NOTES (Company Law)

RAFFLES COMPANY LAW ASHOK
RAFFLES UNIVERSITY
COMPANY LAW
ASHOK
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CHAPTER 1 CORPORATIONS AND LEGAL PERSONALITY
There are three main forms of business organization in Malaysia:

 Sole trader / proprietorship '
 Partnership
 Companies
Register a business firm with the Registry of Business
Incorporate a company with the Companies Commission of Malaysia (CCM) - which is the
Registry of Companies. Businesses may be Incorporated or unincorporated. Unincorporated
organizations are those that do not have a legal personality of their own, for example,
partnerships.
A partnership is defined in s.3(l) of the Partnership Act 196l carrying on business in common
with a view of profit. Thus a partnership is based on agreement between the partners and if the
requirements of s3(1) are satisfied, the court would hold that there is i partnership. The
agreement need not be in writing and although there is a requirement that partnerships be
registered under the Registration of Business Act 1956, the failure to do so does not preclude the
court from finding that there does exist a partnership.
A private limited company on the other hand comes into existence only upon its formal
registration with the Registry of Companies and upon the Registrar issuing a certificate of
incorporation. Law requires a memorandum of association and articles of association to be filed
with the Registrar before it can be registered.
Upon registration, the company is incorporated and becomes in law a separate legal entity
distinct from-its members:[ Salomon v Salomon & Co]
1.1 IMPORTANCE OF SEPARATE EXISTENCE
i. Limited Liability
The company is liable for its own debts, but it obtains its capital from its members and
distributes its profits to those members. But as it exists independently of them, they cannot be
called upon to pay up more than the, outstanding amount on their shares or guarantee, if the
company is limited by guarantee. Members can use the company as a shield against personal
liability: Salomon v Salomon
ii. Succession
If’ a member dies, or sells his shares in the company there is no change in the company itself .It
is not affected because it is a separate Person.
iii. Shareholdings
Members hold shares in the company. These shares are evidence of their ownership, and are a
form of property. They can be transferred to others, unless there are restrictions imposed on them
by the company (basically for private limited companies).
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iv. Assets, rights and liabilities
The assets, rights and liabilities incidental to the company's activities belong to the company, and
not to the members. (Salomon v Salomon Ltd (1897)
v. Capital
Members of a company make a payment to the company in return for the shares issued. These
payments are described as the company's capital. A limited liability company would normally
retain its capital as a fund from which it can pay its own debts.
vi. Directors
Company has a legal identity and is an artificial person. But clearly, it cannot manage itself'
Consequently, the member normally have power to appoint individuals who will act as managers
to run the company. These are called ''directors'. The members may of course appoint themselves
as directors. The members, or shareholders' are therefore the 'owners’ of the company, while the
directors are the 'managers’ who administer and manage the affairs of the company.
vii. Board of Directors
Company will be managed by directors who will act as a group through a Board of Directors.
Specific powers will be delegated by the company to the Board. The members will meet in a
General Meeting of the company where matters not delegated to the board are to be decided. The
Board of Directors and the General Meeting of the company are called the 'organs ‘of the
company.
viii. Company Constitution
The separate areas of control between shareholders and directors are defined in a written
company constitution. It takes the form of two documents - Memorandum of Association and
Articles of Association.
ix. Registration
The company comes into legal existence when it is registered under the Companies Act 1965.It
remains an artificial person until it is formally dissolved by its name being struck off the register
at the CCM or liquidated by the process of winding-up.
1.2 TYPES OF COMPANIES.

 Private company
 Public company
 Company limited by shares
 Company limited by guarantee
 Subsidiary company
 Related companies
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 Exempt private company

 Foreign company
1.2.1 PRIVATE COMPANY
s.4 -- A private company is one which:-
(a) Was existing as a private company, prior to the commencement of Companies Act 1965
Act
(b) Is incorporated by virtue of s.l5
(c) Has converted into a private company.
Section 15 states that a company may be incorporated as a private company if its

memorandum or articles:
a. Restricts the right to transfer its shares.

b. Limits the number of members to 50.
c. Prohibits any invitation to the public to subscribe for any shares in or debentures of the
company
d. Prohibits any invitation to the public to deposit money with the company for fixed periods or
payable at call, whether bearing or not bearing interest.
PUBLIC COMPANY
(ii) A public company is any company other than a private company: s.4. Thus- the public
company has no limitation on the number of members nor any restriction in the memorandum or
articles on the right to transfer shares. It may invite the public to subscribe for shares or
debentures, or to deposit money with the company.
1.2.2 COMPANY LIMITED BY SHARES
A company limited by shares is defined in s.4 to mean 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.
Thus in a company limited by shares, each member will have no further liability if he has fully
paid for his shares.
1.2.3 COMPANY LIMITED BY GUARANTEE
A company limited by guarantee is defined in s.4 to mean a company formed on 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.
Thus in a company limited by guarantee, the members would only have to pay up on the amount
guaranteed by them, if the company goes into liquidation.
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s.14A provides that no company limited by guarantee can be formed with a share capital. This
type of companies generally apply to non-trading c-companies which are not profit motivated
e.g. charitable organisation, which aim to keep income and expenditure in balance but also have
the members guarantee as a form of reserve capital if it becomes insolvent.
1.2.4 SUBSIDUARY COMPANY
Holding and subsidiary companies are defined in s.5. By the section, a company is deemed to be
the subsidiary of another company if:
A. That other company

 controls the composition of the board of directors of the first mentioned corporation;
 controls more than half of the voting power of the first mentioned corporation;
 holds more than half of the issued share capital of the first mentioned corporation
(excluding any part thereof which consists of preference shares)
OR
B. The first mentioned corporation is a subsidiary of any corporation which is that other
corporation's subsidiary. Thus for example if A Sdn Bhd, is the subsidiary of B Sdn Bhd, which
itself is the subsidiary of C Sdn Bhd, then A Sdn Bhd will be considered the subsidiary of C Sdn
Bhd.
NOTE:
a. An ultimate holding company is a corporation which has subsidiaries and is not itself a
subsidiary of some other corporation - Section 5A
b. A wholly owned subsidiary is a subsidiary in which all the shares are owned by the
holding company, nominees, its wholly-owned subsidiaries and the nominees of its
wholly owned subsidiaries - Section 58
Related Companies
1.2.5 RELATED COMPANIES
A company is related to another company
 It is in a holding-subsidiary relationship.
OR
 It is a subsidiary of a common holding company.

Assuming that G Ltd and B Ltd are both subsidiaries of A Ltd. G Ltd is related to A Ltd since
they are in a holding subsidiary relationship.
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Similarly with B Ltd and A Ltd. B Ltd is related to G Ltd since they are both subsidiaries of a
common holding company - A Ltd.
BY S.6 A CORPORATION IS DEEMED TO BE RELATED TO ANOTHER

CORPORATION WHERE:
(a) It is the holding company of that other corporation;

(b) It is a subsidiary of that other corporation; or
(c) It is a subsidiary of the holding company of that other corporation.
1.2.6 WHOLLY OWNED SUBSIDIARY
Section 58 states that a corporation (A) is deemed to be the wholly owned subsidiary of another
corporation (B) if none of the members of the first mentioned corporation (A) is a person
other than:
(a) The second-mentioned corporation (B);
(b) A nominee of the second-mentioned corporation (B);
(c) A subsidiary of the second-mentioned corporation (B), being a subsidiary none of the
members of which is a person other than the second-mentioned corporation (B) or a nominee of
the second-mentioned corporation (B); or
(d) A nominee of such a subsidiary.
1.2.7 EXEMPT PRIVATE COMPANY
An exempt private company is defined in s.4 as a private company in 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.
The exempt private company enjoys the following advantages over other private companies:
(i) It is exempted from the need to file with the Registrar of Companies a balance sheet and profit
and loss account Eight Schedule, CA 1965 and Companies Act 1965 and the conditions therein.
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(ii) It is exempted from the provisions of s.133, which generally prohibits a company from
giving loans to its directors.
(iii) It is also exempted from the provisions of s.133A which generally prohibits a company from
giving loans to persons connected with a director.
1.2.8 FOREIGN COMPANY
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A foreign company is defined under s4(1) as
a) A company, corporation, society, association or other body incorporated outside

Malaysia;
OR
b) An unincorporated society, association, or other body which under the law of its place of
origin may sue or be sued or hold properly in the name of the secretary or other officer of the
body or association duly appointed for that purpose and which does not have its head office or
principal place of business in Malaysia.
Note:- Non registration of a company amounts to an offence. However it does not render
the contracts illegal [Curragh Investments Ltd v Cook]
1.2.9 DIFFERENCES BETWEEN A PRIVATE LIMITED COMPANY AND AN

EXEMPT PRIVATE COMPANY
The main differences between a private limited company and an exempt private limited
company are as follows:
(i) The maximum number of members of a private limited company is 50, whereas for an exempt
private limited company the limit is 20.
(ii) In the case of the exempt private limited company, the membership must consist only of
individuals and not corporations. Further, corporations cannot have any direct or indirect
beneficial interest in it. This restriction does not apply to private limited companies.
(iii) With respect to accounts, there is also a difference. A private limited company must include
an audited copy of its last balance sheet and profit and loss account with its annual return. An
exempt private limited company is not required to do so, though it must include an auditor's
certificate in accordance with s.l65A.
(iv) There is a further difference in relation to loans to directors and loans to persons connected
with directors. Subject to certain exceptions, s.133 generally prohibits a company from giving
loans to its directors while s.l33A prohibits loans to persons connected with directors. Both these
sections do not apply to exempt private companies.
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CHAPTER 2 EFFECTS OF INCORPORATION
2.1 SEPARATE LEGAL PERSONALITY
When a company is registered and is issued with its certificate of incorporation, it becomes in
law a separate legal personality distinct from the members and others. The company acquires a
personality of its own and is seen as a new legal entity independent of its members. The
company is thus sometimes said to be clothed with a veil of incorporation.
The principle was established in the well known case of Salomon v Salomon & Co Ltd (1897)
where although the company was in the effective control of Salomon, who was the managing
director and majority shareholder, it was held by the House of Lords to be a separate legal entity
solely responsible for its own debts
Salomon v A Salomon & Co Ltd
Salomon was a prosperous boot and shoe manufacturer. He ran the business as a sole trader
under the name "A Salomon & Co ". Unfortunately for Salomon, he had children - six of them.
They pestered him for a share in the business. At length he capitulated and incorporated his
business as a limited liability company. He gave one share each to his wife and five of his
children and took 20,001 shares. The business was transferred to the company, in consideration
for which debentures were issued to Salomon.
However, he continued to run the business as before. The company soon fell on evil days.
Despite the efforts of Salomon, it was put into liquidation. Enough could have been realized on
the assets to pay off the secured creditors (including Salomon himself as a debenture holder), but
the unsecured creditors were left out in the cold.
The liquidator sued Salomon. The Court of Appeal held that he was liable to indemnify the
company against its losses. The House of Lords, however, reversed this decision. They held that
incorporation of the company created a separate person. Even though the business of the
company was the same as before and the same persons managed the business and the same hands
received the profits, the company was not an agent or trustee for the members. The members
were not liable in respect of the company's obligations.
Note: Further consequences of this rule are that the property of the company belongs to the
company and not its members and the company can sue and be sued in its own its name.
Lee V Lee's Air Farming Ltd
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Lee formed the company, Lee's Air Farming Ltd. He owned all the shares but one. He was the
company’s sole governing director. He was also employed by the company as is chief and only
pilot. Lee was killed while flying for the company. His wife made a claim for workmen's
compensation under the New Zealand workmen's compensation legislation.
Her entitlement to such compensation depended on whether or not Lee was a worker, ie a person
who has entered into a contract of service with an employer. The New Zealand Court of Appeal
refused to hold that Lee was a worker; they felt that a man could not in effect employ himself.
However, the Privy Council allowed Mrs Lee's claim. Lee may have been the controller of the
company in fact. In law, however they were distinct persons. He could therefore enter into a
contract with the company, and could be considered to be an employee. The widow was
therefore entitled to an award in respect of workmen's compensation.
2.2 INCORPORATION AND ITS EFFECTS
In short incorporation has the following effects:-
 It may sue and be sued
A company may sue and be sued in its own name. Indeed, it must sue on its own behalf in
respect of rights that it has and duties that are to it. The members may not maintain an action on
the company's behalf. If a company has a right against a party in contract, it is for the company
to sue. If a director has breached his duties to the company, it is for the company to enforce its
rights. This is known as the 'proper plaintiff rule' or the 'rule in Foss v Harbottle'
Foss v Harbottle
Two shareholders in the Victoria Park Company brought an action against the company's
directors and some other persons. They alleged that the property of the company had been
misapplied or improperly used. The court held that the injury complained of was injury to the
company. In law, the company and its members were not the same. Therefore the members could
not maintain such a suit. It was for the company to sue.
 It has perpetual succession
The company is immortal. It lasts until it is properly wound up or struck off the register. Its
identity persists despite any change in the shareholding of the company.
Re Noel Tedman Holdings Pty Ltd
The company had only two shareholders, a husband and wife. The shareholders were also the
only directors of the company. Both died in a traffic accident. One infant child survived. The
court was faced with a difficult problem. Even though all the shareholders and directors were
dead, the company still existed. The articles required the approval of the directors before shares
could be transferred under the will of a deceased member. There were no directors. Normally,
this problem would be rectified by the appointment of new directors. However, to appoint
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directors the members had to vote. There were no members. In the end, the court broke the
vicious circle by allowing the personal representatives of the deceased members to appoint the
directors, so that these new directors could assent to the transfer of the shares to the beneficiary.
 It may own land [Macaura v Northern Assurance Co Ltd]
Macaura v Northern Assurance Co Ltd
Macaura owned an estate in Ireland. He sold all the timber on the estate to a company, Irish
Canadian Sawmills Ltd. All the shares in the company were owned by him or his nominees. He
was a substantial substantial creditor of the company. Macaura insured the timber that he sold to
the company in his own name. Two weeks after effecting the insurance, the timber was
destroyed in a fire. Macaura put in a claim. The insurance company refused to pay. The House of
Lords supported the insurance company. When Macaura sold the timber to the company, he gave
up his interest in it. He had no interest that he could insure. Therefore the insurance was void for
want of an insurable interest and the insurance company was not obliged to pay.
 The liability of the members may be limited.(Re Application by Yee Yut Ee (1978))
2.3 LIFTING THE VEIL OF INCORPORATION
Although the company is a separate legal entity, there are a number of situations both under case
law as well as statute where this principle is disregarded. This is sometimes referred to as the
lifting of the veil of incorporation
Under case law: - (Judicial Exceptions)
2.3.1 CASE LAW: JUDICIAL EXCEPTIONS
1. In times of war, in order to determine the enemy character of the company
Daimler Co. Ltd v Continental Tyre & Rubber Co' Ltd
C sued D for money due in respect of goods supplied. D defended that since C's members and
officers were German nationals, to pay the debt would amount to trading with the enemy under
the Trading with the Enemy Act. The court looked behind the veil of incorporation to decide
whether a company registered in the U.K. was in fact an enemy nation during the First World
War. D was therefore successful in his defence.
2. Where the company was set up to perpetrate a fraud or to evade legal obligations.
Jones v Lipman / Gilford Motor Ltd v Horne.
Gilford Motor Co v Horne
Home was formerly the managing director of the plaintiff company. He covenanted not to solicit
customers of the company after the termination of his employment. However, when he left the
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plaintiffs employment he set up JM Horne & Co Ltd, through which he solicited the plaintiffs
customers. The court granted an injunction against both Home and his company, having held that
he had breached his covenant.
Jones v Lipman
Lipman agreed to sell a house to Jones. For some reason he changed his mind. To avoid having
to transfer the house, Lipman set up a company called Alamed Ltd and transferred the house to
it. Alamed Ltd was wholly owned and controlled by Lipman.
His solicitors then wrote to Jones' solicitors offering to pay damages for the breach of contract.
Jones sought an order of specific performance. The defence was raised that Alamed Ltd was not
a party against whom specific performance could be ordered.
Russell J declined to accept this. He stated that Alamed Ltd was 'a creature of [Lipman's], a
device and a sham, a mask which he holds before his face in an attempt to avoid the eye of
equity'. Both Lipman and the company were ordered to specifically perform the contract to sell
the house. If a fraud is perpetrated, the court will not hesitate to pull aside the corporate veil.
Re Darby
Darby was an undischarged bankrupt with several convictions for fraud. He and another
undischarged bankrupt incorporated a company in the Channel Islands called City of London
Investment Corporation Ltd. This company promoted a company in England called Welsh Slate
Quarries Ltd. City sold a quarrying licence to Quarries at an in inflated price.ide. Quarries went
into liquidation and the liquidator sought to make Darby liable to account for the profit as a
promoter. Darby's defence was that in law he and City were different persons. The court refused
to be blinded to the reality of the situation and held him liable.
3. Where the company is regarded as the agent of the shareholders.

Smith, Stone, Knight Ltd v Birmingham Corpn /Bank Bumiputra Malaysia Bhd v Lorrain
Osman
Smith, Stone v Knight Ltd v Birmingham Corpn.
Six tests were created in the above case:-
i. the profits of the subsidiary are treated as those of the parent;

ii. the control is from the parent company;
iii. the parent company is the head and brain of the trading venture;
iv. the parent company decides on the amount of capital to be employed;
v. the subsidiary made the profit by the parent Company's skill and direction; and
vi. the parent company appoints the Board of Directors of the subsidiary.
The eye of equity will not be blinded by any corporate mask that a person may hold before his
face to shield himself.
Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd
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Bank Bumiputra (BBMB) and its subsidiary Bumiputra Malaysia Finance Ltd ('BMF') sued
Lorrain for an account of secret profits that he allegedly made while he was a director of BBMB
and chairman of BMF .When the writ was filed BBMB and BMF also made an ex parte
application for a Mareva injunction to restrain Lorrain from transferring his assets out of
jurisdiction. The court also made an Anton Piller order against Aspatra. The appellant companies
challenged the Mareva injunction and Anton Piller order, inter alia, on the ground that the court
should not have treated their assets as Lorrain's assets for the purpose of granting the injunction
and order. It was found that Lorrain exercised effective or sole control over the appellant
companies through his shareholdings and directorships.
It was held that the court could lift the veil to determine whether the assets of the companies
were really owned by them or whether there was an abuse of the principle that a company is a
separate legal entity. The trial judge had found that Lorrain was the alter ego of the appellant
companies.
4. Where a group of companies is regarded as a single economic entity.
DHN Food Distributors Ltd v Tower Hamlets LBC/Hotel Jaya Puri Bhd v National Union of
Hotel, Bar and Restaurant Workers (1980)
GROUPS OF COMPANIES
In certain situations, a group of companies may be treated as a single corporate entity, although
the general rule is that each company within a group is a distinct entity.
DHN Food Distributors Ltd v Tower Hamlets London Borough Council
In this case there was a group of three companies running a grocery business. The business was
owned by DHN itself. The premises on which the business was conducted was owned by Bronze
Investments Ltd, a subsidiary of DHN, while the vehicles were owned by the third company in
the group, DHN Food Transport Ltd. The Council acquired the land. Under the legislation in
question, compensation could be obtained both for the land and for disruption of business. But
the Council refused to pay compensation to DHN or its transport subsidiary on the basis that they
did not have any interest in the land. The English Court of Appeal refused to accept this and
treated the whole group as one commercial entity
Hotel Jaya Puri Bhd v National Union of Hotel, Bar & Restaurant Workers
Several workers of the Jaya Puri Chinese Garden Restaurant Sdn Bhd were retrenched when the
restaurant closed down. This company, was a wholly-owned subsidiary of Hotel Jayapuri Bhd,
on whose premises the restaurant was situated. The union claimed that the workers had been
dismissed from their employment. Their argument was this: the actual employer was the hotel.
The hotel was still in business. Therefore, the workers could not have been said to have been
retrenched on the closure of a business. The Industrial Court accepted this and made an order of
compensation against the hotel. The hotel appealed to the High Court. The High Court held that
although technically the restaurant and the hotel were separate legal entities, in reality the two
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companies were functionally one. Thus although technically a person working for the restaurant
was an employee of the restaurant, in reality was that the workers were employees of the hotel.
The court was prepared to ignore the separate identities of the restaurant and the hotel and treat
them as one single entity.
2.3.2 STATUTORY EXCEPTIONS
1. S.36(4) Companies Act 1965
By this section if the number of members falls to one and the company carries on business for
longer than six months while it is so reduced, the remaining member who is cognisant of the fact
that it is so carrying business will be personally liable for the debs of the company incurred after
the six months.
2. S.121 Companies Act 1965
By this section, where an officer of a company or anyone on its behalf has signed, issued or
authorised to be signed or issued on behalf of the company any bill of exchange, promissory note
or other negotiable instrument wherein that name and former name (if any) is not so mentioned,
he shall be liable to the holder of the instrument for the amount due thereon unless it is paid by
the company.
Penrose v Martyr
A Company Secretary accepted a bill of exchange drawn on the company on which its name was
incorrectly written defaulted payment and hence the company secretary was held liable.
by omitting the word "limited".
3. S.304(1) Companies Act 1965
By this subsection if in the course of the winding up of a company or in any proceedings against
a company it appears that any business of the company has been carried on with intent to defraud
creditors of the company or creditors of any other person or for any fraudulent purpose, the court
on the application of the liquidator or any creditor or contributory of the company may if it
thinks proper so to do declare that any person who was knowingly a party to the carrying on of
the business in that manner shall be personally responsible, without any limitation of liability, for
all or any of the debts or other liabilities of the company as the court directs.
4. Ss.303(3) And 304(2) Companies Act 1965
By these subsections, if in the course of the winding up of a company it appears that an officer of
the company who was knowingly a party to the contracting of a debt had, at the time the debt
was contracted, no reasonable or probable ground of expectation, after taking into consideration
the other liabilities, if any, of the company at the time, of the company being able to pay the
debt, the officer shall be guilty of an offence against this Act and on the application of the
liquidator or creditor the court may, if it thinks proper so to do, declare that the person shall be
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personally responsible without any limitation of liability for the payment of the whole or any part
of that debt.
5. By s.169 and the Ninth Schedule of the Companies Act 1965
A holding company is required to produce group accounts in which the assets and liabilities,
profit and losses of the subsidiaries are consolidated.
6. By s.140 of the Income Tax Act 1967, the Director General of Inland Revenue may
ignore any transaction or disposition which has the effect of avoiding or evading tax.
2.4 COMPANY FORMATION
Any business organisation which has more than 20 members must be incorporated as a company,
otherwise the partnership becomes illegal and the members cannot enforce their rights - Soh
Hood Beng v Khoo Chye Neo.
REGISTRATION OF A COMPANY
Any person can incorporate a company. Certain documents are to be lodged together with the
prescribed fee.
i. The most important document is the memorandum of association - which contains the
company's name, its objects, the amount of share capital and whether the company is unlimited,
limited by shares or guarantee. ------s.l6(l) & s.l8(1)
ii. The first directors must also be mentioned. S.122(3)
iii. The memo must be signed by the subscribers in the presence of witnesses - S.18(2)
iv. If the company has a share capital, then the subscribers must take at least one share. S.l8(2)
v. The memo will also contain an incorporation clause stating that the subscribers are desirous of
being formed into a company. S.l6( 4)
vi. Upon registration, the Registrar will issue a certificate of incorporation - s.16(4)
vii. This certificate is conclusive evidence that the requirements of the Act have been complied
with and that the company has been incorporated - s.361
viii. The certificate of incorporation is the birth certificate of the company.
2.4.1 REGISTRATION WILL BE REFUSED ON THE FOLLOWING GROUNDS
 s.22(1)
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i. Name is undesirable (for example "Virgin Mary')
ii. Name is identical to another incorporated corporation
iii. Similarity to some other name of a company

North Chesire & Manchester Brewery Co Ltd v Manchester Brewery Co Ltd.[PASSING –
OFF]
iv. Directions of the Minister - certain names not to be used - s.22Q) (these are cases where there
is some sort of official or political connection. Such names are usually published in the
Government Gazette)
v. Registrar's discretion - The circumstances are as follows -

 the documents submitted are contrary to the law (unlawful objects);
 the proposed company is likely to be used for unlawful purpose (prejudicial to public
peace;
 where it is contrary to national security.
PROCEDURE FOR THE REGISTRATION OF A PRIVATE COMPANY TO NOTE:-
a. Application must first be made to CCM for a search as to the availability of the name for
incorporation of the company. This is done by filing Form 13A (Request for availability of
name). The filing fee will be RM30 The proposed name, if available and if CCM is satisfied that
the name can be registered, is automatically reserved for a period of 3 months from the date of
lodgement of Form 13 A. The reply from CCM consists of a name approval/ rejection letter
issued to the applicant together with a duplicate copy of Form l3 A lodged,
b) During the three month period for which the proposed name is reserved, the following
incorporation documents must be lodged with CCM in order to incorporate the company:
1. MEMORANDUM OF ASSOCIATION
This is the most important document in the creation of a company as it sets out the constitution
and objects of the company. This document must contain the names of at least two persons who-
are to be the first directors of the proposed company and the name of the first secretary. This
document must be signed by at least two subscribers and they must write in their own
handwriting the number of shares each of them have subscribed for. The subscribers' signatures
need to be attested by at least one witness and the document must be dated.
2. ARTICLES OF ASSOCIATION
This document sets out the internal regulations of the company. It must be signed by the same
subscribers, dated and witnessed just as the memorandum.
3. STATUTORY DECLARATION BY PROMOTERS AND DIRECTORS (FORM 48A)

