Formation of Company and Its Effects free essay sample

Without him, my assignments would not be completed excellently. Not forgetting my family members too, I would like to express my grateful thanks for supporting me emotionally and financially. They are the one who always concern and encourage me in our studies. I would also like to take this opportunity to thanks the librarian for helping me to find the books and resources needed as the references sources in completing this assignment. Very special thanks also to all classmates for the guidance and helpful comments during the process of completing this assignment. All in all, I finally manage to complete this assignment successfully. Title: Incorporation of the Company and its effects. Topic Sentence: There have several procedures and legal requirement needs to comply with in forming a company relates to its natures and characteristic. 1. 0 INTRODUCTION Companies Act 1956 stated a Company as a group of people working together to accomplish common goal or objectives. The word Company is combination of the Latin word ‘Com’ meaning â€Å"with or together† and ‘Pains’ meaning â€Å"bread†. Thus the company is nothing but a group of people who have a common together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose. Under Section 3 of the Companies Act, 1956 company is defined as ‘a company form or registered under the Companies Act, 1956 or an existing company’. According to the definition by Lord Justice Lindey, â€Å"A company is an association of many persons who contribute money or money’s worth to a common stock and employs it in some trade or business and who share the profit and loss arising there from. The common stock so contributed is denoted in money and is the capital of the company. The persons who contribute it or to whom it belongs are members. The proportion of capital to which each is entitled is his share. The shares are always transferable although the right to transfer is more or less restricted†. Therefore it means that the formation of the company is not for the profit maximization purposes but to increase the wealth of the shareholders or the members. There have several factors that attract any persons to form a company because of the beautiful creatures of the company. It can be seen in terms of limited liability, perpetual succession, financing, taxation, and cost, formality and continuing obligations. The Act provides under section 14 (1) that ‘it subject to any Act or any two or more persons associated for any lawful purpose may be subscribing their names to a memorandum and complying with the requirements as to registration form an incorporated company’. The minimum number of persons required to form a company is only two, based of the class of the company. It means that to incorporate a company, it should form through several procedures and legal requirement to fulfill the incorporation process. . 0 PROCEDURES TO FORM A COMPANY 2. 1 RESERVATION OF COMPANY NAME The formation of a company need to accomplish several procedures. The first procedure is reservation of company name. According to the book of Malaysian Company Law by Chan amp; Goh, an applicant seeking incorporation of a company must apply in the prescribed form to a Registrar for a search as to the availability and reservation of the proposed name of the intended company. The prescribed form needs the applicants to state, inter alia, the proposed name of the company and the proposed type of company. If the proposed name of the company is available and is the proper one, and if the Registrar is satisfied as the bona fides of the application, the Registrar will serve the proposed name for a period of three months from the date of the lodging the application. Once the proposed name is reserved, and during the period of the reservation, no company or foreign company other than the intended company shall be registered under the reserved name or under any other name that, in the opinion of the Registrar, closely resembles the reserved name. However, the reservation of the name does not in itself entitle the intended company to be registered under that name. Within three month’ period the applicant must, if he still wishes the incorporation, lodge all the relevant documents as required under the Act with the registrar. Generally the name of the company will have a special value of the company itself. When a company prohibited carrying on its principal business as indicated by its name, it may be liable to be liquidated on that ground. The proposed name of an intended company must first be made available by the Registrar. A limited company must have the words of â€Å"Berhad† or â€Å"Bhd† as part of and in the end of the company name. A private company must have the additional word of â€Å"Sendirian† or â€Å"Sdn† as part of the name and insert before the words of â€Å"Berhad†. Then the name of the private company will be â€Å"Sendirian Berhad† or â€Å"Sdn Bhd†. 3. 0 DOCUMENTS REQUIRED TO BE LODGED TO FORM A COMPANY 3. 