BUSINESS ORGANISATIONS

BACHELOR OF ACCOUNTANCY LAW 385 COMMERCIAL LAW

BUSINESS ORGANISATIONS

SOLE PROPRIETORSHIP

COMPANY

PARTNERSHIP

SOLE PROPRIETORSHIP
The simplest economic and legal unit is the sole proprietor an individual carrying on business either entirely alone or employing others. very vulnerable - can be made personally bankrupt for his business trade. i.e one person in business for himself.

CHARACTERISTICS OF A SOLE PROPRIETORSHIP

a.k.a. one man show Business is transferable No agreement necessary

Simplest form of business organisation

Needs to be registered under the ROBA 1956

Unrestricted powers of borrowing

Can be dissolved informally

No special rules

Takes all profits and losses

May withdraw capital

Can mortgage assets

Can be formed informally

SP provides everything i.e. skill, labour, capital

Unlimited liability

Cannot create floating charge

PARTNERSHIP

S.3(1) Partnership Act 1961: Partnership is the relation which subsists between persons carrying on business in common with a view of profit.

PARTNERSHIP
SARAWAK: SK CAP 64 (BUSINESS NAMES) & CAP 33 (BUSINESS, PROFESSIONS AND TRADE LICENSING) PENINSULA MALAYSIA: ROBA 1961 SABAH: TRADE LICENSING ORDINANCE NO 16 1948

REGISTRATION OF PARTNERSHIP

PARTNERSHIP
Partnership is the relation of two or more persons carrying on a business in a common view to make profit. Involves principles of commercial agency. Sole proprietorship and partnerships are business organisations referred to as unincorporated associations.

PARTNERSHIP
PARTIES CAN STILL ENFORCE THEIR RIGHTS EVEN IF FAIL TO REGISTER THE PARTNERSHIP Gulazam V Noorzaman and Sobath (1957)) 2 MLJ 45 Cow partnership one party to provide capital and the other to provide labour/expertise

ELEMENTS OF PARTNERSHIP
MORE THAN ONE PERSON AGREEMENT BETWEEN PARTIES BUSINESS ACTIVITIES

AGENCY

PURPOSE IS FOR PROFIT

MORE THAN ONE PERSON

A partnership is between legal persons whether human or otherwise Minimum 2 pax s.47(2) PA maximum 20 pax s.14(3)(a) Companies Act 1965 professional partnerships unlimited TAN TECK HEE V CHONG TIAN PENG firm of 25 partners was void and could not sue. SHIM FATT V LEYLAND ROAD BUS CO firm of more than 20 partners is void.

AGREEMENT BETWEEN PARTIES

No any special form, though it is usually written. relationship between partners governed by contract or agreement either express or implied.
Ratna Ammal & Anor v Tan Chow Soo (1964)
Syndicate agreement for the purpose of selling condensed milk. Court still considered it as a partnership even though the word syndicate used. Substance over form. Relation of parties had a business character of a partnership together with a common view of profit.

BUSINESS ACTIVITIES
Parties must be carrying out a present business, not future business S.2 PA - Business: any trade, occupation or profession Preparation for future business is NOT a partnership.

BUSINESS ACTIVITIES
KEITH SPICER LTD V MANSELL M and B lost their jobs. They agreed to go into business together and form a limited company to run a restaurant. While they were forming the company and before it had received its certificate of incorporation from the registrar, B ordered some goods from Spicers for the business. B went bankrupt before Spicer had been paid. Spicer sued M on the basis that he was a partner of B. HELD. B and M were not partners. They were not carrying business together in partnership but only preparing to carry on a business as a company as soon as they could.

AGENCY
Every partner is an agent to the firm and his other partners the acts of every partner for the firm binds the firm and his partners, unless the partner so acting has in fact no authority to act for the firm in the particular matter, and the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner British Homes Assurance Corporation v Peterson [1902] S.7 PA: each partner in an agent to other partner. Each partner when contracting with outsiders are agents and principals at the same time.