Every person before being appointed promoter and or director of a company needs to make a
statutory declaration that he is not an undischarged bankrupt and has not been convicted in or
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outside Malaysia of offences involving fraud or dishonesty, and that he consents to act as a
director of the company.
4. DECLARATION OF COMPLIANCE (FORM 6)

This is a declaration made by the first secretary, stating that the requirement of the Companies
Act relating to formation have been complied with. (A copy of the NRIC of the first secretary
must also be attached) A copy of the name approval letter together with the duplicate copy of
Form l34, returned by CCM must also be lodged with CCM together with the above
incorporation documents.
5. THE FIRST SECRETARY NAMED IN THE ARTICLES MUST EXECUTE A FORM

48F (DECLARATION BY A PERSON BEFORE REAPPOINTMENT AS SECRETARY).
This form however, is not required to be filed with CCM but should be filed in the minute book
attached to the minutes of the first board meeting.
CHAPTER 3 PROMOTERS
Promoter of a company refers to the person who undertook the responsibility of setting up a
company.
Section 4 of the Companies Act 1965 defines a promoter in relation to a prospectus as a person
who was a party to the preparation of a prospectus
This definition does not adequately explain the position of a promoter. The most frequently cited
definition is that given by Cockburn CJ. in the case of Twycross v Grant where he defined a
promoter as
'ONE WHO UNDERTAKES TO FORM A COMPANY WITH REFERENCE TO A

GIVEN PROJECT AND TO SET IT GOING AND WHO TAKES ALL THE
NECESSARY STEPS TO ACCOMPLISH THAT PURPOSE'.
Therefore the person who forms a company is called a 'promoter', a term which covers the person
who actually registers the company and also those who make business preparations for the
company.
3.1 THE FIDUCIARY DUTIES
The courts have insisted that the promoter of a company therefore owes certain basic fiduciary
duties to the company which must regulate his conduct and behaviour.
THESE DUTIES ARE:

 a duty not to make a secret profit at the expense of the company
 a duty to account to the company for the benefit of any subsequent contract to acquire
property which he intends to sell to the company
 a duty not to exercise undue influence or fraud
 a duty not to hide his interest through a nominee.
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The promoter is in a fiduciary relationship with the company he promotes and as such he owes
fiduciary duties towards it. This means that he is in a position of trust and must all times act
honestly and in good faith for the benefit of the company as a whole.
In particular, a promoter owes a duty not to make a secret profit in connection with the
promotion of the company. Where he does make any profit or acquire any other benefit from it
he owes a duty to make adequate disclosure to the company. The disclosure is required to be
made either to an independent board of directors or to all the members of the company. In most
cases there will not be an independent board of directors as the promoter himself is likely to have
nominated the directors and quite often he himself may be a director.What action can be taken if
the promoter is in breach of these fiduciary duties? In such a situation it is open to the company
to seek one of the following remedies:
3.2 REMEDIES FOR BREACH OF PROMOTERS DUTIES

 Rescission
 Recovery of the secret profit
 Damages for breach of fiduciary duty or deceit.
[The remedies can only be obtained by the company - Habib Abdul Rahman v Abdul
Cader]
1. RESCISSION
Where the company has entered into a contract with the promoter the company is entitled to
rescind the contract upon discovery of the breach by the promoter.
This is seen in the case of Erlanger v New Sombrero Phosphate Co.
Erlanger v New Sombrero Phosphate Co
In this case Erlanger headed a syndicate which bought an island containing phospates for 55000
pounds. Later, Erlanger promoted a company and sold the property to it for 100,000 pounds. All
the directors of that company were nominated by Erlanger and two of them were directly under
his control. Later, the board of directors were replaced by a new board which brought an action
to rescind the contract with Erlanger. Court held that there had been no adequate disclosure of
the circumstances of the sale and the company was to rescind the contract.
It must be noted that rescission is an equitable remedy and courts may not grant such a remedy if
it is inequitable to do so.
IMPORTANT NOTE
The remedy of rescission may be lost for example, where there has been undue delay in
initiating the where third parties have acquired rights bona fide and for value and where
the parties cannot be restored to original position.----Lagunas Nitrate v Lagunas Syndicate.
2. RECOVERY OF THE SECRET PROFIT
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Sometimes the court will order the promoter to repay the company the profit made by him in
breach of his duty.
Gluckstein v Barnes
In this case the defendants bought debentures cheaply in a company at a time when the company
was faring very badly. Later they bought over the company for 140,000 pounds. The debentures
were redeemed at full value and they made a good profit. Later still, they formed another
company and sold the company to the new company at a profit of 40,000 pounds. This profit was
disclosed in the prospectus but not the amount of profit they made on the redemption of the
debentures. The court held that they were in breach of their duties as promoters and the company
was entitled to recover the profit from them.
3. DAMAGES FOR BREACH OF FIDUCIARY DUTIES

The court may also order that the promoter pay damages to the company for breach of his
fiduciary duties
Re Leeds and Hanley Theatres of Varieties Ltd
SOME POINTS TO NOTE
 The fiduciary duties are owed by the promoters to the company; the fiduciary duties are
not owed to the shareholders and creditors unless special facts give rise to a relationship
that goes beyond the ordinary aspects of promotion. This does not mean the shareholders
and creditors have no remedies: they may have grounds for action against the promoter
for deceit, misrepresentation or negligence.
 Where shares are offered for sale to the public by way of a prospectus which is
misleading, the promoter must compensate any person who has acquired securities to
which the prospectus relates and suffered loss because of misleading statements or
omissions: CA 1965 s.46
 Furthermore, criminal liability may follow a misleading statement in a prospectus. A

person making such a statement or wilful non-disclosure, may be imprisoned for up to
five years or fined one hundred thousand ringgit unless he can show the statement was
immaterial or that he had reasonable grounds to believe and did so believe up to the issue
of the prospectus, that the statement was true or the non-disclosure immaterial: CA 1965
s.47.
 REMUNERATION
The Articles of the company normally give authority to directors to pay the promoter for
promotion services. Art.73 Table A provides:
'The directors may, pay all expenses incurred in promoting and registering the company...'
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Payments made to the promoter may be by way of commission, shares, options to subscribe for
shares at par, and/or debentures. Amounts paid must however be disclosed by the promoter to the
company, and also by the company itself in any prospectus issued within two years - Art 15 Fifth
Schedule.
3.3 MAKING CONTRACTS FOR THE COMPANY
The Companies Act 1965 s.35(4) details the circumstances in which contracts may be made on
behalf of a company. The section compares the situation that would exist between private
persons and relates it to the company.
 Firstly, if the contract between private persons would be required by law to be in writing
under seal, then the contract made on behalf of the company should be made in writing
under the common seal of the company.
 Other contracts between private persons may be required by law to be in writing, signed
by the parties to be charged, rather than under seal. Such a contract can be made on
behalf of the company in writing, provided it is signed by a person acting under company
authority. That authority may be express, or it may be implied.
 Finally, regarding those contracts made between private persons which would be valid
even though made only orally, and not reduced into writing - CA s. 35(a) states that such
contracts can also be made on behalf of a company, provided they are made by a person
acting with the authority of the company, express or implied.
Contracts made in any of the ways noted above will be effectual in law. They can bind the
company and its successors and all other parties thereto. Equally, the contracts can be varied, or
discharged, in the manner in which it was authorised to be made in the first place
3.3.1 PRE INCORPORATION CONTRACTS
A pre-incorporation contract is one, which is purportedly made by or on behalf of a company at a

time when the company has not yet been formed. At common law such contracts were totally
void. This was because until a company was incorporated it had no capacity to contract. Further
it also could not ratify the contract after its incorporation.
Kelner v Baxter
In this case A, B and C purportedly acting on behalf of the ‘Gravesend Royal Alexandra Hotel
Co Ltd which was in the process of being formed, entered into a contract for the purchase of
wine from K. The wine was delivered to the company after its formation, but it went into
liquidation before K was paid. The court held that the company was not liable. However, it held
that A, B and C were personally liable, and no ratification could release them from such liability.
Phonogram Ltd v Lane
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Before incorporating a company called Fragile Management Ltd, L contracted with the plaintiff
for a loan of 12,000 pounds to finance a pop group called Cheap Mean and Nasty. The plaintiff
wrote to L in which reference was made to him undertaking to pay. He nevertheless was required
to sign and return a copy 'for and on behalf of Fragile Management Ltd'. The company was never
formed and the group never preformed. It was held that the defendant was personally liable to
repay the money advanced.
The Malaysian position is governed by s.35(l) and (2) of the Companies Act 1965.
s.35(1)
‘Any contract or other transaction purporting to be made by a company prior to its formation or
by any person on behalf of a company prior to its formation may be ratified by the company after
its formation and thereupon the company shall become bound by and entitled to the benefit
thereof as if it had been in existence at the date of the contract or other transaction and had been
a party thereto.
Therefore by s.35(1), a pre-incorporation contract may be ratified by a company after its

incorporation. Once it is ratified the contract becomes binding between the company and the
other party and each may sue the other to enforce it. – [Cosmic Insurance Corpn. Ltd v Khoo
Chiang Poh ].If the company does not ratify, the person purporting to act on behalf of the
company will incur personal liability.
Cosmic Insurance Corporation Ltd v Khoo Chiang Poh
Cosmic Insurance was set up by 12 promoters who offered the job of managing director to Khoo
Chiang Poh (who was one of the directors) This was done in a letter in the following words:
"Mr. Khoo Chiang Poh shall be the managing director for life unless he resigns, dies or commits
an offence under the Companies Act ..."
After the incorporation of the company a resolution was passed thus:
"Resolved that Mr.Khoo Chiang Poh be appointed managing director and holds office for life in
accordance to the articles and memo of association and is responsible to the BOD''
A dispute later arose between the company and Khoo and the company sought to remove him.
The question that was raised was "whether the letter from the promoters was a pre-incorporation
contract and if so, whether it was ratified by the company''. The Privy Council held that the
company had ratified the contract
By s.35(2)
' Prior to ratification by the company the person or persons who purported to act in the name of,
or on behalf ofthe company shall in the absence of express agreement to the contrary be
personally bound by the contract or other transaction and entitled to the benefit thereof.
Therefore by s.35(2), prior to ratification by the company the person or persons who purported to
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act in the name of the company shall, unless there is an agreement to the contary, be personally
bound by the contract or other transaction and entitled to its benefit.
Thus in Malaysia, a pre-incorporation contract is ratifiable by the company after its

incorporation.
Ratification must take place within a reasonable time. Once ratified, either parry can sue the
other upon the contract.
 NOVATION
It may well be that the company enters into a contract after incorporation which merely
reiterates the terms of the pre-incorporation contract. This is known as novation. The
company is bound by the contract even though it occurs after incorporation, when the company
has come into its own separate legal existence.
CHAPTER 4 THE COMPANY CONSTITUTION
MEMORANDUM AND ARTICLES OF ASSOCIATION
4.1 THE MEMORANDUM
Basic constitutional document of a company -------- it sets out the company's structure and aims.
It defines the face that the company presents to the outside world. The memorandum of
association is one of the documents required to be lodged with the Registrar of Companies for
the formation of a company. It contains matters which would be important to persons dealing
with the company. The memorandum of association together with the articles of association may
be regarded as the constitution of the company.
SECTION 18(1) CA 1965 - CONSTITUENTS OF THE MEMORANDUM

 the name of the company
 the objects of the company
 the amount of the company's share capital;
 the manner in which the share capital is divided into shares of a fixed amount
 whether the liability of the members is limited / unlimited / limited by guarantee /
member's contribution in the event of winding up.
 Full names, addresses and occupation of the subscribers;
 names of the first directors
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 a clause stating that the subscribers are desirous of being formed into a company and that
the subscribers respectively agree to take the number of shares set out opposite their
respective names
Note: Other terms may be included in the memorandum (share transfer restrictions / limitation on
the number of members)
4.2 ALTERATION OF THE MEMORANDUM
Section 21 (l) - A company's memorandum may be altered in the manner provided by the Act.
How is alteration of the objects clause done? Section 28(1) - (10)
SECTIONS:-
 28(1) ---- Company to pass a special resolution to add to, vary or delete objects
clause.
A special resolution is a resolution that is passed by a majority of not less than 75% of the
members and voting at general meeting of which not less than 21 days notice has been given .
NOTE:
Shorter notice can also be given as per s.152(2) –
 If the company has a share capital then 95% nominal value of the shares
 If the company has no share capital, then 95% of the total voting rights.
Therefore if members who have a right to attend and vote at the meeting have
agreed, a special resolution may be passed at a shorter notice
 28(2) 21 days written notice must be given.
 28(3) -notice must be given to all members and to all trustees for debenture holders or to
debenture holders directly if there are no trustees.
 28(4) - the court may dispense with the notice required by subsection(2) if the reasons
given appear sufficient to the court.
 28(5) - the following persons are entitled to object:-
i. holders of not less in the aggregate than l0% in nominal value of the company's
issued share capital or if the company is not limited by shares, not less than l0% of
the company's members.
ii. The holders of not less than l0% in nominal value of the company's debentures.
Note: The alteration will have no effect unless the courts confirms it.
 28(6) - 2l days grace period is given after the passing of the resolution for certain
persons to raise objections;
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 28(7)(a) - In confirming the alteration, the court will have regard to the rights and
intentions of the members as well as the creditors of the company.
 28(7)(d) - The court may cancel the alteration, confirm the alteration in part or confirm
the alteration as it stands. (One of the main considerations for the court is whether the
alteration of the object was passed for the benefit of the company as a whole - the onus
would be on those who are opposing to show that it was unfair in some way)
 28(9) – after 'the expiry of the grace period, (21 days) the resolution must be lodged with
the Registrar within 14 days
 28(10)- the alteration will take effect on lodgement of the resolution (if confirmed by the
court)
4.3 COMPANY NAME

Before a company can be registered, a name has to be reserved. - s.22(7)
 The reservation is done in a prescribed form and is effective for 2 months.
 During this time, no other company can utilize this name - s.22(9)
 A further extension can be made for another 2 months - s. 22(10)
4.3.1 STATUTORY CHANGE OF NAME
By s.23 of the Companies Act 1965, a company may by special resolution resolve that its name
should be changed to a name by which the company could have been registered without
contravention of s.22(l).
Registration will be refused on the following grounds --s.22(1)
Further, by s.22(3), a limited company must have the word Berhad' or the abbreviation 'Bhd' as
part of and at the end of its name. If the company is a private company it must have the word
'sendirian' or the abbreviation 'Sdn' as part of its name immediately before the word 'Berhad' or
abbreviation 'Bhd' - s.22(4).
 Power to omit the word "Berhad" (S.24)
A limited Company could obtain a licence from the minister to be registered with a name not
including the word "Berhad".
However, the following conditions must be complied with before approval can be granted:
(a) The objects of the company must be non-profit motivated and are involved in charity or in the
promotion of commerce, art, science, education or religion. (applies for Companies limited by
guarantee).
(b) Prohibits distribution of dividends to its members.
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(c) The profits (if any) must be ploughed back for the further expansion of its objects.
4.3.2 GENERAL CHANGE OF NAME
1. VOLUNTARILY
A company may voluntarily change its existing name to some other by the passing of a special
resolution to that effect. And presenting a signed copy of the resolution to the Companies
Commission of Malaysia (with a fee). The new name takes effect from the date of the issue of
the new certificate (FORM l3), incorporating the new name. s23(2)
2. COMPULSORILY
The name of the company may also be changed compulsorily under the following circumstances:
(a) In the opinion of the registrar, the name is identical to that of any other company or
corporation.
(b) In the opinion of the registrar the name so nearly resembles the name of another company or
corporation as to be likely to be mistaken for it. The registrar may direct the company to change
its name and the company should comply with that direction within 6 weeks.
(c) A company may be ordered by the court in a passing-off action in tort restraining the
company from trading under a name which so resembles that of an established business-
Ewing v Buttercup Margarine Co
Mr. Ewing, owned a business which was known as "Buttercup Dairy Company". Another
company was formed under the name "Buttercup Margarine Company. The plaintiff, Mr. Ewing
was successful in his attempt to obtain an injunction restraining the defendant from using the
name Buttercup Margarine Company as the court held in this case that the dependant was
actually using the name to attract the customers of the plaintiff.
Note: - If an injunction is obtained, in a passing-off action it will be that the defendant's

company must either change its name or cease trading.
Publication of name and address

A company is required to use and publish its name as follows:
(a) Display the name outside every office or place of business of the company.
(b) Engrave its name on its seal.
(c) Use the name on all business letters, cheques, orders etc. (s121)
4.4 ARTICLES OF ASSOCIATION
The articles of association governs the day to day administration of the Company's affairs. It
contains the rules and regulations by which its internal affairs are governed. The Articles of
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Association must be printed and divided into numbered paragraphs. It must be signed by the
subscribers to the memorandum and the signature must be attested by a witness and it must be
dated.
ARTICLES
 The regulations by which the company is governed

 Are a matter of internal management within the company, for example:
i. Issue and transfer of shares
ii. Conduct of meetings
iii. Appointment and removal of directors
 Unlimited companies and companies limited by guarantee must lodge articles with the
CCM, while companies limited by shares may lodge articles, but need not do so:-S 29(l)
 If no articles are lodged by a company limited by shares, the articles contained in the
Fourth Schedule shall be adopted (Table A ) S30(1)
4.4.1 ALTERATION OF THE ARTICLE OF ASSOCIATION
Section: - 31(1)
Articles may be freely altered or added, however a special resolution is required. A special
resolution is one which requires a75% majority vote. When voting to alter the articles, a member
must vote "bona fide for the benefit of the company as a whole" (Lindley MR in Allen v Gold
Reefs of West Africa Ltd)
Allen v Gold Reefs of West Africa
The company's articles gave a lien on partly-paid shares for members debts to the company. Z
was the sole holder of fully paid shares as well as a holder of partly - paid shares. He died before
settling his debts to the company. It was found that his partly-paid shares were not sufficient to
settle the debt. The company undertook to alter its articles so that the company now sought to
have a lien on fully paid shares as well. Z's executors claimed that the alteration was invalid.
The Court of Appeal found the alteration valid. The alteration was for the benefit of the company
and though it imposed some burden on Z's estate, that was irrelevant and the alteration remained
valid.
Greenhalgh v Ardene Cinemas
The articles of a private Co prohibited a transfer of shares to an outsider as long as another

member of the Company was willing to buy them out at a fair value. The majority therefore
passed a special resolution to alter the articles to permit transfer to any person. Greenhalgh
challenged the resolution on the ground that the interest of the minority had been sacrificed to
25
those of the majority. The alteration was valid since every member, including the minority
shareholders, would now be free to sell the shares to an outsider.
It is for the members to decide whether the alteration is for the benefit of the members and the
test is objective.[Evershed MR in Greenhalgh v Arderne Cinemas Ltd ]
This means that the shareholder must proceed upon what in his honest opinion is for the
benefit of the company as a whole.
Evershed M.R. in the case of Greenhelgh v Arderne Cinemas (1951) gave some guidelines as to
what may be considered bona fide for the benefit of the company as a whole. He said that the
alteration would be permitted if it was for the benefit of the individual hypothetical member. In
other words, the alteration would be considered as bona fide for the benefit of the company as a
whole if the alteration affected all members in a similar way and did not discriminate between
members or groups of them.
Brown v British Abrasive Wheel Co Ltd
The facts of that case showed that the company was faring very badly and was on the verge of
liquidation. The majority (who held 98% of the shares) were prepared to inject more money into
the company to save it on condition that the minority could be compelled to sell their shares to
them. An alteration of the articles was proposed for this purpose. The court held that such an
alteration would only serve the majority and would be a fraud on the minority. Hence it was not
a valid alteration.
Where it does discriminate, the alteration would be held not valid, for example in Brown v
British Abrasive Wheel Co, where a proposed alteration provided for the majority to be entitled
to compel the minority to sell their shares to the majority.
 A remedy is found under the law of oppression (S 181)

 Shuttleworth v Cox:- the purpose of the alteration was to remove from office a director
who had repeatedly failed to account to the company for money in his hands. It was held
that the alteration was valid.
 Sidebottom v Kershaw Leese & Co:-
The alteration was to expel a member who carried on a business in competition with the
company. It was a valid alteration.
4.4.2 RESTRICTIONS ON ALTERATION OF ARTICLES
l) The power to alter the articles may be excluded by a provision in the memorandum of
association: - Sec.31(l) Thus if the memo prohibits the alteration of specified articles, these
articles are unalterable.
2) This is in connection with the registration of private companies. i.e.(Sec 15(l))
 a restriction on the transfer of shares

 limit on the number of members
26
More commonly these restrictions may be found in the articles in which case they may be altered
in accordance with the act. If the articles are altered so that they no longer include the
restrictions, limitations and prohibitions as specified in Sec l5(l) the Registrar may declare that
the company has ceased to be a private’ company:- Sec.27(2)(c)
3) This happens where the capital of the company is divided into different classes of shares. If
there is a provision authorizing the alteration of class rights only upon the consent of some
specified proportion of the holders of the shares of that class, an alteration of the articles to affect
class rights may be restrained under Section 65.
(Note – However, if an alteration amounts to a variation of a class right, Table A of the Fourth
Schedule provides a further protection for the holders of such class right. By art. 4, the rights
attached to a class of shares may only be altered with the consent in writing of the holders of
three fourths of the issued shares of that class or with the sanction of a special resolution passed
at a separate meeting of the holders of that class of shares.
4) Sec 33(4) provides that an amendment to the articles is unenforceable if its effect is to require
a member to subscribe for more shares or to pay more to the company or to increase his liability
on his shares. (To be binding a member must agree in writing to be bound)
5) In the case of private companies where the shares are closely held, it may be that the articles
cannot be altered to affect a member’s rights if that is contrary to the understanding that
prevailed when the company was incorporated: - Pang Ten Fatt v Tawau Transport Co Sdn
Bhd
In this case Wan Mohamed held that a proposed alteration of the company’s articles were null
and void as they infringed the rights and privileges given to some individuals on the formation of
the company. It was held that those rights were absolute and that they could not be modified
without the consent of the members affected.
A company would be wound up if the understanding that prevailed among the members is
breached: - Tay Bok Choon v Tahansan Sdn Bhd.
6) The alteration must not contain anything illegal.
4.5 Effect of the Memorandum and Articles of Association
MAIN EFFECT:-
i. A contract between the members and members

ii. No contract between the company and outsider
iii. A contract between the company and members
4.5.1 Members and Members
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This contract is deemed to contain covenants that each member will observe all the provisions, of
the memo and articles: - Sec 33(f) This is as though the memo and articles had been signed and
sealed by each and every member of the company.
[Hickman v Kent]
Rayfield v Hands
The articles of a private company, provided that in the event any members wished to transfer
their shares, they must first inform the directors of their intention and they must take the said
shares equally between them at a fair value. The directors refused to take some shares and argued
that the articles did not impose an enforceable liability upon them. The directors were obliged to
take up the shares in their capacity as members of the Company. If they had been merely
directors and not members of the Company, then they would not have been bound by the
provisions in the articles.
Therefore every member has a personal right to have the terms of the memo and articles
observed. They may be altered by the wishes of the majority but subject to the exceptions as
mentioned earlier. Thus a member may be bound by some terms even though he may not have
consented to them.
A member's rights and liabilities under the articles are a matter of contractual obligations.
4.5.2 Company And Outsiders
Outsiders or non members are not privy to this contract and therefore cannot enforce any rights
upon them: - Hickman v Kent Marsh Sheepbreeders' Association / Raffles Hotel Ltd v
Malayan Banking Bhd
Therefore if there is a contract between the company and an outsider, the alteration of the
company's articles will not justify a breach of that contract. The company may not be restrained
from altering its articles, but to act on the altered articles may amount to a breach of contract for
which the company may be sued: - Southern Foundries v Shirlaw
In this case the court held that the alteration was valid but the company was in breach of the
service contract and was liable for damages.
Southern Foundries v Shirlaw
Shirlaw was appointed as Managing Director of the defendant company for a period of l0 years
by written contract. On a re-organisation of the company, new articles were adopted, one of
which empowered the removal of any director on notice. Under this new article, the company
removed the plaintiff from his office as director, thereby terminating his managing directorship.
The Company was liable to pay damages for breach of contract. The House of Lords held that
the Company could not be stopped by injunction from making the alterations to the articles of
Association.
28
Although the terms of the articles are not with an outsider per se, it is possible that an outsider
might have a contract with the company incorporating the terms of the articles for the time being
This incorporation may be express or implied. Example- 'A shall be the managing director and
shall hold office according to the articles of association' - there is an express incorporation of the
articles of association. However the alteration can only affect the contract prospectively and not
retrospectively: - Swabey v Port Darwin Gold Mining Co (1889)
Swabey v Port Darwin Gold Mining Co

