OVERVIEW

1. Introducing the new Companies Act, limited company and its characteristics
2. Differences between a limited company, sole proprietorship and partnership
3. Types of limited companies
4. Forming a company
5. Advantages and disadvantages of a limited company
6. A company may not purchase its own shares
7. Company’s capital structure & payment of dividends
8. Removal of par value
9. Members’ resolutions
10. Reserves of a company
11. Debentures
12. Winding up of a company
13. Corporate restructuring

1 Introducing the new Companies Act

With effect from 31 January 2017, there was a new Companies Act taking its place: Companies Act
2016
(The old Companies Act was Companies Act 1965). The purpose of introducing this new act was to
modernise and make the landscape for forming new companies easier. Many of the sections in this law
have been simplified to make it easier to comply and more understandable.

1.1 Malaysia and its Companies

 In 2017, there were 1,251,190 companies registered in Malaysia, and 6,859,080 businesses
(sole proprietorship + partnerships) registered in this country. (Suruhanjaya Syarikat Malaysia,
2018)
Chapter
 12 Introduction
At this pointtoinLimited Company
time, Malaysia LTJ 2020
ranks at number 12 among the world economies for ease of 1
doing business (World Bank Doing Business 2020 Report, as reported in the Star online).
 There have been many improvements made in the registration process and the whole
framework for this ranking to happen.

1.2 Definition of a company

 A company can be defined as a as a separate legal entity, having a separate and distinct existence
apart from the natural persons who created it.

 Most companies are formed as limited liability companies, i.e. the liability of its members
(shareholders) is limited to the amount they have agreed to pay on their shares.

1.3 Characteristics of companies

The following are characteristics which distinguish companies from other forms of business
organizations:

i) Legal “personality”/entity

 A company is regarded as having separate legal entity. It is an “artificial” person that can own
property, make contracts, sue and be sued. The company is a separate entity distinct from those
who own it.

ii) Perpetual succession

 As a company is a separate entity, its ownership can change without changing the company itself.
It is unaffected by changes of ownership when shares are transferred or when shareholders die. It
is assumed that the company will continue perpetually until it is wound up.
 iii) Separation of ownership from management

 Shareholders may or may not take part in the management of the company. Usually if the
company is small, like the private limited companies (Sdn Bhd), the shareholders are also the
directors and managers.
 For bigger companies, like the public limited companies (Berhad), shareholders usually appoint
directors and managers to manage the company.

2. Limited companies, Sole proprietorship and Partnership compared

What is a Limited liability partnership? This comparison below helps us to answer that question.

Limited Limited liability General Sole

companies partnerships partnerships proprietorships
Capital Share capital Partners Partners Own contribution
contribution contribution contribution
Who are the  Company is the LLP itself. Partners Sole Proprietor
owners of the owner of itself. Partners have a
business?  Members share in the
(shareholders) capital and
own ‘shares’ in profits of the
the company partnership.
which may give
them a right to
vote.
Chapter
Legal12 Introduction
Status to Limited Company
Separate legal Separate legal LTJ a2020
Not a separate Not separate 2
entity entity legal entity legal entity
Party that is liable Company LLP Partners Sole Proprietor
for debts of the
business
Responsibility for Board of Directors Partners Partners Sole Proprietor
management of
business
Personal liability No personal No personal Unlimited Unlimited liability
liability of liability of liability (jointly which can extend
individual director partner, except and severally to personal assets
or shareholder for own liable with the of the sole
wrongful act or partnership) proprietor
Liabilities borne omission or which can extend
by the directors or without to personal assets
shareholders are authority of the partners
to the extent of
unpaid shares only Liabilities borne
by the partners
are jointly and
severally with
the LLP to the
extent of
contribution
only
No. Of Minimum 1 and Minimum 2 and 2 to 20 partners Sole proprietor
Shareholders/ maximum 50 in no maximum (Except for only
Partners private company. limit partnerships for
 professional
practice with no
maximum limit)

Maximum number of members in a private company

The maximum number of members in a private company still stands at fifty (50) Section 42 of CA 2016.

Can the director and shareholder be the same person

Yes, the one member can be both director and shareholder.

Minimum number of members in a company and partnership

The minimum in a company is one. “One or more members…” CA 2016
The minimum in a partnership is two.

