Corporate Law of Malaysia : Incorporating a business in Malaysia

Ng, May Yee

Heriot Watt University
m.ng@hw.ac.uk

Chang, Chee Fei

Sunway University
cfchang@sunway.edu.my

Abstract
This article describes the formation and lifecycle of an incorporated companies; the role, duties
and risk of a promoter; the legal standing of pre-incorporation contracts and the legal effect of
incorporation. This article also discusses the effect of abolishment of common seal under the
Malaysia Companies Act 2016. Both Malaysia and UK caselaw were referred to where
appropriate. The writing of this article employs the hermeneutics analysis of relevant
legislation(s). It provides a quick and simplified reference for students and non-practitioner.

Creating a company
Company does not emerge at a flip of a switch. A company need to be incorporated under the
Companies Act 2016 (‘CA 2016’). This is to obtain the permission to commerce business from
the Companies Commission of Malaysia (also referred to as ‘the Registrar’).

Pre-incorporation stage is the infancy stage prior to submitting an incorporation application to

the Registrar. At this stage, the business is yet to be a company. It is literally non-existence.
Individual initiating the incorporation process are called ‘promoter’.

Promoter
The legal status of promoter is troubling. The promoter is not an agent of the company because
the latter has yet to be incorporated. Therefore, it has no capacity to appoint anyone as its agent
and to enter into any contract on its behalf. He is not a trustee of the company because a non-
existence entity has no property and is not able to appoint a representative. Nevertheless,
someone need to make the necessary preparation in order to incorporate the company. Yet, the
legal standing of a promoter is still murky. Hence in practice, the parties (the company upon
coming into existence and the third parties dealing with the promoter) make separate
agreements to safeguard the interest of all parties. CA 2016, however, excludes individuals
who participated in their professional capacity (e.g. solicitor, accountant etc.) from being
named as promotor.

The promoter has two important duties. First, fiduciary duties – ‘Fiduciary’ is a position of
trust and confidence. Promoter owes the company (not to the shareholders) the duty of utmost
honesty i.e. full disclosure of relevant facts or not to make secret profit. Promoter may make
personal profit if the company so permits him. Second, duty to account – promoter is
accountable to the company on money received by him in the course of performing his job.

In the event that the Promoter breaches his duties, the company has primarily four recourses.
First, rescind the contract – terminate the contract made by the promoter, return monies or

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property received under the contract to the third party, recover monies paid to the third party
and free all parties from future obligations. This has the effect of returning the parties to the
position as if the contract has not been made. Restitution is not possible if the property cannot
be returned in its original form, say for example, the premise has been demolished or renovated.

Secondly, recovery of secret profit – in the event that the contract cannot be rescinded because,
say for example, the property is necessary for the business, then the company can opt to accept
the contract and recover the secret profit from the promoter. In Gluckstein v Barnes (1900), the
defendants loaned money to Company A in the form of debenture. They later bought over the
company and redeemed the debenture held by them at a handsome price. Then they promoted
and incorporated Company B and sold Company A to the former at a profit. The profit was
disclosed to the members of Company B but not the profit they made on the debenture. The
court held that Company B is entitled to recover the extra money paid to the debenture holders.
The promoters are wrong for nondisclosure.

Thirdly, claim for damages – the company can make a claim to the court for damages from the
promoter for negligence and for whatever losses that flows from the secret profit contract (e.g.
purchase of unsuitable equipment, repair cost etc.). In Re Leed and Hanley Theatres of
Varieties Ltd (1902), a promoter bought 2 music halls through an agent and resold it at a 200%
profit. Both sale and purchase were made in the name of the agent. The promoter's interest and
profit were never disclosed. Eventually, the promoter was ordered to pay damages for breach
of fiduciary duty.

Fourthly, restoration of properties and money – in the event of winding up, Sec.541 of CA
2016 empowers the court to compel the promoter to restore properties or money obtained or
used which in breach of trust or duty. Interest may be imposed on the amount due. Alternatively,
the court may order the wrongdoing promoter to pay compensation to the company.

