The Companies Commission of Malaysia has issued a Consultation Document on the Proposed Companies Bill dated 2 July 2013, and has invited comments on the provisions of the proposed bill before 1 August 2013.
The Consultation Document can be found at http://www.ssm.com.my/sites/default/files/announcement/Companies_Bill.pdf
The following are some of the comments on the Proposed Companies Bill sent by Weng & Co to the Companies Commission of Malaysia for its consideration.
A. Comments on Division 5 “Constitution of a Company”
A1. No provision for validity or enforceability of shareholders’ agreements
Division 5 “Constitution of a Company” is silent as to whether or not a shareholders’ agreement is valid and binding on the members of a company if such agreement is not expressly “adopted” by the members as a constitution. The language of section 31(1) suggests that it is not mandatory to adopt a shareholders’ agreement as a constitution. In practice, shareholders’ agreements are increasingly commonplace, and may only be executed after a constitution is already put in place by the original shareholders, for example where new shareholders come on board. It is also commonplace for shareholders to conduct themselves on the basis of the terms of the shareholders’ agreement, even though the constitution or articles of association are not amended to reflect the terms of such agreements.
It is the policy of the law to uphold rather than destroy bargains. There are no cogent policy reasons not to give effect to a shareholders’ agreement entered into between all members of a company, even though such agreement is not adopted as a constitution, and especially where all members have acted upon or conducted themselves in accordance with the terms of such agreements.
Therefore, it is respectfully proposed that there should be inserted a new section in Division 5 as follows:-
“Nothing in this Division shall affect the validity or enforceability of any shareholders’ agreement entered into between all the members of a company whether or not such agreement has been adopted as a constitution pursuant to section 31.”
A2. Possible conflict between section 30(2) and section 31(2)
Section 30(2) provides that “If a company has a constitution, the company, each director and each member of the company shall have the rights, powers, duties and obligations set out in this Act, except to the extent that such rights, powers, duties and obligations are modified, in accordance with this Act, by the constitution of the company”.
Section 31(2) provides that “The constitution of a company has no effect to the extent that it contravenes or inconsistent with the provisions of this Act.”
There appears to be a possible conflict between section 30(2) and section 31(2). On the one hand, section 30(2) allows company via its constitution to modify the rights, powers, duties and obligations set out in the Act. However, section 31(2) on the other hand may effectively mean that such modifications would be of no effect since it would be “inconsistent” with the provisions of the Act.
It is proposed that one possible solution would be to amend section 30(2) to read:-
“… except to the extent that such rights, powers, duties and obligation are permitted to be modified in accordance with this Act, and are so modified by the constitution of the company”.
B. Comments on Division 9 “Execution of Documents”
If a company’s constitution is only allowed to modify the provisions of the Act where the Act expressly provides for the right to do so (see section 30(2) and section 31(2) above), then a serious difficulty may arise in relation to the provisions of Division 9 “Execution of Documents”, in particular section 63 (Company Contracts), 65 (Execution of Documents).
Sections 63 and 65 have the effect of making a company bound by contracts or documents made or executed pursuant to the provisions therein. In the case of contracts, a company may even be bound by an oral contract made by an agent of the company pursuant to his implied or ostensible authority.
In this regard, Division 9 is silent as to whether the company is entitled to challenge the validity of any such contract or document, for example in the case of fraud or forgery: see for example Ruben v Great Fingall Consolidated  AC 439 (House of Lords), Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kim Leng & Ors  1 MLJ 301 (Supreme Court); or to challenge the ostensible authority of the officer or agent of the company to enter into such contract or execute such document: see for example Armagas Ltd v Mundogas SA  AC 717 (House of Lords), Thanakharn Kasikorn Thai Chamkat v Akai Holdings (2010) 13 HKCFAR 479 (Hong Kong Final Court of Appeal).
The articles of association (or constitution) of a company normally prescribe detailed rules for execution of contracts or documents to prevent forgery or fraud. However, sections 63 and 65 for example are not prefaced by the words “unless otherwise provided in the constitution”. Without these words, the argument may be made that any attempt to modify section 63 or 65 via the terms of a constitution may be ineffective by reason of section 31(2) of the Act.
There is a legitimate need, based on principle and policy, to achieve a balance between third parties who deal with a company in good faith on the one hand, and corporate governance i.e. the ability of a company to minimize fraud or forgery or abuse of authority on the other hand.
For example, a company may be a victim of massive fraud by an agent or officer who misappropriates monies of the company by exchanging foreign currency with a licensed money changer in the name of a company. By holding himself out orally as having ostensible authority to act for the company, section 63 may allow the fraudulent agent to deprive the company of the ability to challenge the validity of the contracts purportedly entered into with the money changer.
