DR. MD.

ABDUL
DR.JALIL,
MD. ABDUL
COMPANY
JALIL,
LAW,
COMPANY
2013
LAW, 201311

CHAPTER TWO
CLASSIFICATION OF COMPANIES

Company is a business organization which allows its directors to raise large

amount of money from its members. Thus, companies can undertake large
businesses in national and international levels. There are different types of
companies based on the number of shareholders, limited by shares, guarantee,
unlimited liability etc. Primarily companies are classified into two types: They
are as follows:
1. Private company
2. Public company
Private Company:
To establish a private company there must have at least two shareholders and
maximum fifty (50) shareholders. The shareholders are also known as members
of the company. A private company cannot sell its shares in the open market.

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MD. ABDUL
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Public Company:
To establish a public company there must have at least two shareholders and there
is no limit of maximum number of shareholders. Therefore, a public company can
have unlimited number of shareholders and can raise a huge amount of capital to
do different types of business. A private company can be transformed into a
public company if the Board of Directors decides. A public company can sell
shares in the open market which a private company cannot. Therefore, a public
company enjoys some advantages over a private company.
Characteristics of a Private Company
There are a few unique characteristics of a private company which do not exist
for public company [Section 15 of Companies Act 1965 herein after referred to as
CA 1965]. Therefore, the unique characteristics distinguish private companies
from public company. These characteristics of a private company are also known
as restrictions on the activities of private companies. The unique characteristics of
a private company are as follow:
a) Minimum number of members should be at least two (2) and maximum
number of members should not exceed fifty (50);
b) Shares cannot be easily transferred by the members. There are some internal
rules to transfer shares.
c) The company also cannot offer and sell shares in the open market;
d) The company also cannot invite the public to deposit money with the company.
The above restrictions are imposed on private companies to maintain the nature
of private companies. These restrictions distinguish private companies from
public companies as those restrictions are not imposed on the public companies.
Differences between private company and public company
There are certain differences between the private company and the public
company which are shown in the table below.
Private company

Public company

1. Maximum members must not be 1. Maximum members can be more

more than fifty (50).
than fifty. There is no limit of
membership.

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2. At the end of company name there 2. At the end of the company name
must have the word Private Limited there must be written Public Limited
(Pvt. Ltd.).
(Pub. Ltd.)
3. Cannot sell shares in the open 3. Can sell shares in the open market.
market.
4. Shares cannot be transferred to 4. There is no such restriction in
others easily.
public company.
5. Cannot invite the public to deposit 5. Can invite the public to deposit
money with the company.
money with the company.
6. It does not need to file prospectus 6. It must file prospectus or statement
or statement in lieu of prospectus in lieu of prospectus with the
with the Registrar of Companies.
Registrar of Companies.
7. It is not compulsory to hold 7. It is compulsory to hold statutory
statutory meeting.
meeting and to submit a copy of
report on statutory meeting to the
Registrar of Companies.

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A private or public company may again may be classified into the following four
types:
i) A company limited by shares;
ii) A company limited by guarantee;
iii) A company limited both by shares and guarantee;
iv) An unlimited company.
Company Limited by Shares
Whether the members of a company have limited or unlimited liability depends
on the statement in the memorandum of association of the company. If the
memorandum of association of the company stipulates that the members will
have limited liability then they will enjoy limited liability in case the company is
wound up [Section 4 of CA 1965]. A company is required to mention in its
memorandum of association the amount of its share capital and its division into
shares of a fixed amount [Section 18 of CA].
A member cannot be asked to pay more than the amount unpaid on his shares
when the company is wound up. If he has paid in full the value of his shares, he
cannot be asked for any further contribution to the assets of the company when
the company is wound up. There is limited liability of members in a company
limited by shares. This has been mentioned in section 214(1) of the Companies
Act 1965. This is known as limited liability. Limited liability is determined by
value of number of shares a member has taken from the company. A limited
liability company must have the word Berhad (Limited) at the end of its name
[Section 22(3) of CA].
Company Limited by Guarantee
There is another type of company known as company limited by guarantee. The
memorandum of this type of company mentions that it is a company limited by
guarantee and the members have limited liability in case it winds up. A member
needs only to contribute the amount he has agreed to guarantee and not more than
that. This type of company does not have shares while operating its functions.
However, if the company is wound up and its liability is more than the company
assets, then the members are required to pay the amount of money which they
have guaranteed. When he has paid in full the amount he has guaranteed, he
cannot be asked to pay further sum of money to pay the debts to the creditors.

