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Companies Act and Company Law in Malaysia – Regulations Pertaining to the Legal Formation of A Company

Companies Act and Company Law in Malaysia Setting up a new company in Malaysia is not an easy task. It involves adhering to what seems to be an infinite set of laws and regulations; all intricately set to ensure the seamless incorporation of a company.  For any prospective corporate body to have its manifestation into a company come to fruition, there are certain fundamental elements that are required to be fulfilled; majority of which fall under the Companies Act 2016 (CA 2016). They include issues regarding directors, the type of companies being incorporated, the publication of the company name and registration of its offices or business centres, its shares, accounts even up until its liquidation.  

About Directors and Secretary of Company

A private company shall have a minimum of one director whereas a public company must have a minimum of two directors who act as company shareholders, being natural persons of full age, having their principal or only place of residence in Malaysia and not under bankruptcy. If an undischarged bankrupt acts as director of, or directly or indirectly takes part in or is concerned in the management of any corporation except with the leave of the Court shall be guilty of an offence against this Act; the penalty for which is imprisonment for five years or RM 100,000 or both. A director has strict obligations under the Companies Act 2016 (CA 2016) as in common law, such as statutory duties, duty of care and fiduciary duties as well as being hegemonized by a Code of Ethics. Additionally, Section 9(b) CA 2016 Act stipulates that ‘A company shall have one or more members’. Note that this provision allows the incorporation of a company with only one member. Section 235(1) CA 2016 provides that the company must have at least one company secretary who is a citizen or a permanent resident of Malaysia. In addition, they must ordinarily reside in Malaysia by having their principal place of residence in Malaysia. A company may have more than one company secretary; and all of them must fulfil these requirements.

Application and Registration for Incorporation

Under the CA 2016, the process of incorporating a company is simplified. The Act introduces a super form for incorporation. Section 15 provides that upon adherence to the procedures and payment of the appropriate fee, the Registrar of Companies (ROC) will designate a registration number to the company and issue the notice of registration. The notice of registration is conclusive evidence that the company is duly registered (section 19).  The ROC may issue a certificate of incorporation only upon an application by the company and payment of the prescribed fee. Next, a pre-incorporation contract will be discussed. A pre-incorporation contract is defined in s65(1) CA 2016 as ‘a contract or transaction that purports to be made by or on behalf of a company at a time when the company has not been formed’. Section 65(1) provides that the person who signs the pre-incorporation contract will be personally liable on the contract or transaction accordingly. Unlike their previous position under the CA 1965, they cannot exclude their liability. Nevertheless, the position of the company with regards to its liability under the pre-incorporation contract remains the same. Section 65(2) permits the company to ratify the contract after its incorporation. If the company does ratify the contract, ‘the company shall be bound by the contract or transaction as if the company has been in existence at the date of the contract or transaction and had been a party to the contract or transaction’.

Registered Office and Characteristics of Private Company

A company shall as from the day on which it begins to carry on business or as from the 14th day after the date of its incorporation, whichever is the earlier, have a registered office within Malaysia to which all communications and notices may be addressed and which shall be open and accessible to the public for not less than three hours during ordinary business hours on each day; Saturdays, weekly and public holidays excepted. In accordance with Section 30(1) CA 2016, every company must also affix and keep affixed on the outside of every registered office or place where it carries out business, in a prominent position in Romanised letters easily legible its name, and also, in the case of the registered office, the words “Pejabat Yang Didaftarkan”. If it fails to do so the company is guilty of an offence against this Act.  To differentiate an unlimited company from the others, section 25(1) CA 2016 provides that the name of an unlimited company shall end with the word ‘Sendirian’ or the abbreviation ‘Sdn.’. A company can also be classified as either a private or a public company. Under the CA 2016, a private company is required to have the following characteristics:

  • It is a company limited by shares (s42(1))
  • It has not more than 50 shareholders (s42(1))
  • It restricts the transfer of its shares (s42(2))
  • It cannot offer its shares or debentures to the public (s43(1)). Under s15(1) of the CA 1965, a private company was prohibited from inviting the public to subscribe its shares or debentures
  • It cannot allot shares or debentures with a view of offering them to the public (s43(1)). This prohibition was not found in the CA 1965
  • It cannot invite the public to deposit money with the company (s43(1)).

Other than the above characteristics, s25(1) mandates that the name of a private company should end with the words ‘Sendirian Berhad’ or its abbreviation ‘Sdn. Bhd.’. In the case of a public company, its name should end with the word ‘Berhad’ or its abbreviation ‘Bhd.’.