The company's articles provided that the directors were to be paid 200P per annum. The
company altered its articles so that the directors’ remuneration was reduced to 5P per month,
Swabey resigned as director and sued for three months' arrears of fees at the old rate.
The Court of Appeal held that the directors remuneration was validly reduced, but only
prospectively. The alteration did not affect the accrued rights and Swabey was entitled to his
arrears at the old rate.
4.5.3 Members and Company
The memo and articles bind the company and the members as if they had been signed and sealed
by each member and contained covenants on the part of each member to observe all the
provisions thereof:- Hickman v Kent and Romney Marsh Sheep Breeders Association
Hickman v Kent and Romney March Sheep Breeders Association
The articles of association required disputes between the company and any members to be
referred to arbitration. Hickman, who was a member was involved in dispute with the company
and he issued a writ on summons against the company.
It was held that the association was entitled to have the writ set aside, since the dispute
concerned membership rights and the articles provided that such disputes be first settled by
arbitration rather than legal action.
It was held that

a) No article can constitute a contract between a company and a third person
b) No solicitor, promoter or director can enforce rights other than a member
c) The articles rights are among the members and the company
Pender v Lushington
The articles of the Co. permitted each shareholder to receive one vote for every l0 shares held up
to a maximum of 100 votes. One member had more than 1000 shares, but because of the above
condition he was prevented from using his full potential vote. Some of the shares were therefore
transferred to Pender. Lushington, the chairman, refused to accept the votes on the grounds that
the transfer was to avoid the provision in the articles. It was held that the articles bound the
company to the shareholders. Pender's votes must be counted.
The shareholders have a right to vote and thus Pender’s votes must be counted. The contract only
relates to matters arising between the company and its members as members:- Eley v Positive
29
Government Security Life Assurance. It was held that this was not a right given to him as a
member and he could not rely on the articles as a contract for professional services. Directors,
Company Secretary, Company auditors and Solicitors are considered as outsiders
Eley v Positive Life Assurance
The articles contained a clause appointing the plaintiff as Company Solicitor. E took
employment with the company and while so employed became a member. Later the company
dismissed him. E sued damages for breach of contract. It was held that the articles did not
constitute a contract between the Company and Eley. Even though E became a member of the
Company later, yet the articles will not be binding in this matter as E is bringing an action
against the company in the capacity as a solicitor of the Company and not as a member of the Co
and the subject matter here does not involve membership rights.
The case of Raffles Hotel Ltd v MBB concerned an outsider trying to enforce rights conferred by
the articles; it did not deal with a member enforcing rights conferred upon him by the articles in
some capacity other than as member.
CHAPTER 5 INDOOR MANAGEMENT RULE
INDOOR MANAGEMENT [The Rule]
The rule in Royal British Bank v Turquand is one, which protects third parties contracting with
the company.
Royal British Bank v Turquand
The directors of a company issued a bond to the Royal British Bank. The articles of association
of the company stated that they had the power to do so, if authorised by a general resolution of
the company. The company claimed that there was no resolution passed authorising the issue of
the bond and that therefore it was not liable.
The court held that the bank was entitled to sue on the bond. As the requirement for the
resolution was a matter of internal regulation for the company and the bank could not
30
know whether such resolution had in fact been passed, it was entitled to presume that it
had indeed been passed. This rule is also known as the indoor management rule.
The rule in Turquand’s case is a presumption of regularity. In other words, a person who deals
with a company is entitled to assume that all procedural matters have been taken care of by the
company. There is a good practical reason for this - an outsider cannot discover whether the
company's internal procedures have been complied with
By this rule,
 where an officer contracting on behalf of the company has exceeded his authority as
found in the articles of association of the company
 such excess of authority was due to non-compliance with an internal procedure of the
company.
 The third party may presume that such internal procedure has been complied with.
He may thus enforce the contract against the company despite the lack of authority of the officer
concerned. The rule will only apply where the officer’s lack of authority was due to non-
compliance with an internal procedure of the company. The actual authority of a company's
agent is an internal matter. An outsider cannot easily find out what an agent's actual authority is .
It is sufficient if the agent has apparent authority to do the acts in question. Persons dealing with
a company in good faith are entitled to assume that acts within the apparent authority of is agent
have been properly performed and need not inquire as to whether the agents powers have been
exercised or conferred regularly in compliance with all the prescribed formalities. As long as the
agent has apparent authority, the fact that there is some internal irregularity that vitiates his
actual authority does not matter.
Koh Nai Chye v Tong Loong Pte Ltd
Tong Loong borrowed $200,000 from one Madam Lim, the plaintiff signing the agreement on
her behalf. The negotiation was conducted by Tay Beng Hock, the company's managing director,
on its behalf. When the plaintiff sued for the loan, the company's other directors disclaimed
knowledge. They gave evidence that the company never received the money. There was
evidence that the company only borrowed from financial institutions previously and that such
loans were authorised by the board. It was argued that Tay had no authority to contract a loan on
the company's behalf. The trial judge held, on the basis of the rule in Turquand's case, that an
outsider like the plaintiff had no need to satisfy himself that the company's internal regulations
had been complied with. Tay had apparent authority as managing director to contract the loan
even though he had deceived both the company and the plaintiff. The company was liable to
repay it.
5.1 PURPOSE OF THE RULE
The purpose of this rule is to assist third parties dealing with a company in good faith by
estopping the company from denying liability in circumstances where some internal procedure of
31
the company had not been followed and the third party could not be expected to know of the
irregularity, if not for the rule, the transaction would be voidable at the option of the company.
5.2 LIMITS TO THE RULE
However, there are limits to the rule as it does not apply in certain circumstances. These may be
summarised as follows:
(i) Where the person seeking to rely on it was not aware of the contents of the articles.
Rama Corporation Ltd v Proved Tin & General Investment Ltd (1952).
(ii) Where the person seeking to rely on it has notice of the irregularity.
Howard v Patent Ivory Co (1888).
Howard v Patent Ivory Manufacturing Co

The directors of the company lent money to the company on the security of debentures. The
articles of association provided that the company could only borrow up to a certain limit, and this
limit had been exceeded. The directors sought to enforce the debentures. The court declined to
let them do so. They were all directors of the company; as directors they knew or should have
known of the limitation on borrowing. Accordingly, they could not rely upon the indoor
management rule.
(iii) Where the document on which the person seeks to rely is a forgery
Ruben v Great Fingall Consolidated
(iv) Where the person seeking to rely on it was put on inquiry and the irregularity would
have been discovered if he had made due inquires.
A. L. Underwood Ltd v Bank of Liverpool
CHAPTER 6 ULTRA VIRES DOCTRINE
6.1 Definition
Companies are generally only allowed to carry out those activities which are permitted in the
objects clause of the Memorandum of Association. Any transaction, which is outside the objects
clause will be considered as outside the capacity of the company, i.e. ultra vires the company.
At common law any transaction which was ultra vires the company was regarded as totally void.
Neither the company nor the third party could enforce such a transaction. [Ashbury Railway Co
v Riche / Re Jon Beauforte ]
THIS RULE IS REFERRED TO AS THE DOCTRINE OF ULTRA VIRES.
32
The purpose of this doctrine was to protect both shareholders and creditors of the company. The
justification for this doctrine lay in the doctrine of constructive notice whereby third parties
dealing with a company were deemed to know the contents of the registered public documents of
the company. This doctrine operated rather harshly, especially on third parties who had not
discovered that the transaction was outside the company's capacity. These were registered with
the Registrar of Companies and could be inspected by anyone
6.2 MODIFICATION OF THE RULE IN MALAYSIA
The operation of the ultra vires doctrine has been modified in Malaysia as a result of s 20 of the
Companies Act 1965
 By s 20(1).
'No act or purported act of a company, and no conveyance or transfer of property to or by

a company shall be invalid by reason only that it was ultra vires’
Thus it would appear at first glance that an ultra vires transaction would be valid in Malaysia.
According to VC George J in Bumiputra Merchant Bankers Bhd v Supreme QBE Insurance Bhd
(1990) the section has abolished the absolute effect of the ultra vires doctrine subject to the
residual effect provided in subsection (2).
 s 20(2), the company's lack of capacity or power may be asserted or relied upon the
following circumstances.[Exceptions to s 20]
s.20(2)(a)
Any member of the company or debenture holder secured by a floating charge on the company's
property or the trustees for such debenture holders may take proceedings against the company to
restrain the company from doing any ultra vires act, or conveyance or transfer of any property to
or by the company.
s.20(2)(b)
The issue of ultra vires may be relied upon by the company or any member in proceedings
against the present or former officers of the company.
s.20(2)(c)
The issue of ultra vires may be relied upon in any petition by the minister to wind up the
company.
s.20(3)
33
Provides that the court may allow compensation to the company or other party for loss suffered
as a result of granting the injunction
Thus in Malaysia ultra vires transactions, which have been completed cannot be
invalidated any more. (Mahima Singh v Baldev Singh)
BUT NOTE :-
This does not give the officers of the company freedom to enter into ultra vires transaction as
they please because by virtue of s.20(2), an injunction may be obtained to stop the performance
of uncompleted ultra vires transactions, and the officers responsible can be made personally
liable to the company. In addition the company could also be wound up altogether, upon a
petition by the minister concerned. [Hawkesbury Development Co Ltd v Landmark Finance
Pty Ltd.]
Thus, by virtue of this section, ultra vires transactions are valid and binding upon the company.
However, this does not mean that the ultra vires doctrine has been abolished in Malaysia.
Companies are still expected to act within the scope of the objects clause. This is evident from
s.20(2). In conclusion it may be said that completed transactions remain valid as between the
company and the third party and either party may sue the other upon it. Thus the doctrine of ultra
vires is no longer applicable against third parties in respect of completed transactions.
However, as mentioned above, uncompleted transactions may be stopped on grounds of ultra

vires. Further, the present and former officers of the company may be made liable to the
company for the ultra vires transactions. In addition, the company may also be wound up by the
minister. This serves to protect the investors of the company, ie. the members and the creditors.
Thus, the rationale behind the ultra vires doctrine still remains intact, and, while the doctrine may
have lost some of its importance it is still applicable in Malaysia to the extent discussed above.
CHAPTER 7 SHARE CAPITAL
7.1 TYPES OF CAPITAL
a) Authorised Share Capital (Nominal Share Capital)
This is the amount of share capital which a 'company is authorised to issue, e-g. RMl00/: divided
into 100 shares of RMI/= each. [sl8]
34
b) Issued or Allotted Capital
This is that part of the company's nominal capital which has actually been issued to the members.
c) Paid-up Capital
This is that part of the issued capital of a company which has been paid up by the members. For
e.g. a company may issue 1,000 shares of RMI/ - nominal value of which 25 sen has been paid.
The paid up capital of the company is therefore - RM250/
The members still owe the company 75 sen for each share which they hold.
d) Uncalled capital
This is the amount of capital which has been issued to the members but payment is not called for
as yet.
7.2 DEFINITION OF A SHARE
s.98 provides that shares shall be movable property and transferable in the manner
provided by the Articles of the company.
A share was defined by Farwell J. in Borlands Trustee v Steel as

'the interest of shareholder in the company measured by a sum of money for the purpose of
liability in the first place and of interest in the second, but also consisting of a series of mutual
covenants entered in by all the shareholders.'
 Measured by a sum of money

 Liability' that the member has a duty to pay for his shares
 Interest shows that the shareholder has rights for example to attend and vote at meetings.
 Mutual Covenants stresses the contractual nature of a shareholder's rights. The
shareholder is bound by the rules and regulations in the articles.
s.99
Requires that each share be numbered. However, this requirement need not be met if all the
issued shares in a company, or all that of a particular class, are fully paid up and rank equally for
all purposes.
7.3 CLASSES OF SHARES
A company's shares may consist of several classes of shares eg. preference shares, ordinary
shares or deferred shares. The rights attached to each of the different classes of shares are called
class rights. These rights usually relate to:-
 voting rights
 dividends receivable
 distribution (return) of capital when liquidation takes place.
35
Preference shares have preferred fixed dividend. That means that all dividends to be paid on such
shares are fixed at a certain figure for e.g 10%. Preference shareholders receive dividends before
ordinary shareholders receive anything.
TYPES OF PREFERENCE SHARES -

 cumulative
 non cumulative
 participating or
 non participating
7.4 TYPES OF SHARES
7.4.1 PREFERENCE SHARES
A Preference share is defined in s 4(l) as:-
‘A share which does not entitle the holder thereof to vote at a general meeting or to
participate beyond a specified amount in any distribution, whether by way of dividend, or
on redemption, in a winding up, or otherwise.’
 A preference share is a share that confers upon its holder some preference in relation to
payment of dividends or return of capital in liquidation.
 Preference shares could be issued with full voting and participation rights.
Therefore appears that there are two sorts of preference shares:

i. Non-voting preference shares and
ii. ii. Preference shares with voting and participation rights.
s66 (l)
Provides that a company may not issue preference-shares or convert any issued shares into
preference shares unless certain rights pertaining to those preference shares have been set out in
the memorandum or articles of association. The following must be stated:
 Whether dividends are cumulative or non-cumulative

 What priority to payment of dividend the shares carry vis a vis other classes of shares'
 Whether there is a right to participate in surplus assets and profits;
 What priority the shares carry with respect to repayment of capital in winding up;
 Voting rights.
It should be noted that even non-voting preference shares carry the right to vote in certain
circumstances, notwithstanding any provision in the company's memorandum or articles.
(s148(2))
36
Note: - Section 65(6) however, provides that the issue of preference shares ranking equally
with existing preference shares be deemed to be a variation of the rights of the existing
preference holders (unless at the time that the preference shareholders were issued shares
the terms of issue or the articles authorized the future issue of more shares of the same
class).
OTHER POINTS TO NOTE
i. Preference shares are designed to appeal to investors who want a steady return on their capital
combined with a high level of safety. They are the first to get the dividend and they get a fixed
rate of dividends.
ii. Preference shares can be cumulative or non-cumulative. Cumulative shares means that if the
company cannot pay a dividend in one year, the arrears must be carried forward to future years
and all the outstanding preference dividends must be paid before the ordinary shareholders
receive anything.
If preference shares are non-cumulative and the company cannot pay a dividend the arrears are
not carried forward, so the preference shareholder will not receive a dividend for that year.
iii. Preference shares are deemed to be cumulative unless the articles state otherwise. Unless, the
articles otherwise provide, preference shares carry the same voting rights as other shares
However, it is usual to restrict the preference shareholders right to vote to specified
circumstances which directly affect them for e.g. when the rights preference shareholders are
being varied.
iv. Preference shareholders do not automatically have a right to prior return of their capital. If the
articles are silent preference shareholders and ordinary shareholders rank equally. However, in
most cases the articles will give priority to preference shareholders for the return of capital. In
such cases, this right is deemed to be exhaustive i.e. it is presumed that the total rights of the
preference shareholders have been specified. They will therefore have no right to share in the
distribution of any assets that remain after all the capital has been returned.
v. If a company goes into liquidation with arrears outstanding of preference dividends, the right
to receive arrears lapses unless the articles provide that the arrears shall he paid out of the assets
available in winding-up.
vi. The rights of preference shareholders with respect to repayment of capital, the participation in
surplus assets and profits, cumulative or non-cumulative dividend, voting and priority of
payment of capital and dividend must he set out in its memorandum or articles of association
(s.66 - Re Hume Industries (Far East Ltd)
If there is no express provision in the Articles, preference shares have a right to cumulative
dividends [Webb v Earle)
There is however, no right to cumulative dividends if this is expressly provided in the Articles or
if it may be clearly implied from the Articles [Staples v Eastmen Photographic Materials Co.]
37
7.4.2 ORDINARY SHARES
They get their dividends after the preference shareholders. The rate of dividends is not fixed. It
will depend upon the profitability of the company for the financial year.
Since the preference shareholder's rights to vote is usually restricted the ordinary
shareholders control resolutions at general meetings.
7.4.3 DEFERRED SHARES (FOUNDERS SHARES)
These are shares which are allotted to the first directors of the company. It is also known as
founders shares. They get their dividends only after the preference and the ordinary shareholders,
However, such shares are taken up by the directors to demonstrate the confidence which they
have in the company.
7.4.4 PARTICIPATING PREFERENCE SHARES
Holders of participating preference shares have the right to participate with holders of ordinary
shares in profits which remain after preference shareholders have their preferred rights satisfied.
This entitlement may also extend to rights over surplus asset on a winding-up.
7.4.5 REDEEMABLE PREFERENCE SHARES
Only preference shares may be redeemable. The Company must have a share capital and there
must be authorisation in writing - s.61(l)
The redemption shall not be taken as reducing the share capital - s.61(2) .
The shares shall not be redeemed - s.6l(3)(a) & (b)
(a) Except out of profits which otherwise would be available for dividend; or out of proceeds of a
fresh issue of shares made for purposes of redemption.
(b) Unless they are fully paid up.
Note the following.
 The premium if payable on redemption shall be provided for out of profits or the share
premium account before the shares are redeemed - s.61(4)
 If the shares are redeemed out of profits then, a sum equal to the nominal amount of
shares redeemed must be transferred to the Capital Redemption Reserve - s.6l(5)
 If a company has redeemed, it may issue new shares up to the nominal amount of the
shares redeemed as if those shares had never been issued and the share capital shall not
be increased accordingly - s.61(6)
38
 The Capital Redemption Reserve may be applied in paying up unissued shares of the
company to be issued to the members as fully paid bonus shares - s.61(7)
 The company must give notice to the Registrar within 14 days of the redemption of the
redeemable, preference shares specifying the shares redeemed - s.61(8)
Shares redeemed under s.61 are treated as cancelled on redemption, but although the company's
issue share capital is reduced, a redemption of shares under the section is not treated as reducing
the amount of 'the company's authorised share capital. Premiums payable on redemption should
be provided for out of profits of the company or out of the funds in the share premium account.
7.5 VARIATION OF CLASS RIGHTS
A company's share capital may be divided into different classes. These classes may
memorandum or articles of association. The rights attached to a particular class could therefore
be contained in the memorandum and articles or in the resolution of the company authorizing the
issue of the shares of that class.
 If class rights are contained in the memorandum of association, they cannot be varied as
the memorandum cannot be altered except in accordance with the Act (s21(1)) - Penalty
RMl000
 The Act makes no provision for alteration of matters that are not required to be contained
in the memorandum. If such class rights are found in the articles, they may be varied by
altering the articles of association. Where the rights attached to a class are set out in a
resolution of the company, they may be varied by a resolution in a similar way.
It may be provided in the memorandum or articles that the rights attached to any class may not
be varied without the consent of a specified proportion of the holders of that class of shares. If
such a 'modification of rights’ clause exists, class rights may not be altered except in accordance
with the procedure set out. Crumpton v Morrine Hall Pty
Crumpton v Morrine Hall Pty Ltd
The company’s sole asset was a building divided into six home units. The articles of the
company provided that the share capital should be divided into different classes. Ownership of
the shares of each class conferred upon the holder the right to the exclusive use of the
corresponding home unit. There was also a 'modification of rights' article that required the
consent of the majority of the holders of a class of shares before the rights attached to those
shares could be altered.
A resolution was passed altering articles of association to restrict the right to let out the home
units. The plaintiff complained that she had not consented to the alteration. Jacobs I held that
where a modification of rights article exists, the rights attached to the classes of shares cannot be
altered except in accordance with the procedure laid down. It was accordingly declared that the
39
purported alteration of the articles did not affect the plaintiffs rights as the modification clause
had not been complied with.
ART 4 OF TABLE A FOURTH SCHEDULE
Class rights may be varied with the consent in writing of holders of three fourths of holders of
issued shares of that class or with the sanction of the court of a special resolution passed at the
general meeting of the holders of that class. The Quorum for the separate meeting must be at
least 2 Persons holding or representing by proxy one third of the issued shares of that class.
Even if the above procedure has been followed, a dissatisfied shareholder may block the
alteration by applying to court under s65. The section allows a holder of 10% of the shares of the
class in question to apply to the court to have the variation or abrogation of their rights cancelled
(s65(l)). The variation will have no effect until confirmed by the court.
Application to the court must be made in writing within one month from the date consent was
given or the resolution was passed - s.65(3)
The court will disallow the alteration if it is if the opinion that the alteration would unfairly
prejudice the shareholders of the class represented by the applicant having regard to all the
circumstances of the case.
Re Holders Investment Trust Ltd
The company proposed a reduction of capital by cancellation of redeemable preference shares.

The reduction had been duly authorized by a special resolution of the company. At a separate
class meeting, the preference shareholders also passed a resolution approving the reduction.
However, the majority shareholders in the class (who held 90% of the shares of the class) also
held 52% of the ordinary shares of the company. The resolution greatly benefited the ordinary
shareholders. There was evidence that the majority shareholders had approved the reduction
because it would have increased the value of their ordinary shares.
Accordingly, Megarry J held that there had been no effective sanction of the reduction and
declined to confirm it.
A variation may be disallowed by the court if in approving the variation, the majority of the
holders of shares of that class did not exercise their votes for the benefit of the class as a whole.
In British America Nickel Corporation v MJ O'Brien Ltd, Viscount Haldane said there is,
however, a restriction of such powers, when conferred on a majority of a special class in order to
enable that majority to bind a minority. They must be exercised for the purpose of benefiting the
class as a whole and not merely individual members only.
Court’s function in such cases is to ensure that the resolution is fair to all members of the class.
Normally, the court is content to be guided by the decision of the members or creditors (as the
case may be) on the ground that they are usually much better judges of what is to their
commercial advantage than the court can be.
The right to apply to court under s 65 only exists where there is a modification of rights clause; if
there is no such provision class rights may be altered in the normal manner, and the court has no
40
power to interfere. However, an application for relief under s65 does not derogate from the
applicant’s rights to obtain relief under s s65(8).
7.5.1 DISTINCTION BETWEEN A VARIATION OF CLASS RIGHTS VARIATION IN

THE ENJOYMENT OF THOSE RIGHTS.
The test is whether after the amendment of the articles, the holders of the shares in
question have the rights they had before the amendment. If they still have the same rights,
there is no variation of class rights notwithstanding that the enjoyment of those rights may
have changed.
White v Bristol Aeroplane Co Ltd
The articles contained a modification of rights clause that stipulated that the approval of the
shareholders of a particular class had to be obtained if their rights were 'varied, dealt with, or
abrogated in any manner'. The company proposed to make a bonus issue of preference and
ordinary shares to the existing ordinary shareholders.
The plaintiff, who was a preference shareholder, felt that his rights as a preference shareholder
were affected by the proposal', and demanded a class meeting. The court declined to hold that the
preference shareholders rights were affected. The preference shareholders would have had
exactly the same rights after the proposed issue as 'before.
Although their block voting power might have been diluted, there was no variation of their
rights.
EXAMPLE
For instance, suppose that X holds five shares out of 100. Suppose further that each of Xs shares
carries five votes and each of the remaining shares carries one vote. If a resolution is passed to
reduce X's voting power to one vote per share, that amounts to a variation of class rights. If
however, a resolution is passed to increase the voting power of the other shares to five votes per
share, X's class rights are not affected. The practical result is the same in both situations.
However, in the first situation the modification of rights article will be called into play,' while in
the second situation it will not.
Greenhalgh v Arderne Cinemas Ltd
The company's share capital was divided into 10s shares and 2s shares. Greenhalgh held the bulk
of the 2s shares. Both types had equal voting power. A resolution was passed to subdivide the
10s shares into 2s shares, the new shares to rank equally with Greenhalgh's. The effect of such a
resolution was to dilute Greenhalgh's voting power drastically. He sought a declaration that the
subdivision was void, inter alia, because his class rights had been varied without his consent as
required by the modification of rights article. The Court of Appeal held that there was no
variation of Greenhalgh's rights. Before the resolution, he had one vote per share. After the
resolution, he also had one vote per share. The fact that the holders of the 10s shares had
increased their voting power five-fold did not amount in law to a variation of Greenhalgh's
rights. Similarly, the issue of further shares of a class or of other classes is not ipso facto a
41
variation of class rights (although it may be if that is specifically stipulated in the memorandum
or articles.
CHAPTER 8 ISSUE AND ALLOTMENT OF SHARES
8.1 A PERSON MAY ACQUIRE SHARES IN TWO WAYS
 From the company directly