It is therefore proposed that sections 63 and 65 be qualified by the words:
“unless otherwise provided in the constitution”.
It is also proposed that there should be inserted a new provision in Division 9 to the following effect:-
“Nothing in this Division shall operate to prevent a company from challenging the validity or authenticity of any contract or document on the ground of fraud, forgery or want of authority by the agent or officer purporting to enter into such agreement or execute such document for and on behalf of the company.”
C. Comments on Section 197 “Persons disqualified from being a director”
C1. Section 198(1) requires substantial amendment
Section 198(1) is not drafted in a satisfactory manner, and may give rise to real difficulties in interpretation. For example:-
- the words “in any way”, which appear in section 130A(1) of the Companies Act 1965 and which are very wide in scope, have been omitted. This creates ambiguity as to the degree and extent of involvement by a disqualified director in the affairs of company.
- the power of the Official Receiver to apply should not only be available “in the case of paragraph (a)”. Compare section 130A(1) of the 1965 Act where the power of the Official Receiver was not limited in such manner. There are no policy reasons to do so.
- the omission of the words “if it appears to the court” which appeared in section 130A(1) of the 1965 Act creates ambiguity as to the standard of proof required of the Registrar of the Official Receiver, and may implicitly suggest that the court must now be “satisfied” to a higher degree that a disqualification order should be made.
- the words “habitual contravention” are vague and difficult to ascertain in practice. For example, is “habitual” to be measured simply in terms of number of occurrences? Is the gap or duration between each contravention a relevant consideration? Is the severity of the contravention to be taken into account (e.g. contraventions merely attracting fines c.f. those which attract heavier penalties)?
Taking into account the views and objectives of the CLRC in particular Recommendations 5.13 and 5.14 (pp. 53, 54 and 217 of their Final Report), it is proposed that section 198(1) be amended to read as follows:-
198. (1) The Court may, on application by the Registrar or the Official Receiver, make an order disqualifying any person from acting or holding office as a director or promoter of a company or in any way, whether directly or indirectly, being concerned with or taking part in the management of a company, if it appears to the Court that:-
(a) he is or has been a director of two or more companies which have gone into liquidation at any time within a period of five years preceding the application, and his conduct in relation to the management of any of those companies wholly or partially contributed to any such company going into liquidation; or
(b) he has a history of contravening, or has a propensity to contravene:-
(i) the provisions of this Act or any corresponding previous written law or repealed written law; or
(ii) his duties as a director whether under this Act or at common law or in equity.
D. Comments on Division 6 “Remedies”
D1. Section 346 “Oppression” and shareholders’ agreements
Section 346, which deals with oppression, should be expanded to reverse the decision of the Federal Court in Jet-Tech Materials Sdn Bhd & Anor v Yushiro Chemical Industry Co Ltd & Ors  2 MLJ 297 which held that breaches of a shareholders’ agreement cannot be a basis for bringing an oppression petition, as shareholders’ agreements and breaches of the same “are not matters relating to the affairs of the company.”
The decision in Jet-Tech is a very controversial, and is contrary to the settled position under company laws, where matters covered by shareholders’ agreements clearly relate to the affairs of the company, and breaches of such agreement have been held to constitute oppression: see e.g. Oak Investment Partners XII, Limited Partnership v Boughtwood  2 BCLC 459, CA (Eng) and Re Phoneer Ltd  2 BCLC 241. It has also been suggested that breaches of a shareholders’ agreement could amount to oppression if the provisions of such shareholders’ agreement were expressly incorporated into the articles of association of the company: Re A & BC Chewing Gum Ltd; Topps Chewing Gum Inc v Coakley & Ors  1 All ER 1017; Teo Choon Mong Frank v Wilh Schulz Gmbh & Anor  2 SLR 529, CA (Sing); Tuan Haji Ishak v Leong Hup Holdings Berhad  1 MLJ 661, CA; Beh Chun Chuan v Paloh Medical Centre Sdn Bhd & Ors  3 MLJ 262.
The decision in Jet-Tech has the effect of undermining the legitimate expectations of the parties to a shareholders’ agreement, and seriously deprives minority shareholders of the protection against oppression afforded by both the shareholders agreement and section 181 of the Companies Act 1965. This is also contrary to the purpose of section 181 of the 1965 Act, which was intended to be wide in scope: Re Kong Thai Sawmill  2 MLJ 227, PC.
As such, it is proposed that the decision in Jet-Tech should be reversed by legislation, and it is also proposed that there should be inserted a new section 346(1A) which provides as follows:-
“For the purposes of subsection (1), the affairs of the company shall include affairs or matters of the company governed by a shareholders’ agreement entered into between all the members of the company, whether or not such agreement is adopted as the constitution of the company.”