1 MEMORANDUM OF ASSOCIATION Memorandum of Association is the compulsory document that should be lodged in forming a company. Every company must lodge a duly signed copy of the Memorandum with the registrar. In essence, the Memorandum is the company’s basic purpose and people, a brief realistic account of who they are and what they intend to do. The contents of the Memorandum are essentially those items listed under section 18(1) of the Companies Act 1965 and vary according to the type of the company to be incorporated. It includes the name clause, the objects clause, the capital clause for a limited company, the limited liability clause and the subscribe clause. The Memorandum must contain the name of the first directors of the company. The Memorandum must be signed by a person called the ‘subscribers’ in the presence of witnesses. The subscribers to the Memorandum are usually the promoters of the company. They will be the first member of the company. The Memorandum will also contain the name of the first secretary. Upon the registration of the Memorandum, the Registrar will issue a certificate of incorporation certifying that the company is incorporated from the date specified. The certificate of incorporation is important evidence that the requirements of the Act in the respect of registration have been complied with, and that the company referred to in the certificate is properly incorporated. The certificate of incorporation is the company’s birth certificate. 3. 2 ARTICLE OF ASSOCIATION Another document to be lodge with the Memorandum is Article of Association. This document is mandatory for the company that limited by guarantee, company limited by shares and guarantee and unlimited company. The Article should be submitted with the Memorandum. For the company limited by shares, it can decide whether to lodge the Article or not. A company limited by shares must be accomplishing all the regulations contained in Table A in order to choose to lodge the Article. Then the article should be printed, divided into numbered paragraphs, and signed by each subscriber to the Memorandum in the presence of at least one witness who must attest the signature and add his address as well. 4. 0 COMPANY’S PROMOTERS The company does not exist in a blink of eyes without the effort of human on it. The person who sets up the company and makes it going is known as promoters. The promoters is actually the persons who interested in the company, or the professional persons who incorporate the company as part of their business and then turn them over to the persons who actually want the company. It is settled that the company promoter owes fiduciary obligation or duties to the company or its liquidator for any profit unless it was disclosed to the appropriate terms of the company and the company consented to the promoter retaining it. The promoter can be view as ‘one who undertakes to form a company with reference to a given project and to set it going, and who takes the necessary action or steps to accomplish this purpose’. It is not the proper definition for promoter but it is according to the cases of Twycross v Grant. There is no proper words can describe the promoter of the company well because promoter can appear in different cases. For example, a person who works in purely on behalf of other person is not automatically to be considered as a promoter because he was work following the instruction of the real promoter. The professional person also as accountants and solicitors also cannot easily become as the promoter of the company even though they are the one who draw up the Memorandum and the Article of Associations of the company. A promoter also can be a company on behalf of other company, means the promoter is not restricted in a person but also can be in a form of company. Whether the person is promoter or not is considerable to the situation when the company makes publics offering of securities, the company must disclose the benefits given to the promoters. Beside that, promoter owes fiduciary duties of the company and may be easily determine whether or not a particular person is a promoter for the purpose of ascertaining whether he has breach his duty to the company. Cases related to the promoters of the company can be described under the cases of Gluckstein v Barnes. Base on the cases, Gluckstein was one of a syndicate of four who bought the exhibition hall, Olympia, nominally for ? 140,000 but actually for ? 120,000 and promoted a company of which they become directors and which then he bought back the property in worth of ? 180,000. The company then disclosed ? 40,000 (? 180,000-? 140,000) as the profit of the shares instead of ? 60,000. The company later failed financially. The liquidator then claimed from Gluckstein of his shares for the undisclosed profit. The court then said that event though Gluckstein is the promoter or not for the company, just related to form a company, the benefits gives to him must be disclosed also to the public as well. It is mean that Gluckstein owes fiduciary duties for the company. The court then decides that as the disclosure is not full enough, the liquidator can sue and get back any undisclosed profit from Gluckstein which is ? 20,000. 5. 0 NATURES OF COMPANY Once the Registrar of Company has been issued the certificate of the incorporation, companies become incorporated and have unique functions and characteristics. The life of the company is started at the date that stated in the certificate of incorporation. Section 16 (5) of the Companies Act 1965 provides: â€Å" On the from the date of incorporation stated in the certificate of incorporation but subjected to the Memorandum together with other persons as may from time become members of the company shall be a body corporate by the name provided in the Memorandum capable forthwith the existing all the functions of an incorporated company†¦. † It means that, once a company is formed, it will stand on its own as well as separated from its members or shareholders. The company may performs or living as a â€Å"person† or knowingly as â€Å"artificial person† in the eyes of laws. The most well known cases that being refers is the cases of Salomon v Salomon amp; Co. Ltd (1897). Salomon has carried a successful business as a sole trader as a leather merchant and wholesale boot manufacturer for many years. He then forms a