Pre-incorporation contracts and its legal implication

The promoter needs to enter into various contracts (e.g. employment contract, purchase
contract, rental agreement etc.) to prepare for an operational business. At this stage, the
company has yet to be registered with the Registrar, therefore non-existence. In view that the
company has no contractual capacity, contracts cannot be made in the name of the company.
The contract is, therefore, made between the promoter and the third party. Expenses incurred
in promoting the company will first be paid by the promoter. They will be reimbursed by the
newly incorporated company subsequently, subject to relevant approvals from the board of
directors and/or shareholders in general meeting. Pre-incorporation contracts have the
following legal implications :

1) The promoter will be personally liable to the pre-incorporation contracts (Sec.65(1), CA

2016). He can sue and be sued in his own name. The company has no privity to sue the
third party after its incorporation. Sec.65(1) effectively codify the common law established
in Kelner v Baxter (1866). In that case, the defendant promotes the incorporation of a hotel.
He purchased some wine from the plaintiff. At the time of contract, the hotel has yet to be
incorporated. The wine was delivered to the hotel after its formation. Unfortunately, the
hotel went into liquidation before the seller could get his payment. The court held that the
defendant cannot have purchase the wine on behalf of the hotel because it has yet to exist
at the time of contract. Having nonexistent, it cannot have appointed the defendant as its

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 agent to execute the contract. Hence, the wine was purchased in the defendant's own name.
He is personally liable to pay the seller.

2) The company can ratify the pre-incorporation contracts after its incorporation. This must
be done within reasonable time after incorporation. Upon ratification, the company shall
be bound by the contract as if it has made the contract itself (Sec.65(2), CA 2016). In
Cosmic Insurance Corporation Ltd. v. Khoo Chiang Poh [1981], the promoters of Cosmos
appointed Khoo as the managing director by Cosmos’s promoters before the company was
incorporated. The appointment letter states that it shall be a lifetime appointment "...unless
he resigns, dies or commits an offence under the Companies Act…”. The appointment was
later ratified by a resolution passed by the duly incorporated Cosmos. The resolution was
worded in a slightly different manner, but it largely acknowledges Khoo's lifetime
appointment. Later, a disagreement arose, and the Board want to remove Khoo. They
argued that the original appointment has not been ratified by the company. Hence, it is a
pre-incorporation contract that is unenforceable upon the company. It was held that the
pre-incorporation contract has been ratified by Cosmos. The exact wordings of the
resolution are not material as long as the intent is to give effect to Khoo's appointment.

3) If the company failed or refused to ratify the pre-incorporation contracts, the promoter
shall continue to be personally liable to those contracts.

Incorporation
The incorporation process began by filing an application with the Registrar with the following
detail about the proposed new company : (Sec.14, CA 2016)
1) The name of the proposed company
2) Clear indication on whether the company shall be private or public
3) The registered address
4) The name, identification, nationality and the ordinary place of residence of every member
of the company. Company can be incorporated with only one member as long as he is a
local resident of Malaysia (Sec.9, CA 2016). If the member is a corporation, the place of
incorporation, registration number and registered office of the corporation must be
provided
5) The name, identification, nationality and the principal place of residence of every director
and secretary (if any). A private company may be incorporated with only one director
(Sec.196(1)(a), CA 2016), whereas a public company will need at least 2 directors
(Sec.196(1)(b), CA 2016).
6) If the company is going to be established as limited by shares, then the details of the class
and number of shares to be taken by members
7) If the company is going to be established as limited by guarantee, the amount up to which
the members undertake to contribute to the assets of the company in the event of it being
wound up
8) A statement made by the promoter or director declaring their consent to act as promoter or
to be appointed as director and that they are not disqualified under the CA
9) And any other information that may be required by the Registrar.

