Comprehensive Classification and Legal Procedures of Companies Under the CA 2016

Classification of Companies Under the Companies Act 2016

• General Classification Criteria: Under the Companies Act ($CA 2016$), companies are primarily classified based on several distinct dimensions:
  • Basis of Liability: Limited by shares, limited by guarantee, or unlimited.
  • Public Status: Public companies versus private companies.
  • Relationship Status: Holding companies, subsidiary companies, or related companies.
  • Incorporation Status: Locally incorporated versus foreign-incorporated companies.
  • Membership Count: One-member companies versus companies with more than two members.

Public Company (Berhad / Bhd)

• Statutory Basis and Definition:
  • Defined under $\text{Section 2(1)}$ as any company that is not a private company.
  • The name must end with the word "Berhad" or the abbreviation "Bhd" as per $\text{Section 25(1)(a)}$.
• Legal Characteristics:
  • Public Invitation: Such companies may invite the public to subscribe for their shares or debentures.
  • Listing Status: May be listed on a stock exchange or remain unlisted. Listed companies must strictly comply with the Bursa Malaysia Listing Rules.
  • Minimum Directors: Must have at least two directors according to $\text{Section 196(1)(b)}$.
• Key Membership and Liability Details:
  • Membership: Minimum of $2$ members with no maximum limit ($\text{Section 196(1)}$).
  • Liability: May be limited by shares or by guarantee.
  • Nationality: Local (Malaysian).
  • Example: Any listed or unlisted "Bhd" company.

Private Company (Sendirian Berhad / Sdn. Bhd.)

• Statutory Basis and Definition:
  • Defined under $\text{Section 2(1)}$ and $\text{Section 42(1)}$ of the $CA 2016$ as a company limited by shares that restricts share transfers and limits membership numbers.
  • The name must end with "Sendirian Berhad" or "Sdn. Bhd." ($\text{Section 25(1)(b)}$).
• Legal Characteristics:
  • Prohibition on Public Subscription: It cannot invite the public to subscribe for its shares or debentures ($\text{Section 42(1)}$).
  • Transfer Restrictions: Shares are not freely transferable; the right to transfer is restricted by the company's constitution.
• Key Membership and Liability Details:
  • Membership: Minimum of $1$ member and a maximum of $50$ members.
  • Liability: Limited by shares.
  • Nationality: Local (Malaysian).
  • Example: ABC Sdn. Bhd.

Exempt Private Company

• Statutory Basis and Definition:
  • Defined under $\text{Section 2(1)}$ as a private company in which no beneficial interest in shares is held directly or indirectly by any corporation.
  • It acts as a hybrid between a partnership and a traditional private company.
• Criteria for Exempt Status:
  • Membership Limit: Must have not more than $20$ members.
  • Nature of Members: All members must be individuals; no corporate shareholders are permitted.
• Legal Protections and Exemptions:
  • Financial Reporting: Exempted from filing audited financial statements with the Registrar of Companies ($SSM$) if the company is solvent, pursuant to $\text{Sections 260--261}$.
  • Regulatory Exemptions: Enjoys exemptions from certain restrictions, specifically those related to providing financial assistance to directors under $\text{Sections 224}$ and $\text{Sections 225}$.

Comparison Between Public and Private Companies

Procedures for Conversion of Company Status

Public to Private Company ($\text{Section 41(1)}$)

1. Special Resolution: The public company passes a special resolution to initiate the conversion.
2. Notice to Registrar: The company lodges a notice of conversion with the Registrar of Companies ($SSM$), specifying the name change (e.g., removing "Bhd" for "Sdn. Bhd.").
3. Registrar’s Action: The Registrar updates the register, issues a Notice of Conversion, and cancels the previous Certificate of Incorporation.
4. Effect: The conversion is effective on the date the Notice of Conversion is issued.
5. Legal Continuity: Identity, rights, obligations, and legal proceedings remain unaffected.

Private to Public Company ($\text{Section 41(2)}$)

1. Special Resolution: The private company passes a special resolution to convert.
2. Lodgement: The company must lodge:
   • A Notice of Conversion with the new "Berhad" name.
   • A Statement in lieu of prospectus.
   • A statutory declaration verifying compliance with $\text{paragraph 190(2)(b)}$.
3. Registrar’s Action: The Registrar records the conversion and issues a Notice of Conversion.
4. Effect: Conversion takes effect upon the issuance of the Notice.
5. Legal Continuity: Rights and obligations continue without interruption.

