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3. What are the comparison between company, partnership and sole proprietorship?
Company
Partnership
Sole
Proprietorship
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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a. Definition
b. Formation
c. Registration
d. Special Law
e. Separate entity
Body of person
combined for
common object
Under CA 1965
2 or more
person business
1 man business
Easier,
no formalities,
registration fee
is cheaper
With Registrar
of The
Company
Companies Law
1965
Separate legal
entity
Registration of
Business Act
1956
Partnership Act
1961
No separate
entity, property
of members is
property of the
partnership as
well
A partner is an
agent of the
partnership (S7)
and binding the
firm
Cannot transfer
without consent
of other
partners
Easier &
economical,
No agreement
necessary,
Registration fee
is also cheaper
Registration of
Business Act
1956
No special Act
f. Agency
Act of SH not
bind the co
g. Transferability of shares
Transferable
but for private
co it is under
restrictions in
sec 15.
Managed by
BOD
h. Management
i. Number of members
j. Liability of members
k. Rule, procedure and
information to public
Pub- no limit
Priv.-max 50
Limited
Subjected to
regulations by
RoC, Court &
Department of
Trade &
Industry
Does not affect
Every partner
entitled to take
part of the firm
Min 2 Max 20
No separate
entity
May transfer to
somebody else
Manages
himself and can
employ
employees to
manage for
him.
Single person
Unlimited
No provision
subjected
Unlimited
No provision
subjected,
accounts are
never subject to
public scrutiny
Dissolves the
Automatically
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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the co.
m. Dissolution
Formal
WU&L
partnership
dissolves the
except
business
agreement to
that contrary
Informal-Agree. Informal-own
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Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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- The company is immortal, it will continue to live until it is properly wound up or struck off the
register
- Even if all the member dies, the business still exists
- Case: Re Noel Tedman Pty Ltd (NoelTed)
- The company had 2 directors who were also the only shareholders, a husband and wife. Both
died in a traffic accident. One infant child survived.
- Has power to acquire, hold and dispose of property
- A company can own property in its name. Although the members have shares in the company,
the company is held or owned by the company
- Case: Macaura v Northern Assurance Co Ltd (MNA)
- In this case Macaura owned an estate and then sold all the timber on the estate to a company, he
and his nominees owned all the shares of the company, he insured the timber that he sold to the
company under his own name. The insurance policy was not transferred into the companys
name. The timber destroyed in a fire, Macaura claimed the insurance but the insurance company
refused to pay.
- Held: When Macaura sold the timber to the company, he gave up his interest in it and the
company had become owner of it.
- Limited liability of shareholders
- Common seal
- S16(5)- required company to have common seal
- The company must use the common seal in any dealing with anybody to make it binding on the
company
- S121(2)(a)- if an officer of a company or any person on its behalf uses or authorizes the use of
any seal purporting to be seal of the co whereon its name does not appear, he or she shall be
guilty of an offence under the act.
- S121(2)(c)-Officer can be made personally liable when signing any instrument without the
common seal of the co.
- Control and management
- Members of a company have no right to interfere in the management of the company
- Power to control and to manage the company mainly vested on the BOD
- Members only can involve in management only during companys meeting or if he is properly
appointed as member in the BOD
6. What is corporate veil?
The principle of a corporation being a separate legal person from its members (ie. shareholders).
7. What are the statutory exceptions to the separate legal entity principle?
I. Section 121(2)(c) when the name of the co does not appear in instrument issued by behalf of the
company
- When signing or authorizing certain documents like promissory notes, bill of exchange, checks etc
in which the name of the company is not stated properly
- If the company fails to honor such documents then the person who signs will be liable.
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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II. Section 303 (3) and 304(2)- when debts contracted at the time the co has no ability of repayment
- When debts are contracted when there is no reasonable or probable expectations of these debts
being paid
- When debts are contracted, the officer must really find about the ability of the company to repay
debts
- If he knew or has reasons to believe that the company is not in a position to repay debts, but still
entered into the contract, he will be personally liable for the debts, if the co goes into liquidation.
III. Section 304(1)- when involving in fraudulent trading
- In the case of involving fraudulent trading, if the company is formed or the business of the
company is carried for fraudulent purposes, the person who is knowingly a party to the carrying
on the business in that manner will be personally liable for the debts of the company if the
company goes into liquidation.
IV. Section 365(2)(b) when dividends are paid out of capital
- Where dividends are paid even though there are no available profits out of which to pay them, then
directors who declared the dividend will be liable to the creditors of the company
- If the company is unable to pay the creditors in the event of liquidation, to the extent by which the
dividend exceed the available profits.
V. Section 48(4) minimum subscription is not received within 4 months of the issue of prospectus
VI. Section 140(1) of the Income Tax Act avoiding of payment of tax
8. What are the judicial exceptions to the separate legal entity principles?
- In Malaysia, the court will lift the corporate veil when the justice of the case so requires
- Malaysian courts have in the past lifted the corporate veil in several circumstances such as fraud,
agency, and where corporations within the group essentially one
- Sham Mere Faade
o Incorporation is often used as a device to circumvent the law or to hide the true state of affairs
from the court
o Some people might use the corporate form as a means to exploit loopholes in the law
o In such situation, the court will not be blinded to reality, notwithstanding the technical
separateness of the company and its members
o Case: RE Bunggle Press Ltd
o Shaw and Jackson held 4,500 shares each and Trelby held the balance 1000 shares out of total of
10,000 shares. Shaw and Jackson wanted to buy over Trelbys shares. To effect this, they
incorporated a company called Jackson and Shaw (Holdings) Ltd., which made an offer to
purchase all the Bungle shares.Shaw and Jackson accepted this offer but Trelby declined.