 From a shareholder.
Where a person acquires shares directly from a company, the company is said to have 'issued or
'allotted' the shares to him. Allotment is the appropriation to a person of a certain number of
shares, though not necessarily specific shares. [Raja Khairulzaman Shah v Zaman Indah Sdn
Bhd]
A share is said to be issued when the shareholder is put in control of the shares allotted to him.
When a person obtains shares from a company directly, he is said to 'subscribe' for those shares.
It is important to grasp the distinction between an issue and a sale. When shares are issued, the
price payable is received by the company. When shares are sold, however, the money is paid to
the shareholder; the company receives nothing.
The normal rules of contract apply to the issue of shares. In the case of a public offering of
shares it is the aspiring shareholder who makes the offer to the company by filling up an
application for shares. The company may accept his offer and appropriate shares to be allotted to
him. 'When shares are issued privately or placed with individuals or corporate shareholders, there
may be an offer in the contractual sense. In the case of a rights issue an offer (in the contractual
sense) is made by the company to the existing shareholders.
A rights issue is a means of raising new capital from the existing shareholders. Each shareholder
is offered new shares in proportion to his existing holdings. A shareholder may decline to accept
his rights, in which case there is no contract. If a shareholder accepts his rights, he will complete
the necessary documentation and the company will at the appropriate time allot the new shares to
him. 'Whichever form an issue of shares takes, a return as to allotment of shares must be lodged
with the Registrar within one month of an allotment. [54(l)]
8.2 ISSUES OF SHARES BY A COMPANY
Where a public company issues shares to the public, it must comply with several specific rules.
A public company that does not make a public issue of shares nevertheless cannot issue or allot
shares unless it has lodged a statement in lieu of prospectus with the Registrar. (s50(1))
The power to issue shares is usually vested with the directors. However, the directors may not
exercise any power to issue shares without the prior approval of the company in general meeting.
(s132D (l).) Thus, although the section speaks of a resolution, it is sufficient if all the members
know and approve of an issue of shares. The approval of the company need not be sought for
every issue of shares. It is common for the directors to procure general approval from the
company to issue shares by means of a resolution passed at the annual general meeting.
42
Such a resolution continues in force until the conclusion of the next annual general meeting (or
the expiration of the period within which the next annual general meeting was to have. been
held) unless previously revoked.
A resolution granting the directors power to issue shares must be lodged with the Registrar in
accordance with s 154 even though it is not a special resolution.( s 132D(5)). Any issue of shares
in contravention of s l32D is void, and the consideration for the shares will be recoverable
accordingly - 132D (6).
The court has a power to validate any improper issue or allotment of shares under S 63,
notwithstanding any other provision of the Act. An application for validation may be made by
the company, a shareholder, a creditor or by a mortgagee of the shares. The court may make the
validation order if it is just and equitable to do so in all the circumstances.
The court may consider the following factors to be relevant in deciding whether or not to
validate improperly issued shares:
 Whether the persons who issued the shares deliberately flouted the law or acted with such
reckless disregard of the statutory provisions that it would be inappropriate to validate the
shares.
 Whether innocent shareholders were misled into taking up such shares and would be
prejudiced by the court's refusal to validate the shares.
 The reason for which the validation order is sought, eg that the applicant wishes to have
locus standi to petition for the winding up of the company.
8.3 OWNERSHIP AND TRANSFER OF SHARES
A share is movable properly - s.98. Legal title in a share is vested in the person to whom the
share is allotted or transferred and whose name is on the register of members in respect of that
share.
Equitable interests in shares can arise in the same way as for any other type of properly, eg
by sale or mortgage or declaration of trust. The sale of specific shares gives to the purchaser
an equitable interest in the shares.
Note - Equitable interests refers to –
 beneficiary under a trust - 5.6A(2)

 a person who has entered into contract of sale - S.6A(6)(a)
 a person who has a present or future right to have shares transferred to his name - S.6A(6)
(b)
 a person who has an option over shares - S.6A(6)(c)
Hawks v McArthur
43
The plaintiff was the holder of a charging order affecting shares held in the name of McArthur.
McArthur had previously sold the shares in question to Roberts and Fraser before the charging
order was obtained,' although they were not registered as holders. The question was whose
interest took priority, that of the plaintiff or that of Roberts and Fraser? A charging order only
operates to charge the beneficial interest of the person against whom it is made. Therefore, if
McArthur had nothing more than the bare legal title to the shares at the time the charging order
was obtained, the charging order would give no right over the shares to the plaintiff.
Vaisey J held that even though the requirements of the articles with respect to transfer of shares
had not been complied with, the sale of the shares to Fraser and Roberts vested them with the
beneficial interest in those shares, and accordingly the plaintiffs charging order was ineffective to
give him any right over the shares. Where shares have been sold but have not been registered in
the name of the purchaser, the person whose name is on the register of members remains the
legal owner of the shares
It is not uncommon for shares to be sold without the purchaser registering himself as holder in
the register of members. Usually, the purchaser is given the share certificate together with a
transfer executed by the registered holder without the name of the transferee filled in (a 'blank
transfer'). The delivery of a share certificate with a blank transfer to a purchaser gives him an
equitable interest in the shares. (Hilkes v Lee Choon Guan (1912)).
In such a case, the person whose name is on the register remains the legal owner of the shares
and holds them on trust for the purchaser - (Lim Eng Yong v Lim Chin Swee (1897)). The
purchaser has an inchoate title to the shares which can be perfected by registration - (Colonial
Bank v Hepworth (1887)). If a purchaser does not register himself as the holder of the shares, he
runs the risk that a bona fide purchaser of the legal title for value and without notice of his
interests may obtain good title to the shares and override his interests.
However a person who is not a bona fide purchaser for value without notice will not take priority
over a prior equitable title even if he registers himself as holder :-
EG Tan & Co (Pte) v Lim (Pte)
Khoo obtained a share certificate and executed transfer form from the plaintiffs by fraud. He
transferred the shares to D, the second defendant. After Khoo's fraud was discovered, the
plaintiffs claimed the return of a share certificate from D. D attempted to register himself as the
owner of the shares but failed. D resisted the plaintiffs' claim on the ground that he had bought
the shares from Khoo in good faith and for value. Chua J, after reviewing the evidence, found
that D had obtained the shares from Khoo in payment of a gambling debt. He accordingly held
that D was not a bona fide purchaser for value without notice. D was ordered to return the shares
to the plaintiffs.
8.3.1 TRANSFER OF SHARES
A share is transferable in the manner provided by the articles - (s 98) In this connection, 'transfer'
means the transfer of legal title to shares; equitable ownership may be transferred without the
necessity of changing the register of members. Shares are transferred by execution and delivery
of a proper instrument of transfer to the company; a company may not register the transfer of
44
shares unless such an instrument is delivered to it. (s103(1) Jimat bin Awang v Lai Wee Ngen
(1995). However, in the context of scripless trading of shares listed on the stock exchange, no
transfer form is required as the shares remain registered in the name of the central depository.
The proper sequence is as follows:
l. The transferor (who must be the registered owner) executes a proper instrument of transfer.
2. The share certificate and transfer form are lodged with the company.
This is usually done by the transferee, but may be done by the transferor.
3. If the transfer form is in order and there are no share transfer restrictions, the company must
within one month issue a new share certificate in the name of the transferee. (S105(1).
4. If there are share transfer restrictions, they must be complied with otherwise the transfer will
be invalid.
5. If the directors have a discretion to refuse to register a transfer, they must make a decision
within a reasonable time. In the event that the transfer is rejected, notice of the rejection and a
statement of fact must be sent to the transferor and transferee within one month after the date that
the transfer was lodged with the company. Otherwise, the transfer must be registered and a new
share certificate issued within one month - S.105:-
Yeung Kai Yung V Hong Kong and Shanghai Banking Corporation (1981)
The plaintiff was a substantial shareholder in the bank. A certain Mr.Wong forged transfers of
the plaintiffs shares to himself. Wong then approached Yeung, a stockbroker, to have the transfer
registered by the bank. This the bank did. The plaintiff then brought an action against the bank
asking to be restored to the register in respect of the shares that had been fraudulently transferred
to Wong. The bank brought Yeung into the action as a third party. The plaintiff won against the
bank, which claimed an indemnity against Yeung. Yeung pleaded that there was no warranty on
his part that the transfers were genuine. The Privy Council accepted the principle that a person
who presents transfers for registration impliedly warrants them to be genuine. This is based on
the general principle that when an act is done by one person at the request of another and that act
turns out to be tortious, the person doing it is entitled to an indemnity from him who requested it
to be done. Accordingly, Yeung was made to indemnify the bank.
A contract for the sale of shares can be enforced by an order of specific performance. Specific
performance of a contract to sell shares is not possible after the company has gone into
liquidation. In that case damages in lieu may be awarded.
8.3.2 RESTRICTION ON TRANSFER OF SHARES
Shares are freely transferable unless restrictions are imposed by the memorandum or articles.
(Lim Ow Goik v Sungai Merah Bus Co (1969).The right to transfer shares may also be restricted
by agreement. In the case of a private company, the transfer of shares must be restricted in some
45
way. (S 15(l) (a). This is commonly done by giving a discretion to the directors to refuse to
register a transfer, or by stipulating to whom shares may be transferred, or by giving to the
existing members a right to have any shares offered to them first before they can be transferred
('pre-emptive rights'). A public company may have share transfer restrictions in its,
memorandum and articles, but this is not compulsory.
 Directors' Discretion to Refuse Registration of a Transfer
 Directors have no discretion to refuse to register a transfer of unless the articles so

provide.
 Where a discretion is given to the board of directors to refuse to register a transfer, this
power must be exercised bona fide in what they consider is in the interests of the
company and not for any collateral purpose( Kesar Singh v Sepang Omnibus Co Ltd
(1964) )
 If a company refuses to register a transfer by reason of a discretion conferred upon the

directors, a notice stating the facts which are considered to justify refusal must be served
on the applicant for transfer within one month of the date the application is made.(
Xiamen International Bank v Sing Eng (Pte)
Judith Prakash J treated this as requiring the company to state its reasons for refusing to register
the transfer)
 Where the directors have given reasons for the refusal to register a transfer, the court may
evaluate the sufficiency of those reasons.
 The court may interfere if the directors have acted from some improper motive or
arbitrarily and capriciously.
Kwality Textiles (Malaysia) Sdn Bhd v Arunchalam
The Malaysian Supreme Court held that the court should not interfere with the proper exercise of
discretion of the board of directors conferred by the articles to refuse registration for the well
being of the company. Indeed the court should be slow to question the exercise of the discretion
in the absence of evidence that the board of directors had acted mala fide.
In Xiamen International Bank v Sing Eng (Pte) Ltd, Judith Prakash JC considered and rejected
reasons given by the directors of the company for not registering a transfer. The learned judicial
commissioner found that the controlling shareholders had used their influence and power
illegitimately to block the transfer of shares pursuant to a power of sale under an equitable
mortgage.
Note: - Xiamen International Bank is a Singapore decision, while Quality Textiles Malaysia
is a local decision)
Points to note
46
 If the directors are given a veto over transfers, to be effective such a veto must be
exercised by a positive resolution of the board. Where the directors are equally divided,
the transfer must be registered.
 Mere failure to pass such a resolution does not amount to a refusal to approve a transfer-
(Ho Shee Jan v Stephens Properties Sdn.Bhd
 The power to refuse to transfer shares must be exercised within a reasonable time,
otherwise the right of refusal may be lost.( Ho Shee Jan v Stephens Properties Sdn. Bhd
 As notice of refusal must be given to the transferor and transferee within one month
after the date the transfer was lodged, (S 105(l)) it would appear that in normal cases one
month would be a reasonable time in which the directors may decide to reject the
transfer.(Royal Trust Nominees v Sri Hartamas Development Sdn.Bhd.)
 Articles conferring discretion on directors to refuse to register a transfer of shares do not
apply where shares are transmitted upon the death of the shareholder. ( Gan Tuck Meng
v Ngan Yin Groundnut Factory Sdn.Bhd (f990)
 A person who delays unduly in applying for registration of shares may be banned from
doing so by the doctrine of laches - Re Selangor Omnibus Co Bhd (1995)
8.4 PRE EMPTIVE RIGHTS

A transfer of shares in breach of the share transfer restrictions may be set aside. In particular, a
transfer in breach of rights of pre-emption is invalid. (Grant v John Grant & Sons (1950)
It may be that such a purported transfer is void and will confer no rights upon the transferee. In
Gan Sin Tuan v Chew Kian Kor, the Court of Appeal of the Federation of Malaya held that a sale
of shares without complying with an article restricting the right of transfer was void. The
majority of the court (Whyatt CJ and Hill D also held that the abortive sale did not transfer any
legal title to the purchaser.
8.5 EFFECT OF A BLANK TRANSFER
A blank transfer is one that has been executed by the shareholder named in the share certificate
but which is blank as regards the transferee - S.57
 Blank Transfer Obtained from Registered Owner of Shares

Where a registered owner of shares intends to pass title and hands over an executed transfer form
together with the share certificate, the transferee obtains an equitable interest in those shares
even though his name is not filled in on the transfer form - (Hilkes v Lee Choon Guan (1912).
In such a case, the transferee has an inchoate title, which he can perfect by registration of the
transfer - (Colonial Bank v Hepworth (1887)):
The transferee might also obtain only a limited interest in the shares, eg where they are deposited
with him as security for a loan. Where a registered owner of shares delivers blank transfers to a
person without intending to vest him with title that person obtains no title to the shares. This may
happen where the shares have been deposited for safe-keeping.
Blank Transfer Obtained from Person other than Registered Owner
47
Most of the problems arise when a transferor purports to transfer shares that are not registered in
his own name. In such a case, there is a risk that the transferor is not the owner of the shares and
the true owner has not authorized the transfer of the shares to the transferee. The transferor
cannot then pass good title, in accordance with the principle nemo dat quod non habet.
A forged transfer is a total nullity and no title can pass under such transfer - Barton v London &
North Western Railway (1889)
If the transferor has no title to pass the transferee will get no title to the shares. If the transferor
has a restricted title, eg as holder by way of security, the transferee can get no better title.
However, there are three ways in which a transferee taking a blank transfer from a person other
than the ‘true owner will get good title:
1. If the transferor is the equitable owner of the shares, the registered owner having divested
himself of all but the bare legal title (this is merely an application of the normal property rule that
a person may transfer whatever title he has. The transferor has an inchoate title to the shares if
they were transferred to him by the registered owner with the intention of passing title. This
inchoate title could be perfected by the transferor by registration of the shares in his name)
2. If the true owner has entrusted the shares to the transferor for the purposes of disposal;( the
title of the transferee depends on normal principles of agency. If the true owner entrusts the
shares to the transferor, who disposes of them within the scope of his actual authority, the
transferee will get good title notwithstanding that the transferor is actually acting to defraud his
principal. Where the transferee knew of the agents’ lack of authority, or where there were
circumstances to put him on inquiry, no estoppel will arise.)
3. If the true owner is estopped from denying the transferor's authority to transfer the shares on
his behalf. (the true owner of shares may be estopped (because of his words or conduct) from
reclaiming his shares from the transferee even he did not entrust the shares to the intermediary
for disposal.
Macphail & Co (Ipoh) Ltd v P & O Banking Corporation [19311
The owner left shares with his broker (the transferor) as security against any losses that might
have been incurred on his account. The transferor deposited the shares with the Bank (the
transferee) as security for advances. The owner claimed the return of the shares from the
transferee. Tenell J held for the owner ---If the shares were handed to the broker for the purpose
of sale or pledge the true owner cannot set up against the bank any limit upon the authority
which he gave his agent, provided the banker is a holder for value without notice. It on the other
hand, the relation was merely that of mortgagor and mortgagee, the mortgagee can, indeed, under
ordinary law, and without any authority from the mortgagor, sub mortgaged them to the bank,
but the security which the bank obtains will be limited to the amount owing by the mortgagor to
the mortgagee.
Seah Eng Lim v P & O Banking Corporation Ltd
48
Seah Eng Lim borrowed money from Rose MacPhail & Penman ('the brokers') by way of a
forward contract. The procedure was as-follows: Seah purportedly sold certain shares to the
brokers at a specified price; simultaneously, he agreed to re-purchase the same shares from the
brokers at a higher price, delivery to be made three months later. The price at which the shares
were bought and sold bore no relation to tire prevailing market price.
The brokers deposited the shares with P&O Bank as security for advances. Seah subsequently
demanded the return of his shares on payment of the sum contracted. The brokers referred him to
the bank, who declined to hand them over, the shares being worth more than what Seah had
borrowed from the brokers. Whitley J held that the forward contract did not amount to an
outright sale to the brokers. The shares were deposited with the brokers as security and without
the intention that the brokers should sell, pledge or otherwise deal with them.
The brokers' interest was limited to the amount repayable by Seah for principal, interest and
brokerage. Whitley J accordingly held that the bank had no title to the shares except to the extent
of the brokers' interest. It was also held on the facts that the bank knew or ought to have known
of the brokers' limited interest in the shares. The bank was ordered to deliver the shares to Seah,
on payment of the amount he owned to the brokers.
8.6 SHARE CERTTFICATE ESTOPPEL
A share certificate contains two statements of importance:
 The first ,the name of the holder of the shares

 Secondly, the amount to which the shares are paid up.
Both these statements amount to representations by the company and will estop the company
from denying their truth to any person who has relied on such statements to his detriment.
In the proper case, the company will have to pay damages to a person who suffers loss in
reliance on these statements. Such loss might arise where the company issues a share certificate
to a person who does not have a valid title to the shares and a subsequent purchaser purchases the
shares on the faith of the certificate.
Re Bahia & San Francisco Railway Co (1863)
Miss Trittin owned shares in the company. Without her knowledge, Stocken and Goldner
procured the transfer of her shares to themselves by way of a forged transfer. The company
issued a new share certificate in their names and cancelled Trittin's. The shares were bought by
Burton and Goodburn in the ordinary course of business through brokers. Trittin (the original
owner) later obtained an order to replace her name on the register of members. Burton's and
Goodburn's names were accordingly taken off, even though they had paid in full for the shares.
The Court of Queen's Bench awarded them damages as they had relied upon the representation
of the company that Stocken and Goldner were the owners of the shares when they bought them.
The basis on which damages are awarded is that the company is estopped from denying the truth
of the statement as to the owner of the shares.
49
The reasoning works like this:-
P purchases shares on the faith of a certificate that states that X is the owner of shares. X is not
the owner and therefore cannot transfer title to the shares to P. Therefore, when true owner asks
for rectification of the register' P’s name must be taken off. If P sues the company, however they
raise the defence that X is not the true owner of the shares because they are4 estopped from
doing so by their representation' Therefore, vis a vis P the company has no defence to a claim
that they have wrongfully taken his name off the register and will have to pay damages.
The issue of a share certificate by a company is a representation by the company that the Person
named therein is the owner of the shares. Thus it gives rise to estoppel as to title'
Daily Telegraph Co v Cohen
As a result of a forged transfer the original owner was removed from the register of members and
replaced by the first transferee X' who was duly issued with a new share certificate by the
company. X in turn transferred the shares to Y' who was the registered shareholder when the
forgery was discovered. The court held that the original owner was to be restored to the register
of members, but Y was entitled to damages from the company as it was estopped from denying
Y's title' cases have held that when a person lodges a transfer with the company' he impliedly
promises that the transfer is genuine. When it is later discovered that it is not so genuine he has
to indemnify the company for the loss that it suffers ---Sheffield Corporation V Barclay (1905)
Note - In Malaysia: s 164(l) gives the court a power to order a company to pay damages to
any Party consequent on a rectification of the register of members'
50
CHAPTER 9 LOAN CAPITAL
The power to borrow is usually included among the objects of companies. It is also found in the
paragraphs of the l2th and 13th Schedule. A company's borrowing powers are usually to be
exercised by the board of directors
9.1 DEBENTURES
Companies issue debentures (securities) to raise debt capital. When an investor acquires a
debenture from a company, the investor is lending money to the company on the terms set out in
the debenture trust. The debenture represents the investor's claim, against the company to be paid
interest and repaid principal. The company issuing the debenture is the borrower from the
debenture holder. In commercial terms, the debenture represents to the investor, a right to receive
income in the form of interest payments, during the term of the debenture.
 Meaning of 'Debenture'
Chitty in Levy v Abercorris Slate and Slab Co said -
In my opinion a debenture means a document, which either creates a debt or acknowledges it,
and any document which fulfills either of these conditions is a 'debenture'
The definition in the Companies Act is:- S.4(1)
'Debenture' includes debenture stock, bonds, notes and any other securities of a corporation
whether constituting a charge on the assets of the corporation of not'. (The definition excludes
among others, bank deposit slips, bills of exchange and promissory)
The Malaysian High Court in Bensa Sdn.Bhd v Malayan Banking Bhd (1993) said the definition
should include any obligation, covenant, undertaking, guarantee to pay or acknowledgement of a
debt. It was held that a memorandum of deposit relating to money placed in a fixed deposit was a
debenture. For the purposes of company law, a debenture is a medium to long term debt security
created by a company.
9.2 PRINCIPAL DIFFERENCES BETWEEN SHARES AND DEBENTURES
51
 Shareholder will look to dividends out of the company's distributable profits for his
return on investment. A debenture holder will look for interest. Dividend rates are not
usually fixed, but will depend on profits and on the amount recommended by the
directors, and approved by the members by ordinary resolution.
 Dividend interest will usually be fixed in the terms of issue of the debenture. Shares may
not be issued at less than their nominal value. Debentures may be issued at a discount.
 The capital and premium attributable to an issue of shares must be retained by the
company as an undistributable reserve. It forms part of the creditors 'buffer. Borrowings
against debenture issues need not be retained in this way and may be freely expended by
the company. .
 Debenture holders are creditors of the company and will have a priority claim against the
assets of the company in the event of its being wound-up. If their debenture is secured by
a charge they rank ahead of the unsecured creditors, as well as enjoying priority over the
shareholders. The shareholders share only in surplus assets, after the settlement of all
creditors ‘claims.
 Debentures usually carry a fixed date for repayment of capital, and may be redeemed
before that date by agreement between the company and the debenture holders. Shares
are seldom redeemable, and because of the creditors' buffer fund requirement, their-
redemption or purchase by the company require compliance with detailed procedures
laid down in the CA85.
 Shareholders have the right to attend and vote in company meetings. Debenture holders
may not.
 If the company gets into financial difficulties, debenture holders will usually have the
power to obtain the appointment of a receiver to assume control of the charged assets of
the company and effect payment of their debt. Shareholders have no such right.
 The rights of debenture holders are largely governed by the terms of their contract with
the company. The 'bundle of rights'(Borlands Trustee v Steele) enjoyed by shareholders
are largely conferred by statute.
 Advance Corporation Tax is payable on dividends, which, being an appropriation of

profits do not reduce the company's pre-tax profits. Debenture interest is an expense
incurred in the earning of profits and is therefore tax relievable
 Debentures are freely transferable. Share transfers are often subject to restrictions on
transfer.
9.3 TYPES OF DEBENTURES

Section 38 provides a list of instruments in current use. These instruments will be debentures
within the meaning of the definition in s $(1). These include notes, bonds or similar unsecured
52
obligations of a corporation. Loan stock and debentures usually denote unsecured borrowings by
the company on a long term basis.
 TRANSFER OF DEBENTURES
A company may issue bearer debentures, in which case title to the debenture will pass by
delivery. A bearer debenture is recognized as a negotiable instrument. In some cases, to avoid the
possibility of theft or loss of bearer be a debentures, it may be arranged that the certificates are
kept in a central depository and transfers made by exchange of deposit receipts
Debentures may also be issued in a form that only allows transfer by registration. In such a case,
the company must keep a register of debenture holders at its registered office.
 REDEMPTION OF DEBENTURES
Since a debenture represents a loan a company may redeem debentures by repaying the money
owed. The redemption may be at the company's option or at the option of the lender, or at a fixed
date or some determinable future time. The company may reissue redeemed debentures or issue
other debentures in their place. A debenture holder who takes such debentures has the same
priorities as if the debentures had never been redeemed. (S 73(2))
It is possible to issue debentures on terms that they will not be “redeemed or redeemed only on
the occurrence of a remote contingency or at the expiry of a long period, These are known as
perpetual debentures or irredeemable debentures. (S 72)
9.4 DEBENTURE HOLDERS' RIGHTS AND REMEDIES
 TRUSTEE FOR DEBENTURE HOLDERS
Where there are a large number of debenture holders it would be highly inconvenient to say the
least for the company to deal directly with all of them. Where debentures are offered to the
public, the appointment of a trustee is made mandatory by S 74(1) unless the offeree is a
prescribed corporation.
A trustee for the debenture holders may be appointed even if the debentures are not issued
publicly. The trustee for the debenture holders is meant to be a watchdog to look after their
interests. If it is necessary to take action to enforce the debentures, it will be for the trustee to do
so. The trust deed sets out the rights of debenture holders and the rights and duties of the
corporation and the trustee. The function of the trustee is to administer the trust in accordance
with the provisions of the trust deed. An important duty of the trustee is to pay the interest and to
settle payments as they fall due and to enforce other obligations on behalf of the debenture
holders.
A trustee is also subject to certain statutory duties in performing their role as a trustee of the
borrowing corporation for example the obligation to exercise reasonable diligence in exercising
their duties towards the corporation,
 RIGHTS OF DEBENTURE HOLDERS
53
Technically, a debenture holder is a creditor and not a member of the company. Accordingly, he
will have none of the rights of a member.
However, a debenture holder occupies a position mid-way between the members and the
ordinary creditors. He does not have all the rights of members, but has more rights than ordinary
secured or unsecured creditors.
 First, the holder of a debenture secured by a floating charge (or the trustee for such
debenture holders) has the same right as a member of the company to restrain an ultra
vires act under S 20(2)(a).
 Secondly, debenture holders (or the trustee for the debenture holders) are entitled to
notice of any meeting where it is proposed to alter the objects clauses in the
memorandum of association. (s28(3). Persons holding not less than l0% of the nominal
value of the company's debentures may apply to court to cancel a proposed alteration of
the company's objects ( S 28(5).
CHAPTER 10 RAISING FINANCE
Financing a company - The issue of a prospectus is necessary when;-

 form of application for shares or debentures in a corporation is issued, circulated or
distributed to the public-37(1)&(2)
 An invitation is made to the public to deposit money with or lend money to a corporation
- s38(l)
10.1 CONSTITUTES AN 'OFFER TO THE PUBLIC''?