Previously, various forms need to be submitted by the promoter. Following the company law
revamp in 2016, the application process is now automated. Application can be made using
electronic superform accessible through the Registrar’s webpage.

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If the Registrar is satisfied that the incorporation requirements have been met, a Notice of
Registration (‘NoR’) will be issued by the Registrar. Note that this notice serves as a conclusive
evidence that the statutory requirements pertaining to registration have been satisfied (Sec.19,
CA 2016). This is procedural matters. Nevertheless, Sec.18 has specifically provided that the
date of incorporation is the date stated on the NoR. This effectively means that the company
may commence its operation starting from that date onwards. As such, the NoR serves more
than mere procedural compliance. This render the Certificate of Incorporation in Sec.17 rather
redundant.

Sec.17, CA 2016 provides that a Certificate of Incorporation (‘CoI’) will be issued upon
payment of some fee. Given the strength of the NoR, some company may still apply for a CoI.
This is to facilitate daily administrative matter, such as dealings with banks, the energy board
(Tenaga Nasional), the telecommunication board (Telekom Malaysia) etc.

Common seal
Common seal has the power of binding the company to the contract where the seal is affixed.
Previously, common seal is an integral part of the company. It is equivalent to the thumb print
of a natural person. Normally, the common seal is carefully guarded by the company secretary.
Now, under Sec.61(1) of CA 2016, the common seal has become optional. Documents or
contracts may be executed by the authorized signatories of the company. However, in practice
some companies may prefer to maintain a common seal for the sake of convenience, say for
example, when the company has oversea branches or trading at other countries where the
authorized signatories may not be present to sign the documents. If common seal is used, these
rules must be observed :
1) The name and registration number of the company must be engraved on the seal in legible
romanized character
2) Seal that is used outside of Malaysia (the ‘official seal’) must be the exact copy of the
original common seal, with the addition of the place where it is used on the seal. The
official seal bound the company in the same way as the common seal
3) Any person may be authorized under the common seal to affix the official seal on
documents. The holder of the official seal shall certify in writing on the document the date
and place of which the seal has been affixed.

Matters that ensue immediately following incorporation

Filing of company constitution.
It is not necessary that company must have a constitution, namely the Memorandum of
Association and the Article of Association (for further information, please see a separate article
from this series entitled : Corporate Law of Malaysia : Corporate Constitution of Malaysia
Companies). If the company choose to do so, it must submit its constitution with the Registrar
within 30 days after its adoption through special resolution (Sec.32, CA 2016). A company
limited by guarantee, however, must have a written constitution (Sec.31, CA 2016).

Appointment of company secretary

It is not compulsory to have a company secretary in place at the time of incorporation, although
company may choose to do so. In fact, it is beneficial to have a company secretary at the early
stage as they play an important role in ensuring that the company complies with all regulatory
requirement. Alternatively, appointment can be made within 30 days from the date of
incorporation (Sec.236, CA 2016).

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Effect of Incorporation
Once incorporated, whether private or public, the company will enjoy separate legal entity,
perpetual succession, unlimited capacity and limited liability. Each are explained in the
following paragraphs.

(a) Separate legal entity

It is sometime also called separate legal ‘personality’. This means once incorporated,
companies own its own legal personality that is separated from its owner. It is a sovereign
entity that is disconnected from the persons who created it (the promoters) and the persons
for funded it (the shareholders). This is the veil of incorporation. The ‘veil’ is akin to a
curtain that separates the company from its founders and shareholders. The company can
sue and be sued in its own name. A member or the directors cannot sue others on behalf
of the company. The company may enter into contracts in its own capacity without
incurring personal liability for its members (Sec.20(a), CA 2016). This principle is derived
from the ancient case of Salomon v Salomon & Co Ltd (1897). Mr.Salomon, along with
his wife and children, are the shareholders of Salomon & Co, a limited liability company,
that was established to takeover a previous sole proprietor business belonging to
Mr.Salomon too. He remained as the director of the new company and it is largely under
his full control. He gave a loan of £10,000 to the new company in the form of debenture.
Eventually, the company went into liquidation and Mr.Salomon claimed priority
repayment of the loan in his capacity as secured creditors. Other unsecured creditors
contended claiming fraud. The court held that once incorporated, a limited liability
company is separated from its members. The secured creditors relationship should be with
the company, not Mr.Salomon as a member or director. Hence, Mr.Salomon may claim
repayment.

