The modern commercial company started with something called a “corporation aggregate” [1] which emerged in England in the Middle Ages. [2] It conferred on a group of people the capacity to hold and deal with property and interest for their collective aims. However, this type of incorporation required the consent of the Crown [3] through a Royal Charter. [4]
Later in the 17th century, incorporation was granted to various “merchant venturers” [5] giving them the rights to conduct business in a particular region such as the East India Company which pursued trade with the East Indies and later with the Indian subcontinent. At about the same time, when more capital was required for commercial activities, the “joint stock company” [6] came into existence. Each investor was allocated a share in the company. The shares were transferable without the consent of the other shareholders. [7] However, it only operated as a large partnership because incorporation at that time would still require a Royal Charter which was very rare at that time. The joint stock company did not enjoy any advantages of separate legal personality.
In the 18th century, there was a well developed market for shares. The South Sea Company was a British joint-stock company which was founded in 1711. Its shares rose from £100 to £1000 within months. [8] The company was a public-private partnership formed for the purpose of consolidating and reducing the cost of national debt. The company was also granted a monopoly to trade with South America. However, there was no prospect that any trade would take place and the company did not enjoy any profit from its monopoly. Speculation was very intense until it hit its peak in 1720 before collapsing to slightliy above its original price of floatation. This later became known as the South Sea Bubble resulting in large losses for many growing middle class families and many were ruined. The national economy was crippled. The founders of the scheme had engaged in insider dealing by using their advance knowledge to make huge profits for themselves by purchasing debt in advance before the national debt could be consolidated. Bribes were given to many politicians to support the Acts of Parliament necessary for the scheme. The insiders used the company money to deal in its own shares and the individuals who purchased these shares were given loans backed by the same shares to spend on purchasing more shares. The dream of making tremendous wealth from trade with South America was used to persuade the public to purchase the company’s shares without any likelihood of it ever materialising. The only major trade which really took place at that time was in slave trading. However, the company had failed to manage this profitably. Parliament passed a legislation called the Bubble Act 1720 which prohibited associations from acting as bodies corporate and from issuing shares without a Royal Charter or an Act of Parliament to prevent fraudulent stock issuing companies from coming into existence.
Large scale ventures such as the development of of railways at that time required a lot of capital and the lawyers at that time came up with the “deed of settlement” [9] companies to circumvent the Bubble Act. It was roughly that at this time, the concept of limited liability first emerged. According to Goulding, [10] this device was used so that money of a group of persons associating together for for purposes of business could be put into a trust asnd trustees could be apppinted to administer it. There was therefore a joint stock held under a trust and although there was in fact no corporation, all the parties for all practical purposes acted as if there was one. Shares in the company could be issued to the persons contributing property to the joint stock and each person would entered a covenant that he would perform and abide by the term of the trust. The difference between these unincorporated companies and partnerships was that unincorporated companies enjoyed continous existence with transmissible and transferable stock but unlike partnerships, no individual associate could cause the downfall of the other associates or deal with the assests of the associations. The ingenuity of the the legal draftmen in drawing up the trust deeds brought about a situation where groups of associated persons achieved corporate status for all practical purposes. [11]
In the 19th century, these deed of settlement companies could no longer fulfill the requirements of investors because they did not confer any of the advantages of incorporation. William Gladstone introduced the The Joint Stock Companies Act 1844 [12] which would later become the precursor to modern company law or “legislative ancestor of modern company law”. [13] The Joint Stock Companies Act 1844 allowed business associations to become companies by a process of registration. Before that time, incorporation had been a privilege conferred only by a Royal Charter or by an Act of Parliament. Any group wishing to form a company for any lawful purpose could apply for registration and by lodging the required information and paying the prescribed fees could obtain it. The companies registered under the Joint Stock Companies Act 1844 [14] Act were corporations and had the key attributes of separate legal personality but it did not give the attribute of any limited liability on the participants in the company. If the debts of a company incorporated under the Joint Stock Companies Act 1844 [15] exceeded its assets, creditors of the company could pursue the individual investors once their claims against the company had been exhausted. There were attempts to limit the investors’ liability such as specific agreement with creditors or through complex drafting in the deed of settlement itself. As a consequence, unlimited liability was seen as a disincentive to investment, requiring investors to monitor closely the financial position (and therefore ability to meet their share of any claim by a creditor) of other investors and the activities of managers. [16]
In a span of about a decade after the Joint Stock Companies Act 1844, the English Parliament passed the Limited Liability Act 1855. The significant milestone of this Act was it conferred limited liability upon the shareholders of a company and the term “limited” must be included in the name of the company to warn those who are dealing with the company that they are dealing with a company where the liability of a shareholder is limited. Various reforms over the years resulted in the enactment of Companies Act 1862 [17] and subsequently through the passage of time, the enactment of Companies Act 1948. [18] From here, the English Companies was further amended to move in tandem with time.