Only public companies can offer securities to the public. This is because private companies are
by definition prohibited from raising finance from the public.(s15(1)(c) & (d). Contravention of
the restriction may lead to prosecution and is an offence in connection with the promotion,
formation or management of a company which may lead to a disqualification from directing,
promoting and managing companies. Because of the serious consequences of contravention, it is
necessary to know when an offer of securities is an offer to the public and therefore requires a
prospectus to be issued.
10.2 ISSUE OF SHARES TO THE PUBLIC

Generally, an issue of shares to the public may take one of several forms:
l. A direct allotment, where the shares are issued and allotted directly to members of the public
who have subscribed for the shares;
2. An offer for sale. There are two scenarios.
i. ' First, where a private company seeks to 'go public', a portion of the shares held by the existing
shareholders may be offered for purchase by members of the public.
ii. Secondly, a company may allot shares to an issuing house which then will offer them for sale
to the public
54
3. A rights issue. A rights issue is an offer (in the contractual sense) to the existing members of a
corporation of new shares for subscription. Where the issue is renounceable, the member to
whom the shares are offered may transfer his right to subscribe for the new shares to another
person.
10.3 ISSUE OF DEBENTURES TO THE PUBLIC
A company may borrow from the public by issuing debt securities. These are referred to in the
Act as 'debentures'. Debentures may be offered to the public in the same way as shares, ie by
direct allotment, offer for sale or rights issue. Every corporation which borrows money from the
public (the borrowing corporation) must issue to every person who advances money a document
that acknowledges or evidences the indebtness of the corporation. This must be done within two
months of the receipt of the money-s38(1)
Where debentures are offered to the public, provision for the appointment of a trustee for the
debenture holders must be made either in the debentures themselves or in a trust deed relating to
the debentures. The trustee for the debenture holders must be a trustee corporation, ie a company
registered as a trust company, under the Trust Companies Act or a public company that has been
declared by the Minister to be a trustee corporation for the purposes of the Act s4(l).
10.4 CHARGES
Security for Corporate Borrowing
A company charge is a security given by a company over some or all of its assets in favour of a
creditor. A charge is defined in S.4 as including a mortgage and any agreement to give or
execute a charge or mortgage whether upon demand or otherwise.
Company may give any type of security that a natural person may give. Such security may take
the form of a charge or mortgage of some sort or a pledge of chattels.
10.4.1 COMPANY CHARGES MAY BE FIXED OR FLOATING.
 A fixed or specific charge is one that attaches to a specified asset. If the asset is
transferred, the charge generally follows it.
Seah Eng Lim v P & O Banking Corporation Ltd
Thai Chee Ken v Banque Paribas (1993)
 The essential feature of a fixed charge is that if properly created it attaches from the
moment of creation (the company cannot deal with the properly without the lender's
consent) to the property in question and (subject to registration) gives the holder of the
charge an immediate security over the property in priority to subsequent claimants.
 Company may also create a floating charge over its present and future assets.
55
 floating charge, in contrast to a fixed charge, is ambulatory and shifting in its nature,
hovering over the property which it is intended to affect until some event occurs or some
act is done which causes it to settle and fasten on the subject of the charge within its
reach and grasp.(Illingworth v Houldsworth )
 The essence of a floating charge is that it does not relate to any specific assets until it is
crystallized, when it becomes a fixed charge. As long as the charge remains floating the
assets comprised within the charge may be dealt with as if they were unencumbered.
 Floating charge is a charge on a class of assets rather than on a specific asset. For
instance, a company may charge its stock in trade, present and future. While the charge
remains uncrystallized the company may sell part of its stock in trade and purchase
replacements. The existence of the floating charge does not affect the goods once they are
disposed of. When the charge crystallizes, however, it affects all the goods within the
class at the time; these goods are then subject to a fixed charge.
10.4.2 ADVANTAGES OF FLOATING CHARGE
 The advantage of a floating charge is that it allows a company to give security

where a sole trader or partnership could not. It is impracticable to create fixed
charges where the assets in question are numerous and of little individual worth.
 The floating charge is therefore a charge that is especially advantageous to a
company which has no fixed assets but has a lot of stock-in-trade, because the
floating charge, unlike the fixed charge, gives the company the freedom to sell the
goods in the ordinary course of business.
10.4.3 DISADVANTAGES OF FLOATING CHARGE
The floating charge, however, may not be very advantageous to the lender of money, for the
following reasons.
 As the company is free to use the assets in the ordinary course of business, the value of
the security is uncertain.
 The assets subject to the security may in fact be the subject of a retention of title clause
by a supplier of those assets. In such cases the seller of those goods under the retention of
title clause will have a better title to the goods than the floating charges: A.I.V. v
Romalpa (1978).
 If a creditor has levied and completed execution, the debenture holders cannot compel
him to restore the money, and before crystallisation he cannot be prevented from levying
execution.
 Certain categories of preferential creditors would have to be paid out of assets subject to
a floating charge unless there are other assets available for this purpose: ss.l91 and292.
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 A floating charge, although useful, is peculiarly vulnerable as a security. The main

problem lies in the fact that the chargee implicitly authorizes the chargor to deal with the
property charged in the normal course of business-
Thus, assets may be taken out of a class of charged assets without being replaced.
Despite these disadvantages, the lender still enjoys an important advantage in that, upon
crystallisation of the floating charge, he obtains priority in the payment of debts over unsecured
creditors.
10.4.4 CREATION OF A FLOATING CHARGE
There is no particular form of words required to create a floating charge. Generally, if a charge
has the following characteristics it will be a floating charge. (per Romer LJ Re Yorkshire
Woolcomfers Association Ltd (1903); Re Lin Securities (Pte) (1988)
l. If it is a charge on a class of assets ‘of a company present and future’
2. If that class is one which, in the ordinary course of business of the company, would be
changing from time to time; and
3. If it is contemplated that until some future step is taken by or on behalf of those
interested in the charge the company can carry on its business in the usual way as far as
concerns the particular class of assets in question.
The fact that an instrument does not purport to create a floating charge is irrelevant. If there is a
‘charge and that charge has the characteristics of a floating charge, it matters not what the drafter
of the instrument chose to call it- It is the essence and nature of the security and not the label
placed upon it that matters. (Re Lin Securities (Pte) (It was held that the letters of hypothecation
created floating charges.)
Chase Manhattan Bank NA v Wong Tui Sun/ Dresdner Bank AG v Ho Mun-Tuke Don
Where the modus operandi was the same in all three cases, shares being hypothecated to various
banks under variously titled instruments - the security created was held to be a floating charge.
A floating charge may be created even if it is not intended to do so. If a supplier retains equitable
ownership of goods supplied to the company that may lead to 'a floating charge even though
what was intended is merely to retain title (Aluminium Industrie Vaasen BV v Romalpa
Aluminium Ltd (1976)
Re Bond Worth Ltd
A floating charge need not be over all the assets of a company. It could cover assets of a
specified category only. In this case all the elements of a floating charge were present and
therefore registrable as such since the charge was unregistered, it became void as against the
other creditors of the company. (Registration - s 108). The general rule is that there will be a
charge where a company transfers the property in its goods to another party as surety, for
payment of debts owed by the company to that person.
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Whether the charge will be a floating charge or a fixed charge depends upon the construction of
the clause in question. The fact that the chargor is at liberty to deal with the assets charged is a
very strong indication that there is a floating as opposed to a fixed charge.
Siebe Gorman & Co Ltd v Barclays Bank Ltd
The company created a charge over book debts. The charge provided that the company could not
charge or assign these debts and had to pay the proceeds into an account with the chargee bank
which the company could not operate without the consent of the bank - the court held there was a
fixed charge. The absence of the ability to use book debts in the normal course of business
deprived the charge of the character of being floated. It was therefore held that Barclays had a
fixed charge over McDonald's book debts.
CONTRAST WITH:
Re Brightlife Ltd (1987)
The company created a charge over book debts. The company retained the freedom to pay the
proceeds into the bank account and use them in the normal course of its business - it was held
that the charge was a floating charge.
10.4.5 CRYSTALLISATION OF FLOATING CHARGE
Crystallisation is the transformation of a floating charge into a fixed charge over assets within
the class of assets, the subject of the charge and owned by the company at the time the event
triggering crystallisation, occurs. Until a floating charge crystallizes, it remains ambulatory and
shifting and the chargor is at liberty to use the assets charged in the ordinary course of business.
The charge only becomes fixed when an event occurs which crystallizes it. This may occur in
one of several ways.
 Firstly, if the company goes into liquidation, all floating charges automatically
crystallize.
 Secondly, the appointment of a receiver by the court or by a creditor under a power
contained in the debenture has the effect 'of crystallizing floating charges. (United
Malayan Banking Corporation Bhd v Official Receiver &Liquidator of Soon Hup Seng
Sdn Bhd [9861. If a receiver of a company's assets is appointed, the floating charge
ceases to be a floating security and becomes a fixed charge and the company cannot
thereafter deal with any part of the charged properly except subject to the charge.(United
Malayan Banking Corporation Bhd v Official Receiver (1986). A creditor has to take
some positive step before the charge will crystallize. The mere fact that there has been a
default in payment of interest will not of itself crystallize the charge"' (subject to the
possibility of automatic crystallization).
 Thirdly, steps taken by the creditor to enforce or take possession of the security may also
crystallize the charge. (Dresdner Bank AG v Ho Mun-Tuke Don) one of the major issues
was when the charge crystallized.
58
 Fourthly, a floating charge will crystallize upon the cessation of the company's business.
 Fifthly, it is possible to provide in the instrument that creates the charge that it will
crystallize at the option of the creditor. The debenture may be so drafted as to give to the
holder the option to convert the floating charge into a specific charge by giving notice to
the company.( Re Brightlife Ltd (1987))
 Sixthly, there is a possibility that a floating charge may crystallize automatically upon the
happening of a specified event. (Re Brightlife Ltd (1987))
Once crystallized, thereafter treated as a fixed charge . Upon crystallization, the floating charge
fastens on the assets subject to the charge, and thenceforth the company is not at liberty to deal
with the assets, whether in the course of business or otherwise. It is true that at that stage the
charge has become a fixed.
CHAPTER 11 CAPITAL MAINTENANCE RULES
The creditor, gives credit to the company on the faith of the representation that the capital shall
be applied only for the purposes of the business and he has therefore a right to say that the
corporation shall keep its capital and not return it to the shareholders (per Jessel MR in Re
Exchange Banking Co (Flitcroft's Case.) The general rule is that a company may not return any
assets to its members while it is a going concern except in the form of dividends paid out of
available profits.
It was established in Trevor v Whitworth that the purpose was to ensure that the
Company's share capital is properly maintained. Any purchase of a company of its own
shares will whittle down the company's capital.
Chung Khiaw Bank v Hotel Rasa Sayang
What is prohibited is the gratuitous return of assets to the members. The creditors take the risk
when they give credit to a company that its assets may be depleted in the normal course of
business, however they do not take the risk that the company will return part of its capital to its
members. (Guinness v Land Corporation of Ireland). A company owes a duty to its creditors to
preserve its assets for the payment of its debts and may not dissipate them by applying them for
improper purposes.
11.1 WHAT IS MAINTENANCE OF CAPITAL?
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Doctrine of maintenance of capital - is one which dictates that the issued capital of the company
must be at all times maintained and not wasted away. Hence the company is in general not
permitted to purchase its own shares or otherwise reduce its capital
This does not mean that the company cannot utilise the share capital. Indeed the very reason for
raising capital by the issue of shares is "to finance the company in the pursuit of its legitimate
activities as stipulated in its memorandum of association.
The issued capital represents a fund (buffer stock) which the creditors of the company reasonably
expect to be applied towards payment to them in the event of a winding up. Thus if the company
were to be given a free hand to use its issued share capital as it pleases, it would prejudice the
position of creditors. The primary purpose of the doctrine of maintenance of capital is therefore
to protect creditors of the company.
Indirectly, this doctrine would also protect the shareholders of the company in that, if the capital
was properly maintained, the greater are the chances that the company would be solvent and they
could expect a full return of their capital upon the winding up of the company.
11.2 WHY DOES THIS RULE EXIST?
 It may be undesirable for a number of reasons. It may allow the current board and senior
management to entrench their control, by giving them a block of shares, purchased at the
company's expense which they could use to vote in their own favour.
 It may allow for manipulation of the share price by company management.

 It may create a false appearance of substance, where in fact the company's only assets are
the shares itself.
 It may allow for members to be treated unfairly as between themselves with some
members being given the opportunity to sell their shares to the company on advantageous
terms.
Despite the doctrine, the Companies Act 1965 does permit the reduction of capital. However
such reduction is only subject to stringent conditions designed to protect the creditors of the
company regarding maintenance of capital may be stated as:
 a company may not purchase or acquire its own shares;

 a company may not lend money on the security of its own shares;
 a company may not give financial assistance to any person to enable him to acquire its
shares;
 a company may not pay dividends to its members unless there are profits available for
that purpose; and
 a company may not return assets to its members or reduce its capital except in the manner
provided in the Act.
11.3 ISSUE OF SHARES AT A DISCOUNT
General rule is that the company must receive the full nominal value of its shares upon issue or
subsequently. A company cannot issue shares below their nominal value on terms that the
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shareholders have no further liability to the difference [Ooregum Gold Mining co of India Ltd
v Roper]
The reason for this rule is to protect the creditors, who have nothing but the company's
funds to look to for payment of the sums owed to them. The principle that underlies this
prohibition is the same principle that underlies the general prohibition against returning
assets of a company to its members while it is a going concern.(Trevor v
Whitworth)
SECTION 59 PERMITS A COMPANY TO ISSUE SHARES AT A DISCOUNT SUBJECT

TO CERTAIN CONDITIONS:
l. The shares must be of a class already issued; therefore a company's first issue of shares may
never be discounted;
2. There must be a resolution passed by a general meeting specifying the maximum rate of
Discount.
3. At least one year must have elapsed since the date on which the company was entitled to
commence business.
4. The issue must be confirmed by an order of court.

The court may confirm the issue on such terms and conditions as it thinks fit. Where a company
proposes to issue shares at a discount the shares must be offered to the existing shareholders of
that class-proportionately to the number of shares that each holds (s59(4). This statutory right of
pre-emption exists notwithstanding any contrary provision in the company's articles.
Issue of shares at a discount should be distinguished from issue of partly paid-up shares. When a
company issues partly paid shares, the members' liability to pay the unpaid portion of the price
remains in existence. The shareholders are liable to pay the uncalled portion of the capital, unless
extinguished under s64. In the case of an issue at a discount, shares are issued without such
liability on the part of the shareholders to pay the difference between the issue price and the
nominal value of the shares. If shares are issued at a discount without complying with the
requirements of s 59, the holders of the shares will be liable to pay the full nominal value of the
shares. (Ooregum Mining Co of India Ltd v Roper )
Directors who issue shares at a discount without complying with s59 breach their duty to the
company and may be made accountable for the amount by which the shares are discounted
In practice, it is possible to circumvent the rule against discounts.
 ‘Firstly, it is possible for a company to issue shares for a consideration other than, cash.
(s 54(3) & (5))
 Secondly, S.58 permits a company to pay a commission to any person in consideration
for his subscribing for shares. The effect of paying a commission (which cannot exceed
l0%o or such lesser rate as is prescribed by the articles) is to give a discount to the
subscriber. This power can only be exercised if the payment is authorized by the articles
and proper disclosure is made in accordance with S58 (l). The power to pay commissions
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must be exercised bona fide. The bona fide payment of brokerage in connection with the
issue of shares does not contravene the general prohibition against issuing shares at a
discount.
11.4 REDUCTION OF CAPITAL
Reducing Share Capital

What is prohibited is the return of assets to the company's members since the effect of such a
return of capital would be to reduce the assets that are available for distribution to the creditors
should the company go into liquidation. Thus, a company has no power to refund to its members
the money that they paid for their shares. ( Sinnasamy v Hup Aik Omnibus 1952) Once a
company received money in payment for its shares, it cannot refund that money without getting
the court's leave to reduce capital.
11.5 MODE OF REDUCING CAPITAL
The Act provides that a company may reduce its share capital in any way. In particular, it may
extinguish or reduce the share capital, cancel any paid-up capital which is lost or unrepresented
by assets or pay off any paid up capital' which is in excess of the needs of the company.(ss 6a(l)
(a)(b)(c))
S.64 OF THE COMPANIES ACT 1965

A company may, if permitted by its articles, reduce its capital by special resolution, subject
further to the confirmation by the court. If these conditions are satisfied, the company may
reduce is capital in any way.
S.64 IN PARTICULAR STIPULATES THREE WAYS:
i. By "extinguishing or reducing the liability on any of its shares in respect of share

capital not paid up;
ii. By cancelling any paid up share capital which is lost or unrepresented by available
assets;
iii. By paying off any paid up share capital which is in excess of the needs of the
company.
 PROTECTION FOR CREDITORS[ s64(2) ]
As a protection for creditors, where creditors are likely to be affected by the reduction, then
s.64(2) must be complied with. This subsection provides inter alia that where the proposed
reduction involves the payment to any shareholder of any paid up share capital, then every
creditor of the company who at the date fixed by the courts entitled to any debt or claim,
which if that date were the commencement of the winding up of the company, would be
admissible in proof against the company, shall be so entitled to object to the reduction.
62
The court must then settle a list of creditors so entitled, and for this purpose may publish
notices fixing a final day on or before which creditors not entered on the list may claim to be so
entered.
When the court is satisfied with respect to every creditor entered on that list that either his
consent to the reduction has been obtained or his debt or claim has been discharged or has
determined or has been secured, it may make an order confirming the reduction on such terms
and conditions it thinks fit. In special circumstances the court may direct that the provisions of
s.64(2) shall not apply to any class of creditors:
s.64(3).
Therefore to effect a reduction of capital three things are required in all cases:
l. Firstly, the reduction must be authorized by the company's articles.
2. Secondly, a special resolution for the reduction must be passed.
3. Thirdly, the reduction must be confirmed by the court.
The requirement of court confirmation is the primary protection that creditors' have. In certain
cases the approval of the creditors is also necessary. The court's discretion to confirm a reduction
should only be exercised where the court is satisfied.
(a) That the proposed reduction affects all members equally, or that those who are treated
differently consented to such treatment and
(b) That the cause of the reduction was fairly put to the members so that they could exercise an
informed choice.
Certain reductions of capital are exempt from s 64. These are:
 The cancellation of shares that have not been taken up or which have been forfeited; (S
62(1)(e))
 The application of the share premium account in ‘writing off the preliminary expenses of
the company or the expenses of the share issue; ( S60(3)(e))
 The application of the share premium account in providing for the premium payable on
redemption of redeemable preference shares; ( S60(3)(f)) and
 The cancellation of shares consequent on a purchase of those shares by the order of court
under ( S18l(2)(c).
11.6 Differences between a buyback and reduction of capital under s64
 In a buy-back, the member has an option of refusing to sell, while in a reduction of

capital, the members' shares can be cancelled against their will
 A reduction of capital may not involve a payment to members when the shares are
cancelled, while in share buy-back it is paid back to the members.
11.7 ACQUISITION OF A COMPANY’S OWN SHARES
63
s 67(l) of the Act prohibits a company from acquiring its own shares or units of shares in
itself and from acquiring shares or units of shares in its holding company. (s 5). The reason for
the prohibition is that the purchase of its own shares by a company would amount to a return of
capital to the members. A contract or transaction by which a company acquires or purports
to acquire its own shares or units of its own shares is void.
The general prohibition in s 67(l) is subject to any other express provision of the Act. Thus, a
company may by court order purchase its own shares under s 182(2)(c) .
By s.67 of the Companies Act 1965, a company cannot purchase its own shares .Neither can it
give any financial assistance; whether directly or indirectly in connection with the purchase of
the company's shares by any other person, This prevents a company from giving a loan to enable
any person to purchase the shares. It also is prohibited from giving any guarantee or security to
facilitate the obtaining of a loan from some other party for such a purchase.
Where such financial assistance is given, the transaction is void but the company will be entitled
to recover the financial assistance given. However the section is subject to several exceptions as
follows:
STATUTORY EXCEPTIONS UNDER S.67(2)
 ' Firstly 'a company whose ordinary business is lending money may lend in the ordinary
course of business, if the activities of that company are regulated by any written law
relating to banking, finance companies or insurance companies – [s67(2)(a)] Steen v
Law (1964)
 Secondly, a company may finance a scheme to enable its employees or employees of a

related corporation to own shares in the company or its holding company.- [ s67(2)(b)]
 Thirdly, the giving of financial assistance to persons other than directors, bona fide in the
employment of the company with a view to enabling those persons to purchase fully paid
shares. [s67(2)(c)]
In the event of any contravention - guilty of an offence – s 67(3) - imprisonment of 5 years and
or RM100,000. The court also has a power to make compensation orders against convicted
persons if it is just and equitable to compensate the company or any person for loss or damage
arising out of a contract or transaction entered into contravention of the transaction
General prohibition - A company might acquire its own shares in other ways than by
purchase. For instance,
 A company could acquire a beneficial interest in its own shares under the terms of the
will of a deceased member.
 A company might forfeit a member's shares for non-payment of calls.
 Shares may be transferred to a trustee to be held on trust for the company.
64
11.8 LENDING MONEY ON THE SECURITY OF THE COMPANY'S SHARES

General Prohibition
Section 67(1) prohibits a company from lending money on the security of its shares or the shares
of its holding company or on the security of units of shares of the company or its holding
company. Any contract or transaction that contravenes this prohibition is void. Thus, a loan
made in contravention of this section would be void and the money would be immediately
recoverable by the company. However, the security itself will not be affected and the company
will have a lien over the shares pledged with it as security for the repayment of the money lent –
[Batu Pahat Bank v Official Assignee] (1933)
11.9 FINANCIAL ASSISTANCE FOR ACQUISITION OF SHARES
WHAT AMOUNTS TO FINANCIAL ASSISTANCE

A company may not give financial assistance to any person whether directly or indirectly for the
purpose of:
 the acquisition or proposed acquisition of shares in the company or units of such shares;
or
 the acquisition or proposed acquisition of shares in its holding company or units of such
shares. (s 67(l))'
SOME EXAMPLES OF FINANCIAL ASSISTANCE ARE AS FOLLOWS -

(i) A company lending money to a person to be used to acquire shares in the company or holding
company;
(ii) A company guaranteeing a loan by a 3 rd party to a person who will use the loan funds to
acquire shares in the company [Chung Khiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd (1990)]
(iii) A company making a gift to a person, which is used to acquire shares – [Belmont Finance v
Williams Furniture Ltd]
(iv) Reducing the liability of a person in connection with the acquisition of the company's shares
– [EH Dey Pty Ltd v Dey ]
(v) A subsidiary company cannot give a loan, give security or guarantee or any form of financial
assistance to a person to acquire shares in its holding company. Armour Hicks Northern Ltd v
Armour Trust Ltd
In Cheam. Theam Swee v Overseas Union Bank Ltd (1989) - the financial assistance must
have come from the company itself and not the shareholders
It has been an established principle in company law that a company cannot purchase its own
shares. This rule is found in the case of Trevor v Whitworth. The purpose of the rule was to
ensure that a company's share capital is properly maintained. Any purchase by a company if
its own shares will certainly whittle down the company's capital. The rule was later extended by
statute to include the giving of financial assistance for the purchase of its own shares'
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s.67(l)
A company cannot give whether directly or indirectly and whether by means of a loan,-guarantee
or the provision of security or otherwise, any financial assistance for the purpose of or in
connection with a purchase or subscription made or to be made by any person of or for any
shares in the company or, where the company is a subsidiary, in its holding company, or in any
way purchase, deal in or lend money on its own shares. Thus, by the section, a company cannot
purchase its own shares, cannot give a loan to any person to enable that person to purchase its
shares .It also cannot give a guarantee or provide security in respect of a loan made by some
other party to enable a person to purchase its shares.
Many cases illustrate this prohibition, e.g. Selangor United Rubber Estate, Ltd v Craddock
(1963); Chung Khiaw Bank v Hotel Rasa Sayang (M) Sdn Bhd (19E8); Kidurong Land Sdn Bhd
v Lim Gaik Hua & others (I990)
s.67(2) PROVIDES THE FOLLOWING EXCEPTIONS TO THE GENERAL

PROHIBITION:
a) Where the lending of money is part of the ordinary business of a company the company may
lend money in the ordinary course of its business;
b) The provision of money for the purchase of or subscription for fully paid shares in the
company or its holding company, if the purchase or subscription is by trustees for the benefit of
employees, including directors holding a salaried employment. (scheme)
c) The giving of financial assistance to employees (excluding directors) to them to purchase fully
paid shares in the company or its holding company.
N.B. Any financial assistance given in contravention of the section is recoverable s.67(6).
11.10 Share buy back
Section 67A of the Companies Act 1965, which was introduced by the Companies (Amendment)
Act 1997 and which was further amended by the Companies (Amendment) Act (No.2) 1998,
now provides that a company may purchase its own shares subject to the following conditions:
S.67(A)(2)
i. It must be a public company with a share capital.
The articles of association of the company must permit such purchase.
ii. Company must be solvent at the date of the purchase and must not become insolvent
as a result of the purchase.
66
iii. The purchase must be made through the stock exchange on which the share are
quoted and must be in accordance with the relevant rules of the stock exchange.
iv. The purchase must be made in good faith and in the interests of the company.
The company is permitted to utilise the share premium account to fund the purchase of the
shares.
Further, where the company has purchased its own shares, the directors may resolve to cancel the
shares so purchased or retain the shares in treasury as 'treasury shares'. They may resolve to
retain only part of the shares in treasury and cancel the remainder. In addition, they may also
distribute the treasury shares as share dividends or resell the treasury shares on the stock
exchange.
Where the directors decide to cancel the shares so purchased, or cancel any treasury shares, the
amount by which the issued share capital is diminished must be transferred to the Capital
Redemption Reserve. This is also known as a share buy-back. A share buy-back refers to a
purchase by a company of its own shares. Under a buy-back, the company offers to buy some or
all of the shares owned by some or all of its members, at a particular price. It is up to the
members to decide whether to accept the company's offer and sell their shares, or keep their
shares by rejecting the offer. As seen earlier such purchase was generally prohibited at common
law under the rule in Trevor v Whitworth (f8E7) and under Section 67(l) of the Companies Act
1965. This relaxation of the prohibition against such purchase has been seen to have a number of
advantages for the company
 It may allow for majority shareholders to retain control of the company.