company named Salomon amp; Co. Ltd. He was chosen to form the company liability limited by shares. The company issued one shares for Salomon, together to his spouse and their five children. Salomon then sold his business (sole trader) to the company. The company paid Salomon in terms of partly shares and partly debentures, and partly in form of cash. After a year of the corporation of the company, the company become insolvent and went into liquidation. The issue arise is when Salomon is as the majority shareholder of the company and a debenture holder of the company. It means that, as a creditor he has the right to claims any amount of the company if the company facing liquidations. As the answer for the cases, the Court said that: â€Å"Salomon and the company are completely separated persons. Thus, the business that Salomon sold to the company was owned by and its debts were the liabilities of the company, not of Salomon personally. Although Salomon owned the beneficially all the issued shares of the company, he could also be a secured creditor with enforceable rights against the company in that capacity†. Therefore, as a majority creditor of the company, Salomon gets the opportunity to being paid first than the other creditors. After all Salomon debt has been settled, then the company can proceed to pay the other creditor. But in this case, priority is for Salomon. This case shows the very clear effects once the company has been incorporated. As the company has being incorporated, the effects that taken place are, the company is a body corporate with the powers of an incorporated company, the company may sue and be sue in its own name, has everlasting succession, may own its own property and the liability of the members are limited depends on the types of the company than the other business organization. 5. 1 COMPANIES AS A BODY CORPORATE The company and its members are fully separated once the certificate has been issued. A company is a legal fiction, an abstraction, with legal but no physical existence. According to the case of Continental Tyre amp; Rubber Co (Great Britain) Ltd v Daimler Co Ltd (1915), the company has â€Å"neither body, parts nor passions. Apart from its corporators, it can have neither thoughts, wishes, nor intentions, for it has no other mind than the mind of the corporators†. Therefore, once the company had been incorporated, the members cannot be made liable for any debt or liabilities of the company. The company itself has to settle its own debts and liabilities. The company also hold a powers provided by a legal provision provided by the Companies Act 1965, provided under the Memorandum of Associations, under Article of Associations, under Common Laws and Companies Practices. Another case for the characteristic of the corporate legal body is the case of Lee v Lee’s Farming Ltd. (1961). The facts of this case are, Lee has formed a company named Lee’s Air Farming Ltd. Mr. Lee is the one who own all of the shares of the company and his wife only holds one share. He is also the only one employee of the company. One day, he was involved in an air crash and was killed during performs his work on behalf of the company. Later on, his wife rise up the claims for compensations from the company due to the case under New Zealand Worker’s Compensation Acts 1922. The courts then finally decide that Mrs. Lee can claim the compensations as Lee and the company is completely separated bodies. As the widow of Mr. Lee, the former worker of the company, Mrs. Lee can claim any compensation on behalf of her late husband. 5. 2 CAN SUE AND BEING SUED The second natures of the company one it was incorporated is it can sue and being sued under its name. According to the Companies Act 1965 section 16(5), it state that, upon the registration, the company has the ability to sue and being sued in its own name. If any person does a wrongful act or breaches the duty or contract to the company, it is for the company itself to take action to enforce its right to sue against that person and not the members. Then if the company does the wrongful acts also breaches any duty or act to any person, the company must be sued using its name, not the members of the company. This is because of the special treatment of the company once it being incorporate as become â€Å"juridical persons† that wholly separated form its members. The members of the company may not maintain an action on the company’s behalf. If the director has breaches its duties to the company, it is for the company to enforce its right to sue the director. The proper case to describe the nature of the company for can sue and being sue is under the case of Foss v Harbottle (1843) 2 Hare 461. The case state that, the two shareholders in Victoria Park Company say that the property of the company has been misapplied and they want to against the company’s directors. The court then held that the company and its members are not the same. Therefore it is for the company duties to sue the director, not the members. In the eyes of persons, it is possible to see that the company actually separated from its members because if the company has breach the contract or duty, the company is the one who going to be sued and not the person who actually running the company. 5. 