3. Types of limited liability companies

Companies are normally formed as having limited liability. This basically means:

 The liability of the members (i.e. shareholders) are stated in the company’s constitution and it is
limited to the amount unpaid (if any) on the shares held by them respectively.
 When the shares are fully paid up, there is, in general, no further liability. Should the company be
unable to settle all of its debts upon liquidation, the company’s payables have no right to seize
upon the personal assets of the members (shareholders).
 In other words, the personal assets of a shareholder such as his house, car, etc. cannot be taken by
the company’s payables to settle the company’s outstanding debts.

Limited liability companies may be classified broadly as follows:

Chapter 12 Introduction
i) Private companies: to Limited
Sdn Company
Bhd; and LTJ 2020 3
ii) Public companies: Bhd

Note: Companies can be ‘unlimited’ in liability. Though these would be rare.

4. Forming a Company

 The minimum number of members a company should have is now one. This has changed since the
Companies Act 2016 (CA 2016) came into effect.

 The constitution of the company may consist of:

(i) the objects of the company;
(ii) the capacity, rights, powers or privileges of the company if the provision restricts such capacity,
rights, powers or privileges;
(iii) any other matters as the company wishes to include in its constitution.

The company may alter its constitution by special resolution (at least 75% votes).

Memorandum and Articles of Association

It is acceptable for companies to write up these two documents as their constitution. The difference CA
2016 is that, the entire Companies Act seems to serve as a constitution for companies. So, there is less
need for a company to write a memorandum and articles document.

If company does not have constitution

If the company does not have a Memorandum or Articles of Association, then the rights, powers, duties
and obligations as set out in the Companies Act 2016 will be its constitution.
 Authorised capital – abolished
Previously, it was required to state ‘the amount of share capital, if any, with which the company
proposes to be registered and the division thereof into shares of a fixed amount’ S18 of CA 1965. That
was referring to authorised share capital.

Now in the S35 Contents of Constitution of CA 2016, there simply isn’t this requirement to state how
many proposed shares, i.e. authorised capital anymore.

5. Advantages and Disadvantages of operating as a limited company

Advantages

The limited company form of business has several advantages over the sole proprietorship and
partnership forms. The main advantages are discussed below:

A. Limited liabilities

As a separate legal entity, a company is responsible for its action and liabilities. Payables have
claims only against the assets of the company, not against the personal assets of the shareholders.
Because owners of a company are not personally liable for corporate debts, the maximum amount
they can lose is the amount they have invested in shares. To investors, this is one of the most
important advantages of the corporate form, since under the alternative form of business
Chapterorganisation, owners
12 Introduction tomay be personally
Limited Companyliable for business debts. LTJ 2020 4
B. Broad source of capital

Ownership rights in companies are represented by transferable shares. By dividing ownership of

the business into many shares with a relatively small value per share, both large and small investors
are able to participate in the ownership of the business. Most large public companies can therefore
draw upon the savings of many people to obtain the capital they need.
For example, a company’s capital of RM1,000,000 may be divided into 1,000,000 shares of
RM1.00, which thus allows many small investors to buy small parcels of shares.

C. Continuity of existence

A company has an indefinite life and continues in existence even if its ownership change, that is, a
company has the attribute of perpetual succession. The transfer of shares from one owner to
another has no effect on the continuity of a company. In contrast, the death, incapacity or
retirement of an owner terminates the businesses of sole proprietorship or partnership.

D. Ready transferability of shares

Company shares may be transferred easily without disrupting the activities of the company. Shares
in public companies can be bought and sold through the stock exchange. Consequently, a
shareholder can readily convert his/her investment into cash when the need arises.
 E. Use of professional management

Although the shareholders own the company, they do not manage the daily affairs of the company.
Shareholders elect a board of directors, which has overall responsibility for the business decisions.
The board then hires a president or managing director and other professional managers to manage
the business. In contrast to a partnership, no mutual agency exists in a company. An individual
shareholder does not have the right to bind the company to a contract unless he or she had been
hired as a director or employee of the company. This separation of management and ownership
permits the company to hire the best managerial talent available.