 It is likely to stabilise share prices on the stock market, especially during times of
economic downturn.
 It may help prevent excessive speculation.
 It may help to prevent potential take-overs of the company.
 It would strengthen investor confidence in the company.
Buy backs can only be made through the open market, It does not allow a private company or an
unlisted public company to buy back its own shares. The only permitted buy-back are -
(a) Through redemption of redeemable preference shares -s.61

(b) By a court order pursuant to S.l8l (oppression)
If the company contravenes s.67A, then the officers will be liable under s.67A(7) and the offence
is punishable with imprisonment of up to 5 years or a fine of RM100,000 or both.
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CHAPTER 12 COMPANY DIRECTORS
12.1 APPOINTMENT AND QUALIFICATIONS OF DIRECTORS
Types of Directors
l. Executive director - one who works for the company on a full time basis (SPP Ltd v Chew
Beng Gim - managing director
68
2. Non executive director - one who does not work full time for the company (they do not
participate in the management of the company - their job is to keep a close eye on the company
to safeguard the investments). Basically they attend board meetings.
3. Alternate director - the alter ego of someone else, they turn up at meetings when the
directors are unable to do so.
4. Informal or de facto director - one who acts as a director though not appointed formally.
s4(l) defines a director as ' any person occupying the position of a director of a corporation by
whatever name he is called'
5. Shadow director - a person in whose directions or instruction the directors of a company are
accustomed to act. (Re Hydrodam (Corby) Ltd 1994)) - on shadow directors.
APPOINTMENT OF DIRECTORS
 There must be at least 2 directors, each of whom must have his principal or only place of
residence in Malaysia - s 122(1)
 Director here does not include alternate or substitute director - s.122(1A)
 Must be a natural person of full age - s.l22[2]
 They must be named in the memo and articles of association - s122(3) the documents
must be delivered to the CCM to secure the incorporation of a new company which will
include their consent
 The company cannot be registered until this is done- sl6(7)
 The appointment of subsequent directors is regulated by the articles.(Table A Art 63)

 At each AGM l/3 of the non executive directors retire but are eligible for re-
election. Those longest in office since their last election should retire first.
 The BOD has power to appoint a new director either to fill a vacancy or as an
addition to their number but such director will only hold office until the next
AGM at which he retires and is eligible for re-election.
 Director shall not resign, if by his resignation, the number of directors of the company is
reduced below the minimum number of two - s.122(6)
 The above shall not apply if the resignation is due to a disqualification under
s.124(1)(share disqualifications) or by virtue of some disqualification under the Act.
The articles may also provide that a certain body or person to have the power to appoint directors
(Raffles Hotel v Malayan Banking)
 The articles may also provide that a director may assign his office to another person and
in the case of a public company this must be approved by a special resolution s138(1)
 The consent must be in writing and lodged with the CCM s123(1) otherwise it would be a
'defacto' appointment
12.2 SHARE QUALIFICATION S124
69
The memo and articles may prescribe that directors obtain a certain number of shares to qualify
as directors. Art 7l - the shareholding qualification for directors may be fixed by the company in
general meeting.
In such a case the directors must obtain the shares within 2 months of his appointment or as per
the articles 124(l) (whichever is lesser) - otherwise he has to resign – s124(3). The penalty is
RMl000. The share qualification of any director must be held by him solely - s.124(2)
A person disqualified under this section will be incapable of being re-appointed as director, until
he has obtained his qualification - s.124(4)
The acts of the directors will be valid notwithstanding the defect – s 127
Dawson v African Consolidated Land and Trading Co
A call on shares was disputed by some shareholders on the ground that a director had at the
relevant time, parted with his qualification shares.
The court held that the call was valid despite the defect in the appointment.
(Normally the company will try to avoid liability, but 3rd parties will rely on s.127.
12.3 UNDISCHARGED BANKRUPTS 25
 An undischarged bankrupt cannot take part in the management of corporation – s125(1)

unless he has the leave of the court. (Imprisonment for 5 years or RMI00,000 or both.)
 Leave will be given provided notice of intention to apply has been served on the Minister
and on the Official Receiver and either of them may be represented at the hearing of and
may oppose the granting of the application.
 The aim is to protect the public that such a person is not fit to be entrusted with the
management of a company - Re Altim Pty Ltd
12.4 PERSONS UNFIT TO BE DIRECTORS SS130 & 130A

s130 - if a person is convicted (within or outside of Malaysia)
 a. in an offence in connection with the promotion, formation or management of a
corporation;
 b. in an offence involving fraud or dishonesty punishable on conviction with
imprisonment for 3 months or so or;
 c. any offence under ss 132 (duty and liability of officers), l32A (dealings by officers in
securities) and 303 (liability where proper accounts are not kept)
(that person within a period of 5 years after his conviction or release from prison is a director or
a promoter of a company without the leave of the court shall be guilty of an offence -
imprisonment of 5 years or RM100,000 or both)
12.5 S130A DISQUALIFICATION OF DIRECTORS OF INSOLVENT COMPANIES.
It appears to the court -

That a person -
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(i) Is or has been a director of a company which has at any time gone into liquidation (whether
while he was a director or subsequently) and was insolvent at that time; and
(ii) Is or has been a director of such other company which has gone into liquidation within 5
years of the date on which the first mentioned company went into liquidation; and
(b) That his conduct as director of any of those companies makes him unfit to be management of
a company, the Court may an order that the person shall not, without the leave of the, court, be a
director of or in any way, whether directly or indirectly, be concerned or take part in the
management of a company for such period beginning on the date of the order and not exceeding
5 years as may be specified in the order.
12.1
PERSISTENT DEFAULT IN FILING DOCUMENTS
If a person is convicted 3 times for failing to file prescribed documents, or failing to give notice
when required, or failing to deliver or send documents to the Registrar, that person is
disqualified for 5 years from being a promoter or director of the company. [Hicks]
"Disqualifications for Persistent Default in Filing]
Applications for leave: the court will take a number of factors before granting leave-
 the nature of the offence;
 the nature of the applicant's involvement;
 the applicant's general character;
 the structure of the company to which applicants wants to manage the nature of the
business;
 the interests of the general public, the shareholders and the employees;
 the risks to the general public, the shareholders and the employees.
12.7 AGE LIMIT FOR DIRECTORS
 Age limit - public companies /subsidiaries of public companies -70 years unless the
procedure in s.129(1) is followed.
 His seat becomes vacant at the conclusion of the AGM following the date he attains the
age of 70 years.129(2).
 Any acts done by a person as a director will be valid notwithstanding that there was a
defect in his appointment - s.129(3)
 This is an automatic vacation - there is no need for resignation.
 Procedure for appointment - sl29(6) -
 Notice of resolution to appoint such person must be given.
 The length of notice must be 14 days –s145(2)
 The resolutions must be passed by, three-fourths 'of those present and voting.
 The appointment is only valid" until the next AGM.
 The whole process must be repeated if the director wants to remain in seat.
AGE LIMIT - PRIVATE COMPANIES – NO LIMIT.
12.8 VACATION OF OFFICE AND REMOVAL OF DIRECTORS
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A director may vacate in several ways

 resignation
 retirement
 contingency
 removal
 death
12.8.1 Resignation
a. This will be provide for in the Articles

b. Written notice must be given on resignation - Art72(e) Table A,
c. If it amounts to a breach, then he is liable to pay damages,
d. Prohibits the 'retirement of a director-unless-at least 2 directors remain, who must be
ordinarily resident in Malaysia.
12.8.2 Retirement
I. Articles usually provide for it on a rotation system.
II. Prohibits the retirement of a director unless at least 2 directors remain, and they must
be ordinarily residents in Malaysia.
 Automatic Vacation of Office
a) On the happening of a particular event,

b) 129(2)--only instance is in the case of a director of a public company who attains the age of
70,
c) On liquidation - directors vacate automatically and then the liquidator would take over."
12.8.3 REMOVAL
 Removal by other Directors

 Removal by Members
(S.128 and Table A art 69)
12.8.3.1 REMOVAL BY OTHER DIRECTORS

This is only possible in private companies. (For public companies it is prohibited by s128(8).
In the case of Khoo Choon Yam v Gan Miew Chee (2000) a director was asked to sign an
undated resignation letter. When he was removed using the letter of resignation, he successfully
argued that there was duress.
12.8.3.2 REMOVAL BY MEMBERS
 The power of removal is with the general meeting .
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 Public company can remove a director by an ordinary resolution (S128(I)) but special
notice must be given – s128(2). However if the director so appointed represents the
interests of any particular class of shareholders or debenture holders, the resolution to
remove him shall not take effect until his successor has been appointed - s.128(1)
 This is also provided for in the articles. (Art 69) The company may by ordinary
resolution remove a director before the expiration of his period of office.
 This means that persons proposing to remove the director must give 28 days notice to the
company of their intention to move such a resolution before the meeting – s153
 The director who is to be removed is entitled to make representations in writing to the

company, which is bound to circulate them - 128(3)
 The representations must be of a reasonable length [1000words)
 If the company is unable to send the representations out to the members before the
meeting because they received it too late etc, the director concerned has the right to
require that the representation be read at the meeting- S.l28(3)
 However, if the court is satisfied that there is a misuse or abuse of the above section to
secure needless publicity for defamatory matters, copies of the representation need not be
sent out to the members - s.128(4)
 At the meeting the director has the right to be heard in his defence. If he is representing
the interests of a particular class, then his removal will not take effect until his successor
has been appointed - 128(1)
 If removed, the vacancy shall be filled up as a casual vacancy – s128(5)
 Directors do not serve under a contract of service, there is no need for payment of
damages. However managing directors normally serve under a contract of service. In
such cases sacking him amounts to a breach of contract. Such a director may be claim for
compensation - s.l28(7) - Southern Foundries Ltd v Shirlaw
Soliappan v Lim Yoke Fan (1968)

The company's articles provided that a director might be removed. The articles provided for 7
clear days to be given of any general meeting.(today this is no longer possible - s.145(2) - 14
days) The plaintiffs wanted to remove all the directors of the company. Three days before the
meeting one of the plaintiffs sent a notice to the company for a resolution to remove the director.
At the meeting they removed the directors and appointed themselves as directors. The defendants
refused to relinquish their posts as directors. The plaintiffs brought an action. The trial judge held
that the plaintiffs were not properly appointed, as a 28 day’s notice was required before the
removal is effected.
The Federal Court held that s.128 was not mandatory. The power to remove directors under that
section coexisted with the articles. Therefore it is not necessary to give the 28 days notice, the
removal could be in accordance with the articles (in this case 7 days).
On the facts the articles required 7 clear days, whereas the plaintiffs only gave 3 days.
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Even if there is contract that a director shall hold office for life, it is implied he will only hold
office as long as he performs his duties satisfactorily in the interests of the company and the
members - Khoo Chiang Poh v Cosmic Insurance Corp (1974)
Ebrahimi v Westbourne Galleries (1973)
Ebrahimi had been in business with a colleague for 25 years, the last ten as a company. He
agreed to transfer some of his shares to his colleague's son, who then combined with his father to
dismiss Ebrahimi from the board. The court held that the company be wound up under just and
equitable grounds (s 181CA 1965)
12.8.3.3 COMPENSATION FOR LOSS OF OFFICE (EX GRATIA PAYMENT) s 137

The general rule is that a company does not pay compensation to a director but only to officer of
the company s137(1) . However it can be made subject to the following:-
 There is a disclosure to the members and approval by the general meeting- 137(l)(a) -
actual payment amount need not be disclosed.
 Where no meeting held, the unanimous approval of all members is required - Jimat bin
Awang v Lai Wee Ngen (1995)
Re Duomatic (1969)
Compensation for loss of office payments were made to a director after having been approved by
the voting shareholders. No disclosure had been made to the non-voting shareholders except by
way of disclosure in the accounts .after the payment had been made..
It was held that the payment was unlawful. Disclosure must be made to all shareholders and prior
to the payment being made.
 Payment is under agreement

 Payment made under an agreement and approved by a special resolution of the
company -137(5)(b)
 Bona fide' payment by way of pension or lump sum or lump sum gratuity for past
services but the sum in question must not exceed the total emoluments of the directors in
the 3 years preceding his retirement or death- 137(5)(d)
 If pursuant to any agreement before he became a director as consideration for his
agreeing to serve as a director - 137(5)(e) (there is no need for disclosure to company or
approval by members)---Southern Foundries v Shirlaw
12.9 REMUNERATION OF DIRECTORS
The general rule is that a company cannot provide or improve emoluments for a director in
respect of his office unless approved by a resolution. Emoluments refers to any fees, percentages,
sums paid by way of expense allowance, contributions to pension schemes and any benefits
received other than cash.
Directors remuneration takes two main forms:-
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a. Director’s Fees
b. Director As An Employee
Usually the company's articles require the board to approve remuneration paid to the directors
who provide services. In the absence of such approval, the director cannot keep the payment.
Basically decided by common law rules and articles (i.e by the BOD or the general meeting)
Guinness plc v Saunders
Guinness plc v Saunders (1990)
Ward, a director of Guinness received ,5.2 million from the company as special remuneration for
services in connection with a take-over bid which the company had made. The remuneration was
authorised by a subcommittee of the board. It was held that the articles required authorisation by
the whole board. Ward had no entitlement to the 5.2 million and it was recoverable by the
company. His subsidiary argument that he should be entitled to a quantum meruit since he had
provided valuable service was rejected because such would be contrary to the nature of the
directors' fiduciary relationship with the company which requires him not to profit from his
position.
Art 72 Table A states when the office of a director may become vacant. The following are the
circumstances i.e. if the director -
a) "Ceased to be a director by virtue of the act.

b) becomes a bankrupt or makes any arrangement or composition with his creditors generally.
c) Becomes prohibited from being a director by reason of any order made under the act;
d) Becomes of unsound mind.
e) Resigns his office by notice in writing to the company.
f) Being absent from meetings for more than 6 months without the permission of the other
directors.
g) Without the consent of the company in general meeting holds any other office of profit under
the company except that of managing director or manager or.
h) Is directly or indirectly interested in any contract or proposed contract with the company and
fails to declare the nature of his interest.
12.10 LOANS TO DIRECTORS AND TO COMPANIES IN WHICH DIRECTORS

HAVE AN INTEREST
 LOANS TO DIRECTORS - SECTION 133 - 133(5)

Section 133(1) prohibits a company from making a loan to its directors or to directors of related
corporations, or giving a guarantee or security in connection with such a loan. Neither may a
company make a loan to director's spouse 'or children (whether adopted or natural), or give a
guarantee or security in 'connection with such a loan (S 133 A /122A)
 THE EXCEPTIONS TO THIS SECTION ARE AS FOLLOWS:
l. An exempt private company is not subject to this prohibition .s133(1)
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2. s 4(l) only applies to a 'company'. This means a company incorporated in Malaysia. Therefore,
the prohibition does not apply to a foreign Company, which consequently may lend to its
directors or give security for or guarantee a loan made to them.
3. Advances to a director to provide him with funds to meet expenditure incurred or to be

incurred by him as a director for purposes of the company or for the purpose of enabling him to
perform his duties as an officer of the company are not caught by the section (s133(1)(A)
However, the amount of the loan or the extent of the guarantee or security must be disclosed to
the members and the prior approval of the company in a GM must be obtained (s133(2)(a).
If such approval is not given at or before the next annual general meeting, the loan must be
repaid and the liability under the guarantee or security must be discharged within 6 months of the
conclusion of the next Annual general meeting (s133(2)(b)
4. It is permissible to provide a director engaged in the full-time employment of the company or

of a related corporation with funds to meet expenditure incurred or to be incurred by him in
purchasing or otherwise acquiring a house (s133(l)(b). Again, the prior approval of the general
meeting is required as in (3) above.
5. If the company has a loan scheme for employees, loans may be made to directors who are full-
time employees of the company or its related corporations (133(1)( c) The loan must be made in
accordance with the scheme, which must have been approved beforehand by the general
meeting.
6. A loan made in the ordinary course of business by a bank, finance company or insurance
company to a director would also be permissible.
If a loan is made or guarantee or security is given in contravention of the above, the directors
who authorized the transaction may be convicted of an offence s133(4). Moreover, since the
directors who authorized the transaction would have breached their fiduciary duties in
contravening the law, they may be liable to indemnify the company against any loss that their
breach, of duty might cause. Penalty RM 10 000
Such loss might occur because of the recoverability of the loan, because the company is called
upon to pay under the guarantee or because of the enforcement of the security. It is specifically
provided that if the company does not give approval where approval is required ((3 ) and; (4)
above), the directors who authorized the transaction will be jointly and severally liable to
indemnify the company against any loss - s.133(3)
[Federal Court in the case of Co-operative Central Bank Ltd v Feyen Development Sdn
Bhd
12.11 PERSONS CONNECTED WITH A DIRECTOR S122A
a) A member of that director’s family
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b) A body corporate
c) A trustee of a trust under which that director or a member of his family is a beneficiary
d) A partner of that director or a partner of a person connected with that director
s122A (2) - a member of that director's family refers to his spouse, parents, child (including
adopted child and step-child) brother, sister and the spouse of his child, brother or sister
133A (L) - A COMPANY SHALL NOT :-
1. Make a loan to any person connected with a director of the company or of its holding
company; or
2. Enter into any guarantee or provide any security in connection with a loan made to such
person by any other person.
S133A (2) – EXCEPTIONS
1. Anything done by a company where the loan is made, or the guarantee or security is
provided in relation to a loan made, to a subsidiary or holding company or a subsidiary of
its holding company.
2. To a company whose ordinary business includes lending of money or the giving of

guarantees in connection with loans (banking, finance companies or insurance - subject to
supervision of Rank Negara Malaysia).
3. To any loan made to a’ person connected with a director who is engaged in the full-time
employment of a company or related corporation-
a. For the purpose of meeting expenditure incurred or to be incurred by him in

purchasing or acquiring a home; or
b. In accordance with a scheme for the making of loans to employees approved by
the company in general meeting.
s.133A (3) The Company may recover the amount of loan or the amount for which it becomes
liable under any guarantee in contravention of the section.
s133A (4) Any director who contravenes this section is guilty of an offence and the penalty is
RM10, 000.
12.12 SUBSTANTIAL PROPERTY TRANSACTIONS INVOLVING DIRECTORS
A company shall not enter into any arrangement or transaction with a director of a company or a
holding company or with a person connected to a director to acquire from or dispose to such a
director or person any non cash asset of the requisite value UNLESS approved by a R in a GM .
 S.132E (7) -'non cash asset includes any property or interest in property other than cash
and for this purpose cash includes foreign currency, ( ss,132E and 132F). Such contracts
77
would voidable at the instance of the company unless within a reasonable period it has
been ratified by the company in a GM- s 132E(2)
 Non cash asset is of the requisite value at the time of the arrangement for the acquisition
or disposal of the asset, its value is not less than RM 10 000 but (to that exceeds) RM
exceeds 250,000 or 10% of the company’s assets or value.
 S.132E(3) - Any transaction in contravention of S.132E (1) that director and the person
so connected and any director who authorized the arrangement shall in addition to other
liability, be liable -
i. To account to the company for any gain which he has directly or indirectly made ' by
the transaction.
ii. Jointly and severally with any person liable to indemnify the company for any loss or
damage resulting from the transaction,
iii. S.l32E (l) - The court on the application by a member of the company restrain the
company from entering into an arrangement in contravention of subsection (l)
S.132E (6) - A director who contravenes the section shall be guilty of the offence -
Imprisonment for 5 years or 30 000.
 S132 WILL NOT APPLY –S132F

 (a) transaction between a holding company and its wholly-owned subsidiary or between
two wholly owned subsidiaries of the same holding company;
 (b) winding up by court or a creditors voluntary winding up unless it is a
members' voluntary winding up;
 (c) - a company where the acquisition and disposal of its assets is in the ordinary course
of business and on terms not more favourable than those available to its employees or the
public;
 (d) - the acquisition or disposal of its assets by a company not involving transfer of cash
or property and which shall have no effect unless approved by the general meeting or the
relevant authority. of company required for disposal by directors of company's
undertaking or property
12.13 APPROVAL OF COMPANY REQUIRED FOR ISSUE OF SHARES BY

DIRECTORS s132D.
Prior approval of the company in a GM is required before the directors can exercise any power to
issue shares.
(6) Any issue of shares in contravention shall void and consideration given for the shares shall
be recoverable accordingly.
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(6A) - No prior approval is required to issue shares where the said shares are to be issued as
consideration or part consideration for the acquisition of shares or assets by the company and
members have been notified of the intention to issue the said shares at least 14 days before the
date of the issue of the said shares.
(6B) - Members are deemed to have been notified of the intention to issue shares if:-
a) A copy of the statement explaining the purpose of the intended issue of shares has been sent to
every member at his last known address according the Register of Members; and
b) The copy of the statement has been advertised in a national language and an English, language
newspaper circulating generally throughout Malaysia.
(7) - Any director who contravene the above shall be liable to compensate the company the and
the person to whom the shares were issued for any loss, damages or costs which the company or
the person may have sustained. No proceedings may commence after the expiration of 3 years
from the date of issue.
12.14 DISCLOSURE OF INTERESTS
Property Transactions between the company and the directors s131

