Comprehensive Study Notes on Business Entities and Incorporation Law
Overview and Definition of Corporate Entities
Nature of a Company:
A company is defined as a "corporation" — an artificial legal person created by law, as distinguished from a natural person (a human being).
As a recognized legal person, a company possesses legal rights and obligations in the same manner as a natural person.
Under Section 2 of the Companies Act 2016 (Act 777), a company is defined as a company incorporated under the Companies Act 2016 or under any corresponding previous law.
In contrast to a sole proprietorship or a partnership, a company is an incorporated association. Upon incorporation, it becomes a body corporate recognized by law as having a separate legal entity distinct from its members and officers.
Distinction Between Company, Corporation, and Body Corporate:
Corporation: Defined under Section 3 and Section 2(1) of the Companies Act 2016 as any body corporate formed, incorporated, or existing within Malaysia or outside Malaysia, including any foreign company.
Body Corporate: An artificial person possessing a separate legal personality.
Company: A specific type of corporation incorporated in Malaysia pursuant to the Companies Act 2016 or previous written legislation.
Sources of Malaysian Company Law
Statutory Enactments and Legislation:
Companies Act 2016 (Act 777)
Securities Commission Act 1993 (SCA)
Capital Markets & Services Act 2007
Company Commission of Malaysia Act 2001
Civil Law Act 1956
Companies Regulations 2017
Regulatory Frameworks and Guidelines:
Listing Requirements of Bursa Malaysia Securities Berhad (BMSB)
Securities Commission Guidelines
Best Practices in Malaysian Code of Corporate Governance 2012
Common Law and Precedent:
Judicial Case Law Precedents (Malaysia, United Kingdom, and Australia).
Common Law principles applied when statutory provisions are silent, pursuant to Section 5 of the Civil Law Act 1956 regarding English Common Law.
Historical Development of Malaysian Company Law
Statutory Evolution:
Companies Enactment 1897
Companies Enactment No 20 of 1917
Companies Enactment 1927
Companies Ordinance 1946
Companies Act 1965 (CA) — modeled upon the English Companies Act 1948 and the Australian Uniform Companies Act 1961.
Companies Bill 2015 — passed by the House of Representatives (Dewan Rakyat) on 4 April 2016 and by the Senate (Dewan Negara) on 28 April 2016.
Companies Act 2016 (Act 777) — enforced on 31 January 2017, completely replacing the previous Companies Act 1965.
Functions and Scope of Company Law
Functions of the Companies Act 2016:
Regulatory Function: Prescribes conditions that must be complied with to obtain registration and statutory rules that must be observed to protect members, creditors, and the public against corporate risks.
Statutory Function: Empowers two or more persons (natural or artificial) to form a body corporate by registering a company, which possesses an independent, separate legal personality upon registration.
Scope of Corporate Regulation:
Regulates company formation and ultimate termination (winding-up/liquidation).
Regulates relationships between corporate participants (e.g., directors and shareholders).
Facilitates commercial dealings between companies and external third parties.
Governs internal corporate management.
Imposes statutory duties and legal obligations on entities and individuals.
Regulatory Bodies in Malaysia
Companies Commission of Malaysia (SSM / Suruhanjaya Syarikat Malaysia):
A statutory body formed on 16 April 2002 via the merger of the Registrar of Companies (ROC) and the Registrar of Businesses (ROB).
Acts as the primary authority to incorporate companies, register businesses, and supply company and business information to the public.
Serves as the leading authority for corporate governance, ensuring compliance with business registration and corporate legislation through monitoring and enforcement activities.
Securities Commission Malaysia (SC):
Established on 1 March 1993 under the Securities Commission Act 1993 (SCA).
A self-funded statutory body tasked with regulating and developing the Malaysian capital market.
Statutory Mission: To promote and maintain fair, efficient, secure, and transparent securities and derivatives markets, and to facilitate the orderly development of an innovative and competitive capital market.
Bursa Malaysia Securities Berhad:
An exchange holding company established in 1973 and listed in 2005.
Advantages and Disadvantages of Incorporation
Advantages of Forming a Company:
Facilitates capital accumulation by pooling resources from a large number of investors.
Capital is subdivided into small transferable shares, allowing investors to trade smaller investment portions easily.
Limited liability protection minimizes financial risk for investors, thereby encouraging commercial investment.
Separate legal personality simplifies business dealings (e.g., transfers of asset ownership are avoided when participants enter or leave, as ownership changes via share transfers).
Disadvantages of Forming a Company:
High establishment and operational costs alongside time-consuming compliance procedures.
Highly complex organizational structure, which can be overly burdensome for small businesses where board directors and shareholders consist of the exact same individuals.
Comprehensive Classification of Companies
Classification by Member Liability:
Company Limited by Shares (Section 10(2)):
Founded on the principle of limiting member liability in the corporate constitution to the amount unpaid on shares held by each member.
