Problem Questions on Company Law

Question a:

A company that formed will create a separate legal entity to conducting business which is protected under the Companies Act 1993 (Companies Office, 2014). When a company is formed, the company will contained some basic elements such as the company’s name which is reserved by Registrar of Companies, at least one share, one shareholder and a director, a registered office that used to keep the records of the company, an address that used to serve the legal documents of the company and the address for communication. All the companies that formed usually are categorized as the limited liability companies and the unlimited liability companies are rare. On the other hand, a partnership is a legal relationship formed by the agreement between two or more individuals to conducting business as the co-owners (Murray, 2015).

There are three types of partnership which are the general partnership, limited partnership and limited liability partnership. General partnership is created with the general partners only that are involved in day-to-day operations of the business and assuming the personal responsibility for the liabilities of the partnership. Limited partnership is created with general partners and limited partners. For the limited partnership, the general partners are involved in the day-to-day operation of the business and also responsible to bear liabilities for the business while the limited partners are involved in the investment of the business but not involved in the day-to-day operations, so the limited partners have limited liability within the partnership. Limited liability partnership is the combinations of the characteristics of partnership and corporations where all the partners are protected from the negligence of the other partners.

Differences between Corporation and Partnership The first difference between a corporation and a partnership is the structure. A company is an independent legal entity that owned by the shareholders who are responsible to determine the way of the operation of the company and decides who should manage the company. It is also a person separate from its members and its directors. Meanwhile, a partnership is not the independent legal entity which involved two or more individuals who share the ownership of a business by sharing all the management duties, expenses, liability and profits together. Furthermore, another difference between company and partnership is the liability. A company does not held individual liable for the company’s debt or legal obligations since the company is classified as a separate entity because the company itself is responsible for all debts and legal fees.

This is to protect the shareholders from the risk of losing personal assets but only held liable for the actual investment of the shareholders in the company. Meanwhile, the general partners of a partnership held liable for all company’s debts and legal responsible where the personal assets of the general partners may be used to pay the company’s debts. There is the partnership agreement that involved in a partnership which stating the percentage of the profit and loss in the business that should be shared by each of the partners. Meanwhile, the number of members is also one of the differences between a company and a partnership. Corporation is established by high number of people which can reached more than twenty people in a company whereas partnership is formed between two until twenty people only. There is no maximum of number of members for a company except the private company that only can reach maximum fifty people as the members. A company involved higher paperwork with the local government and higher number of people within the board of directors in decision making for the business while the decision making are made by the partners that involved in the business for a partnership. Besides that, the difference between the company and partnership is the registration.

The formation of company is required to be registered with the Registry of Companies based on the Companies Act 1965. The creation of a company is expensive and complicated which involved higher administrative costs, complex tax and legal requirements. On the other hand, the formation of the partnership is required to be registered according to the Registration of Businesses Act 1956. For the creation of a partnership, it is less costly and also easier since there is less complex administration works as compared to the company. Moreover, the legal difference between a company and a partnership is also includes the constitution. The constitution of a company must be formed in writing by the Memorandum and Articles of Association. The formation of a company must file the articles of incorporation and obtain state and local licences and permits. Normally, the company will hire lawyer for help in the process of the formation of the company. By contrast, a partnership can be formed in the ways of either orally or in writing. The formation of partnership must register the business with the state and also obtain the local or state business licences and permits in order to carry on the business. Other than that, the legal difference of a company and a partnership is dissolution. The characteristic of perpetual existence of a company making the company can still continue to operate even though there is occurrence of the death or the insolvency of the members within the company. However, a company can be dissolved by liquidation and winding up. On the other hand, a partnership will be dissolved informally such as when there is death or retirement of the partners or agreement among the partners. In conclude, Mr. Azwan and Mr. Zuhri should consider setting up a partnership if the number of people that involved in the business is less than twenty people (Tasmanian Government, 2014). There are some advantages to create a partnership. The formation of a partnership is much simpler than a corporation since the structure of a partnership is smaller. The simpler structure of a partnership will also eventually lower the start-up cost of the partnership. Other than that, formation of the partnership can bring in more capital for the business. When there are more than two people in a partnership, the borrowing capacity for the purpose of investing in the business will become greater. Moreover, the advantages of the creation of a partnership also include the business affairs of the partners are private and protected since there is limited external regulation on the business of a partnership. Therefore, the formation of a partnership is the best choice for Mr. Azwan and Mr. Zuhri.