Directors who have an interest in a contract with the company must disclose to the BOD –
 They must give the exact nature and extent of the interest. This declaration must be made
as soon as is practicable at a meeting of directors. Hely Hutchinson v Brayhead , non
disclosure renders the contract voidable at the instance of the company and makes the
director accountable for the profit.
 However formal disclosure is not necessary when all directors are aware of it.
 Tan Bok Seong v Sin Bee Seng (1995)
In Tan Bok Seong v Sin Bee Seng (1995),
 Company would have to rescind within a reasonable time, otherwise the transactions
would be valid.
 This requirement shall not apply if the interest of the director is not regarded as material
interest.
THE FOLLOWING INTERESTS ARE EXEMPTED: S131
(2).Where the directors interest is due to the fact that he is a creditor or member of a corporation
which is interested in a contract or proposed contract with the company, provided that the
interest is not a material interest or
79
(3)(a) - Where the contract or proposed contract relates to any loan to the company, and the
director has guaranteed or joined in guaranteeing the repayment of the loan or any part of the
loan; or
(3)(b) - Where a contract, or proposed contract has been or will be made with, or for the benefit
of or on behalf of, a related company and arises merely because the director is a director of the
related company.
A director may give other directors standing notice about an interest.
12.15 DISCLOSURE UNDER S135
A director must disclose to the company, in writing the following:-
 (1)(a) - the director's shareholding, debentures, rights, options, contracts and

participatory interests.
 s.135(1)(b) – any change in the shareholding, debentures, rights, options, contracts or
participatory interests in the company or in its related corporation to enable the company
to comply with the Companies Act
 (l)(c) - any matter and events affecting or concerning him that are necessary for
compliance with the Companies Act "
 (1)(d) director is a director of a public company or its subsidiary, the date on which he
attains or will attain the age of 70
Penalty- Imprisonment- 3 years or RMl5000
 Disclosure must be made to:
The company within 14 days of the event the change, the date on which the director became a
director or the date on which the director acquired an interests in the shares, debentures,
participatory interest options or contracts;
 Prohibited transactions ‘involving shareholders and directors under S. l32G
Under s.132G, a company is prohibited from acquiring shares or assets in another company if
any shareholder or director or persons connected with a shareholder or director of the acquiring
company has a substantial shareholding in the other company.
However, such a transaction is allowed if the transaction is entered into after three years has
passed
12.16 DUTIES AND LIABILITIES
'DUTIES
s132(1)
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A director shall at all times act honestly and use diligence in the discharge of the duties of his
office.
12.16.1 DIRECTOR'S ROLES
TWO POINTS
 Firstly, the directors of a company are persons of some importance with a definite place
in the constitutional structure of the company. It is they who, in practice, control the
company and upon whom the fortunes of the company largely depend. But this does not
mean that they can treat the company as their own.
 Secondly, the directors have certain duties, which they are obliged to fulfil. These derive
from the various roles which a director has and the roles which he fills within the
company.
a. Director as employee
Although a director may be an employee, he need not necessarily be one, so his duties are not
necessarily related to a contract of service. Generally speaking, an employee's duty of fidelity
may impose lesser obligations than the director's duties of good faith.
b. Director as agent
They will be in the position of an agent (although the precise nature of the agency will depend
upon the particular circumstances) and so will owe the duties of an agent. But their relationship
with the company cannot be determined solely by reference to the law of agency, especially as
they do not necessarily have all the rights of an agent.
c. Director as trustee
The quasi-trusteeship position of director has great significance with reference to breach of duty
in that if a director in breach of fiduciary duty misapplies company assets he commits a breach of
trust and under trust law principles becomes liable to restore the misapplied properly.
12.16.2 DUTIES OF A DIRECTOR
A director has 3 broad categories of duties:
1. Fiduciary duties
2. Duties of skill care and diligence
3. Statutory duties
Therefore a director must act in what he honestly considers to be the company’s interest and not
in the interests of some other person or body - Chua Boon Chin v JM McCormack . This is a
director's main and overriding duty:
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Further a director must not place himself in a position where his duty to the company and his
personal interests conflict .A director must employ the powers and assets that he is entrusted with
for the proper purposes of the company.
TO WHOM ARE THE DUTIES OWED?
 THE COMPANY
The general rule is that directors owe their duties to the company as a whole and this has
traditionally been taken to mean to the shareholders as a collective body; which includes present
and future shareholders. They may take account of their own interests as shareholders and of the
interests of particular sections of shareholders. The law requires them to have regard to the
interests of employees and members but their duty is to the company. The transaction must
benefit the company.
 THE MEMBERS
The directors owe no general duty to members:
Percival v Wright
Facts: some shareholders wrote to the secretary of a company asking if he knew of anyone
wishing to purchase shares in the company. After negotiations, the shareholders sold theii shares
to the chairman of the company and two directors at l2.IO pounds per share.
Subsequently, the claimants discovered that during the negotiations the board had been engaged
in talks with another party concerning a takeover of the company, at a price which was
considerably more. The attempted takeover did not take place. The shareholders wished to have
the sale of their shares set aside on the basis that the directors should have disclosed the
negotiations with the bidder.
Held: the directors must act bona fide for the interests of the company but they are not in a
fiduciary position in relation to individual shareholders. Therefore the individual shareholders
had no action against the directors.
 THE EMPLOYEES
The law insists that the directors have regard to the interests of the company's employees as well
as the members. However, the duty is to the company; there is no duty to the employees and any
breaches of the directors' duties are enforceable by the company as the proper claimant.
 THE CREDITORS
A director appointed by holders of debentures under a power in the debentures owes his duties
primarily to the and not to the debenture holders. A general duty is owed to the creditors of the
company to ensure that the of the company are properly administered and that its property is not
dissipated or exploited for the benefit of directors themselves to the prejudice of the creditors.
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Spies v The Queen (2000) -----The duty is only owed to the company.
 THE BOARD
It might be argued that the directors are responsible to the board of directors but their duties are
not owed to the board but to themselves.
12.16.3 FIDUCIARY DUTIES
A fiduciary is a person who is expected to act in the interests of another person . they cannot use
their knowledge or position to benefit themselves.
S132(1) a director shall at all times act honestly and use diligence in the discharge of the duties
of his office. The section basically highlights the following:-
 A director must at all times act honestly and use due diligence in the carrying out of the
duties of his office.
 Director must not make use of his position as director to gain an advantage for himself or
for another.
 They must not exercise their powers for an improper purpose and must not put
themselves in a position of conflict between their duties to the company and their
personal interest. Among other things, this means that they must not usurp corporate
opportunities for themselves and must not make any profit without making full disclosure
to the company. If they have done so they are accountable to the company for such profit.
 The company may recover such profit from the directors even if the company itself could
not obtain such.
1. ACTING IN THE COMPANY’S INTEREST
Directors must exercise their discretion bona fide in what they consider in the interests of the
company. Directors when acting must only consider the interests of the company. Where they
have acted in their-own interest without considering the interest of the company, they may be
liable to the company for a breach of their fiduciary duty. That must be their overriding motive
Re W & M. Roith Ltd
The director of two companies entered into a service agreement with one of the companies
under which his widow would be entitled to a pension for life. The court held that this agreement
would only further the interest of the director and could not be considered to be for the benefit of
the company as a whole.
Parke v Daily News Ltd
83
Directors of a newspaper that was going out of business proposed to distribute a large sum of
money to the company’s employees out of philanthropy. The company also carried other
business but since the majority of their business dealings dealt with the 2 newspapers many of
the employees were made redundant.
A minority shareholder challenged the decision.
The court stated that the intentions of the directors were good, but they had breached their duty
to act in the interests of the company. The interests of the company were the members and not
the employees.
2. CONFLICT OF INTERESTS
Thus, a director must not do or omit to do something if that gives rise to a conflict, or might
reasonably be expected to give rise to a conflict between the duties of his office and either their
private interest or any duties they owes to any other person. The possibility of such a conflict
arises in a number of circumstances:
(a) Where a director is in a position to compete with the company
(b) Where a director makes a profit from the position as director
(c) Where a director contracts with the company.
 A trustee must not place himself in a position where his duty and interests conflict -
Boardman v Phipps.
 Directors are trustees of the company and they owe fiduciary duties to the company - Re
City Equitable Fire Insurance.
 The company has the option of recovering the amount of the bribe or to sue for damages -
Mahesan v Malaysian Government Officers'Co-operative Housing Society

[Privy Council.]
In this case one Mahesan was a director of the Co-Operative Society the object of which was to
provide housing for government employees. In relation to a purchase of land for this purpose, he
received a bribe of some RM 122 000. The Privy Council held that he had breached his duty.
The Society was entitled to recover either the profit that he had made or damages for breach of
duty.
 A director may not retain a profit made by reason made by reason and in course of his
fiduciary relationship with the company. If a secret profit is made or a benefit comes to
him because he is a director that profit must be disclosed to the company and approved .
Regal (Hastings) Ltd v Gulliver
Regal owned a cinema. The directors wished to acquire the leases of two other cinemas with a
view to selling the whole as a going concern. Regal had insufficient funds to purchase the leases
and the directors were unwilling to purchase in their own names, thereby making themselves
personally liable without limit. So they formed a company Amalgamated, with a capital of 5,000
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l pound shares. Regal subscribed for 2,000 shares and the directors and their friends subscribed
for the rest. Eventually the three cinemas were sold as a going concern by a sale of the shares in
both companies. The directors received 2.16 pound per share. The company sued for the
recovery of this profit.
Held: The directors used their opportunities and special knowledge as directors to make a secret
profit for themselves. They were accountable to the company for the profits made.
3. DUTY TO ACT FOR THE PROPER PURPOSE
A director must act honestly in the company's interests and sometimes he might be in breach of
his fiduciary duty.
Mills v Mills
Directors, who were majority ordinary shareholders, capitalised dividends and issued bonus
shares to the ordinary shareholders and thereby the position of preference shareholders was
weakened.
Hogg v Cramphorn Ltd
Directors issued shares to trustees for the benefit of the employees. The purpose of the issue was
to forestall a takeover bid. The directors feared that they would lose their position as directors,
should the takeover bid be successful. The court held that the directors had acted for an improper
purpose and the share issue was set aside.
12.16.4 OTHER FACTORS TO CONSIDER
A. TRANSACTIONS BETWEEN A COMPANY AND ITS DIRECTOR.
 GENERAL RULE
A director should not generally contract with his company, otherwise he might be dismissed as a
director. He must account for profits and the company may avoid the contract (it need not do
so).
Aberdeen Railway v Blaikie
The defendant company entered into a contract to purchase a quantity of chairs from the claimant
partnership. One of the directors of the company was also a member of the partnership at the
time of contract.
Held: the director was interested in both sides of the bargain. Therefore, he could not make the
best bargain for the company. No question should be raised as to the fairness or unfairness of a
contract so entered into. The company was entitled to avoid the contract.
This situation necessarily exists where the director contracts directly or has an interest (eg, as
director or shareholder
EXCEPTIONS
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 Articles allow
 Approval GM
A. COMPETITION WITH THE COMPANY

A person can be a director of 2 competing companies
Cooks v Deeks
The shares of a railway company, T, were held in equal shares by four people who also
constituted the board. The company carried out several large construction contracts for the
Canadian Pacific Railway Co. Three of the directors, hearing that there was a new contact
coming up, obtained it in their own names to the exclusion of the company and formed another
company, D, to carry out the work. They then passed resolutions by virtue of their shareholding
approving the sale of plant by T to D and declaring that T had no interest in the new contract
with the Canadian Pacific. The fourth director, Cook, brought an action against the others
claiming that the benefit of the contract properly belonged to T and the directors could not use
their voting power as shareholders to vest it in themselves.
Held: the opportunity to obtain the new contract came to the directors whilst acting as directors
of T, the contracts belonged in equity to the company and the directors could not retain the
benefit of it for themselves. Moreover, the directors could not use their voting control to
appropriate the interest and property of the company. Thus, the directors could not keep the
benefit of the contracts even though it had been ratified by the general meeting as it had been
their own voting power which had resulted in the ratification.
Industrial Development Consultants Ltd v Cooley
In this case Cooley was the managing director and architect of Industrial Development
Consultants (the company). He was required by the company to negotiate a confact with the Gas
Board. During negotiations it was made clear to him that the Gas Board was not prepared to offer
the contact to the company. But there was some hint that the Gas Board may offer the contract to
him. Cooley reported to the Board of directors of the company that the negotiations were very
unsuccessful. Later he terminated his contract with the company on grounds of ill health. Later
still, he took up the contract with the Gas Board and made a good profit. When the company
discovered this, it sought to recover the profit from Cooley.
B. WHO DECIDES WHAT IS IN THE BEST INTERESTS OF THE COMPANY?
The test here is subjective ie, did the directors themselves honestly believe that they were acting
in the best interests of the company? If so, their judgement will not be impugned even if the
outcome shows or the opinion of the court is that they showed bad judgement.
As an example, a director and controlling shareholder must not procure a service agreement for
himself entirely to 'provide a pension for his widow: Re Roith (1967). He was held to be in
breach of duty because he had given no thought to the benefit of the company.
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C. WHAT ARE THE INTERESTS OF THE COMPANY AS A WHOLE?
This is really another aspect of the problem posed above ie, to whom is the duty owed and what
happens if there are conflicting duties? .It may be that it is becoming accepted that directors must
take account of the interests of the company and that this requires taking account of all relevant
interests (whether of shareholders, creditors, employees, etc).
Interests Of The Company - Subjective Or Objective Test?
The test is objective and the court will not interfere in a management decision. It has been held
that the proper test is whether an intelligent and honest man in the position of a director of the
company concerned could in the whole of the existing circumstances have reasonably believed
that the transaction was for the benefit of the company ( Charterbridge Corporation Ltd v
Lloyds Bank (1970) -Objective test.
D. WHO ENFORCES THE DUTIES?
If it is a statutory breach - enforced by the Companies Commission of Malaysia; .

If it is a breach of a common law duty - enforced by the company of which the person is a
director of an officer of the company. .
E. DONATIONS
s 19(1)(a)
The company has power to make donations for patriotic or charitable purposes. The conveyance
or transfer of property is not invalid just because the company lacks the capacity to make the
transfer. It would be binding as far as third parties are concerned. Even if the gift was ultra vires
it would be validated by Section 20(l).
12.15.5 BREACH OF FIDUCIARY DUTY AND THE COMPANY'S CAPACITY
Effect of Breach of Director's Fiduciary Duties on Corporate Transactions
Two basic scenes where the transaction is with the director and where the transaction is with the
third party
(i) Company transacts with Directors
Breach of fiduciary duty -voidable at the instance of the company
(ii) Transactions with third parties by Directors in breach of their fiduciary duties
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Whether or not the transaction can be avoided depends upon whether that party knew or ought to
have known of the director's breach of duty in procuring the company to enter into the
transaction.
 DIRECTORS' NEGLIGENCE
 Duty to be skilful
The general rule is as long as directors act honestly and within the powers conferred on them,
they are not liable for error of judgment - however ridiculous and absurd their conduct might
seem.
 The duty and standard of care

A director owes a duty of care to the company. There is a proximity of relationship between the
director and the company. ----Re Brazilian Rubber Estates
 The duty to be diligent
s 132 states that a director must exercise reasonable diligence in performing the duties of his
office.
ENFORCING DIRECTORS DUTIES
Remedies for Breach ‘of Directors Duties:- It takes the following forms:-
 Injunction
 Damages
 Account for the profits
 Rescission
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CHAPTER 13 COMPANY MEETINGS AND RESOLUTIONS

TYPES OF MEETINGS
There are three types of meetings:-
 Statutory meeting
 Annual general meeting
 Extraordinary general meeting
13.1 STATUTORY MEETING: (S.142)

 Only public companies limited by shares hold these meetings.
 It is only held once in the beginning of the company's life.
 The company must hold the meeting not less than one month and more than three
months after the company commences business - Section 142(l)
 Directors are responsible for convening the meeting - failure to comply amounts to an
offence- Section 142(10).
 At least seven days before the meeting is held, the directors are entitled to forward a
'statutory report' certified by at least 2 directors to every member of the company and
lodge a copy of the report with the Registrar - Section 142(2)(3)(5)
 Members at the meeting may discuss any matter relating to the formation of the
company or arising from the report.
 Failure to hold the statutory meeting or to lodge the statutory report is a ground upon
which a petition to wind up the company may be presented: Section 2l8(l)(b).
13.2 ANNUAL GENERAL MEETING: (S.143)
 An AGM must be held once in every calendar year - 143(1) An exception maybe in the
year of incorporation as long as the first AGM is held within l8 months of its
incorporation. However by s143(2) the Registrar on the application by the company may
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extend the period if for any reason he thinks fit to do so. With the Registrar's approval,
subsequent meetings may be held within 15 months from the last AGM.
 The responsibility of holding the meeting rests with the directors of the company, but
with the court’s approval on the application of a member an AGM may be called for:-
143(4)(b)
 The AGM must be held in the state in which the registered office is situated - S.145A
 At the AGM, a member will have the opportunity to meet and query on matters
pertaining to the running of the company. Examples include issue of shares, retirement of
directors, declarations of dividends etc.
13.3 EXTRAORDINARY GENERAL MEETINGS S144/ S145

 (basically to resolve matters of urgency) Any other meeting other than the AGM is an
EGM - Table art 43
Who can call for the meeting -
 Two or more members holding not less than l/l0th of the company's share capital (if the
company . has a share capital) 145(l)
 If the company has no share capital, then not less than 5% of the members.- 145(1)
 The directors in accordance with the articles of association- Table A art 44
13.3.1 REQUISITION FOR A MEETING
 The directors must convene a meeting if required to do so by requisition - 144(1)

 A requisition is a written notice to the directors requiring that a meeting be called. A
requisition by joint holders of shares should be signed by all of them. This is determined
at the time of deposit and the subsequent withdrawal of some does not affect the validity
of a requisition
 Who does it and how is it done?
 A meeting may be requisitioned by members holding not less than l0% of such paid up
capital (with voting rights) - 144(l)
 For a company without share capital, by members representing l0% of the total voting
rights. - 144(1)
 The requisition must state the objects of the’ meeting and must be signed by all of them
and deposited at the registered office of the company- 144(2) (It is sufficient if it is sent
by post) - Hup Seng Co Ltd v Chin Yin (f 962)
The directors must convene the meeting within 2 months after receipt of the requisition,
otherwise the requisitionists may convene the meeting themselves- 144(3) (It is between a
minimum of 14 days and a maximum of 2 months.
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 If the requisitionists hold the meeting it must be held within 3 months of the date of
deposit of the requisition) Any reasonable expenses incurred by the requisitionists in
calling be paid by the company- 144(4)
It should be noted that the directors are not obliged to call for a meeting if it is for a purpose
beyond the powers of a general meeting:- Credit Development Pte Ltd v IMO Pte Ltd.
Business that can be transacted at the requisitioned meeting
 Ball v Metal Industries Ltd
States that only business specified in the requisition, while in the case of Holmes v Life Fund of
Australia- the court said any business may be transacted if sufficient notice of the necessary
resolutions could be given. If it is impracticable to call for a meeting, the court may make an
order - s.150 . [Re Noel Tedman Holdings Pty Ltd. ]
Re Noel Tedman Holdings Pty Ltd /Re El Sombrero
The company had only two members, who were also the directors. They were both killed in a car
accident. As there were neither members nor directors, a meeting could not be convened in the
normal way. The court therefore used its power to call a meeting. The application was made by
the personal representatives of the deceased shareholders. There was a further difficulty in that
there were no members to attend the meeting. In this case, the court authorized the personal
representatives of the deceased members to make up the quorum and to pass the necessary
resolutions to appoint directors, who could subsequently approve the transfer of shares to new
shareholders.
Re El Sombrero Ltd
The shareholding of the company was divided as follows: the applicant, 900 shares; the two
respondents, 50 shares each. The respondents were the directors of the company. The articles
provided that the quorum should be two. The applicant twice requisitioned meetings, but the
respondents deliberately absented themselves so that no quorum was present.
The applicant sought an order of court that one person should be deemed to constitute a quorum.
The court granted the application.
13.4 CONVOCATION AND CONDUCT OF MEETINGS
 NOTICE OF MEETINGS
i. PERSONS ENTITLED TO NOTICE OF MEETING
 Every member- 148(l)

 Company's auditor- 174(7)
 As provided by the articles-Table A Art 111
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ii. PERIOD OF NOTICE
 Ordinary resolution
14 days clear notice.[Between the day of issue and day of the meeting 145(2)]
 Special resolution
21 days written notice must be given.
iii. SHORTER NOTICE
 AGM
Only with the unanimous consent of all members entitled to attend and vote - 145(3)(a)
(basically l4 days notice)
 OTHER MEETINGS
With the agreement of members holding at least 95%in nominal value of the company's voting
shares or 95% of total voting rights of all members at that meeting (for a company with no share
capital) -145(3)(b)
iv. SERVICE OF NOTICE
 In accordance with the articles

 If there is no provision - Table A art 108
a. Personal
b. Sending to the registered address, by post. The letter should be properly addressed, prepaid
and posted and it takes effect on the day after the date of its posting.
c. Address supplied to the company for such notices.
v. DEFECT IN THE SERVICE. DOES IT INVALIDATE A MEETING?
A) COMMON LAW - YES

B) STATUTE - NO
 COMMON LAW
A defect might invalidate the meeting---- Isetan (S) Ltd v Wisma Development Pte Ltd
 STATUTE
Section 355 provides that an irregularity does not invalidate a meeting unless substantial
injustice is caused:- Welch v Britannia Industries Pte Ltd
Non receipt of notice of meeting:-
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a) Does not automatically invalidate the meeting

b) the notice must be a proper notice
c) Company must show all reasonable steps were taken to give the member the notice
s145(5) - states that the accidental omission to give notice of a meeting to or the non receipt of
notice of meeting by any member shall not invalidate proceedings at a meeting.
vi. CONTENTS OF NOTICES OF MEETINGS: S.151
 Notices of meetings must be accompanied by circulars or statements setting out the

business. The text of any resolution should also be set out.
 Members may propose resolutions and send out explanatory circulars but at their own
expense.
 The requisitionists should hold at least 5% of the total .voting rights or there must be at
least 100 members holding shares on which there has been paid up an average sum per
member of not less than $500 – l51(2)
 Resolutions that are inconsistent with the articles or the act which cannot be moved do
not have to, be included in the agenda. Credit Development Pte Ltd v IMO Pte Ltd
(1993).
 Notice calling for a meeting must contain sufficient information to enable a prudent
member to decide whether or not to attend. If the member absents himself, he must be
prepared to accept the decision of the majority.
 All material facts must be disclosed in the notice calling for the meeting otherwise any
resolutions passed may be invalidated as against a member who did not attend - Tiessen v
Henderson (1899). The text of the resolutions sought to be passed must be set out :- Hup
Seng Co Ltd v Chin Yin (f962)
Hup Seng Co Ltd v Chin Yin (1962)
Certain shareholders or the company requisitioned a general meeting. The requisition stated the
objects of the meeting as required by law, and was deposited at the registered office of the
company. Upon the failure of the directors to convene the meeting, the requisitionists did so.
They sent out notices of the meeting. These notices did not set out the draft resolutions to be
proposed at the meeting; they merely stated that the 'business before the meeting will be to
discuss and vote upon the resolutions set out in the notice of requisition'.
Suffian I held that this was insufficient and that the resolutions were void.
 An irregularity may be considered waived if all the members entitled to vote, have
unanimously voted in favour of it at a duly convened meeting.
13.5 SPECIAL NOTICE OF RESOLUTIONS: S.153
Members wishing to propose a resolution are required to special notice in the following cases:
 Removal of director of a public company- 128(2)
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 Removal of a company's auditor before their term of office expires- 172(4)
Provisions are found in s.153
The members proposing the resolutions must give the company at 28 days notice before the
meeting at which the resolution is to be moved. This is to allow persons who are to be removed
to prepare their defences. The company must then give notice of the intended resolution to its
members at the same time and in the same manner as it gives notice of the meeting at least 14
days before the meeting. The resolution can then be passed by a simple majority
13. 6 QUORUM: S147
1. Articles will specify the number, if not 2 members personally present will constitute a quorum
147(l)(a) - Re Salvage Engineers
In deciding whether a notice calling a meeting is sufficient, the notice and accompanying
circulars should be sufficiently clear so that the members may get a fair and reasonable
intimation of what is actually proposed to be done without the necessity of painstaking reading.
Re Salvage Engineers
Company had only two shareholders, Keet and Raper, both of whom were directors. Raper left
the country stating that he would not return, and appointed Keet to be his proxy. An
extraordinary general was called, attended by Keet representing himself and as proxy for Raper.
The meeting passed a special resolution that the company be wound up. Raper subsequently
changed his mind and returned. He sought to have the solution to wind the company up set aside.
J set aside the resolution on the ground that there had been no proper meeting of the company.
2. Art 47 Table A - Two persons present in person shall be a quorum. A member here
'includes a person attending as a proxy or as representing a corporation.
3. Art 48 Table A
If a quorum is not present within, half an hour the meeting if convened by a requisition
of members shall be dissolved; in any other case it' shall be adjourned to the same day in
next week at the same time place; or to such other day and at such other time and place
the directors may determine.
4. A quorum must be present at the commencement of the meeting only and not throughout
- Tan Guan Eng v BH Holdings Sdn Bhd (1991). The lack of a quorum does not
invalidate the meeting unless the court is of the opinion that substantial injustice has been
caused. There is no meeting if only one member is present;-United Investment and
Finance Ltd v Tee Chin Yong. It is necessary for at least two members to be present
throughout the meeting, even though a quorum was present at commencement of the
meeting.
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Re London Flat's Ltd

There were only two shareholders of the company, Oppenheim and Lyon. On the death of the
company's liquidator, a meeting was summoned to appoint a replacement. Lyon withdrew from
the meeting before it ended. Oppenheim purported to pass the necessary resolution to appoint
himself as the 'liquidator. Plowman J recognized that it was only necessary to have a quorum at
the beginning of a meeting and not throughout. However, when Lyon left there could no longer
be a valid meeting. Therefore the resolution passed by Oppenheim was a nullity.
Even if it is provided that the members present shall constitute a quorum, there is no meeting if
only one member is present.
United Investment and Finance Ltd v Tee Chin Yong
The articles of the company provided that if no quorum was present at a meeting, the meeting
would be adjourned to the following week and the members present would constitute a quorum.
An extraordinary general meeting was adjourned for lack of quorum. Two members attended the
adjourned meeting. However, one of them had no right to attend or vote. Therefore effectively,
there was only one member at the meeting. A special resolution was passed.
Chua I held that this resolution was invalid as there was no meeting.
13.7 CHAIRMAN AND CONDUCT OF MEETINGS
 The articles provide for the appointment of a chairman
 He need not be a member of the company. The members could elect one at the meeting if
there is no provision in the articles - 147(l)(b)
 Election is by show of hands
 Art 49 states that the chairman of the BOD shall preside as chairman at every general
meeting and if there is no chairman present within 15 minutes after the time appointed for
the holding of the meeting or is unwilling to act the members present shall elect one of
their members to be the chairman.
 Chairman's job - to ensure the meeting is run smoothly and that order is maintained. As
long as he acts bona fide, any irregularities in the conduct of a meeting by the chairman
will be an internal irregularity which is ratifiable by the members.
 In the case of equality of votes (whether by show of hands or on a poll) the chairman may
be given a casting vote by the articles - Art 53
 He has no right to adjourn the meeting at his pleasure - Tan Guan Eng v BH Holdings
Sdn Bhd. He has to get the consent of the meeting to adjourn. Only the business left
unfinished at the earlier meeting may be discussed. No new issues are to be discussed. If
the meeting has been adjourned for more than 30 days, then notice of the adjourned
meeting shall be given as in the case of the original meeting - Art 50.
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13.6 MINUTES OF GENERAL MEETINGS S156 AND S157
 Every company must keep minutes of all general meetings and directors meetings. The
minutes should be entered within 14 days of the holding of the meeting – 156(1)(a); and
those minutes must be signed by the chairman of the meeting or the chairman of the next
succeeding meeting. - 156(l)(b)
 The minutes are evidence of the proceedings to which they relate. This only means that
the minute books re prima facie evidence of the proceedings. Where the minutes have
been signed and entered, they are prima facie evidence that the meeting has been duly
held and convened, that all appointments are valid and that the proceedings were duly
conducted- 156(3)
 Default penalty - RM2000
 The minutes books may be inspected by any member of the company without charge -
157(2)
 Member may request in writing for a copy of the minutes and the company should
furnish it within 14 days after the request was made at a charge not exceeding one ringgit
for every hundred words thereof – s157(2)
 Default penalty - offence - RM500
13.7 RESOLUTIONS
The Act provides for two types of resolutions:
 Ordinary
 Special resolutions
i. Special Resolutions are usually required for more important matters