(b) Perpetual succession

Once incorporated, the company lives perpetually unless it is being wound up voluntarily,
by the court or by creditors. The company may continue to exist even if it has no business
operation, although the Registrar has power under Sec.549, CA 2016 to strike off company
that no longer carrying on business. Otherwise, the company shall continue to be in
existence until it is removed from the register (Sec.20(b), CA 2016). Example can be seen
in the case of Noel Tedman Holdings Pty Ltd (1967) where the husband and wife are the
only shareholders and directors of the company. They both died in a tragic accident,
leaving an infant child. The child becomes the only beneficiary to inherit the shares of the
deceased parents. However, the company's article stipulates that shares transfer must be
approved by the directors. Since both the directors were dead, the company's stewardship
falls into a deadlock. The court allowed the personal representatives of the deceased
shareholders to appoint directors to approve the share transfer to the child. Consequently,
the company continued despite the demise of its owners.

(c) Unlimited capacity

The company will have full capacity to undertake any business or activity. It can enter into
contracts in its own name. This means the company can sue and be sued in its own name.
The company can acquire, own, develop or dispose any property (Sec.21, CA 2016).
Property belonging to the company cannot be used by members (owner) to off-set their
losses, by directors to off-set their compensation or by creditors to off-set debts owe to
them unless a court order has been obtained to crystalize specific assets under a charge. In
terms of finances, the company has now more access to finance sources and credit, thus it
may incur debts and liabilities (make borrowing) on its own name. Borrowing power is

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 essential for the operation of the company. Generally, in terms of company law, there is
no limit to how much a company can borrow. The limit lies in the willingness of financial
institutions to allow lending to the company after considering its asset strength and
potential for future growth.

(d) Limited liability

It is important to note that limitation to liability refers to members’ liability towards the
debt of the company. Members bear limited liability to contribute to the asset of the
company in the event of winding up, up to the amount unpaid. This doctrine does not apply
if the company has been incorporated as an unlimited company (i.e. members of a
company that is incorporated as ‘unlimited’ company can be called to contribute further
cash until all debt of the company is met). The liability of the company itself is unlimited.
The company must pay off its creditors in full.

Lifting the Veil of Incorporation

The principle of separate legal entity is to protect the members from debts, obligations or
misconduct committed by the company. This is due to the fact that the company is managed
by a team of administrators headed by the board of directors. Members do not participate in
the daily operation of the company. Instead, the directors are the master mind behind the
conduct of the company. Hence, it may not be equitable to hold the members liable for the
conduct of the company. After all, members are just investors who invest money into the
company.

This protection is, however, not absolute. There are situations when rigid upholding of the
Salomon principle would lead to injustice. In such circumstances, the court will lift the
protection and hold the members liable for the company’s wrong. This is called ‘lifting the
veil of incorporation’.

The veil can be lifted against a member by statute or by common law. The former refers to
provisions in the CA 2016 that specify circumstances when the members can be held
responsible. Whereas the latter refers to precedent established in previous case laws where
protection has been lifted.

(a) Lifting the veil by Statute

Sec.540(1) of CA 2016 provides for responsibility for fraudulent trading. If in the course
of winding up, it appears that the company has carried out businesses with the intent to
defraud, the court may declare any person who was knowingly a party to the carrying of
the fraudulent activity to be personally liable for all debts and liabilities of the company.
This responsibility is unlimited.