Jackson and Shaw Holdings then purported to use section 209 (equivalent Malaysian section
180) of the UK Companies Act 1948 to acquire Trelbys shares.
o Held: The court of appeal declined to allow Jackson and Shaw Holding to take advantage of this
section to buy Trelbys shares.
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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- Group Of Companies
o In certain situation, a group of companies may be treated as a single corporate entity, although the
general rule is that each company within a group is distinct entity. This is due to commercial
realities.
o Case: Hotel Jaya Puri Sdn Bhd V National Union Bar & Restaurant Workers
o Jaya Puri Chinese Garden Restaurant Sdn Bhd was closed down and workers were retrenched.
This company was wholly owned subsidiary of Hotel Jaya Puri Bhd whose premises the
restaurant was situated. The Union claimed that the actual employer was the hotel and the hotel
was still in business. Therefore the workers could not have been said to have being retrenched on
the closure of a business.The industrial court allowed this and made order of compensation
against the hotel. The hotel appeal to the High Court.
o Held: Although technically the restaurant and the hotel were separate legal entities, in reality, the
companies were functionally as one.
o Technically, a person working for the restaurant was an employee of the restaurant, the reality
was that the workers were employees of the hotel.
o The court ignored the separate identities of the restaurant and the Hotel and treated them as one
single entity.
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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- A company was incorporated to carry on the business of tailors and manufacturers of clothes and
materials. If then decided to manufacture veneered panels and ordered coke on the company
letterhead, which stated that the company was a manufacturer of veneered panels.
The supplier of the coke then sought to enforce payment and he failed because the contract was
ultra vires.
Held: Supplier cannot enforce contract because he had constructive notice that such an activity
was outside the companys object.
16. How to diminish importance of ultra vires doctrine?
a. Interpretation of objects
- Sometimes, company may extend their object clause by inserting a clause that says:
The objects set out should not be restrictively construed and that each of paragraphs should be
regarded as conferring a separate and independent object
- The validity of this clause was raised in Cotman V Brougham
- Case: Cotman V Brougham
b. Wide objects clause
- Sometimes in order to maintain flexibility, companies draft objects in the widest possible terms
- This would normally include independent and dependent objects clause
- The effect of such an objects clause is that company has the capacity to engage in any other
business as long as it is not illegal and general meeting of members honestly believes that there
is a connection with its existing businesses and it is advantageous to the company
- Case: Bell Houses Ltd V City Wall Properties Ltd
- The company was a housing developer and the MOA contained independent object clause
related to house development. It also have a dependent objects clause which allow the company
to carry on any other trade so long as it is advantageous and in connection with the business of
the company.
- Held: This dependent object allows the company to contract to introduce another company to a
source of finance.
c. Section 20
- In Malaysia, ultra vires doctrine has been modified by this section
- The effect is that if certain transaction is valid, the fact that the company did not have the
capacity to enter into it is immaterial
- The co. lack of capacity may only be relied in 3 situations:
a. Proceedings by any member or holder of floating charge to restrain the co from doing any act,
conveyance or transfer of property to or by the co.
b. Proceedings by the co. or member of the company against the present or former officer of the co.
and
c. Any petition by the minister to wind up the company
d. Alteration of objects clause
- S28(1)- Allows a company to alter its object clause by special resolution
- S28(3)-Notice of general meeting where it is proposed to alter the object of the co must be given
to all members and debenture holder
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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- S28(6)- application for cancellation of alteration to the objects clause must be made within 21
days after the passing of the special resolution
- S28(5) This application may be made by holders of not less than 10% of the companys issued
capital
- When such application is made, the alteration does not have nay effect unless confirmed by the
court
17. How AOA can be altered?
- S31
Subject to the act and the companys MOA, a company may by special resolution alter or add to
is AOA
- S31(1)
Any alteration or addition to the articles is valid as if originally contained in the AOA
- S31(2)
Provision in the MOA may restrict the ability of the co. to alter the AOA by imposing further
requirements in addition to a special resolution.
18. What are the legal of effects of MOA and AOA?
a. Between member and member
- Constituted by the AOA is contract between a member and every other member
- Each member will observe all the provision of the MOA & AOA
- It also means that if one member is not observing these, another member has a right to make him
observe it
- A member may enforce his rights to have the provisions of the MOA & AOA observed by
injunction
- This action may be brought directly and the company does not have to be joined as a party
- Case: Rayfield v Hands
The AOA required every director to be a shareholder and provided that if a member intended to
transfer his shares, he should inform the directors who would take the said shares equally
between them at fair value. The directors refused to purchase the plaintiffs shares.
Held: It was held that there was a contract between P and the defendants constituted by the AOA
as they were all members and therefore they have to purchase the shares
- A members rights and liabilities under the AOA is a matter of contractual obligations the court
will not look at whether it is fair to enforce it. Even if it may be unfair, it may be enforced
- Case Wong Kim Fatt v Leong & Co Sdn Bhd
A companys AOA provided that if holders of 7/10 of issued capital requested the company to
transfer to them any particular shares held by others, then the company is bound to do it. One
shareholder held 250,000 shares out of total 300,000 shares. He asked the company to transfer
Wongs share i.e. he served a requisite to buy out Wongs shares. Wong objected to this and
went to court to get an order restraining the company from transferring his shares.
Held: Wong has to sell the shares because AOA is a contract between the members and
therefore, this is a matter of contractual obligations and the plaintiffs has to do the obligations he
had undertaken
b. Between company and outsiders
Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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Mr. Mohd Ab Malek bin Md Shah / BUSINESS LAW/ LAW299/ UiTM MELAKA
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