Disadvantages

The corporate form also has some disadvantages when compared with sole proprietorship and
partnership, as given below:

A. Greater governmental regulation

Companies come into existence under the Companies Act, 1965. Consequently, they are subject to
a greater degree of control and supervision by the government than are the sole proprietorship or
partnership. In addition, public companies must prepare annual financial reports for presentation to
their members and to the stock exchange on which their shares are traded.
These annual reports must be prepared in accordance with approved accounting standards and with
the Listing Requirements of the stock exchange. Hence, meeting these requirements often can be
very costly and time-consuming.

B. Separation of ownership from management

ChapterThe
12 use of professional
Introduction managers
to Limited was cited earlier as an advantage. In some cases,
Company LTJhowever,
2020 this 5
separation of ownership from management may prove to be a disadvantage because managers may
sometimes operate companies for their own benefits rather than for the benefit of the shareholders.
Considerable harm may be done before shareholders become aware of the condition and take action
to change the management. Many legal requirements in the Companies Act have been established
to discourage management from acting in their own interests to the detriment of shareholders.

6. A company and the purchase of its own shares

Section 123 A company is normally not allowed to give any financial assistance for the purchase of its
own shares.

Some exceptions to this rule:

(1) Where the lending of money is part of the company’s ordinary business;
(2) Where it is for a trust scheme for employees;
(3) Where the financial assistance is given to employees for their own benefit;
(4) Where the company is regulated by written laws relating to a bank, insurance or takaful or which are
subject to the supervision of the Securities Commission; or
(5) Where the company is not a public listed company and it has complied with further conditions listed
in s126.
6.1 A company buying its own shares
Generally, a company is not permitted to purchase its own shares or that of its holding company.

With the following exceptions:

(1) a redemption of preference shares (s72);
(2) a cancellation of shares (s. 116 and 177);
(3) a share buyback by public listed companies (s127); or
(4) a remedy awarded by the court in a case of oppression (s346).

6.2 A company may reduce its share capital

Section 115 provides that a company may reduce its share capital following the procedures prescribed in
the section unless its constitution provides otherwise.

According to s115, a company may reduce its capital by either (1) a special resolution supported by a
solvency statement from all directors; or (2) a special resolution confirmed by the court.

Note: As a general principle, a company does not reduce its issued share capital. However, the above is
an exception.

7. Company’s capital structure & payment of dividends

In general, the different classes of shares can be categorised into ordinary shares and preference shares:
(i) Preference shares – a share which does not entitle the holder to the right to vote on a
resolution or to any right to participate beyond a specified amount in any distribution whether by
way of dividend, i.e. the dividends is fixed.
(And it can be called by other names other than ‘preference share’ as long as it fulfils
characteristics of preference shares)
(ii) Ordinary shares – these shareholders can vote at the general meetings. There is also no upper
Chapter limit to the amount
12 Introduction of dividends
to Limited they can receive. Of course, when there are noLTJ
Company profits
2020left after 6
paying the preference shareholders, they may receive no dividends for that year.

Something to note for directors or managers regarding dividends

Section 133(2) provides for the liability of the director and manager who wilfully paid or permitted to
be paid dividends out of what they knew to be not profit. They are liable to the company to the extent of
the amount exceeding the value of any distribution of dividends that could properly have been made.

Section 131 states the rule for dividends. ‘The dividend should not be paid if the payment will cause
the company to be insolvent.’ The directors are responsible for this.

8. Removal of Par value

With effect from 31 January 2017, all companies with share capital migrated to no par value regime. The
Companies Act 2016 reads, ‘All shares issued before or upon the commencement of this Act shall have
no par or nominal value.’.

9. Members’ Resolutions (S290)

Members’ resolutions are decisions made by members (shareholders).

Normally, members’ resolutions are passed at a general meeting (annual or extraordinary).

However, when there are only a few members, calling for a general meeting can be burdensome. So the
Act provides for a written resolution, thereby only needing to be circulated to the members. This is
allowed for a private company (Sdn. Bhd.).
 Whereas for a public company, a resolution of the members shall be passed only at a meeting of the
members.

Note: A Berhad does not have to be a listed company. A public listed company refers to one that is
‘listed’ on a share exchange, making it easier for the public to buy its shares.

S301: Written resolution

A written resolution may be proposed by the directors or by any member holding at least 5% of the
voting rights in a private company.

S302 provides that a lower threshold may be stated in the company’s constitution.

9.1 Ordinary and Special resolutions

For an ordinary resolution, it is passed if it is agreed by a simple majority (>50%).

A special resolution requires 75% of the members.