 For the alteration of the name of the company under s.23 .
 For the alteration of the object clause under s.28
 For the conversion of a company from unlimited to limited under s.25
 For the conversion of a public company to a private company and vice versa- s.26 .
 For the alteration of articles of association under s.3l
 For the reduction of capital under s.64 .
 For the winding up of the company by the court under s.218(1)(a)
 For the voluntary winding of the company under s.254(l)(b).
A special resolution must be passed by a three-fourths majority of those present and voting at a
meeting of which 2l days ‘written notice has been given- 152(l). Although the section speaks of a
three-fourths majority of members, on a poll the number of votes that each member is entitled to
by the Act or the articles is counted; thus, it is more accurate to define a special resolution as one
passed by a three-fourths majority of the votes cast.
96
In determining whether the requisite majority has been obtained, reference is had to the number
of votes for and against the resolution. The majority is computed on the votes actually cast;
abstentions do not count as s 152(l) refers to persons who actually vote and not to those who can
vote but do not do so.
A special resolution may be passed at short notice only if that is agreed to by a 95% majority of
the members who have the right to vote at the meeting, the majority being reckoned according to
nominal value of voting shares held or, in the case of a company without a share capital,
according to voting rights - 152(2')
The notice of the meeting must be in writing and must specify that the resolution is proposed as a
special resolution. The power to amend a proposed special resolution at the meeting is severely
limited because of the necessity to give proper notice. A printed copy of every special resolution
(except where the Act provides otherwise) must be lodged with the Registrar- 154(1)(a)
ii. An ordinary resolution is a resolution passed by a simple majority of those present and voting.
iii. Hybrid resolutions may be provided for in the Act or in the articles.(it is provided that
a resolution to re-appoint an over aged director of a public company must be passed by three-
fourths majority.)
This is not a special resolution because the meeting need not be called on 2l days ‘notice, nor is it
an ordinary resolution. It is possible for the articles to specify special majorities for the passing
of certain types of resolutions.
A resolution may be a decision of the company, but it does not amount to a contract.
Lam Eng Rubber (M) Sdn Bhd v Lim Beng Yew
The company passed a resolution to make interest-free advances to and directors. KC Vohrah J
held that this did not amount to a contract between the company and the shareholders.
Section 152A - A company may pass resolutions without having to hold a general meeting. As
long as there is a resolution in writing, signed by or on behalf of all persons for the time being
entitled to receive notice of and to attend and vote at the general meeting of a company, it is
treated as a resolution duly passed at a general meeting of the company and where relevant as a
special resolution so passed. (Circular resolutions)
13.8 VOTING SS 146/147 /148
Who gets to vote is a matter left to the articles. The general rule is that all members are entitled
to attend any general meeting of the company and to speak and vote on any resolution before the
meeting - l48(1) . Exceptionally the articles may provide that a member who has not paid up all
calls or other sums due may not vote. The number of votes that each member is entitled to will
be fixed by the articles. The general rule is that each share carries one vote - I47(l)(c)( ii). In the
case of public companies and their subsidiaries each equity share may carry only one vote.
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Members of companies without a share capital are entitled to one vote each unless the articles
provide otherwise – s147(1)(d)
Voting may be by a show of hands or on a poll, ie a written ballot. In the case of a company with
a share capital, each member is entitled to one vote on a show of, hands insofar as the articles do
not provide otherwise -
I47(1)(c)(i).
On a poll, a member will have as many votes as his shareholding entitles him to according to the
articles. A member may only utilize his full voting power on a poll. The articles will set out the
conditions under which a poll may be demanded.
On a poll a person entitled to more than one vote need not, if he votes, use all his votes or cast all
the votes he used in the same - 147(2)
A corporation may by resolution of its directors, (if it is a member of a company), authorize a

person to act in representative either at a particular meeting or at all meetings of the company or
of any class of members -147(3)(a). The representative of the corporation is not a proxy but acts
as an individual member representing the company.
However, notwithstanding the articles, a poll may always be demanded by:- [146(l)(b)]
(a) Any five or more members having the right to vote at the meeting.
(b) A member or members representing at least 10% of the total voting rights of all the members
at the meeting.
(c) A member or members holding voting shares on which are paid up in aggregate not less than
l0% of the total amount paid up on all the shares conferring the right to vote at the meeting.
However, the articles may provide that the election of a chairman or adjournment of the meeting
may be decided by a show of hands- 146(l)(a).
In the case of a special resolution, the articles cannot require that more than five members are
required to demand a poll – 152(4)(a)
If the articles are silent regarding polls on special resolutions, then a poll may be demanded by -
152(4)(b).
 Any three members having the right to vote at the meeting.
 Any member or members holding at least l0% of the total voting rights of all the
members at the meeting.
 Any member or members holding not less than l0% of the paid-up share capital of the
company.
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Art 51 -At any general meeting a resolution put to the vote of the meeting shall be decided on a
show of hands unless a poll is demanded -
a) By the chairman;
b) By at least 3 members present in person or by proxy;
c) By member or members present in person or by proxy holding at least l/l0th of the total voting
rights of all members having the right to vote at the meeting;
d) By member or members holding shares on which an aggregate sum of not less than 1/10th of
the total sum has been paid and having a right to vote
13.9 PROXIES S149
 Member need ' not be personally present in order to cast his vote. He may appoint an
agent to vote on his behalf. Such a person is known as a proxy. A proxy cannot be a non-
member unless he is an advocate, an auditor or a person approved by the Registrar
149(l)(b).
 Art 59 - A proxy may but need not be a member of the company.
 One person may be the proxy of more than one member. A proxy has a right to speak at
the meeting. In the absence of a contrary provision in the articles, a proxy may only vote
on a poll - 149(1)(a).
 A member shall not be entitled to appoint more than 2 proxies to attend and vote at the
same meeting-149( l)(c).
 Where a member appoints 2 proxies, the member has to specify the proportions of his
holdings to be represented by each proxy - 149(l)(d).
 A proxy may demand a poll, and a demand for a poll by a proxy is deemed to be the
same as a deemed by a member.
 A proxy is usually appointed, by a written instrument in a proxy form. A proxy may be

instructed to vote in a specified manner or, he may be given a discretion to vote as he
thinks fit. It often happens that the directors solicit proxy votes by circulating proxy
forms inviting members to appoint them as their proxies. Where this is done at the
expense of the company, the invitation must be made to all the members- s149(3).
(Otherwise penalty - RM2000)
 It is usual for a company to require that proxy forms be deposited at a certain time before
the meeting. This is to enable the forms to be checked and validated. However, any
provision in the articles requiting proxy forms to be deposited more than 48 hours before
99
a meeting is void – 146(l)(c). The normal time period is not less than 48 hours before the
meeting or in the case of a poll not less than 24 hours before the time appointed for the
taking of the poll - Art 61.
 A proxy authority to vote on behalf of a member may be terminated in the same other
agent's authority. Notice of the revocation should be given to the company otherwise the
proxy will have ostensible authority to bind the member.
 It is often provided in the articles that a vote given by a proxy shall be valid
notwithstanding the death unsoundness of mind of the principal, unless notice of such is
received by the company before the commencement of the meeting.
 However if a member turns up at the meeting himself and votes the company must
accept his vote and reject that of the proxy. (Cousins v International Brick Co Ltd)
 Note: A company need not hold a general meeting to determine the wishes of the
members, if all members assent to a certain course of action - Jimat bin Awang v
Lai Wee Ngen. This is known as a 'written resolution'. This is a common practise in
private companies if the number of members is small. The assent of the members
will be binding as a resolution of the company. Re Duomatic Ltd
Re Duomatic Ltd
The ordinary shares of the company were held by Elvins, Hanly and East, all of whom were
directors. Non-voting preference shares were held by a company called AG Bondo NV ('Bondo).
The remuneration of the directors w:rs to have been fixed by the general meeting. However, no
resolution was ever passed. The directors drew sums from the company from time to time as the
need arose. Hanly subsequently quarrelled with his codirectors. Although they could have
removed him from the board, they chose not to do so because he threatened to sue the company.
Instead they paid him money as an inducement for him to leave without trouble.
The liquidator claimed this sum back from the directors, as well as the amounts that they had
informally taken as directors' remuneration. Buckley J held that although no formal meeting had
been held to approve directors' remuneration, the payments had been made with the knowledge
and consent of all the holders of voting shares. The fact that the preference shareholder (who
could not vote) did not know of these payments was irrelevant. The assent of the corporators was
as binding as a resolution. Irregularities may also be waived in the same manner - David Lau Tai
Bek v Lau Ek Ching Sdn Bhd
 CLASS MEETINGS
It may be necessary to call a meeting only of a certain class of members and not a general
meeting of all the members of a company for instance, in the case of a variation of class rights.
 MEETINGS OF DIRECTORS
100
Board Meetings
The Act does not regulate board meetings. Such meetings are usually provided for in the articles
of association. Notice of board meetings should be given in accordance with the articles of
association. If notice is not given to some directors, the meeting may be declared to be invalid
and the resolutions passed set aside. The Companies Act does not stipulate that Board Meetings
be held in Malaysia (where foreign members are involved - majority members) they may be held
elsewhere.
 If notice is given but does not reach the directors, there is an irregularity, which can be
validated ----Dr.Mahesan v Ponnusamy
 In contrast, if no notice is given to some of the directors, the proceedings are void- Aik
Ming (M) Sdn Bhd v Chang Ching Chuen (1995)
 The length of notice may be stipulated by the articles. In such a case, strict compliance is
necessary. If no notice is stipulated, the court will examine the previous practice of the
company to determine whether sufficient notice has been given
Note:- Art 85 states that if a chairman is not present within l0 minutes after the time appointed
for such meetings, the directors present may choose one of their numbers to be the chairman.
CHAPTER 14 AUDITORS/ COMPANY SECRETARY
14.1 AUDITORS
 APPOINTMENT
There is a need for every company to have auditors. They are the watchdogs of the company.
 By s.172(l), the first auditors are appointed by the directors within 3 months of
incorporation.
The directors of the company may appoint the auditors at any time before the first annual general
meeting.- (S172(l). If the directors do not appoint them, the company may do so at a general
meeting. The auditors so appointed hold office until the conclusion of the first annual general
meeting.
 By s.172(2), the company shall appoint auditors at each annual general meeting to hold
office until the next annual general meeting.
101
 By s.172(3), the directors may appoint auditors to fill any casual vacancy. (eg death of an
auditor)
 Section 172(10), allows the Registrar to make an appointment on the application of any
member, if the company does not make the appointment.
 AUDITORS ARE INVARIABLY ACCOUNTANTS BY PROFESSION.

BY SECTION 9 OF THE COMPANIES ACT 1965 A PERSON CANNOT ACT AS
AUDITOR OF A COMPANY.
 If he is not an approved company auditor - (from the Minister of Finance and registered
with the Malaysian Institute of Accountants under the Accountant Act 1967 (Form 3).
 If he owes the company or a related company more than RM2500;
 If he is an officer of the company;
 If he is a partner, employer or employee of an officer of the company;
 If he is a partner or employee of an employee of an officer of the company;
 If he or his spouse is a shareholder of a corporation whose employee is an officer of the
company;
 If he is responsible for the keeping of the register of members or register of holders of
debentures of the company, or
 If he is the partner, employer or employee of a person responsible for the keeping of the
register of members or register of holders of debentures.
 NOMINATION OF A NEW AUDITOR
If a new auditor is to be nominated, notice must be given by a member to the company at least 21
days before the AGM – s172
Upon receipt of notice of nomination of an auditor, the company must send the notice to each
auditor and to all persons entitled to receive notice of general meetings at least seven days before
the meeting -
 REMUNERATION
Fixed either by .
 The Registrar .
 The BOD .
 The GM (General Meeting)
 VACATION OF OFFICE
An auditor's term of office may come to an end by:
 Death- s172 (3)
102
 Resignation – s172(14) & (15) - an auditor may resign if he is not the sole auditor of the
company or at a " general meeting of the company.
 Removal
 REMOVAL
Auditors cannot be removed by the directors. These provisions have the effect of strengthening
the position of the auditors. Auditors may be removed from office before the expiry of their term
of office in accordance with the procedures set out in s.172(4) - (6).
By s.172(4) an auditor may be removed from office by an ordinary resolution passed at a general
meeting of which special notice has been given.
Special notice, by virtue of s,153, is a notice given to the company not less than 28 days before
the meeting at which the resolution is to be moved.
Section 172(5) requires that the company shall forthwith send a copy of the notice to the auditor
concerned, and to the Registrar. The auditor concerned, upon receipt of the copy of the notice is
entitled to make representations in writing to the company (not exceeding a reasonable length)
and request that prior to the meeting at which the resolution is to be considered, a copy of the
representations be sent by the company to every member of the company to whom notice of the
meeting is sent.
Unless the Registrar orders otherwise, the company must send such representations to the
members. The auditor also has the right to request that his written representations be read out at
the meeting. The auditor concerned also has the right to attend the meeting and be heard orally-
s.172(6).
 DUTIES
Auditors are in a contractual relationship with the company and on the basis of ordinary
principles of contract law can be liable to the company if they fail to honour the terms of the
contract. The main duties of an auditor as to reports on accounts are stated in ss.174 and 175.
 By s.174(I), an auditor has the duty to report to the members on the accounts which are
required to be laid before the company in annual general meeting and on the company's
accounting and other records.
 In the case of a holding company, the auditor is also required to report on the
consolidated accounts.
 In the case of a borrowing corporation, the auditor is required to send a copy of the
report to the trustee for the debenture-holders: s.175
 The auditor is required to state in his report whether, in his opinion, the accounts and
consolidated accounts, if any, have been properly drawn up so as to give a true and fair
view of the matters required to be dealt with in the accounts and consolidated accounts, if
any and in accordance with the provisions of the Act so as to give a true and fair view of
the company's affairs.
103
Where he becomes aware of any matter which, in his opinion, is relevant to the exercise and
performance of the powers and duties imposed by the Act or by any trust deed, he must send by
post a report in writing on the matter to the borrowing corporation and a copy of it to the trustee
for the debenture-holders: s.175(2).
By s.174(3) it is also the duty of an auditor to form an opinion as to each of the following
matters:
 Whether he has obtained all the information and explanations that he required.
 Whether proper accounting and other records have been kept by the company as required
by this Act.
 Whether the returns received from branch offices of the company are adequate and
 Whether the procedures and methods used by a holding company or a subsidiary in

arriving at the amount taken into any consolidated accounts were appropriate to the
circumstances of the consolidation.
If there was any failure or shortcoming in respect of any of these matters, the auditor must state
particulars of it in his report. In relation to other breaches of the provisions of the Companies
Act, the auditor has the duty to report to the Registrar if he is satisfied that the matter will not be
adequately dealt with by comment in his report or by bringing it to the notice of the directors---
s.174(8).
The qualifications of a company secretary are governed by ss.139 and 139A of the Companies
Act 1965.
Section 139(1) requires every company to have at least one secretary. Each secretary must be a
natural person of full age. He must have his principal or only place of residence in Malaysia.
Section 139A states that a person may be qualified to act as secretary of a company only if he is
(1) licensed by the Registrar for that purpose or
(2) is a member of a professional body prescribed by the Minister by notification published in the
Gazette.
The professional bodies which have been prescribed include the Malaysian Institute of
Accountants, the Malaysian Association of the Institute of Chartered Secretaries and
Administrators and the Malaysian Bar. Section 139B states that a licence may be granted by the
Registrar only if, after considering the character, qualification and experience of the applicant as
well as the interest of the public, he is of the opinion that the applicant is a fi t and proper person
to hold a licence.
104
CHAPTER 15 WINDING UP
15.1 BASIC ASPECTS OF WINDING UP OF COMPANIES
(a) By s.254(1) Companies Act 1965, a company may be wound up voluntarily:
(i) When the period, if any, fixed for the duration of the company by the memorandum or articles
expires, or
(ii) The event, if any, occurs, on the occurrence of which the memorandum or articles provide
that the company is to be dissolved, and the company in general meeting has passed a resolution
requiring the company to be wound up voluntarily; or
(iii) If the company so resolves by special resolution.
(b) (i) By s.218(1), a company may be wound up by the court in a number of circumstances.
105
These include the following:
1. If the company has, by special resolution, resolved that it be wound up by the court;
2. If default is made by the company in lodging the statutory report or in holding the statutory
meeting;
3. If the company does not commence business within a year from its incorporation or suspends
its business for a whole year;
4. The number of members is reduced in the case of a company below two;
5. If the company is unable to pay its debts; and
6. If the court is of the opinion that it is just and equitable that the company be wound up.
(ii) By s.219(1), where before the presentation of the petition, a resolution has been passed by
the company for voluntary winding up, the winding up shall be deemed to have commenced at
the time of the passing of the resolution. By s.219(2), in any other case the winding up shall be
deemed to have commenced at the time of the presentation of the petition for the winding up.
(iii) The effects of the commencement of a winding up are stated in ss.223 and 224.
By s.223, any disposition of the property of the company including things in action and any
transfer of shares or alteration in the status of the members of the company made after the
commencement of the winding up by the court shall, unless the court otherwise orders, be void.
By s.224, any attachment, sequestration, distress or execution put in force against the estate or
effects of the company after the commencement of the winding up by the court shall be void.
15.2 PERSONS WHO MAY PETITION FOR A WINDING UP
The persons who may petition the court to wind up a company are stated in s.217(1) of the
Companies Act 1965. Among them are:
(i) The company;
(ii) Any creditor;
(iii) A contributory;
(iv) The liquidator;
(v) The Minister, for example, where the membership of the company falls below two; and
106
(vi) The Registrar, for example, where the company is being used for unlawful purposes.
15.3 SCHEME OF ARRANGEMENT /RECONSTRUCTION

A scheme of arrangement is basically a scheme under which the rights of creditors and/or
members are varied for the benefit of both the company and its members/creditors. It is usually
resorted to when the company is insolvent but there is some possibility of avoiding liquidation. It
may involve the need to reorganise the share capital of the company and envisages a compromise
with creditors and/or members. Usually the term ‘scheme or arrangement’ is used where there
is an internal arrangement within the company and does not involve any other company. In this
context, under the Companies Act 1965, an ‘arrangement’ is defined in s.176(11) to include a
reorganisation of the share capital of a company by the consolidation of shares of different
classes or by the division of shares into shares of different classes or by both these methods.
15.2.1 RECONSTRUCTION
A reconstruction, on the other hand, usually refers to a scheme of arrangement which involves
the transfer of assets and liabilities by one company to another within a group of companies. A
reconstruction may involve a merger where one company takes over another company and the
operations are merged.
Section 178(1) of the Companies Act 1965 states the matters that the court can provide for in
any order approving the compromise or arrangement, or in any subsequent order, so as to
facilitate a reconstruction or amalgamation of companies. These may be summarised as follows:
i. It may provide for the transfer of the undertaking and property of one company (the transferor
company) to another (transferee company). It may also provide for the transfer of liabilities of
the transferor company to the transferee company.
ii. It may provide for the allotting or appropriation by the transferee company of any shares,
debentures or other similar
interests in that company to or for any other person in compliance with the terms of the
compromise or arrangement.
iii. It may also provide that legal proceedings which are pending by or against the transferor
company be continued by or against the transferee company.
iv. The order may provide that the transferor company be dissolved without the need for a
winding up of it.
v. The order may make provision for those persons who dissent from the compromise or
arrangement.
107
vi. . It may provide for any necessary incidental, consequential and supplemental matters to
ensure that the reconstruction or amalgamation will be fully and effectively carried out.
15.3 PAYMENT OF DIVIDENDS
One of the cardinal principles in company law is that dividends may only be paid from profits
and not out of capital. By
s.365(1) of the Companies Act 1965, no dividend shall be payable to the shareholders of any
company except out of profits or pursuant to s.60. Section 60 relates to the share premium
account, which is regarded as capital. Hence it appears at first glance that dividends may be paid
out of capital.
However, a closer examination of s.60 shows that the share premium account may only be
utilised for the payment of dividends, if such dividends are satisfied by the issue of shares to
members of the company. --- s.60(3)(c).
A company cannot utilise the profits of its subsidiary, to pay dividends to its (Roogi Bhd’s)
members. The rule is that the profits out of which the dividend is to be paid must be the profit of
the company declaring the dividend. Although a company is managed as part of a group, each
company, being a separate legal entity, is treated separately for the purpose of paying dividends.
------- Industrial Equity Ltd v Blackburn (1977).
It has been well-established by case law that a company may pay dividends out of current
revenue profits without making good previous years’ losses. Each accounting period is treated in
isolation and not as part of a continuous process. ---Ammonia Soda Co Ltd v Chamberlain
(1918). Therefore in the event it makes revenue profits next year, utilise those profits to pay
dividends for that year without offsetting the revenue losses for the previous years.
(d) Cermat may be advised that if dividends are paid out of capital, every director who willfully
pays or permits such dividends to be paid, shall be guilty of an offence under the Companies Act
1965. Further, the director concerned shall be liable to the creditors of the company as provided
in s.365(2)(b) Companies Act 1965.
MAIN DUTIES OF A RECEIVER
The receiver is a person who is appointed by a creditor for the purpose of taking possession of
the property charged and for its ultimate disposal with a view of discharging the secured debt.
The duties of the receiver under the Companies Act 1965 may be summarised as follows:
i. By s.188(I)(a), when a receiver of the property of the company is appointed he must forthwith
send notice of his
108
appointment to the company.
ii. By s.187(I), upon the appointment of a receiver every business document of the company
must contain a statement immediately following the name of the corporation that such
appointment has been made.
iii. By s.188(I)(b) the company is required to send to the receiver a statement of the affairs of the
company. Upon receipt of the statement the receiver must lodge a copy with the Registrar
together with any comments he considers necessary.
v. Section 190 requires that the receiver must prepare accounts of the receipts and payments and
an estimate of the total value of the property in respect of which he was appointed receiver. Such
accounts and estimates must be submitted to the Registrar every six months during the course of
the receivership and within one month after the receiver ceases to act.
v. The receiver, in distributing the proceeds of the realisation of the assets subject to the charge,
must observe the order of priority as stipulated in s.191. Among other things it requires that
where a receiver is appointed over property secured by a floating charge and the company is not
in liquidation, he has the duty to pay certain preferential debts out of those assets in priority to
the debenture holders secured by that floating charge.
109

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RAFFLES COMPANY LAW ASHOK

CHAPTER 1 CORPORATIONS AND LEGAL PERSONALITY

There are three main forms of business organization in Malaysia:

Register a business firm with the Registry of Business

1.1 IMPORTANCE OF SEPARATE EXISTENCE

iv. Assets, rights and liabilities

vii. Board of Directors

viii. Company Constitution

1.2 TYPES OF COMPANIES.

 Exempt private company

1.2.1 PRIVATE COMPANY

s.4 -- A private company is one which:-

(b) Is incorporated by virtue of s.l5

(c) Has converted into a private company.

Section 15 states that a company may be incorporated as a private company if its

a. Restricts the right to transfer its shares.

1.2.2 COMPANY LIMITED BY SHARES

1.2.3 COMPANY LIMITED BY GUARANTEE

1.2.4 SUBSIDUARY COMPANY

A. That other company

1.2.5 RELATED COMPANIES

A company is related to another company

 It is a subsidiary of a common holding company.

BY S.6 A CORPORATION IS DEEMED TO BE RELATED TO ANOTHER

(a) It is the holding company of that other corporation;

1.2.6 WHOLLY OWNED SUBSIDIARY

(a) The second-mentioned corporation (B);

(b) A nominee of the second-mentioned corporation (B);

(d) A nominee of such a subsidiary.

1.2.7 EXEMPT PRIVATE COMPANY

An exempt private company is defined in s.4 as a private company in which no beneficial

1.2.8 FOREIGN COMPANY

A foreign company is defined under s4(1) as

a) A company, corporation, society, association or other body incorporated outside

1.2.9 DIFFERENCES BETWEEN A PRIVATE LIMITED COMPANY AND AN

CHAPTER 2 EFFECTS OF INCORPORATION

2.1 SEPARATE LEGAL PERSONALITY

Salomon v A Salomon & Co Ltd

Lee V Lee's Air Farming Ltd

2.2 INCORPORATION AND ITS EFFECTS

In short incorporation has the following effects:-

 It may sue and be sued

 It has perpetual succession

Re Noel Tedman Holdings Pty Ltd

 It may own land [Macaura v Northern Assurance Co Ltd]

Macaura v Northern Assurance Co Ltd

2.3 LIFTING THE VEIL OF INCORPORATION

Under case law: - (Judicial Exceptions)

2.3.1 CASE LAW: JUDICIAL EXCEPTIONS

1. In times of war, in order to determine the enemy character of the company

Daimler Co. Ltd v Continental Tyre & Rubber Co' Ltd

Gilford Motor Co v Horne

3. Where the company is regarded as the agent of the shareholders.

Smith, Stone v Knight Ltd v Birmingham Corpn.

Six tests were created in the above case:-

i. the profits of the subsidiary are treated as those of the parent;

Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd

4. Where a group of companies is regarded as a single economic entity.

DHN Food Distributors Ltd v Tower Hamlets London Borough Council