Sec.542 of CA 2016 provides that if it appears to the court that, in the course of winding
up the company, any past or present officer or member has been criminally liable for
offences in relation to the company, the court may order that the officer or member be
prosecuted.

Sec.131 of CA 2016 provides that any persons can be held liable for making distribution
(i.e. dividend) to shareholders which is not out of profits. Distribution can be made only if
the company has profit. Otherwise, all officers or any person, in this case including

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 members, shall on conviction be liable for imprisonment not exceeding 5 years or a fine
not exceeding RM3,000,000 or both.

Sec.127, CA 2016 provides that a company that wishes to purchase its own shares has to
adhere to strict guidelines pertaining to its solvency and treatment of the shares following
the repurchase. Members can be held liable for violation of this section.

(b) Lifting the veil by common law

Any members or promoter can be held liable for liabilities that arise from a company that
has been used as a devise to shield its sham. In the case of Gilford Motor Co Ltd v. Horne
[1933], Horne's contract of employment contains a restrictive clause that forbid him from
soliciting with Gilford's customers after his employment ended. Horne set up another
company outside where his wife was the director. The company was competing with
Gilford's business and established contact with its customers. Gilford suited Horne. It was
held that Horne has used the company as a sham. Hence, he was held liable for stealing
Gilford's customers.

Any members or promoter can be held liable for liabilities that arise from a company that
has been used as engine to commit fraud. In Aspatra Sdn Bhd v. Bank Bumiputra Malaysia
Bhd [1988], Osman was a director of BBMB. The latter bought an action against the
former and some companies controlled by him to recover secret profits amounted to
approximately RM27 million. BBMB were concerned that Osman may fled the country
along with the assets. Osman argued that the money are the companies' (including Aspatra)
assets, not his. The court assert that the veil will be lifted if fraud is involved.

Generally, subsidiary is distinct from its parent as they each has separate legal entity.
However, in some situation, the law may treat both the parent and subsidiary companies
as a single entity. In the case of Hotel Jaya Puri Sdn Bhd v National Union Bar &
Restaurant Workers (1980), the restaurant was established independently from the hotel.
It is situated inside the hotel premise and it has the same Managing Director and managers
as the hotel. Most of the restaurant's employees were employed by the hotel. Subsequently,
the restaurant ceased operation and the employees were retrenched. The Union argued that
the actual employer, which is the hotel, was still in operation. Hence the employees cannot
be retrenched by reason of cessation of business. The hotel claimed separate legal entity.
The Court opined that the corporate veil should be lifted, and the employees’ claim should
be allowed. The two companies were functionally one entity.

In another case of Pek Seng Co. Pte. Ltd. & Ors v Low Tin Kee & Ors [1990], the creditor
of Pek Seng (parent) obtained a mareva injunction against it and two of its wholly owned
subsidiaries. The subsidiaries argued that the parent and the subsidiaries are separate
entities, therefore the injunction order should be lifted. The application was denied because
the managing director of Pek Seng have full control over the subsidiaries. Hence, the three
companies should be treated as one entity.

Conclusion
The above describe the formation and lifecycle of an incorporated companies; the role, duties
and risk of a promoter; the legal standing of pre-incorporation contracts and the legal effect of

Electronic copy available at: https://ssrn.com/abstract=3797479

incorporation and the effect of abolishment of common seal under the Malaysia Companies
Act 2016.

Other regulations concerning operating a business in Malaysia can be found in multiple articles
in this series of "Corporate law of Malaysia". The immediate chronological continuation of this
article can be found in “Corporate Law of Malaysia : Corporate constitution of Malaysia
companies”. It provides information concerning constitution of companies, explains the
different position under the old and revised Companies Act of Malaysia. It also highlighted the
legal significance of the traditional memorandum and article of associations and the legal
implication following the abolishment of these two statutory documents. Articles in this series
aimed at providing a quick and simplified reference for students and non-practitioner.

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