TUTORIAL 5

QUESTION 3

Syarikat Moderne Sdn Bhd has thirty members and two directors. The company was
incorporated in 2019 and its constitution provides for the liabilities of its members to the amount
owing by the company to its creditors. Due to the recent pandemic, the company’s debts have
escalated. Last month, the directors decided to convert the company to a private exempt
company limited by shares. The move is aimed at avoiding any public scrutiny of its financial
statements and to avoid payment of debts to its two main creditors namely MBB and PBB. Last
week, a general meeting was held whereby 75% of its members voted for the said conversion. It
is also hoped that the company can raise share capital of more than RM2 million after the said
conversion. The shares of the minority shareholders were purchased by one of the existing
members namely Syarikat Johnson Bhd.

Advise the Syarikat Moderne Sdn Bhd on all the issues stated above with reference to the
Companies Act 2016 and decided cases.

ANSWER:

The issue is whether Syarikat Moderne Sdn Bhd can convert from a private company to an
exempt private company.

In Malaysia, there are several types of company under Section 10 of the Company Act(CA)
2016 which can be classified under two categories via public status, public company and private
company that can be either exempt or non-exempt. Also, via liability of members, company
limited by shares, company limited by guarantee, company limited by shares and guarantee and
unlimited company.

A public company under Section 2 of the CA 2016 is a company that is other than a private
one. While private company as pursuant to Section 2 of the CA 2016 is any company prior to
the commencement of the 2016 Act, was a private company under corresponding previous
laws; a company incorporated as a pirate company wit h regards with the 2016 Act; and any
company that converted into a private company by virtue Section 42 of the CA 2016 . A private
company may have a share capital with limited or unlimited liability. These types of companies
do not seek funds from the public and therefore enjoy certain privileges not enjoyed by a public
company. A private company is usually distinguished by having the word ‘sendirian’ or ‘Sdn’
before ‘berhad’ or ‘Bhd’ in the company name.

A private company can be either exempt or non-exempt. Under Section 2 of CA 2016 stated
that an exempt private company, is a private in the shares of which no beneficial interest is held
directly or indirectly by any corporation and which has not more than twenty members and none
of whom are corporations. To simplify the characteristic of an exempt private company are its
shares are held by individuals and not by any company also the membership shall not exceed
twenty persons. Next, there are certain duties that an exempt private company does. Under
Section 260 states that an exempt private company may lodge with the registrar for each
financial year a certificate relating to its status as an exempt private company in lieu with the
requirements stipulated is Section 259(1)(a). In which if a private company fulfills the
characteristics of an exempt company it has the option of filing an exempt certificate to the
Registrar instead of a full audited financial statement. In applying, to convert to be an exempt
private company they must first fulfill all the characteristics of an exempt private company as
stipulated under section 2, as Syarikat Moderne Sdn Bhd consists of thirty people and two
directors, it does not fulfill the characteristics of shall not exceed twenty members. Hence, the
conversion cannot take place, as it does not in compliant under section 2. Next, the conversion
of the company from private to an exempt private through general meeting and voting cannot be
ascertained as there is no provision available under the Company Act nor cases, hence if they
still insist on converting to an exempt private company, it is best for them to register a new
company that is in compliant with all the characteristics of an exempt private company as stated
above.

Furthermore, if they decide to start anew as an exempt private company, they may avoid public
scrutiny which as pursuant to Section 260 and section 259(1)(a) where they can be exempt
from presenting a full audited financial document to the registrar. For Syarikat Jonson Bhd that
purchased the shares of the minority of shareholders, cannot become one of the members, this
is pursuant to Section 2 as stated above, a member of an exempt private company must be a
human being and not a company. As a private company exempt or non-exempt they cannot
raise share capital as it is a purview of a public company, hence the raise capital of more than
RM 2 million cannot take place even after the conversion of their company.
For the issue regarding liability, as stipulated in its constitution, that provides for the liabilities of
its members to the amount owing by the company to its creditors. As their purpose of converting
the company is to avoid payment of debts to its two main creditors namely MBB and PBB, it still
cannot cease their liability to pay the debts. As in Malaysia, a conversion of a company cannot
change the liability of the company; this is also stipulated under Section 40(5) of CA 2016. This
is because liability of a company is contractual in nature. Thus, even if a company name has
changed, the legal entities and the company number registered to the Registrar is still the same
hence, it cannot be avoided. Hence, conversion of a company has no effect on debts and
liability.

In conclusion, Syarikat Moderne Sdn Bhd cannot convert from a private company to an exempt
private company as it does not fulfill the requirement under section 2 of CA 2016.