Memorandum and Articles of Association & Company’s Constitution

Under the CA 1965, every company was required to have a memorandum and articles of association. The memorandum and articles of association are now collectively known as the constitution, and it is expressly stated in s31 and 38 CA 2016 that only a company limited by guarantee shall have a constitution; other types of company may or may not have a constitution. It is optional for them. If a company has no constitution, the company, each director and each member of the company shall have the rights, powers, duties and obligations as set out in the Act. In addition, ‘if the company has a constitution, the company, each director and each member of the company shall also have the rights, powers, duties and obligations as set out in the Act, except to the extent that such rights, powers, duties and obligations are permitted to be modified in accordance with this Act, and are so modified by the constitution of the company’ (s31(2) CA 2016). In other words, the rights, powers, duties and obligations of the company, director and member are prescribed by the CA 2016 unless modified by the company’s constitution. The company’s constitution can modify any of those rights, powers, duties and obligations only if the Act permits it.

Pertaining to a company’s objects, Section 21 CA 2016 provides that a company shall have the capacity to carry on or undertake any business or activity. Nonetheless, if the company has a constitution which states the company’s objects, s35(1) provides that the company shall be restricted from carrying on any business or activity that is not within those objects.  The CA 2016 does not prescribe the consequences of a transaction outside the company’s objects clause. Thus, the consequences of an ultra vires transaction are uncertain. Drawing from the provisions in the Act, specifically s21 and 39, it is submitted that a third party dealing with a company can assume that the company has full capacity to carry on or undertake any business or activity. This is because s39 provides that the doctrine of constructive notice applies only to documents relating to instrument of charges. No person shall be deemed to have notice or knowledge of the contents of the constitution or any document (other than charges) related to the company which has been registered by the ROC or which is available for inspection at the company’s registered office. Thus, a third party dealing with a company can rely on s21 and 39 and assume that the transaction in question is within the capacity of the company, for the company has full capacity to carry on or undertake any business or activity.

About Appointment / Re-appointment of Auditor

The Company’s Act even includes reform in the appointment of an auditor. The CA 2016 provides for the automatic re-appointment of an auditor for a private company, whereas for a public company, their appointment is until the conclusion of the company’s next AGM. In addition, under s255(3) CA 2016, the ROC may exempt certain classes of companies from appointing an auditor. On 4 August 2017, the ROC issued Practice Directive 3/2007 exempting three categories of private companies, namely dormant companies, zero revenue companies and threshold-qualified companies. Topics relating to company meetings that fall under the CA 2016 reform include Annual General Meeting (AGM), notice of meeting, venue and proxies who are people who attend meetings on behalf of a company member. They are known as the member’s proxy. The CA 2016 has removed the restriction on who is qualified to be appointed as a proxy and currently, a member can appoint anyone to be their proxy.

Corporate Restructuring – Winding Up of A Company

In terms of corporate restructuring, The CA 2016 provides a mechanism for a statutory corporate restructure scheme which will bind all creditors. However, the company is in a vulnerable state between the formulation of the scheme and the approval by the court, for a creditor who does not agree with the scheme may take legal action to recover their loan. Thus, the company or any of its members or creditors may apply to the court for an order to restrain further proceedings against the company except with the court’s leave. Furthermore, CA 2016 also delves into the liquidation of a company. There are two ways to wind up a company: (1) voluntary winding up where the members have passed a resolution to wind up the company; and (2) compulsory winding up where the court has ordered the company to be wound up (s432(1)). Generally, the voluntary winding up of a company commences when the members’ resolution to voluntarily wind up the company is passed. However, where an interim liquidator is appointed before the members’ resolution is passed, then the winding up will commence when the directors’ declaration on the company’s insolvency is lodged with the ROC. In a compulsory winding up, the winding up commences at the passing of the members’ resolution if the company has passed a resolution to voluntarily wind up the company before the presentation of the winding up petition. In other cases, the winding up commences on the date of the winding up order. One of the grounds for the winding up of a company is its inability to pay its debts. Section 466 CA 2016 provides that a company is deemed to be unable to pay its debts if it fails to pay a debt exceeding the amount prescribed by the Minister, within 21 days after it is served with a notice of demand at its registered office.

Conclusively, it can be seen that the CA 2016 has reformed almost all aspects of company law in Malaysia. These are just some amongst a plethora of regulations pertaining to the legal formation of a company. Abiding to these laws will be crucial for organisations to experience a legal and by-the-books inauguration of their companies so business can be run accordingly. The strict ramifications for failing to adhere to the regulations are imperative to ensure potential business owners are on a level playing field with others in the market.