The requirement for a shareholders’ agreement to be entered into between “all the members of the company” will ensure that the rule will not apply to cases where the shareholders’ agreement is only between a few shareholders, thus addressing the policy concerns highlighted by the Court of Appeal in Tuan Haji Ishak v Leong Hup Holdings Berhad  1 MLJ 661 at pp. 691 – 692.
The words “whether or not such agreement is adopted as the constitution” is necessary, because in certain cases oppression may be caused by the majority refusing to adopt the shareholders’ agreement as the constitution or amending the constitution to give effect to the shareholders’ agreement.
D2. Conflict between Section 346 “Oppression” and section 446(1) “Circumstances in which the company may be wound up by the Court”
Section 346 allows the Court to order a company to be wound up if the affairs of the company are being conducted or the powers of the directors are being exercised in a manner oppressive or prejudicial to the minority shareholders.
There is now a substantial body of case law on the interpretation of section 181 of the Companies Act 1965 which would be applicable to section 346, and which lay down the principles to be considered by the courts in deciding whether or not there has been oppression so as to justify the winding up of the company.
However, section 446(1)(e) provides that the Court may order the winding up of a company if:-
(e) the directors have acted in the affairs of the company in their own interests rather than in the interests of the members as a whole, or in any other manner whatsoever which appears to be unfair or unjust to other members;
The wording of section 446(1)(e) appears to be far wider than section 346, in particular the words “in any other manner whatsoever which appears to be unfair or unjust to other members”. It may be easier to establish that the acts of the directors “appear to be unfair or unjust” to minority shareholders under section 446(1)(e), as opposed to establishing that the acts of the directors amount to “oppression” or “unfairly prejudicial” conduct under section 346.
Furthermore, a petition under section 446(1)(e) may be brought by a wider class of persons by reason of section 445(1) (companies, creditors, contributories, liquidators, the Minister, Bank Negara, the Registrar etc) as opposed to section 346 (member or holder of debenture of the company).
There is a real danger that litigants will choose to resort to a section 446(1)(e) petition to wind up a company in order to avoid the difficulties of establishing a case of oppression under section 346. This may have the effect of rendering section 346 completely redundant, and would allow section 446(1) to be abused by litigants for tactical reasons. This could not possibly have been the intended result of the legislature or the CLRC.
As such, it is proposed that section 446(1)(e) should be deleted altogether, and the power to wind up a company in cases of oppression should be exercised by the court only pursuant to section 346.
D3. Section 347 and 348 “Statutory Derivate Action” and Leave of Court
Section 347 allows a complainant to “bring, intervene in or defend an action on behalf of the company”.
Section 348 sets out the procedure for the complainant to apply to the court for leave. In particular, section 348 (2) provides that the complainant shall give thirty days’ notice in writing to the directors of his intention to apply for the leave of Court under section 347.
Although the wording of sections 347 and 348 are largely identical to sections 181A and 181B of the Companies Act 1965, it would appear that insufficient consideration has been given to the situation where a complainant is seeking for leave to defend an action on behalf of the company.
It would not be practicable for a complainant to give thirty days’ notice to the directors of his intention to apply for leave of the Court to defend an action. This is because the company would only have 14 days from the service of an action to enter an appearance, failing which judgment in default may be entered against the company. It is not clear whether this point was considered by the CLRC in its Final Report, as the Report focuses only on the required notice period before bringing an action.
In order to safeguard the company’s position in a case where a complainant intends to defend an action on behalf of the company, it is proposed that section 348 should be amended as follows:-
(A) Section 348(2) should be amended as follows:-
“The complainant shall give thirty days notice in writing to the directors of his intention to apply for the leave of Court to bring or intervene in an action under section 347.”
(B) Section 348(3) should be amended as follows:-
“Where leave has been granted to bring or intervene in an action pursuant to an application under section 347, the complainant shall initiate proceedings in Court within thirty days from the grant of leave.”
(C) There should be a new section 348(3A) as follows:-
“Where the complainant intends to defend an action on behalf of the company:-
(i) the complainant shall give seven days notice in writing to the directors of his intention to apply for leave of court under section 347;
(ii) the complainant shall serve a copy of the originating summons on the Plaintiff;
(iii) the Court may order that the period prescribed for entering an appearance under Order 12 of the Rules of Court 2012 shall not apply or shall be suspended until the disposal of the application for leave;
(iv) where leave has been granted to defend an action pursuant to an application under section 347, the complainant shall cause the company to enter an appearance to the action and file a defence within such period as may be directed by the Court.”