles of association. (S 122(3)) • If this is not done the co cannot be registered.

29. DUTIES OF DIRECTORS • The power of management of companies is usually vested in the BOD. • In HL BOLTON (ENGINEERING) CO LTD. V. GRAHAM & SONS LTD (1957) 1 QB 159 • Lord Denning stated: ‘ A co may in many ways be likened to a human body. It has a brain and nerve center which controls a what it does. It has hands which hold the tools and act in accordance with directions from center.’

30. Some of people in the co are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. • Others are directors who represent the directing mind and will of the co, and control what it does.’

31. 3 duties of director:- • 1. Fiduciary duties • 2. Statutory duties • 3. Duties of care, skill and diligence.

32. FIDUCIARY DUTIES • Fiduciary r/hip: r/ship between a person in a position of trust, the fiduciary and the person for whose benefit the fiduciary acts. • Fiduciary duties of the director can be summarized as follows:- • 1. To act bona fide in the interest of the company • 2. To exercise power for their purpose • 3. To avoid conflict of interest

33. DUTY TO ACT BONA FIDE IN THE INTEREST OF THE COMPANY • The fiduciary duties of directors of a co require them to act bona fide in the best interest of a co as a whole. • Whilst the power of management are conferred on the BODs collectively, the fiduciary obligations are owed by the directors individually. • Whether a director is in breach of these fiduciary obligations depends on the particular circumstances of each cases.

34. Lord Greene MR in RE SMITH AND FAWCETT LTD (1942) 1 ALL ER 542 • ‘they must exercise their discretion bona fide in what they consider – not what the court may consider to be in the interest of the company, and not for any collateral purposes.’ • S 132(1) – officers must at all times act honestly in the exercise and discharge of the duties of their office.

35. This duty is a subjective duty – there is no breach where the directors act in what they honestly believe to be the interest of the co • The court are generally reluctant to override the business judgment of the directors. • Directors are presumed to have acted bona fide for the benefit of their co and those persons alleging a breach of duty bear the onus of proving that this is in fact not the case. • Case:Fawziah Holding Sdn Bhd. v Metramac

36. ‘acting for the benefit of the co means that the director must act; • In the interest of the shareholders as a collective group • They interest of a group of co • The interest of employees • The interest of shareholder • The interest of the creditors

37. DUTY TO EXERCISE POWERS FOR PROPER PURPOSES • In exercising their powers bona fide, the directors also use them for a proper purpose. • If the purpose is collateral, the action will be invalid unless approved by the shareholders in general meeting.

38. CASE:BISHOPGATE INVESTMENT MANAGEMNET LTD V. MAXWEL (1993) • Court: ‘if a director choose to participate in the management of the co and exercises powers on it behalf, he owes a duty to act bona fide in the interest of the co. he must exercise the power solely for the purpose for which it was conferred…’

39. Where a director exercises the powers granted to him by the memorandum or articles in a manner other than for its proper purpose the action is beyond the actual authority of the director. • Any agreement with third party in such circumstances is binding on the co, however, unless the third party had notice that the directors were exercising their powers for purposes other than for the co.

40. It is open to general meeting to ratify the actions of the directors.

41. CASE: MILLS V MILLS • Dixon J: ‘ … a power conferred upon them cannot be exercised in order to obtain some private advantage or for any purpose foreign to the power’. • CASE: ALEYN V BELCHIER (1758) • Lord Worthington: …no [point is better established than that, a a person having power, must execute it bona fide for the end designed, otherwise it is corrupt and void.’

42. In cases where it is alleged that the directors have exercised their powers for improper purpose, the onus of establishing the directors acted improperly rest with those alleging the breach of duty.

43. DUTY TO AVOID CONFLICT OF INTEREST • The general rule is that directors must not place themselves in a position where duty and interest are in conflict. • This is part of a wider rule that a trustee must not place himself in a position where conflict of interest may arise. • Directors are trustees in the sense that they owe fiduciary duties to the co.

44. The rule can be summarized thus: if a director obtains a benefit while director of a co in circumstances where there could have been a conflict of interest, he is accountable to the company for that benefit unless he has disclosed it and obtained the approval of the co. • The rule effectively means – if a director is in doubt, he should disclose the possibility of conflict of interest.

45. The courts have been strict on the matter – the director will to be able to plead actions were made bona fide or in the interest of the co and the fact that the co have made profit is irrelevant. • Where there is a conflict of interest, the contract is avoidable at the instance of the co but the right to avoid the contract is lost in certain circumstances, I.e: • The co affirms the contract, or • Delays unduly before rescinding, or • Restitution becomes impossible, • The rights of bona fide parties intervene.

46. As well as setting aside the contract, the court can call upon the director to account for any gains he has made in the transaction. • In all such cases, it is not necessary to show that there has been an actual conflict of interest: it is enough to show there is a ‘real sensible possibility of one’.

47. Particular instances where conflict of interest may arise: • 1. A director may not use information obtained by virtue of his position to make a profit for himself. • S 132(2) – provides that any co officer may not made improper use of any information acquired by virtue of his position to gain direct or indirect advantage for himself or another, or to cause detriment to the co. • The penalty is that he will be liable to the co for damage suffered and is guilty of an offence punishable by imprisonment or fine.

48. 2. A director may not use co property or money to make a profit for himself. • If he does so, the director is in breach of his duty and the profit he makes will belong in equity to the co. • He may also be guilty of criminal breach of trust since he is regarded as a trustee of co property, to be used for the purposes of the co only.

49. 3. A director may not use his position to obtain profit for himself. • If he does obtain a profit by using his position he will be accountable to the co for that profit. • Accepting a bribe is clearly a breach of this rule and the co will then be able to recover the bribe or sue for damages.

50. CASE:MAHESAN V.MALAYSIAN GOVERNMENT OFFICERS CO-OPERATIVE HOUSING SOCIETY(1978) • Facts: The director received a bribe amounting to one quarter of the profit made by a person who sold land to the Society. • Held: The society could recover the amount of the bribe, or they could sue the director for his breach of duty but not both.