AGENCY
There are four elements which must be satisfied for the act of the partner to bind the firm and other partners.

act must be done in relation to the partnership business

carrying on usual way of business

the act must be done in the capacity as a partner and not as an individual person.

the person with whom he is dealing either knows that he has no authority or does not know or believe him to be a partner.

AGENCY
Re Briggs & Co (1906) A father and son were partners in a firm. The firm was in financial difficulties. They were being pressed by the creditors and they have no money to pay back the creditors. The son assigned book debts to the creditors without informing the other partner i.e the father. Later they firm was declared bankrupt and the trustee sought to set a side the agreement stating that it was executed by the individual. Court held that the agreement was binding because it was an instrument relating to the business of the firm and there was some intention to bind the firm.

LIABILITY OF PARTNERS
Every partner is liable jointly with the other partners for all debts and obligations of the firm incurred while he was a partner. a) Part II of the Partnership Act 1961 - a partners liability is for debts and obligation if the firm incurred while he is a partner. b) Section 12 of the Partnership Act 1961 partners liability for torts. Section 14 - a partner is jointly and severally liable for torts committed by co partner while both are members of the firm. c) Section 13 (a) - a partner is liable for his co partners misapplication of money received by the co partner in the course of his apparent authority

PURPOSE IS FOR PROFIT

Business is carried on in common with a view of profits Profits = net profits To be shared equally unless otherwise agreed. Voluntary organisations are NOT partnerships as not formed for the purpose to gain profits.

PURPOSE IS FOR PROFIT

Soh Hood Beng v Khoo Chye Neo (1897) 4 SSLR 115 A Chinese loan association does not fall under the ambit of partnership as its purpose was to assist its members to secure loans. Choi Siew Cheong V Lucky Height Development Sdn Bhd [1995] A joint venture for property development as there was no business with a common view for profits.

TYPES OF PARTNERS
General partner a partner in the fullest sense.

Salaried partner commonly found in professional firms, may receive a fixed remuneration irrespective of profits or fixed salary every month plus a small percentage of the profits. The firm is fully responsible for his acts

An active partner actively participates in the management of the business and is known to the world as a partner.

Quasi partner not a partner but who is liable for debts of the partnership as a consequence of holding out, that is causing people to believe he is a partner.

Dormant partner sometimes called as the sleeping partner, that is, a partner who takes no active part in the management but is nevertheless liable as a partner

FORMATION OF PARTNERSHIP
Formality Capacity Documents Duration
Written agreement unwritten

Anyone of sound mind including minors (minus liabilities) William Jacks & Co V Chan & Yong Trading Co

Partnership agreement or articles of partnership

S.28(1) no requirement for duration Any partner can dissolve at anytime by notice May extend duration without new agreement

DISSOLUTION OF PARTNERSHIP
BY AGREEMENT BY OPERATION OF LAW
Termination by way of expiry of partnership duration as per agreement or articles By mutual agreement
By expiration S.34(1)(a) & (b) By notice S34(1)(c) By death/bankruptcy S.35 By charging of shares S.35(2) By illegality S.36 When numbers exceed 20 Insanity S.37(a) Permanent incapacity S.37(b) Prejudicial conduct S.37(c) Willful and persistent breach S.37(d) Loss S.37(e) Justice and equity S.37(f)

BY ORDER OF THE COURT

COMPANY
Governed by the Companies Act 1965 A company is a corporate body of a corporation. A corporation is an artificial legal person. A separate and independent of the persons who are members of that corporate body. S.16(5) of the Companies Act, 1965 - after fulfilling all the requirements of the Act, the Companies Commission of Malaysia (CCM) issues a certificate of incorporation, a new legal entity comes into existence. The company, an artificial person, is born out of the process of law. This new entity is separate from its members. Like a natural person it has its own name and can own property.

COMPANY
CONCEPT OF LEGAL PERSONALITY
Separate legal personality from its members advantages - limited liability principle. But shareholders may still be liable for the companys debt. A corporate body with limited liability means the shareholders of a company limited by shares are not liable for more than what they have to contribute for the shares they get. If the company is limited by guarantee, they are not liable for more than amount they have agreed to contribute to the assets on winding up.