If shares are fully paid up, members are not required to contribute further funds toward corporate debts upon winding up.
If shares are partly paid, members may be called upon at any time (or upon winding up under Section 192(1) and Section 192(2)(a)) to pay the remaining unpaid balance.
Case Precedent: Tan Tien Kok v Medical Specialist Centre (JB) Sdn Bhd [1994] 3 MLJ 469 — Confirmed that imposing surcharges contrary to statutory limited liability principles is invalid (applying Section 214(1)(d) of CA 1965, equivalent to Section 435(2)(b) of CA 2016).
Company Limited by Guarantee (Section 10(3), Section 38, Section 45(1), Section 192(2)(b)):
Member liability is limited to the specific sum agreed in the corporate constitution to be contributed to corporate assets in the event of winding up (Section 435(2)(c)).
Does not possess share capital.
Provides corporate status and creates a reserve fund guarantee for financial crises or dissolution.
Generally formed for non-profit objectives under Section 45(1): promoting art, science, religion, charity, pension/superannuation schemes, recreation, amusement, commerce, industry, or public utility.
Must have a Constitution and submit it at incorporation (Section 38). Can only be incorporated as a public company (Section 11(2)).
Examples: Aman Palestin Berhad, Borneo Nature Conservation Berhad, Kuok Foundation Berhad, Institut Keusahawanan Negara Berhad, MAICS Berhad, Malaysian Institute of Chartered Company Secretaries Bhd.
Unlimited Company (Section 10(4)):
Places no limit on member liability. Members remain fully liable for corporate debts if company assets are insufficient during liquidation.
Section 25(1)(c) mandates the inclusion of the word "Sendirian" or "Sdn" in its registered name.
Conversion from Unlimited to Limited Company:
Governed by Section 40 of the Companies Act 2016.
Requires passing a special resolution and lodging a formal notice of conversion with the Registrar of Companies.
Section 40(5) provides that conversion does not affect the legal identity of the company or render defective any pending legal proceedings.
Classification by Status and Membership:
Private Company (Section 11(1), Section 25(1), Section 42, Section 43):
Must be a company limited by shares (Section 42(1)).
Maximum membership capped at 50 shareholders (Section 42(1)).
Must restrict share transferability (Section 42(2)).
Statutorily prohibited from offering shares or debentures to the public, allotting shares/debentures with a view of offering them to the public, or inviting the public to deposit money (Section 43(1)).
Name must conclude with "Sendirian Berhad" or "Sdn. Bhd." (Section 25(1)).
May be formed with a single shareholder (Section 9(b), Section 42) and requires a statutory minimum of only 1 resident director (Section 9, Section 196(1)).
Exempt Private Company (Section 2(1)):
A private company limited by shares in which no beneficial interest is held directly or indirectly by any corporation.
Maximum of 20 members, all of whom must be natural persons (individuals).
Public Company (Section 2(1), Section 11):
Any company other than a private company.
Name must conclude with "Berhad" or "Bhd." (Section 25(1)).
May be a company limited by shares, limited by guarantee (Section 11(2)), or unlimited (Section 11(3)).
No restrictions on share transferability.
Requires a statutory minimum of 2 resident directors (Section 196(1)).
Key Differences Between Private and Public Companies:
Resident Directors: Private companies require a minimum of 1 resident director; public companies require at least 2 (Section 196(1)).
Written Resolutions: Only private companies may pass written resolutions without calling a physical meeting (Section 290).
Annual General Meeting (AGM): Only public companies are mandated by statute to hold an AGM (Section 390).
Audit Exemption: Certain qualifying categories of private companies are exempted from having financial accounts audited (Section 255).
Conversion Provisions: Section 41(1) covers conversion from public to private; Section 41(2) covers conversion from private to public; Section 41(3)-(4) governs notice lodgement; Section 42(4)-(5) governs cessation of private status.
Classification by Corporate Relationship:
Holding and Subsidiary Relationship (Section 4, Section 6):
Corporation S is deemed a subsidiary of Corporation H if:
H controls the composition of the Board of Directors of S (Section 4(1)(a)(i)). Under Section 4(2), control exists if H can appoint or remove all or a majority of S's directors (Section 4(2)(a)-(b)).
H controls more than 50% () of the voting power of S (Section 4(1)(a)(ii)).
H holds more than 50% () of the issued share capital of S, excluding preference shares (Section 4(1)(a)(iii)).
S is a subsidiary of another corporation that is itself a subsidiary of H (Section 4(1)(b)).
Ultimate Holding Company (Section 5):
A corporation is an ultimate holding company of another corporation if that other corporation is its subsidiary, and the holding company is not itself a subsidiary of any other corporation.
