The Companies Act 2016 has been enacted in Malaysia which has replaced the previous act titled Companies Act 1965. The act has come into the force from 31st January 2017 along with Companies Regulations 2017. The objective of this act is to modernise corporate regulations, reduce the costs of compliances, facilitate economic growth, and remove corporate conflicts (EY, 2017). The act is targeted towards providing a comprehensive act which is easy to comply by corporations and its members in Malaysia. Under this act, the government has removed the age limit for directors. Section 129 of the Companies Act 1965 provides that a public company or its subsidiaries cannot appoint a director in the company above the age of 70 years. However, this limit is removed by the Companies Act 2016 based on which the directors can be appointed above the age limit of 70 years.
In the given case study, Perfection Sdn. Bhd. has been incorporated in which Becky and Keith are shareholders. Laurel is another shareholder in the company who holds 10 percent shares in the company in which she has only paid half the price. Joey and Mike are the directors of the company, and it has hired ten professional event planners who work on its behalf. Joey is expected to retire soon after celebrating his 60th birthday; however, he wanted to continue to serve as the director of the company. Since the Companies Act 2016 has removed the age limit of directors, Joey can continue to serve the company as a director.
Section 3 of the act provides the definition of a company. It is referred to a corporation which is incorporated in Malaysia and foreign companies. Section 20 of the act provides various rights of companies based on which it has the capability to sue third parties or get sued (ACCA Global, 2016). In Salomon v Salomon & Co Ltd [1897] AC 22 case, the court provided that the company has a separate entity through which it can form legal contracts with third parties under which the members cannot be held personally liable. This principle was applied by the court in Lee v Lee’s Air Farming Ltd [1960] UKPC 33 case. In this case, the court provided that a company has a separate entity based on which it has the authority to enter into contractual relationships with its clients or customers (Pentony et al., 2013).
Based on such contract, the contractual obligation is imposed on the company. In Double Acres Sdn. Bhd. v Tiarasetia Sdn. Bhd [2001] 1 AMR 111 case, it was held by the court that the corporation is responsible for the debts which it occurs during its operations and the contractual obligations are imposed on the company as well rather than it members of employees. Both public and private limited companies have a separate legal entity from their members. A private limited company has to add the word ‘Sendirian’ or ‘Sdn.’ after its name as given under section 25 (1) (b) of the Companies Act 2016 (Federal Gazette, 2016). These corporations are authorised to issue their shares in the public to raise capital. Section 14 (1) of the Act imposes a limit on the number of members in the company which should not exceed 50.
In the given case study, Jacky has formed a contract on behalf of the company with Holly and Henry for providing them services of event planning in their wedding reception. As per the request of Holly and Henry, services were provided by Jacky in which a western-style menu was served. Two days after the event, it was reported that many guests suffered from food poisoning complain after eating the food at the wedding reception. It was also reported that 10 guests were admitted to the hospital because they suffered from acute stomach pains. Holly and Henry claimed that Jacky should be held personally liable for making misrepresentation to them by using the name and reputation of the company.
As discussed in Salomon v Salomon & Co Ltd case, the corporations are separate from their members based on which they have the right to form legal contracts. The company has the authority to enter into contractual relations with third parties (Lee v Lee’s Air Farming Ltd). The contractual obligations which arise in a contractual relationship between the company and third party remain between the parties, and in case of a breach the third party can directly sue the company (Double Acres Sdn. Bhd. v Tiarasetia Sdn. Bhd). Therefore, Jacky is not personally liable for the contract formed with Holly and Henry because the company is liable for the contract obligations. Holly and Henry can file a lawsuit against the company for the loss which their guests suffered (Section 20).
To conclude, Jacky cannot be held liable by Holly and Henry because they have entered into a contract with the company based on which they can file a lawsuit against the company.
The Companies Act 2016 is focused on implementing and promoting good corporate governance behaviour of the companies based on which the sanctions which are imposed on the non-compliance of directors has been increased. As per the new law, the penalty which is imposed on directors for non-compliance or breaches of the provision of the Companies Act 2016 includes a maximum fine of RM3m and/or maximum imprisonment sentence for a period not exceeding 10 years (Federal Gazette, 2016). Section 538 provides that these penalties can be imposed on the directors or any other officers operating in similar capacity that is found guilty of falsification of books of the company.