CONCEPT OF LEGAL PERSONALITY

Salomon v A. Salomon & Co. Ltd. (1897) AC 22

Salomon was a boot and shoe manufacturer. He ran his business as a sole trader. In 1892 Salomon formed a limited liability company. He gave his wife and children one share each in the company. He then sold his shoe and boot business to the company for f39, 000. In consideration for the business, the company paid him partly in cash, partly in 20, 000 shares, and partly in 10, 000 debentures issued by the company. By being a debenture holder, Salomon becomes a secured creditor of the company.
Salomon continued to run the business as one-man company. The business did not do well and after some time became insolvent. What was left of the assets of the company were not enough to pay off the creditors. It was mostly used to pay off the debenture held by Salomon. The other creditors tried to claim that Salomon had no right to the remaining assets as the sale of this business to the company was a sham, and that his wife and children were merely his nominees, and that Salomon and the company were in fact one and the same. Held that the incorporation process made Salomon and his company two separate persons. Even if the business were the same as before, and it was still managed by Salomon himself, the company was not an agent or trustee for the members. Although Salomon beneficially owned all the issued shares of the company, the court also recognized him as a separate person who can be a secured creditor with enforceable rights against the company.

ADVANTAGES OF INCORPORATION
Creates a veil no direct proceedings against the members but only against the company itself. reduces the need to monitor management and other shareholders. Limited liability together with free transfer of shares, will also facilitate the market for control. An incentive for the management to perform efficiently. Would increase the volume of transactions that would improve the information fed to the market place. Allows shareholders to diversity their shareholdings. Limited liability will result in a positive attitude to risk taking and so would facilitate investment decisions.

DISADVANTAGES OF INCORPORATION
Tunstall v Steigmann (1962) Landlord forced to allow a new tenancy by a company set up by the existing tenant. Shareholders cannot pledge or insure companys property Macaura v Northern Assurance (1925) Causes hardship to members who own substantial shares of the company, who cannot claim for insurance taken under his own name. Creditors will suffer if the company incurs debts which it is unable to pay, as the shareholders are not liable beyond the amount they have contributed in full for their shares.

EFFECTS OF INCORPORATION
S.16(5) of the Companies Act, 1965: On and from the date of incorporation specified in the certificate of incorporation the subscribers to the memorandum together with such other persons as from time to time become members of the company shall be a body corporate by the name set out in the memorandum. S.16(5) states the effect of incorporation are: shall be a body corporatecapable forthwith of exercising all the functions of an incorporated body and of suing and being sued and having perpetual succession and a common seal with power to hold land but with such liability on the part of the members to contribute to the assets of the company in the event of its being wound up

EFFECTS OF INCORPORATION
a body corporate comes into existence capable of exercising all the functions of an incorporated company; has the ability to sue and be sued;

enjoys perpetual succession;

has the power to hold property;

Able to contract with members; and

the liability of the members depend on the type of company

EFFECTS OF INCORPORATION
A Body Corporate
A legal person that is created and given recognition by the law. This legal person is actually a legal fiction. an artificial legal person unlike human individuals who are known as natural persons. s.4(1) a corporation is any body corporate wherever formed and includes any foreign company. A company is a type of corporation that is recognized by the law as having powers and liabilities like an individual.

EFFECTS OF INCORPORATION
Lee v Lees Air Farming (1961) AC 12 Lee formed Lees Air Farming Ltd. and held all the shares, except for one. The company was formed to undertake the business of aerial crop spaying. Lee was employed as the companys pilot. He was killed in an accident while carrying out his work. His wife claimed workmens compensation under the New Zealand law, and she could only succeed if she could show that Lee was in effect an employee. The Privy Council held although Lee was the controller of the company, personally he was separate from the company. He could enter into a contract with the company, and could be an employee.