Wholly Owned Subsidiary (Section 6):
A corporation is a wholly owned subsidiary if none of its members is a person other than its holding company, a nominee of its holding company, another wholly owned subsidiary of the holding company, or a nominee of such a wholly owned subsidiary.
Related Corporations (Section 7):
Corporations are related if one is the holding company of another, one is the subsidiary of another, or both are subsidiaries of a common holding company (vertical or horizontal corporate relationship).
Classification by Place of Incorporation:
Local Company: Incorporated in Malaysia under the Companies Act 2016.
Foreign Company (Section 2(1)):
A company, corporation, society, association, or body incorporated outside Malaysia; or
An unincorporated society/association formed outside Malaysia that under its home law may sue, be sued, or hold property in the name of an officer, and does not have its head office or principal place of business in Malaysia.
Must register with the Registrar prior to establishing a place of business in Malaysia.
Comparative Analysis of Business Entities
Structure:
Company: Separate legal person distinct from its members.
Partnership: Two or more persons carrying on business in common with a view of profit.
Sole Proprietorship: Individual carrying on business on his own.
Registration:
Company: Registered with Companies Commission of Malaysia (SSM) under Companies Act 2016.
Partnership: Registered with SSM under Registration of Businesses Act 1956.
Sole Proprietorship: Registered with SSM under Registration of Businesses Act 1956.
Transferability of Rights/Ownership:
Company: Shares generally freely transferable (subject to constitutional restrictions in private companies).
Partnership: Partners cannot transfer partner status to third parties without consent of all other partners.
Sole Proprietorship: Owner may transfer business to another party.
Formation Requirements:
Company: Formed in writing, with or without a corporate constitution.
Partnership: Formed orally or in writing.
Sole Proprietorship: Easy, economical, no formal agreement required, inexpensive registration fee.
Management & Agency:
Company: Members as such are neither managers (directors) nor agents of the company.
Partnership: Partners are mutual agents of the firm in the ordinary course of business and are entitled to participate in management.
Sole Proprietorship: Sole proprietor owns and manages directly, with option to hire employee managers.
Membership Limits:
Company: No maximum limit (except private companies capped at 50 members).
Partnership: Maximum limit of 20 partners.
Sole Proprietorship: Exactly 1 person.
Constitution:
Company: Optional, except mandatory for companies limited by guarantee (Section 31 & Section 38).
Partnership: Optional agreement formed orally or in writing.
Sole Proprietorship: No agreement necessary.
Capital & Liability:
Company: Capital subscribed by members cannot ordinarily be returned; limited company members are not personally liable for corporate debts once shares are fully paid up.
Partnership: Partners may withdraw capital, but liability for firm debts to creditors is unlimited.
Sole Proprietorship: Proprietor may withdraw capital, but liability for firm debts is unlimited.
Dissolution:
Company: Formal legal procedure involving winding up and liquidation.
Partnership: Informal dissolution (e.g., mutual agreement among partners).
Sole Proprietorship: Informal dissolution by sole proprietor directly.
Impact of Death and Bankruptcy:
Company: Does not interrupt operations (enjoys perpetual succession).
Partnership: Automatically dissolves the partnership firm.
Sole Proprietorship: Automatically dissolves the business entity.
Factors Determining Entity Selection:
Procedural complexity and formation/maintenance costs.
Extent of personal liability exposure for debts.
Need for continuous perpetual existence.
Ease of transferability of ownership rights.
Tax structure (entity-level tax rates vs individual income tax scales).
Process and Mechanics of Incorporation
Statutory Mode of Formation:
Governed by Section 14(1) of the Companies Act 2016.
Any two or more persons associated for any lawful purpose may form an incorporated company by subscribing their names to a memorandum/registration application and complying with registration requirements (note: Section 9 and Section 42 permit a single person to incorporate a private company).
Requires lodging memorandum and registration documents alongside prescribed statutory fees with the Registrar of Companies (ROC / SSM).
Certificate of Incorporation:
Issued pursuant to Section 17 once pre-registration statutory procedures are fulfilled.
Serves as the official "Birth Certificate" of the legal entity.
Under Section 19, the Certificate of Incorporation provides conclusive evidence that all statutory incorporation requirements (and matters precedent/incidental under Section 15) have been complied with and that the entity is duly incorporated from the stated date.
Statutory details stated on certificate:
Type of company registered.
Date of registration.
Name of company.
Assigned company registration number.
Case Law Precedent: Tan Lai v Mohamed Bin Mahmud & Ors [1982] 1 MLJ 338 — Confirms that Section 19 makes it impossible for any party to challenge the lawfulness and validity of the company's existence, though it does not validate objects or powers in the memorandum that are intrinsically unlawful or unlawfully exercisable.