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A company limited by guarantee may be suitable for clubs or other non-trading

companies whose capital comes from outside sources, subscription from the
members, social activities etc. This type of company can enjoy separate legal
entity and limited liability status.
Company Limited by Both Shares and Guarantee
Previously it was possible to form a company limited by both shares and
guarantee under section 14(4) of the CA 1965. The members of this type of
company are liable to pay the value of unpaid shares and the amount of guarantee
they undertook to pay in case of winding up of the company. So, the liability of
members was limited by the both shares and guarantee.
However, at present this type of company is not possible to form because of the
prohibition provided in section 14A of Companies Act 1965. This section was
inserted in the Companies (Amendment) Act 1985 (Malaysia) and came into
force on February on 1, 1986. Section 14A provides that on or after the coming
into force of this section, on February 1, 1986, no company may be formed or
become a company limited both by guarantee and a share capital. Because of this
section, now a company can be formed either as limited by guarantee or limited
by shares. A company limited by both guarantee and shares cannot be formed.
However, companies limited by both guarantee and a share capital existing before
coming into force of this section are not affected by this section.
Jenkins Committee in the UK (known as Company Law Committee, cmnd. 1749,
1962) in its report in para 70 recommended for the abolition of companies limited
both by guarantee and shares. Following this recommendation of the Jenkins
Committee, section 1(2) of Companies Act 1980 abolished a company limited
both by guarantee and shares. The Jenkins Committee felt that it was
inappropriate for a company limited by guarantee to make a prorate distribution
of profits to its members.
On winding up of a company limited by both guarantee and shares, the members
are liable to contribute to the company assets the amount they guaranteed to
contribute. He is also liable to pay the amount of unpaid on the shares held by
him. [Section 214 (4) of Companies Act 1965]

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Unlimited Company
There is another type of company known as unlimited company which can be
formed if the members of the company agrees to. [Section 16(4)] This type of
company can be formed with or without share capital. The liability of the
members to contribute to the assets of the company on winding up is not limited
in any way. The members will be liable to pay all the debts of the company when
the company does not have enough money to pay the debts. Businessmen are not
interested to set up unlimited company at present time, as it is very risky for
them.
There are some other types of companies such as foreign companies, holding and
subsidiary companies, related companies, legal status of related companies, fully
owned companies and investment companies. The nature and characteristics of
these companies are discussed briefly below.
Foreign Companies
Foreign companies are those companies, societies, associations or other body
registered outside Malaysia. These foreign companies can have a business office
and can do business in Malaysia after registering the company in Malaysia as
foreign companies. The company has to lodge certain documents with the
Registrar of Companies to register the company as a foreign company. Sections
332 (1) sets out the documents required to be lodged with the Registrar for
registration purpose. If the Registrar is satisfied with the documents submitted he
will issue a certificate of incorporation in the prescribed form. A foreign company
is entitled to hold real property in Malaysia [Section 331].
Holding Company
Holding company is the main company which has one or more subsidiary
companies under its control. According to section 5 of the CA 1965 a corporation
which is subsidiary of another corporation, that other corporation is known as
holding company. The holding company controls the management of subsidiary
companies.
Subsidiary company
A company which is subsidiary of another company is known as subsidiary
company. In other words a subsidiary company is under the control of the holding
company. A company becomes a subsidiary company of a holding company if the
following conditions are fulfilled:
a) If the holding company controls the composition of the board of directors
of the subsidiary company [Section 5(2)]. If the holding company can
appoint or remove all or a majority of the directors of the subsidiary, then

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it can be said that the holding company has controlling power over the
composition of board of directors;
b) If the holding company controls more than half of the voting power of the
subsidiary;
c) If the holding company has more than half of the issued share capital of
the subsidiary.
Related Companies
When there is holding and subsidiary relation among the companies, such
relation between them is known as related companies. When there are two or
more subsidiaries of a common holding company, they are also known as related
companies. The related companies are also known as group of companies
[Section 6 of the Companies Act 1965].
Figure 1: Related Companies

In Figure 1: the relation between X and Y is holding and subsidiary company.

Therefore, X and Y are related companies. They are also known as group of
companies.
Figure 2: Related Companies

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COMPANY
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In Figure 2: Z is a common holding company and it has three subsidiary

companies such as A, B and C. The relation among Z and A is holding-subsidiary
company. So, they are related companies. The relation between Z and B are
holding-subsidiary companies. So, they are also related company. The relation
between Z and C is holding-subsidiary companies. So, they are also related
company. A, B and C are three subsidiary companies of a common holding
company Z. A, B and C are also related companies as they are subsidiaries of a
common holding company Z. Company Z, A, B and C also known as group of
companies. In this group, Z is the common holding company and A, B and C are
subsidiary companies.
There is a prohibition of giving loan to a director of a related company as
provided in section 133(1). A company (other than a private exempt company) is
prohibited to give loan directly or indirectly to a director of its holding company
or to a director of its related company. Section 134(1)(a) provides that every
company must keep a register showing the shares and debentures held by each
director in the company including a related company.
Legal status of related companies
Each of the related companies enjoys separate legal entity. Related companies are
not treated as a single entity. Each of the related companies is liable separately for
its liability to the creditors. Therefore, the creditors of a subsidiary company
cannot sue the holding company to claim debts. The subsidiary company is only
liable for the debts payable to the creditors. Hence, the creditors can only sue the
subsidiary to enforce its rights.
However, in certain circumstances the court may lift veil of incorporation and
treat all the related companies in a group as a single economic entity. Usually the
court is reluctant to lift the veil of incorporation but for the interest of justice the
court may lift the corporate veil and can treat the group of companies as a single
entity for holding liable for the debts to the creditors. Sometimes, the court lifts
the veil of incorporation and finds the holding company liable for deciding a
matter related to its subsidiary company.
When the holding company is actually the controller of the subsidiary company,
the court may lift the veil of incorporation and treat the related companies as a
single economic entity to issue an order against the holding company. In DHN
Food Distributors Ltd. V. Tower Hamlets London Borough Council 1, DHN was
a holding company and it had two wholly owned subsidiary companies. One of
the subsidiary company had a freehold land from where another subsidiary
operated transport business. Tower Hamlets London Borough Council made a
compulsory purchase order for the land under section 5 of the Land
Compensation Act 1961. Compensation was paid to the subsidiary which holds
1 [1976] 1 WLR 852. This case was decided by the Court of Appeal in England.