2.2 Company Law in Australia
On the other side of the ocean, a substantial part of Australia’s company law was transplanted from England and its evolution was in response to the economic needs of Australian society at the time. [19] Australia’s company law was mainly to finance the development of the mining industry, which was catalyst for the economic success of Australia at that time. In the 1800s, Australia had experimented with joint stock companies and limited liability partnerships but with limited success. After the consolidation of companies legislation in England in 1862, much of the United Kingdom Companies Act 1862 was passed in most of Australian colonies between 1863 and 1874 such as Companies Act 1864 (Victoria) and Companies Act 1864 (New South Wales) amongst others. [20] However the Australian Companies Act was regarded as a mere copy of the English legislation. Differing legislations over the years between the different states in Australia later culminated in the enactment of Uniform Companies Act 1961. [21] Subsequently, Australia passed many other Acts to reflect the changes in time.
2.3 Company Law in Malaysia
At the turn of the nineteenth century, Malaysia or British Malaya was divided into the Straits Settlements, Federated Malay States (FMS) and Unfederated Malay States (UFMS). The Malaysia’s company law in was shaped by the Royal Charter of Justice of 1807, which introduced and applied English law to all areas within England’s administrative jurisdiction in so far as it was suitable to local conditions and circumstances.
The Straits Settlements were a group of British territories controlled by the British East India Company. The Straits Settlements comprising of the states of Penang, Singapore and Malacca which originally applied the Indian Companies Ordinance 1862. This Ordinance was repealed and replaced by the Straits Settlements Companies Ordinance 1889. It was the first local company law statute. This Ordinance was again later repealed and replaced by the Companies Ordinance 1915, Companies Ordinance 1923 and Companies Ordinance 1940.
The FMS used the Companies Enactment 1897 for the states of Selangor, Pahang, Negri Sembilan and Perak. This Enactment was subsequently repealed by the Companies Enactment 1917. The UFMS comprising of the the states of Johor, Kedah and Kelantan, had a separate but similar Company Enactments. They are respectively called Enactment No. 128 of Johor, Enactment No. 41 of Kedah and Enactment No. 14 of 1931 of Kelantan. The FMS and UFMS statutes reflected the equivalent existing company law in England during that period. There was no single company law statute in Malaya because of different administrative structure of the FMS, the UFMS and Straits Settlements prior to the Second World War.
After the Second World War, the British Government proposed a unified administrative and political structure for the Straits Settlements, the FMS and the UFMS called Malayan Union. [22] In 1946, the Companies Ordinance 1946 (MU No. 13 of 1946) was enacted. It extended its application of the Straits Settlement Companies Ordinance 1940 throughout Malaya at that time and replaced the company law statutes applicable to the FMS and the UFMS. However, the Malayan Union did not last for long and was soon replaced by the Federation of Malaya in 1957. However, the applicable company law statute for Malaya was still the Companies Ordinance 1946. [23]
After the establishment of the nation of Malaysia in 1963, the Government through the Ministry of Commerce and Industry, formed a committee to consider a new legislation to replace the existing Companies Ordinance 1946 (for the Federation of Malaya) and the other existing statutes on company law for Sabah and Sarawak which became part of Malaysia. The Committee considered the following in preparing its submission to the Government: the English Companies Act 1948, the Australian Uniform Companies Act 1961, the Cohen’s Report, the Jenkins’ Report, the Report and Draft Code prepared for Ghana by Professor Gower and the submissions of interested persons and bodies within Malaysia. [24] The reasons for the reform were: firstly, the fact that the Companies Act of 1929 of the United Kingdom which was the basis of Malaysia’s existing company law statute was outdated and was no longer capable of keeping up with the speed in which companies were developing; and secondly, that there was a need to consider whether there was adequate protection given to the investors in view of the policy of the Government to promote a healthy investment climate and prevent fraudulent and undesirable practices. Thirdly, the proposed Companies Bill 1965 was influenced by the reforms in various jurisdictions throughout the Commonwealth. The Companies Act 1965 replaced the Companies Ordinance 1946, including the Companies Ordinance 1953 of Sabah and Companies Ordinance 1958 of Sarawak. Since its enactment in 1965, the Companies Act 1965 has been amended several times. Some of the amendments were the result of changes in the regulatory structure. The Companies Act 1965 [25] which is modelled after the United Kingdom Companies Act 1948 and Australia Uniform Companies Act 1961 came into force on 15 April 1966 (P.U. 168/1966) and is applicable throughout Malaysia. There have been many changes to the Companies Act since then. The Companies Act 1965 is also supplemented by many other Acts such as Securities Commission Act 1993 and Securites Industry (Central Depositiories) Act 1991 amongst others. [26] Although many areas of law in Companies Act 1965 have undergone tremendous changes however there are areas of law which are still governed by the principles of English common law. [27]
The Companies Act 1965 despite its name does not purport to be a comprehensive legislation covering all aspects of company law. This is can be seen from Section 131(8) [28] of the Companies Act 1965 [29] and Section 132(5) of the Companies Act 1965 that provide that these sections shall be in addition to and not in derogation of the operation of any rule of law. [30] Section 131 of the Companies Act 1965 [31] is on disclosure of director’s interest while Section 132 of the Companies Act 1965 [32] is on duty of a director in a company. Tan [33] states cases decided in England and Australia are highly persuasive because the the underlying principles are largely the same. Aiman concludes that because of our common history, many English and Australian principles of company law still apply in Malaysia. [34] However, along the same line, there is currently there is no provision in Malaysian Companies Act for corporate criminal liability.