3 PERPETUAL SUCCESSION The third natures of the company once it was formed are the company may enjoy perpetual successions. Company is there forever unless the company observes the legal requirement it still a going concern. In other form of business as partnership, the death of the business is because of the certain conditions as the death of the partner. Perpetual succession means the company is not affected event though one of the members is missing or dead. The identity of the company is still remains even though there have changes in structures of the members or shareholders of the company. The life of the company is lasts when the property is wound up or struck off by the registrar of the company. The case of Re Noel Tedman Holding Pty Ltd. (1967) describing the natures of everlasting life of the company. According to the case, the company had only two shareholders which are husband and wife. The shareholders were also the directors of the company. They were involved in traffic accident and both are died leaving their infant child. The court faced difficulties in deciding who will be the next directors of the company. Even though all of the shareholders of the company are dead, the company is still remains and the new director need to be appointed. The appointment of the directors is according to the vote from the shareholders but there is no remaining shareholder of the company. In the end, the court allows a representative of the deceased directors to appoint the new directors of the company. So that, the transfer of the shares to the beneficiary will be done by the appointed directors. 5. 4 ABILITY TO OWN PROPERTY Beside that, the company has the ability to own its own property in its own name. Section 19(5) of the Companies Act 1965 mention that the company can own land but the company actually can own any kind of property also. This is due to the facts that the company is a separate legal entity from its members. The property that the company own is indeed for the company and not for the members. Even the person is own all the share of the company but he is not entitle to own the company’s property. The case of Macaura v Northern Assurance Co. Ltd can illustrate the natures of the ownership of the company well. Macaura owned an estate in Ireland. He sold all the timber on the estate to a company, Irish Canadian Sawmills Ltd. The property of the company is its own nor his nominees. Other than that, he is also a substantial creditor of the company. Macaura then took an insurance policy to the timber he had sold to the company in his own name. Two week after affecting the insurance, the timber was destroyed in a fire. Macaura then put a claim for compensation against the insurance company for the loss suffered. But then, the insurance company refuses to pay. The court found that that Insurance Company is right because once Macaura sold the timber to the company, then the timber is wholly owned by the company. Macaura has no more interest on the timber that he could insure. Therefore the insurance company did not have obligation to pay for Macaura. 5. 5 LIMITED LIABILITIES FOR ITS MEMBERS Another important and unique feature of the company once it was incorporated is the liability of the members of the company is limited. As the company can own property in its own name, it means that the liability of company’s is also for in its own, not for the members. Even if the person is a director of the company and running the company as well as contracts the debts of the company, the company is the one who is liable. The members of the company cannot be sued for the debts of the company. In other words, the members are fully protected and their personal property cannot take away on behalf to pay any debts or liabilities of the company. The case of Salomon v Salomon amp; Co give a proper sight on how the company is the only one liable for its liabilities and debts during liquidations. Therefore the company should settle any debts to the secure creditors of the company before settle any liabilities to the other creditors. The members of the company are not involved. However, as members of the company, they have some liabilities but the liabilities are limited. The liability of members for company is quietly different with the liabilities for the members in partnership. The liabilities of the members of the company is depends on the types of the company that being incorporated. In the case of the company limited by guarantee, a member is liable to contribute to the company’s assets on winding up only up to the amount that he agreed to guarantee. It is stated under section 214(1)(e) Companies Act 1965. For the company limited by shares, the members are called upon to contribute capital once, when the shares are issued to them. A holder of fully paid shares are not entitle from being asked to contribute more to the company to pays its debt or liabilities. The special situation is when the company is choosing to be unlimited company. All of the members in unlimited company can contribute without limit to the company. Even though the company is unlimited, it does not mean that, if the creditor wants to sue the company they cannot directly go towards to the members. As the members and the company is separate legal entity, the creditors have to sue the company. If the company cannot pay all of their liabilities, then the company is eligible to be liquidation. When the liquidation taken place, all of the members will be called for contribution to pay the liabilities of the company using their own property or assets. Not only the members but the directors and officers also responsible for the company’s liabilities if the company cannot pay the liabilities anymore. The case of Re Application by Yee Yut Ee (1978) held is the example case of the limited liabilities of the company’s members. Regarding to the case, the court held that except in cases of fraud, breach of warranty of authority or other exceptional circumstances, a director is not liable for any debts of an incorporated company. 6. 