EFFECTS OF INCORPORATION
Can Sue and be Sued
Has liabilities, others may sue against it. Members cannot take any legal action on behalf of the company. Only the company itself can enforce its rights. This is called the proper plaintiff rule and it was established in the case of: Foss v Harbottle (1843) 2 Hare 461 Two shareholders of a company brought action against directors of the company for misapplication and improper use of the companys property. The court held that as the injury complained of was injury to the company and not to the members. As such the members could not take action. Only the company had the right to sue.

EFFECTS OF INCORPORATION
Perpetual Succession
After incorporation, continues to exist until it is dissolved according to the law or it is struck off the register. Even if the membership changes, or all the original members die, the company does not come to an end. This continuous life of the company is said to be perpetual succession. Re Noel Tedman Holdings Pty Ltd. (1967) QDR 561; The company had a husband and a wife as its only shareholders. They were also the companys directors. They died in an accident, leaving behind an infant child. After their death the company still existed. The problem that arose was, as the shareholders and directors had died, the shares could not be transferred as according to the will of the deceased to the infant child. The court thus allowed the personal representative of the deceased to appoint directors of the company, so that these directors could allow the transfer of the shares to the child.

EFFECTS OF INCORPORATION
Power to Own Property
S. 19: a company has the power to hold land. Can own other types of property too. Property of a company is its own, and not that of its members. Even if a member holds almost all the shares of a company, he does not have any proprietary interest in the companys property. Once a person has sold or given his property to the company he no longer has any right over it. The property belongs to the company, and the member no longer has any right or interest.

EFFECTS OF INCORPORATION
Macaura v Northern Assurance Co. Ltd. (1925)AC619 Macaura owned an estate and he sold all the timber one the estate to company called Irish Canadian Sawmills Ltd. All the shares in the company were owned by him or his nominee. Macaura had insured the timber that he sold to the company in his own name. After the insurance was taken, a fire broke out destroying the timber. The insurance company refused to pay his claim. The House of Lords agreed that Macaura had no right to claim, because when he sold the timber to the company, he had given up his interest in it. The timber was the property of the company and Macaura no longer had insurable interest in it.

EFFECTS OF INCORPORATION
Liability of the Members
A company is liable for its own debts and obligations. Members are not responsible for it. Members will make a contribution to the capital and he will be given shares. If the company should suffer losses, the shareholder is not liable to contribute any more to the company if he has fully paid for his shares. His actual loss would be the amount he has paid for the shares. Creditors of the company cannot be take any action against the members, because the members are separate from the company.

EFFECTS OF INCORPORATION
In the Application for Re Yee Yut Ee (1978)2 MLJ 142 Yee was the secretary of a company that was a wholly-owned subsidiary of an American corporation. The company had retrenched their staff and dispute arose as to the retrenchment benefits. The matter was brought to the Industrial Arbitration Court where an award was made in the companys absence. As the company did not comply with the award, the Arbitration Court ordered that Yee be personally liable as he had been appointed director by then. The High court held that a director is not liable for the companys debts.

EFFECTS OF INCORPORATION

COMMON SEAL The common seal is the companys signature. Used in any of the companys dealings . Binding on the company Requires approval of the board of directors before usage.

EFFECTS OF INCORPORATION
CONTROL AND MANAGEMENT

Vested in the board of directors

Members have no right to interfere unless appointed as a member of the board

THE VEIL OF INCORPORATION

A fiction created by law separating the company as a legal personality from the people behind it. GENERAL RULE: Courts would not look beyond the corporate veil to see who is behind the company and why the company was established.

LIFTING THE VEIL

Exceptions to the general rule on the principle of veil of incorporation. Under exceptional circumstances, the law will ignore the separation between the company and its members or officers. A.k.a. Lifting the veil. Members or officers will be made liable for the companys obligations. Veil is lifted under situations provided by statute and judicial precedents under the common law.