Question b:

Introduction The Memorandum of Association determines the basic parts of the structure of the company which states the objects formed within the company. Normally, Memorandum of Association is required and needed in the companies because it provides the information to others such as shareholders and investors about the company. The regulations for management of the company will be set in the Articles of Association and the regulations in the Companies Act 1965 may be used (Pheng, 2005). The Memorandum of the company may be modified according to the Companies Act 1965 unless the Memorandum itself prohibits the changing and deleting of the provision that set in the Memorandum. In fact, there is a particular class of members have the authority to inhibit the changing and deleting of the provision of the Memorandum. Meanwhile, the Articles can be altered by a special resolution based on the Companies Act 1965 and conditions in the Memorandum. After registered, the Memorandum and Articles are a contract that used to form a bond between the members and the company. Articles of Association represent the contract that involved the matters between the company and its shareholders. The object clause of the company is stated in the Memorandum of Association and the objective of the object clause is to limit the activities that can be undertaken by the company. The act of the company will be considered as ultra vires if the act is exceeding the limits of the object clause. Ultra vires doctrine is defined as an act that beyond the powers of the company.

The act that is ultra vires is considered void and cannot be approved although all of the members of the company wish to approve the act. The situation of ultra vires doctrine occurred when the directors of the company exceeded their power to carry out certain activities that should not be undertaken by the company. Ultra vires doctrine is created to protect the investors and creditors of the company by helping the investors to know the activities that their money is invested. Besides that, this doctrine is also developed to ensure the creditors that the funds of the company will not be wasted in the unauthorized activities so that the creditors can guarantee the payment from the company by avoiding the company went out of the circumstances of the business. This doctrine can prevents the company to allocate the money of the investors for other purposes that did not stated in the object clause of its Memorandum. Not only that, ultra vires doctrine is also used to guarantee the correct application of the company’s assets in order to avoid the problem of liquidation of the company besides protecting the creditors. This is because the doctrine can check the activities that are carry out by the directors in order to let the directors know the power or authority that they should act within the company so that they will not acting without authority. In order to identify whether the action is ultra vires or not, there are two aspects that need to be determined.

The two aspects are the main purpose and the special powers that are affecting that purpose. When the action is fulfilled both of the requirements, then the act need to be determined whether is incidental or consequential (Law Teacher, 2013). Referring to the reference case of Attorney General v. Mersey Railway Co. [1907], a company was incorporated for running on a hotel business (Law Teacher, 2013). The company has entered into a contract with the third party for purchasing furniture, hiring servants for maintaining omnibus. The purpose of the company was actually to run a hotel business but the object clause of the Memorandum of the company did not mention that they can purchase furniture or hire servants. This action was challenged and this case was brought to the court to see whether this act of the directors is considered as ultra vires. Based on the reference case, the court held that a company that incorporated for carrying on a hotel could reasonably purchase furniture, hire servants and maintain omnibus to attract more intending customers to the hotel to enjoy a full range of facilities that are provided by the hotel. This action is reasonably necessary to achieve the objective of the company to provide the best service to the customers in order to maximise the profit gained in the company.

List of Referencing

Companies Office. (2014) What is a company? [online] 26th September 2014 Available at: https://www.business.govt.nz/companies/learn-about/companies/what-is-a-company [Accessed 6th January 2015] Kunz, M. (2015) 5 Major Differences Between a Corporation and a Partnership. [online] Available through: https://smallbusiness.chron.com/5-major-differences-between-corporation-partnership-18830.html [Accessed 17th January 2015] Law Teacher. (2013) The Doctrine of Ultra Vires. [online] Available at: https://www.lawteacher.net/free-law-essays/company-law/the-doctrine-of-ultra-vires-company-law-essay.php [Accessed 21st January 2015] Murray, J. (2015) What is a Business Partnership? [online] Available at: https://biztaxlaw.about.com/od/glossaryp/g/partnership.htm [Accessed 6th January 2015] Peng, L. M. (2005) General Principles of Malaysian Law. 5th ed. Shah Alam: Oxford Fajar Sdn. Bhd. Tasmanian Government. (2014) Partnership- advantages and disadvantages. [online] 9th September 2014 Available at: https://www.business.tas.gov.au/starting-a-business/starting-a-business-from-scratch/choosing-a-business-structure-intro/partnership-advantages-and-disadvantages [Accessed 3rd February 2015]

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