0 TYPES OF COMPANY To ensemble the purpose which a company may practice, the Companies Act 1965 allows the formations of different types of companies. Under section 16(4) of the act provides four types of company which are classified according to the liability of the members are; a) Company limited by shares b) Company limited by guarantee c) Company limited by both shares and guarantee ) Unlimited company 6. 1 COMPANY LIMITED BY SHARES Section 4 of the act define the company limited by shares as â€Å"a company formed on the principle of having the liability of its members limited by Memorandum to the amount unpaid on the shares respectively held by them†. Therefore, the liability of a member’s contribution to the company’s assets is limited to the amount, if any, unpaid of shares. If the shares are fully paid, therefore the members are no longer being called for contribute if the company facing difficulties in paying its liabilities. 6. 2 COMPANY LIMITED BY GUARANTEE Under section 4 of the acts, it also defines company limited by guarantee as â€Å"a company formed on the principle of having the liability of its members limited in Memorandum to such an amount as the members may respectively undertake to contribute to the assets of the company in the event of its being wound up†. The liability of the members to contribute to the company only arises when the company is going to be wound up. Therefore, the members are protected by guarantee that they are only be liable when the company not able to pay all its debts and going to liquidation. . 3 COMPANY LIMITED BY BOTH SHARES AND GUARANTEE Company limited by both shares and guarantee is the company that have a members holing shares and also given guarantee in the same time. This requires its members to be liable to pay amount for any unpaid on any shares held by them in addition to meeting their guarantee undertaking to contribute a specified amount in the event the company is going to wound up. 6. 4 UNLIMITED COMPANY Unlimited company is â€Å"a company formed on the principle of having no limit place on the liability of its members†. The members of unlimited company are agreed to be liable in winding up for the liabilities of the company. The members will have no limited contribution if the company facing liquidation. The condition is almost similar with partnership but it is in form of incorporation. Limited liability is the most reason why the company being incorporated, therefore the unlimited company is quite rare nowadays especially in trading company. This kind of company is most used in Mutual Funds or in Investment Company. 7. 0 PRIVATE AND PUBLIC COMPANY All of the types of companies can be classified into two kinds of company which is Private and Public Company. 7. 1 PRIVATE COMPANY Companies Acts 1965 provided Private Companies under section 4(1) as: a) Any company which immediately prior to the commencement of the act was a private company under the repealed written law, b) Any company incorporated as private company by virtue of its predecessors which have retained its private status, c) Any company converted into a private company and which has not ceased to be private company. The private company serves as important vehicle of the small group of companies to advantage themselves to become a corporate entity. To be a private company, the company must have share capital, therefore the Company limited by guarantee is prohibited to become as a private company. Under the Memorandum or Article of association of the private company should contain certain restrictions, limitations and prohibitions as: a) Restricting the right to transfer its shares, b) Limiting its members to not more than 50 persons ) Prohibiting any invitation to the public to subscribe for any shares in or debentures of the company, d) Prohibiting any invitation or offer to the public to deposit money with the company for a fixed period or payable at call whether bearing interest or not. As a private company has more than one class of shares, then the restrictions must be apply to all classes of shares it must be mentions in the Memorandum or Article of Association of the company. The restricti ons of transfer may include several forms. First is, if the members want to transfer the shares he holds, he must issued it first to the other members in the company. Second is, the clause of the company already give discretion to the directors of a private company to refuse any transfer of the shares without assigning any reason. One major effect of restriction is that the person who whishes to join a private company may be prohibited from doing so. The restrictions means that the existing members of a company who whishes to transfer his shares may find that it is unable to do so. The members may do so only by transferring his shares to the selected members at a price that already set up by the company. Another effect that will taken place due to the restriction of the shares is in term of the marketability and value of the shares in private company. This also affects the ability of the members to gain any gain or retains control over the private company. If the private company breaching any prohibition provided in the Memorandum or Article of Association submitted to the registrar, the High Court may order to determine that the company ceased to be a private company on such a date made by the High Court. The notice from the registrar of company will be issued upon the ceased of the company to be a private company. a private company must have the word â€Å"Sendirian† or â€Å"Sdn† as part of its name that inserted before the word â€Å"Berhad† or â€Å"Bhd†. Hence, the name of the private limited company will end as â€Å"Sendirian Berhad† or â€Å"Sdn. Bhd or jus â€Å"Sendirian† for the private unlimited company. 