LIFTING THE VEIL

In the interest of public policy (Gilfor V Horne; Wellersteiner V Moir)

s.36 When the numbers is less than 2

s.304(1) when there is fraudulent trading

s. 121(2) & s.121(1A) Failure to use the Companys name

TYPES OF COMPANIES
Companies in Malaysia are classified according to :

LIABILITY

PUBLIC OR PRIVATE STATUS

TYPES OF COMPANIES
Companies classified according to liability.
Company limited by shares company limited by guarantee company limited by share and guarantee unlimited company

COMPANY LIMITED BY SHARES

S.4 : 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. the most common form of company. The liability of a member of this company will depend on whether his shares are fully paid or not. If fully paid shares, he has no further liability to the company. If company insolvent he cannot be made to contribute to the assets of the company. if his shares are partly paid, he will be liable to contribute to the companys assets, up to the amount still unpaid on his shares.

COMPANY LIMITED BY GUARANTEE

S.4 : a company in 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. company does not have a share capital specified in the memorandum of association. If the company is wound up, then a person who has been its member may be required to contribute up to his amount of guarantee towards payment of debts incurred by the company while he was a member. This liability extends to those who has left the company but was a member within a year before the company wound up. Not normally used for trading. Often formed to run clubs and other organizations that is maintained by subscription, social activities and donations.

CLASSIFICATION ACCORDING TO STATUS

CLASSIFICATION AS PRIVATE OR PUBLIC COMPANIES

Private Company Public Company

S.15(1): restricts right to transfer shares limit number of members to no more than 50 prohibits invitation or offer of shares or debentures to public prohibits invitation or offer public to deposit money with company

CLASSIFICATION ACCORDING TO STATUS

S.15(1): a company is classified as a private company if its memorandum or articles: restricts the right to transfer shares. Limits the number of members to not more than 50. Employees of the company or its subsidiaries who are not members are not counted. Prohibits any invitation or offer to the public to subscribe for shares in or debentures of the company. Prohibits any invitation to the public to deposit money with the company.

CLASSIFICATION ACCORDING TO STATUS

A private company may have a share capital with limited or unlimited liability. Enjoy certain privileges that are not given to public companies. A private company may be distinguished from a public company in having the word Sendirian or the abbreviation Sdn. as part of its name. If the company is a limited liability company then this word should come before the word Bhd.

DOCUMENTS OF COMPANIES
PRE-INCORPORATION DOCUMENTS Name of the company has to be approved Must submit to the CCM the pre-incorporation documents together with the required fees: (i) The memorandum and articles of association (ii) A statutory declaration by persons before appointment as director, or by a promoter (iii) A declaration by the person who has agreed to be the company secretary (iv) approval letter for the use of the name Application for the registration of the company must be made within the three months of the approval for the reservation of the name of the company.

DOCUMENTS OF COMPANIES
Memorandum of Association: essential components of the structure and formation of the Company, alterable only according to S.21 Articles of Association: regulations for the management of the company alterable on according to S.31 Certificate of Incorporation (a.k.a birth certificate) to the company issued. Once a company has been registered, it is recognized as a separate legal entity.

DISSOLUTION
Striking off S.308

Compulsory liquidation

Dissolution

Scheme of arrangement S.178

Voluntary liquidation

COMPARATIVE ANALYSIS BETWEEN A COMPANY AND A PARTNERSHIP

NATURE STRUCTURE COMPANY Company separate from members ROC Yes Can be non members No maximum but 50 for Sdn Bhd M&A PARTNERSHIP 2/> persons carrying on business with a view of profit ROBA Subject to consent of all partners Partners manage Maximum 20 but no limit for professional partnerships Agreement

REGISTRATION TRANSFERABILITY MANAGEMENT NUMBER OF MEMBERS

CONSTITUTION

COMPARATIVE ANALYSIS BETWEEN A COMPANY AND A PARTNERSHIP

NATURE CAPITAL & LIABILITY COMPANY Once capitalised, nonrefundable. If not capitalised, liable to pay for unpaid shares Only for current assets vide floating charge Yes Vide formal procedures e.g. winding up or liquidation PARTNERSHIP May withdraw capital but retains unlimited liability/debts No floating charges, only mortgage No Informal and at any time

SECURITY OVER DEBTS RULES, PROCEDURE & INFORMATION TO PUBLIC DISSOLUTION