9.2 Written resolution

The period for agreeing to the written resolution is capped at 28 days from the circulation date, unless
the company has a different time limit written in its constitution.

Members who vote after this 28 days to the proposed written resolution cannot be counted.

10. Format of Capital and Reserves in the Accounts

The reserves of a company can be illustrated as follows:

Chapter 12 Introduction
Modern Sdn Bhd to Limited Company LTJ 2020 7
Statement of Financial Position as at 31 December 2019 (extract)
RM RM
Capital and Reserves
Capital
5,000,000 Ordinary shares 5,000,000
2,000,000 7% Preference shares 4,000,000 9,000,000

Reserves
General reserve 830,000
Retained profits 550,000
Asset revaluation reserve 65,000
Capital redemption reserve 130,000 1,575,000

10,575,000

Note: ‘Capital and Reserves’ can be titled as ‘Equity’ also.

11. Debentures

 Debentures are typically unsecured obligations of the issuing company, with claims on only
general assets of the company.

 Debentures may be redeemable, i.e. repayable by the company at or by a specified date. Debentures
may be convertible, i.e. the debentures are eligible to be converted into ordinary shares at or by a
specified date. The conversion rate is specified when the debentures are issued. Debentures may be
listed on the stock exchange, which means that the debentures can be bought and sold before its
expiry date. Therefore, the rights attached to the debentures are transferable.

 It should be noted that debenture holders are not members of the company in the same way as
shareholders are, and debentures must not be confused with the share capital in the Statement of
Financial Position. Debentures should always be shown as non-current liabilities, unless they are
to be redeemed within one year from the date of the Statement of Financial Position, in which case,
they are shown as current liabilities.

11.1 Secured creditor

Compared to debentures, a secured creditor has claims on a particular asset of the company.

According to Section 524, there are three (3) options for a secured creditor in the event of a company
bankruptcy:

(1) If the secured creditor is entitled to realise the charged property, they may do so and claim for
any shortfall as an unsecured creditor.
(2) The secured creditor may value the charged property and claim for the balance as an unsecured
creditor.
(3) The secured creditor may surrender the charge to the liquidator for the general benefit of
creditors
Chapter and claim astoanLimited
12 Introduction unsecured creditor for the whole debt.
Company LTJ 2020 8
(Paragraphs (1)(a), (b), (c) and (3)(a) of Section 524)

In other words, the secured creditor may either sell the property or give up the property for the good
of all creditors.

11.2 The recording of debenture interest in the ledger accounts

 The double entry for cash paid on debenture interest paid by the company to its debenture holders
are:

Dr Debenture interest (an expense in SPL)

Cr Bank (amount paid)

 The double entry for debenture interest accrued by the company as outstanding to its debenture
holders are:

Dr Debenture interest (an expense in Statement of Profit or Loss)

Cr Debenture interest payable (outstanding interest not yet paid)

12. Winding up of a company

One of the grounds for the winding up of a company is its inability to pay its debts. Currently, the
amount set is at RM10,000. I.e. if the company can’t pay its debts of up to RM10,000, it is required
to start winding up. (RM10,000 is prescribed by the Minister of Domestic Trade and Consumer
Affairs as Suruhanjaya Syarikat Malaysia – SSM is parked under their control).

Example:
A company has debts of RM5,000 (Lower than the amount set by Minister)
 Company is not required to wind up at this point.

12.1 Voluntary winding up

This type of winding up commences when there is a members’ resolution to voluntarily wind up.

Thinking question
Say that a company does not wind up, but goes for corporate restructuring instead. How does that
work out?

13 Corporate restructuring
Sometimes, instead of stopping a company altogether, the management may try to restructure the
company. Whether to find a buyer of its shares ‘white knight’ to rescue the company, by pumping in
more capital, or by renegotiating its loan with the bank.

How would that work out?

The creditors may apply what is due to them as a secured creditor (see point 11 on charged
property). This could cause them to sell some of the company’s assets while the company is trying
to go for a turnaround.

What can the company do?

The company can apply to the court for an order to restrain further proceedings against the company
except with the court’s leave (Section 368).

Chapter 12 Introduction to Limited Company LTJ 2020 9

Court restraining order
Courts can stop legal proceedings against a company to allow the company time to make new plans
and look for friendly parties to buy out the company.

The court can grant this order for not more than three months.