BCL - 11. Company Incorporation

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Business & Company Law11. Company Incorporation : 

Business & Company Law11. Company Incorporation Norsurianna Teh Binti Abdullah Malaysian Institute of Accountant – Qualifying Examination

Summary : 

Summary Registration Procedures Certificate of Incorporation Commencement of business Promoters Pre-incorporation contracts Section 35[1] of Companies Act 1965 Section 35[2] of Companies Act 1965 Common seal of company

1. Registration procedures : 

1. Registration procedures The CCM under Section 22[1] has the discretion to reject a proposed name which in his opinion: Undesirable or Similar to the name of another existing company or a name which has been reserved or Is a name that the Minister of Trade & Consumer Affairs has directed the CCM not to accept for registration

1. Registration procedures : 

1. Registration procedures The Minister has a list of words which the CCM cannot accept as names for companies unless consent from the Minister is obtained: Words suggesting connection with the crown or members of the Royal Family such as Royal, King, Queen, Sultan, Raja Words suggesting connection with the State or Federal Government department statutory body, authority or government agency or municipality or other local authority such as Federal, State, National, Government

1. Registration procedures : 

1. Registration procedures The Minister has a list of words which the CCM cannot accept as names for companies unless consent from the Minister is obtained: Words suggesting connection with any Asean, Commonwealth or foreign government or with the United Nations or with any other international organization such as Asean, Unesco, Nato, Opec Words suggesting connection with any political party, society, trade union, co-operative

1. Registration procedures : 

1. Registration procedures The Minister has a list of words which the CCM cannot accept as names for companies unless consent from the Minister is obtained: Words such as Bank, Bumiputra, Chartered, College, Foundation, Fund, Institute, International, Leasing, Made in Malaysia, Trust, University Words which are misleading as to the identity, nature, purpose of a company or in any other manner

1. Registration procedures : 

1. Registration procedures The Minister has a list of words which the CCM cannot accept as names for companies unless consent from the Minister is obtained: Words or names that are blasphemous or likely to be offensive to members of the public Names including a proper name which is not the name of a director

2. Certificate of incorporation : 

2. Certificate of incorporation A company is formed by the issue of a certificate of incorporation. Various documents must be sent to the Registrar namely memorandum of association; articles of association and statutory declaration of compliance with the registration requirements of the Act.

2. Certificate of incorporation : 

2. Certificate of incorporation The certificate of incorporation is the company’s birth certificate and the company becomes a body corporate as described in Section 16[5] with the following information: Company number Company’s name Date of incorporation Type of company ie limited by shares or limited by guarantee or unlimited Whether the company is a private or a public company A company is formed by the issue of a certificate of incorporation. Various documents must be sent to the Registrar namely memorandum of association; articles of association and statutory declaration of compliance with the registration requirements of the Act.

2. Certificate of incorporation : 

2. Certificate of incorporation The effect of registration is that the company exists under the name given in the certificate of incorporation; it can exercise its function as a company and its members are liable to contribute to its assets in accordance with their liability arising from either their shares or guarantee.

3. Commencement of business : 

3. Commencement of business A private company may do business and exercise its borrowing powers from the date of its incorporation whilst a public company on the other hand has to obtain a certificate to trade from the CCM under Section 52[3].

4. promoters : 

4. promoters A promoter has been defined as ‘one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose’. Twycross v Grant: Promoters acting together [to form a company] are not treated as acting in partnership since their intention is to form a company not a partnership firm: Keith Spicer Ltd v Mansell

4. promoters : 

4. promoters Twycross v Grant: A person engaged in the formation or flotation of a company. A promoter stands in a fiduciary relationship to the company; his functions may include drafting a prospectus or listing particulars, negotiating preliminary agreements, instructing solicitors, and obtaining directors. Solicitors, bankers, and other professionals involved in the company, but acting merely in their professional role, are not regarded as promoters.

4. promoters : 

4. promoters Keith Spicer Ltd v Mansell Two individuals - X and Y purchased premises upon which they hoped to establish a restaurant. They intended to form a company for this purpose. Prior to the company's formation, X purchased furniture from a third party. The furniture was not paid for and the third party thereupon sued Y on the basis that he was in partnership with X.   The court said there was no partnership as X and Y were not carrying on business in common but were preparing to do so as a company. Acts carried out in contemplation of a business being undertaken in the future did not point to a partnership. Further, the holding of property jointly did not change things.

4. promoters : 

4. promoters Fiduciary duties of promoters A promoter is in a fiduciary relationship with the company and therefore under an obligation to the company to act bona fide [in good faith] and not to have conflicts of interest with the company. The promoter has to make proper disclosure of any personal advantage which he may have obtained from acting as promoter. The disclosure must be made either to an independent board of directors or to existing and prospective members of the company: Erlanger v New Sombrero Phosphate Company

4. promoters : 

4. promoters Types of profits Legitimate A promoter who acquires interest in property before promoting a company and then makes a profit when he sells the property to the promoted company and makes a legitimate profit provided he discloses it: Re Lady Forrest [Murchson] Gold Mine Ltd Wrongful A promoter who enters into and makes a profit personally in a contract as a promoter is acting wrongfully in breach of fiduciary duty.

4. promoters : 

4. promoters Remedies for breach of fiduciary duty If the promoter does not make a proper disclosure of legitimate profits or if he makes wrongful profits, the primary remedy of the company is to rescind the contract by returning the property and recover its money.