Moreover, section 68 provides that the annual returns of the companies should be lodged within 30 days from the anniversary of the incorporation date of the company. A company can cease to exist after a winding-up order is obtained to terminate the legal existence of the enterprise. However, the separate legal entity principle can be overlooked by the court in case the directors or shareholders of the company committed any fraud. The court held in Salomon v Salomon & Co Ltd case that the corporate veil of a company can be lifted in case of fraud. Thus, fraud is a key ground based on which the court did not have to adhere to the principle of separate legal personality of the company as given in the case of Re Darby [1911] 1 KB 95 (Hudson, 2017). The court provided in the case of Lim Kar Bee v Duofortis Properties (M) Sdn Bhd [1992] 2 MLJ 281 that the corporate veil of a company can lift in order to discover an improper or illegal purpose of the company.
Moreover, the violation of creditors’ rights is a key reason based on which the court can lift the corporate veil. If the corporation is acting fraudulently or wrongfully, then the court can lift the corporate veil to put a restriction on the operations and impose penalties on the parties who indulged in the unfair practices. The directors of the company are responsible for taking business decisions for the corporation. Section 213 of the Companies Act 2016 provides various duties and responsibility of directors. Subsection (1) of this act provides that the directors shall all time exercise their duties for the proper purposes only, and they should act in good faith while focusing on the best interest of the company (Federal Gazette, 2016). It is their duty that they should maintain a reasonable standard of care and diligence while discharging their duties to avoid taking any actions which could harm the interest of the company or its members. In case these provisions are violated by the directors, the court can impose a fine on the director not exceeding three million ringgit, imprisonment for a term not exceeding five years or both (EY, 2017).
In the given case study, the directors violated the provisions given under section 538 because they alter the financial account of the company to hide the fact that the profits have reduced. They also decided to withhold the disclosure of this information from shareholders and Companies Commission of Malaysia until the end of 2018. As per new provisions, the annual returns of the company should be lodged within 30 days from the anniversary of the incorporation date based on which the directors have violated section 68 of the act. Directors have failed to act in good faith for the interest of the company and its shareholders, and they have also failed to maintain a standard of care and diligence. They also failed to take into the interest of creditors into consideration while making business decisions based on which the veil can be lifted. They have violated their duties given under section 213, therefore, they can be penalised by the court.
In conclusion, the court can pierce the corporate veil to hold the directors liable under the provisions of the Companies Act 2016 for withholding the information and altering the accounts.
The directors owe the duty towards the company based on which they also have to ensure that their actions do not violate the interest of the shareholders. There are various issues regarding whether the directors owe a duty of care towards creditors. In the case of Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187, the court rejected the claim that the directors of a company owe a duty towards the creditors of the enterprise (Wen, 2013). However, in Walker v Wimborne (1976) 137 CLR 1 case, the Australian High Court gives a positive answer regarding the duty of directors towards the interest of creditors of the company (Xie, 2016). However, there are various conflicting views regarding whether the directors owe a duty of care towards the creditors. Many experts argue that the directors owe a duty towards the company; however, while exercising this duty, they have to take into account the interest of creditors.
However, an overwhelming majority of cases have highlighted that no direct duty is owed by the directors of the company towards its creditors. However, while taking business decisions, the directors have to regard the interest of the creditors as provided in the case of Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242. In this case, the creditors filed a case against the directors in which they alleged them to take a decision to issue to the dividend when the company was on the verge of becoming insolvent based on which they prejudice their interest. The court rejected these claims by providing that the company was solvent at the time directors took the decisions, and they also acted honestly based on which they cannot be held liable for violating their duties (Cassidy, 2006). Moreover, section 199 of the act provides that the court has the authority to disqualify a person from acting as the director of the company in case the company becomes insolvent due to the conduct of such director (Federal Gazette, 2016).
In case of creditors, a direct duty is not owed by the directors towards them as discussed in Kuwait Asia Bank EC v National Mutual Life Nominees Ltd case. However, the directors have to take the interest of creditors into consideration while taking business decisions. The directors have not acted honestly, and they took the decision to start a subsidiary when the corporation is on the verge of insolvency based on which the directors can be held liable as discussed in Nicholson v Permakraft (NZ) Ltd (in liq) case. The court can lift the corporate veil in order to hold them liable for their actions. They have also violated section 199 of the Companies Act 2016.
To conclude, a direct duty is not owed by directors toward the creditors; however, they have to take their interest into consideration while making business decisions.
The corporation can hold land and assets under its own name, and it enjoys perpetual succession. The element of perpetual succession provides that the company continues to exist despite the death or change in its members or exit of any or its members or transfer of share by them. Thus, a company is referred as a ‘legal entity in law’ which is also defined as a ‘person in law’ which enjoys various rights and has to comply with various liabilities as well. The liabilities of the company are its own, and its members or shareholders cannot be held personally liable.
