Mar 23, 2008

Company Law Tutorial 1&2

1. Limited liability means the liability is limited to the amount of shares you have or guarantee that been given.

2. For limited companies, the liability of its member is limited to the amount of shares and guarantee you have whereas the members of unlimited companies have unlimited liability. They can be sued for their personal wealth such as property.

3. The members of an exempt private company is not more than 20 members. Therefore, it is easier to control and managed the company. Besides that, the affair of the company can be secret because exempt private companies do not need to submit the financial statement to Suruhanjaya Syarikat Malaysia (SSM)
* SSM is the Malay version of CCM. It is better to use SSM instead of CCM.

Limited Company
Advantages:- separate legal entity where the members have limited liability
- perpetual succession
- transferability – the shares in a company are generally transferable although the right of transfer
may be restricted
- can enter into contract
- can own property in its name
- can sue or be sued under its own name
- raising finance – it is more established and easier to get bank loan

Advantages:- no separate legal entity where the members have unlimited liability
- no perpetual succession
- transferability – usually a partner cannot transfer his status as partner to someone else without the
consent of all the other partners

Limited Company
Disadvantages:- there are many formalities to be complied with and difficult to form
- all company affairs would have to be make known publicly
- ultra vires problem
- lesser profit because the profit must be shared among the shareholders

Disadvantages:- easy to form and less formalities
- all company affairs do not have to be make known publicly
- no ultra vires problem exists
- more profit due to less members in partnership

5. Separate legal entity

6. According to Section 15(1) Companies Act, 1965, a private company:
(a) restricts the right to transfer its share
(b) limits the number of its members to not more than 50
(c) cannot invite public to buy shares
(d) prohibits the public companies to deposit with private company
The private companies always end with the words “Sdn Bhd”

7. (a) Judicial Exceptions

i. company used to evade legal obligations or to commit fraud
Case: Gilford Motor Co. v. Horne
- The owner of the company who was formerly a director of the former company had entered into contract stating he could not set up his company within certain locality. Later, he set up his company near his former company and took over the customers from his former company. The court lifted the veil of incorporation to find out who was the owner of the co and found out there was a breach of contract.

ii. Company employed as agent of its controllers
Case: Smith, Stone & Knight Ltd v Birmingham Corp [1939] HC
-The court lifted the veil of incorporation to find out the ownership of the waste paper business and the ownership of the land, which the waste paper business was operated. The court found out Smith, Stone& Knight Ltd, a holding company did not transfer ownership of waste paper business and land to Birmingham Corp. Therefore, the waste paper business was still the business of parent co& it was operated by the subsidiary as agent of the parent co.

iii. Company is a sham or façade
Case: The Saudi Al Jubail, Re FG(Films) Ltd [1953]

iv. Groups of companies
Cases: DHN Food Distributors Ltd v. Tower Hamlets London Borough Council

v. Where justice of the case requires it

(b) Statutory Exeptions

Section 36 of Companies Act, 1965- where membership falls between 2 for more than 6 months
Section 46 of Companies Act, 1965- untrue statement in prospectus
Section 119,120, 121(2) of Companies Act, 1965–non compliance with regulation which requires the company to show its name in its correct form
Section 303(3), 304(2) of Companies Act, 1965 – contracting debts without expectations of payment
Section 304(1) of Companies Act, 1965 – fraudulent trading
Section 365 (2)(b) of Companies Act, 1965 – payment of dividends
Section 169(5) of Companies Act, 1965 – groups of companies

8. (a) There are 3 types of business which are sole proprietor, partnership, and company. The risk is very high to start a business manufacturing noodles as there are many competitors. Partnership is not suitable because the members of partnership have unlimited liability. Their wealth such as the assets and properties may be affected. It is advisable not to form public company, as it is risky to do so. No one would buy the shares of the company because it just starts the business and the brand name is not well known by the public. Therefore, it is hard to raise money. On the other hand, the members of the private company have limited liability. Friends and relatives can invest in their business. Besides that, the private company has perpetual succession and can sue or be sued by others. Furthermore, it can own property or enter into contract in its own name. Therefore, private company is suitable for and appropriate for this type of business.

(b) Yes, Amy and Barbie will never be personally liable because it is limited liability unless one of the exceptions under lifting the veil of incorporation applies.

(c) They should convert private company to public company when they expand their business. They can raise their capital by issuing shares. More people will buy the shares because the company is established.

*Many thanks to Yet Ling for her answers!!

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