4. promoters : 

4. promoters However sometimes it is too late to rescind as rescission may be lost in the following grounds: The company does not rescind within a reasonable time after becoming aware of the promoter’s breach The company has already affirmed the contract after becoming aware of it Restitution in integrum is impossible ie it is not possible to restore the parties to their original position eg if the property purchased has undergone a substantial alteration Prior to the rescission third parties acquire some interest in the property

4. promoters : 

4. promoters If the company does not rescind or is unable to rescind the contract the other remedy is to obtain damages from the promoter for breach of fiduciary duty: Re Leeds and Hanley Theatre of Varieties Ltd.

4. promoters : 

4. promoters Remedies for secret profits - where a promoter has made secret profits, the company has several remedies available to it: First, the company may seek to rescind the contract made with the promoter as held in Erlanger v New Sombrero Phosphate Co. and also in Habib Abdul Rahman v Abdul Cader. The company may also seek to recover the secret profit made by the promoters: Gluckstein v Barnes The promoters may also be held liable for damages for breach of fiduciary duty: Re Leeds & Hanley Theatres of Varieties Ltd. Thus, the company, XYZ may be advised that as Mr. A and / or Mr. B being a promoter(s) having made a secret profit of $$$ without disclosing it to the company, it is entitled to rescind the contract, or alternatively to recover the secret profit, or may allow him to keep the profit and affirm the contract. The company may be advised that it can i) rescind the contract or ii) affirm the contract and either recover the secret profit from the promoter or allow him to keep it.

5, incorporation contracts : 

5, incorporation contracts Definition A pre-incorporation contract is one which is purportedly made by or on behalf of a company at a time when the company has not yet been incorporated. At common law such contracts were totally void. This was because until a company was incorporated it has no capacity to contract. A company could not ratify the contract after its incorporation. Thus, in Kelner v Baxter, it was held that the pre-incorporation contract was not binding on the company after its formation, and that the promoters or persons acting on behalf of the company before the formation were personally liable. Further, no ratification could release them from such liability. However, a person carrying on the affairs of an existing company under a new name which has not yet been registered will not be personally liable: Oshkosh B’Gosh v Dan Marbel

5, incorporation contracts : 

5, incorporation contracts The promoter makes arrangements which he intends that the company will carry out once it is incorporated. The promoter makes a contract on the company’s behalf either being aware or disregarding the fact that the company is not yet formed. He may hold himself out to be director of what is in fact a non-existent company

6. Section 35[1] of ca1965 : 

6. Section 35[1] of ca1965 Under the common law a pre-incorporation contract is null and void and cannot be ratified. It cannot be ratified as the company does not exist when the pre-incorporation contract was made.

6. Section 35[1] of ca1965 : 

6. Section 35[1] of ca1965 Liability of the company However under Section 35[1] the pre-incorporation contract may be ratified by the company after its formation and thereupon the company shall be bound by and entitled to the benefit thereof as if it has been existence at the date of the contract and had been a party thereto.

6. Section 35[1] of ca1965 : 

6. Section 35[1] of ca1965 In Cosmic Insurance Corporation Ltd v Khoo Chiang Poh [1981] the Privy Council held a pre-incorporation letter of appointment as Managing Director as having been duly ratified by resolution of the company passed after incorporation though the resolution was in different terms from the letter. It was held that what was material was that the subject of the resolution was the ratification of appointment as Managing Director and not the terms of appointment.

7. Section 35[2] of ca1965 : 

7. Section 35[2] of ca1965 Liability of promoters Section 35[2] provides that prior to ratification by the company the person or persons who purported to act in the name or on behalf the company [usually the promoter] shall in the absence of express agreement to the contrary, be personally bound by the contract and entitled to the benefit thereof. Thus the promoters will be personally liable unless their personal liability is specifically and clearly excluded.

7. Section 35[1] & [2] CA1965 : 

7. Section 35[1] & [2] CA1965 Current Position The Malaysian position is governed by Section 35(1) and (2) of the Companies Act 1965. By virtue of Section 35(1) of the Companies Act 1965, any contract or other transaction purporting to be made by a company prior to its formation may be ratified by the company after its formation. After such ratification, the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of the contract or other transaction, and as if it had been a party thereto. By virtue of Section 35(2) of the Companies Act 1965, prior to ratification by the company, the person or persons who purported to act on behalf of the company shall in the absence of express agreement to the contrary be personally bound by the contract or other transaction and entitled to the benefit thereof. Thus, in Malaysia, a pre-incorporation contract can be ratified by the company after its incorporation. Once ratified, either party can sue the other party for breach upon the contract as illustrated in Cosmic Insurance Co. Ltd. v Khoo Chiang Poh (1981). If the company does not ratify the contract after its formation, the person purporting to act on behalf of the company will incur personal liability.

7. Section 35[1] & [2] CA1965 : 

7. Section 35[1] & [2] CA1965 Apply: Thus, as the contract has not been ratified by the company after it was incorporated, the promoter or person acting on behalf of the company would be personally liable or entitled to its benefit under Section 35(2) of the Companies Act 1965 unless he has expressly excluded personal liability. Or As the contract has been ratified by the company after its incorporation, the company shall be bound by and entitled to the benefit of the contract under Section 35(1) of the Companies Act 1965.

8. Common seal of company : 

8. Common seal of company Every company must have a common seal. The company number and name of the company appear in legible Romanized letters on the seal. The common seal is significant for certain documents such as the company’s share certificates and instruments of transfer of land. Section 101 provides that a company may if authorized by the articles a duplicate common seal.

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