In order to understand these elements, the evaluation of Salomon v Salomon & Co Ltd [1897] AC 22 case is important. In this case, Salomon terminated his sole trader business to form a company in which seven members were present. He himself was the majority shareholder of the company along with his other family members. He was also holding debentures of the company (Whincop, Keyes and Posner, 2018).
Later the company went into liquidation, and a suit was filed by the unsecured creditors of the company that since Solomon is the majority shareholder, he should be held liable to pay their debts. He should not be allowed to take the money for the debentures which he owned, and he shall be held personally liable.
The Court of Appeal agreed with the arguments made by the creditors, however, the House of Lords overturned the judgement. It was held that a company is considered as a separate legal entity based on which it is separate from its shareholders. The shareholders have limited liability in the company which cannot be exceeded more than the value of their share. This is a landmark case in which the element of a separate legal entity and limited liability was established by the court. This judgement was upheld by the court in the case of Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1996] 3 MLJ 533 (Mahmood, 2014). Moreover, both of these elements are recognised by the Companies Act 2016 as well based on which the members did not have the ownership on the assets of the company, and they cannot be held personally liable to pay off its debts. Moreover, the court provided its judgement in the case of Tan Lai v Mohamed bin Mahmud [1982] 1 MLJ 338 based on the principle of perpetual succession. In this case, it was held that the legal existence of the company continues even after the death of all of its members (Zuryati, Yusoff and Azrae, 2009).
In the given case, the claim made by Joey and Mike that the company is no longer exists is wrong. As discussed in Tan Lai v Mohamed bin Mahmud case, the company cannot cease to exist based on the fact that all its members died based on the principle of perpetual succession. This rule was upheld by the court in the cases of Salomon v Salomon & Co Ltd and Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor. Therefore, the company did not cease to exist even after the death of all of its members.
References
ACCA Global. (2016) Malaysian Companies Act 2016: an overview. [Online] Available at: https://www.accaglobal.com/ca/en/student/exam-support-resources/fundamentals-exams-study-resources/f4/technical-articles/mys-comp-act.html [Accessed 06/10/2018].
Cassidy, J. (2006) Concise corporations law. Annandale, NSW: Federation Press.
Companies Act 2016 Double Acres Sdn. Bhd. v Tiarasetia Sdn. Bhd [2001] 1 AMR 111 (2017) Companies Act 2016. [PDF] Available at: https://www.ey.com/Publication/vwLUAssets/EY-take-5-companies-act-2016/$FILE/EY-take-5-companies-act-2016.pdf [Accessed 06/10/2018].
Federal Gazette. (2016) Laws of Malaysia. [PDF] Available at: https://www.federalgazette.agc.gov.my/outputaktap/aktaBI_20160915_CompaniesAct2016Act777.pdf [Accessed 06/10/2018].
Hudson, A. (2017) Understanding Company Law. Abingdon: Routledge.
Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187
Lee v Lee’s Air Farming Ltd [1960] UKPC 33
Lim Kar Bee v Duofortis Properties (M) Sdn Bhd [1992] 2 MLJ 281
Mahmood, K. (2014) Incorporation of companies. [Online] Available at: https://www.balohpedia.com/2014/02/incorporation-of-companies.html [Accessed 06/10/2018].
Nicholson v Permakraft (NZ) Ltd (in liq) [1985] 1 NZLR 242
Pentony, B., Graw, S., Parker, D. and Whitford, K. (2013) Understanding business law. New York: LexisNexis Butterworths.
Re Darby [1911] 1 KB 95
Salomon v Salomon & Co Ltd [1897] AC 22
Sunrise Sdn Bhd v First Profile (M) Sdn Bhd & Anor [1996] 3 MLJ 533
Tan Lai v Mohamed bin Mahmud [1982] 1 MLJ 338
Walker v Wimborne (1976) 137 CLR 1
Wen, S. (2013) Shareholder primacy and corporate governance: legal aspects, practices and future directions. Abingdon: Routledge.
Whincop, M.J., Keyes, M. and Posner, R.A. (2018) Policy and Pragmatism in the Conflict of Laws. Abingdon: Routledge.
Xie, B. (2016) Comparative Insolvency Law: The Pre-pack Approach in Corporate Rescue. Cheltenham: Edward Elgar Publishing.
Zuryati, Z.A., Yusoff, M. and Azrae, A.N. (2009) Separate legal entity under Syariah law and its application on Islamic banking in Malaysia: A note. International Journal of Banking and Finance, 6(2), p.8.
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