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DR.JALIL,
MD. ABDUL
COMPANY
JALIL,
LAW,
COMPANY
2013
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the title deed on the land. However, because of compulsory acquisition of the
land, another subsidiary could not find an alternative premise to operate its
transport business. As a result, it was bound to cease its business and suffered
loss. Therefore, DHN and its subsidiary filed a suit claiming compensation for
causing disturbance in business operation.
The court lifted the veil of incorporation and treated the group of companies (the
DHN company and its subsidiaries) as a single economic entity entitling DHN
company to claim compensation for disturbance.
Ultimate holding company
It is an ultimate holding company if it has one or more subsidiary companies and
the holding company is not itself the subsidiary of another company.2
Wholly owned companies
According to section 5B of the Companies Act 1965 a company is a wholly
owned company if its members are:
i)

From its holding company;

ii)

a nominee of its holding company;

iii)

another wholly owned subsidiary of the holding company;

iv)

a nominee of such wholly owned subsidiary.

A company is wholly owned subsidiary if it has no member other than the

members have been mentioned above.3
Investment companies
Investment companies are those companies which invest its money to other
companies in marketable securities for the purpose of revenue and profit. These
companies should not have an intention to exercise control over the company in
which it has invested.4
Investment companies invest in marketable securities. Marketable securities are
debentures, funds, stocks or bonds of any government or of a local authority or of
any corporation or society, including any right or option in respect of shares in
any corporation and any interest.5
2 Section 5A of the Companies Act 1965.
3 Section 5B of the Companies Act 1965.
4 Section 319(2) of the Companies Act 1965.
5 Section 84 of the Companies Act 1985.

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DR. MD.
JALIL,
ABDUL
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COMPANY
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Companies Act 1965 provides certain restrictions and prohibitions on the

activities of investment companies.6 Those restrictions are as follows:
i)

It cannot borrow in total an amount exceeding twice its net tangible

assets; [Section 320]

ii)

It cannot invest in another company an amount in excess of ten per

cent of its net tangible assets. [Section 321]

iii)

It is restricted in the underwriting of share issues because if the

underwritten shares were not disposed of, the investment company
would be obliged to take them up. Accordingly, investment companies
are prohibited from underwriting any issue of unauthorized securities
exceeding 20 percent of its net tangible assets. [Section 322(2)]. In the
case of underwriting authorized securities, the maximum amount is 40
per cent of its net tangible assets [section 322]. This is because
authorized securities are relatively safe, being securities in which
trustees are authorized to invest.

iv)

It must state in its prospectus and articles of association the types of

securities in which it may invest and whether it is among the objects
of the company to invest within Malaysia or outside or both. [Section
323]

v)

It is prohibited from purchasing shares or debentures in other

investment companies. [section 324]

vi)

It is prohibited from speculation in commodities. [section 325]

vii)

It must comply with special disclosure requirements in its balance

sheet. This requires a complete list setting out its investments,
showing the descriptions and quantities of those investments and it
must show separately in the profit and loss account the income
derived from underwriting and sub-underwriting. [section 326(1) and
(2);

viii)

It must keep a reserve account called the investment fluctuation

reserve which records net profits and losses from the purchase and
sale of securities. [section 327]

Sample Questions:
1. What are the differences between private company and public company?
6 Sections 320 to 325 of the Companies Act 1965.

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JALIL,
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COMPANY
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COMPANY
2013 LAW, 20131111

2. Write the characteristics of a private company which distinguish a private

company from a public company. Explain why such restrictions are
imposed on private companies?
3. Explain the following types of companies:
i)

Company limited by shares;

ii)

Company limited by guarantee;

iii)

Company limited by both shares and guarantee;

iv)

Unlimited Company.

4. Explain the following types of companies:

i)

Foreign company;

ii)

Holding company;

iii)

Subsidiary company;

iv)

Related company;

v)

Ultimate holding company;

vi)

Wholly owned company;

vii)

Investment company.

5. Explain the origin and development of Companies Act 1965 (Malaysia).

6. Explain power and functions of Companies Commission Malaysia
(CCM).
7. Explain power and functions of Registrar of Companies.