7. 2 PUBLIC COMPANY Public company means â€Å"a company other than the private company† under the Companies Act 1965, section 4(1). A public company not affected by any restrictions, limitations, and prohibitions as the private company. In the simple words, the public company is freely to give invitation or offer their shares in or debentures to the public. Therefore, the public or interested investors may become as a members of the public company. Basically, most of the public company is listed in Malaysian Stock Exchange. The major disadvantage of public company is the inability of the company to exercise or commence business without the grant of the certificate. It is prove to be extremely inconvenient particularly in cases where arrangements for the financing of the company are to be made immediately after the incorporation. Therefore, in avoiding this cases is arising, nowadays, most of the newly formed company are chosen to be private company before transfer it into public company later on. The company that originally incorporated as public company is a company that has a share capital which does not issue a prospectus on or a reference to its incorporation may not allot any of it shares or debentures. Therefore, the company must not commence any business or exercise any borrowing power before get the grant of certification to entitle the company to commence business. But, before the registrar issue the certificate of commencing business, the company must accomplish certain condition which is: a) There has been lodged with the registrar a statement in lieu of prospectus, b) Every director of the company has paid to the company on the shares taken or contracted to be taken by the director, c) There has been lodge with the registrar a statutory declaration by the secretary or one of the directors that two of the requirement stated has been complied with. 8. 0 COMPARISON BETWEEN PRIVATE AND PUBLIC COMPANY There are several distinctions between a private and public company. The comparison will be classified in forms of function, transfer of shares, memberships, name of the company, contents of Memorandum and Article, Director, and meetings. For the function, the private companies can commence its business and exercise all the functions as an incorporated body, including its borrowing powers, upon the issues of the incorporations. For the case of the public company, it must obtain any certificate from the registrar before commence and exercise its power. A public company is not bound to any restriction, limitation, and prohibition as the private company. A members public company is freely issues their shares and debentures to the public. The private company is restricted to issue their shares and debentures to the outsides and have to issues first the shares to the existing members. All of the restrictions, limitation, and prohibition of the private company must be stated in the Memorandum or in the article of association. For the public company, it is not imposed by the Act. The membership of the private company must not exceed 50 members, whereas there is no limitation number of members for the public company. The name formation of name of the company of the private company must have the words of â€Å"Sendirian† or â€Å"Sdn† before the words of ‘Berhad† or â€Å"Bhd†. Whereas, for the public company, it is restricted to have the word ‘Sendirian† or â€Å"Sdn† but must end with the word of â€Å"Berhad† or â€Å"Bhd† after the name. The private company is not restricted to appoint the directors that over the age of 70 years. Private company and public company are required to hold their first annual meeting 18 months of the incorporations. 9. 0 CONCLUSION The reason why company is incorporated is because of the unique features of the company which is become as â€Å"corporate person† and assures its members to holds limited liabilities. A company is very different to the other form of business as sole proprietorship and partnership. Once the company being incorporated, it may enjoy a ‘life† as a normal persons which it become a corporate entity, can sue and being sued under its name, have perpetual succession, can have its own property and the liability of its members are limited. But in order to enjoy the unique feature of the company, it must follow several procedures and legal requirement to get the certificate of incorporations. A company did not set up immediately in just a blink of eyes. Therefore, promoter needed to start the jog in incorporates a company. A promoter is can be in person also in a form of company. Any benefit or gain that the promoter receives during the process of incorporations must be disclosed to the members also to the third party as well to avoid the conflict of interest and to smooth the work of the liquidator upon winding up. There have four types of company which is a company limited by shares, company limited by guarantee, company limited by both shares and guarantee, and unlimited company. All this kind of company can be in form of Private or Public Company but the company limited by guarantee are not eligible under Private company as its have no share capital. The company has to state the requirements to become a private company in its memorandum or article of associations. All the restrictions, limitation, and prohibition of the private company must be stated as well. The private and public company have several different characteristic as the name, transfer of shares and more. Both of this kind of company has their own strength and weaknesses so it is depends to the individual whether to become as the members in private or public company.