Legal Effects and Characteristics of Incorporation
Statutory Effects (Section 20 & Section 21 of CA 2016):
Separate legal entity status (Section 20(a)).
Perpetual succession (Section 20(b)).
Capacity to perform all functions of an incorporated body (Section 21(1)).
Power and capacity to sue and be sued (Section 21(1)(a)).
Power to acquire, hold, and dispose of property (Section 21(1)(c)).
Power to enter into contracts (Section 21).
1. Separate Legal Entity (Section 20(a)):
An artificial legal personality created by law, distinct from directors, officers, members, and employees.
Landmark Case: Salomon v Salomon & Co Ltd [1897] AC 22:
Facts: Salomon conducted a successful sole-trader boot and shoe manufacturing business. In 1892, he incorporated Salomon & Co Ltd and transferred his business to it. The company comprised 7 shareholders: Salomon, his wife, and his 5 children. Payment for the business was taken in 20,000 fully paid shares, cash, and a debenture secured by a floating charge over corporate assets. Salomon thus became a secured creditor of his own company. When the company encountered financial distress and went into liquidation, assets were insufficient to satisfy both secured and unsecured creditors. The liquidator prioritized unsecured creditors, claiming Salomon's debenture was invalid as the company was a sham/agent and Salomon was identical to the company.
Holding: The House of Lords held that Salomon and Salomon & Co Ltd were two distinct, separate legal persons. The business belonged to the company, making debts liabilities of the company, not Salomon personally. Salomon was legally entitled to priority as a secured creditor despite holding 99% of shares.
Legal Principle: Incorporation creates an independent legal entity separate from its incorporators/shareholders, insulating personal assets from corporate debts.
2. Power to Sue and Be Sued (Section 21(1)(a)):
A company must litigate in its own legal name for breaches committed against it and may be sued for its own unlawful acts/omissions.
Hypothetical Illustration: If promoter Kevin breaches fiduciary duty and makes a secret profit of , the wrong is committed against the corporate entity. Only the company itself possesses legal standing to sue Kevin to recover damages or disgorge secret profits.
Landmark Case: Foss v Harbottle (1843) 2 Hare 461:
Facts: Two shareholders initiated legal proceedings against company directors, alleging corporate property had been misapplied and wasted.
Holding: The court dismissed the action, ruling that the alleged injury was inflicted upon the company itself, not the individual shareholders. The company is the proper plaintiff to sue for corporate wrongs.
Legal Principle: The Board of Directors is the proper organ to authorize legal proceedings on behalf of a company. Individual directors or shareholders cannot sue on corporate rights without specific legal authorization.
3. Perpetual Succession (Section 20(b)):
A company enjoys continuous legal existence independent of changes in membership or control. It continues until legally dissolved via winding up or struck off the register.
Landmark Case: Re Noel Tedman Pty Ltd [1967] Vr 561 / Qld R 561:
Facts: A private company had only two directors who were also the sole shareholders (a husband and wife). Both perished in a fatal traffic accident, leaving an infant child behind. Articles of association required director approval prior to transferring shares under a deceased member's will. With no surviving directors or members, no appointments or transfers could be executed under standard constitutional voting mechanisms.
Holding: The court granted liberty to the personal representatives of the deceased shareholders to appoint new directors, enabling those directors to formally assent to transferring shares to the surviving beneficiary.
Legal Principle: Corporate legal existence survives the total extinction of its human membership.
4. Capacity to Own Property (Section 21(1)(c)):
Corporate property belongs strictly to the body corporate, not to its shareholders or directors. Members hold shares in the company, not beneficial ownership of underlying corporate assets.
Landmark Case: Macaura v Northern Assurance Co Ltd [1925] AC 619:
Facts: Macaura owned an estate and sold all timber on it to a company in exchange for all issued shares. Macaura insured the timber against fire under his own personal name, rather than transferring policies to the company. A fire subsequently destroyed the timber, and Macaura claimed insurance payouts.
Holding: The House of Lords held that the insurer was not liable. Having sold the timber to the company, Macaura lost all personal legal and equitable interest in the timber. Shareholders have no insurable interest in the assets owned by a corporation.
5. Power to Enter Into Contracts (Section 21):
A company has full legal capacity to enter contracts with external third parties or its own officers and members.
Landmark Case: Lee v Lee’s Air Farming Ltd [1961] AC 12:
Facts: Lee incorporated Lee’s Air Farming Ltd, holding all shares except one. He was sole governing director and was also employed under a contract of employment as chief pilot. Lee died in an airplane crash during top-dressing operations for the company. His widow claimed statutory compensation under New Zealand workers' compensation legislation. Lower courts denied the claim, holding an individual could not employ himself.
Holding: The Privy Council reversed, ruling that Mrs. Lee was entitled to compensation. The company was a separate legal entity capable of entering into a binding employment contract with its chief shareholder and director.