Automatic Conversion from Private to Public ($\text{Section 41(4)}$)

A private company ceases to be private and automatically becomes public if it fails to maintain specific statutory requirements:

• Condition (a): It ceases to restrict the transfer of its shares (removing the mandatory constitutional clause).
• Condition (b): It ceases to have a share capital (restructuring that eliminates the defining private company trait).
• Condition (c): It exceeds the limit of $50$ shareholders (excluding employees/former employees).
• Restriction on Reverting: Per $\text{Section 41(6)}$, once a company becomes public by operation of law, it cannot return to private status without permission ("leave") from the Court.

Classifications Based on Member Liability

Company Limited by Shares

• Statutory Basis: Defined under $\text{Section 10(2)}$ and reinforced by $\text{Section 192(2)(a)}$.
• Liability Rule: The liability of members is strictly limited to the amount (if any) unpaid on shares held.
• Key Principles:
  • If shares are fully paid, the member has no further liability even if the company is wound up ($\text{Section 435(2)(b)}$).
  • If shares are partly paid, the member is liable for the unpaid portion during a call or winding up.
  • Personal assets remain protected unless the corporate veil is lifted.

Company Limited by Guarantee (CLBG)

• Statutory Basis: Defined under $\text{Section 10(3)}$ and $\text{Section 192(2)(b)}$.
• Mechanism: Members undertake to contribute a specific amount to the company's assets only in the event of winding up.
• Common Use: Typically used for non-profit purposes (charity, religion, education).

Unlimited Company

• Statutory Basis: Under $\text{Section 10(4)}$, there is no limit on the liability of its members.
• Legal Characteristics:
  • Members are personally liable for all debts if the company becomes insolvent.
  • It maintains a separate legal entity and perpetual succession.
  • Naming: Must end with "Sendirian" or "Sdn." ($\text{Section 25(1)(c)}$).
  • Debated Anomaly: $\text{Section 42(1)}$ implies private companies must be limited by shares, which creates a legal inconsistency regarding whether an unlimited company can technically be private.
• Conversion to Limited Company ($\text{Section 40}$): Requires a special resolution, notice to the Registrar, and an automatic constitutional amendment to reflect the new limited status.

Holding and Subsidiary Company Relationships

• Subsidiary Definition ($\text{Section 4(1)}$): A corporation is a subsidiary of another (the holding company) if:
  • Control of Board: The holding company can appoint or remove the majority of the board of directors ($\text{Section 4(2)}$).
  • Voting Power: The holding company controls more than half ($> 50\%$) of the voting power.
  • Issued Shares: The holding company holds more than half ($> 50\%$) of total issued shares (excluding preference shares).
  • Indirect Control: If it is a subsidiary of another subsidiary (the "chain relationship").
• Rules for Assessment ($\text{Section 4(3)}$):
  • Shares held in a fiduciary capacity (as a trustee) are excluded from control counts.
  • Shares held by nominees are treated as held by the holding company.
  • Shares held as security (e.g., by a bank or via debentures) are disregarded.
• Holding Company Definition ($\text{Section 4(4)}$): Simply defined as a corporation of which another company is a subsidiary.
• Example Scenario:
  • Tier 1: ABC Berhad holds $70\%$ of ordinary shares in XYZ Sdn. Bhd. and controls its board.
  • Tier 2: XYZ Sdn. Bhd. owns $60\%$ of DEF Sdn. Bhd.
  • Result: XYZ Sdn. Bhd. is a direct subsidiary of ABC Berhad. DEF Sdn. Bhd. is an indirect subsidiary of ABC Berhad.

Foreign Companies

• Registration Requirement: Under $\text{Section 561(1)}$, a foreign company must register before "carrying on business" in Malaysia, which includes managing property or operating a share transfer office.
• Excluded Activities (Thirteenth Schedule / $\text{Section 561(2)}$): Certain activities do not constitute "carrying on business":
  • Being a party to legal proceedings (suing/being sued).
  • Holding internal director or shareholder meetings.
  • Maintaining a local bank account.
  • Selling through independent contractors.
  • Soliciting orders that are accepted outside Malaysia.
  • Creating debt instruments or charges over assets.
  • Enforcing rights or collecting debts.
  • Conducting an isolated transaction (lasting within $31$ days).
  • Investing funds or holding property purely for investment.
  • Temporary importation of goods for display/exhibition.

One Member Company

• Introduction: Introduced under $\text{Section 9(b)}$ to simplify business for small entrepreneurs.
• Structure:
  • Membership: Exactly one member.
  • Director: The sole member serves as the director ($\text{Section 234}$).
  • Liability: Limited by shares.

Questions & Discussion

• Question 1: What kinds of activities or purposes are restricted to Companies Limited by Guarantee (CLBGs)?
  • Reference: Section $\text{45(1)}$.
• Question 2: Why do you think companies promoting charity or religion must be formed as companies limited by guarantee instead of by shares?
  • Context: This concerns the nature of profit distribution and the commitment of members to the organization's non-commercial objectives.