Ownership and Control of Private Higher Educational Institutions

 

This note is a follow-up to a question raised at the end of a previous article, Private Higher Educational Institutions: Confusion Continues Over Their Status. That question was about ownership and control of private higher educational institutions (PHEIs), established under the Private Higher Educational Institutions Act 1996 (the Act), particularly the division of powers between the regulatory agencies, the company, and the Chief Executive, who is the statutory official appointed to manage the PHEI.

Some of the conclusions from the previous article are repeated here as background to the discussion in this article.

The PHEI is Not an Entity Separate from the Company

1.      The previous article established (i) that a PHEI can only be established by a company registered under the Companies Act, (ii) that the company owns and maintains the PHEI, and (iii) that the PHEI is not a separate entity but is part of the company establishing it, a proposition that is now supported by the Court of Appeal decision in Eagle One Investment Ltd & Others. v. Asia Pacific Higher Learning Sdn. Bhd.[1]

2.      Confusion over the identity of the PHEI was again an issue in Limkokwing University of Creative Technology International Sdn. Bhd. v. Mahkamah Perusahaan Malaysia & Others.[2] In this case, litigants who brought an action in the name of the PHEI were granted leave by the court to amend the claim by substituting the company establishing the PHEI.

3.      The Court of Appeal’s decision in the Eagle One case settles the law that in any legal action concerning the PHEI, the proper plaintiff or defendant is the company establishing the PHEI. Any legal action arising from the activities of a PHEI must be initiated by the company or be brought against the company and not in the name of the PHEI, which to labour a point, is not an entity that can either sue or be sued in a court of law.

4.      If a Private Higher Education Institution (PHEI) is owned by the company establishing it, and is part of the company, then logically, and in keeping with the underlying scheme of the Act, the company is the PHEI. The company enters contracts to carry out the business of the PHEI, whether to build the facilities to support the PHEI and recruit students, demand, refund fees, employ staff or deal with any other contractors.

Any legal action arising from any of these transactions, whether by or against the PHEI must be brought in the name of the company and not in the institution's name. The courts have clarified this much in the cases mentioned earlier and those decisions are in alignment with the Act’s intended scheme of the Act. However, as will be seen, the statutory provisions dealing with the control of the PHEI deviate from the underlying scheme of the Act which places the company establishing the PHEI in control of the institution.

The Act Regulates the PHEI, not the Company

5.      The Act, in many of its provisions treat the PHEI as if it is a legal entity that can be regulated separately from the company. If the PHEI is not a legal entity, it is trite that regulations cannot be directed at it. It must be directed at the company, or any natural person involved in the institution’s operations, but not at the PHEI. The Act, however, directs most of its provisions at the PHEI as if it is a legal entity. Whilst there are also provisions directed at the company and individuals overseeing the institution's operations, most of the regulations are directed at the PHEI. For instance, s. 18(1) provides that the prior approval of the Minister shall be obtained before a private higher educational institution establishes a branch or affiliates, associates or collaborates with other higher educational institutions. It is submitted that this and other similar sections are unenforceable because a PHEI lacks the legal capacity to do any of the actions stipulated. It cannot establish a branch or affiliate or associate with or collaborate with any other institution. Such actions can only be taken by the company establishing the PHEI. Section 18 must therefore be directed at the company and not the PHEI.

6.      As they now stand, many of the Act’s regulatory provisions are unenforceable because they are directed at the PHEI and not the company establishing the PHEI. However, it is submitted that these discrepancies can be overcome if the term ‘private higher educational institution’ is redefined as proposed in the previous article. The proposed definition defines the PHEI as ‘a company carrying on the business of higher education.’ As the proposed definition treats the PHEI as the company, any provision directed at the PHEI will, in effect, be against the company.

Governance, management, and the control of PHEIs

7.       A more vexing question, one that cannot be solved by the proposed definition of PHEI concerns the governance, management, and control of PHEIs. If a PHEI is established and owned by the company, it must follow that management and control must necessarily rest with the company. Regulatory control of the institution (PHEI) must be directed at the company and not the PHEI. All this is obvious from the general scheme of the Act which only allows a company to establish a PHEI. Part III of the Act which deals with the establishment of PHEIs is unambiguous about the role of the company in ensuring adequate facilities for the PHEI, establishing a system of governance and management of the PHEI, and even maintaining standards of education in the proposed PHEI. Notwithstanding these foundational expressions, the Act veers away from them when it deals with the management of PHEIs under Part VI. Instead, the Act attempts to regulate the PHEI through the Minister, the bureaucracy of the ministry, and a statutory appointee with the title of chief executive of the PHEI. Under these statutory provisions, the company’s role in the control and management of the PHEI is minimal.

8.      The two main instruments of control of the PHEI are the constitution of the institution prescribed by the Act and the chief executive who is an officer appointed under the Act to manage the PHEI.

The Prescribed Constitutions

9.      Under s. 30(2) of the Act, PHEIs are to be managed in strict accordance with their constitutions. Before the 2017 amendment of the Act,[3] the contents of the constitution were left to be determined by the company subject to approval by the Registrar General. The changes effected by the 2017 amendments require the constitution to contain provisions that may be prescribed by the Registrar General.[4] The Private Higher Educational Institutions (Constitutions) Regulations 2017 (Constitutions Regulations)[5] issued to give effect to the 2017 changes, prescribe two constitutions, one for universities[6] and the other for colleges.[7]

10.  The prescribed constitutions are based on the model constitution[8] of the Universities and University Colleges Act 1971 (UUCA) which is an instrument designed for institutions that are fundamentally different from PHEIs. The UUCA University is established as a corporate body through an incorporation order initiated by the Yang di-Pertuan Agong. The UUCA Constitution is the sole instrument that regulates and animates the UUCA University. There is no other regulatory structure imposed by the law than that specified by the First Schedule Constitution. The PHEI, on the other hand, is established by a registered company whose regulatory structure is determined by the Companies Act 2016.

11.  Under the Companies Act 2016, the business and affairs of a company must be managed by, or under the direction of the Board of Directors of the company.[9] Since the sole object of a company establishing a PHEI is to establish and manage a PHEI, it must follow that the PHEI is managed by the Board of Directors. Contrary to these provisions, the prescribed constitutions based on the UUCA constitution, attempt to impose a bicameral system of governance over the PHEI. The two prescribed constitutions separate general governance (Board of Governors) from academic governance and management (Senate). The UUCA University functions and operates through two such organs.

12.  A registered company operates through its shareholders and Board of Directors (BOD). These organs are bound by strict fiduciary duties under the Companies Act and company law, as interpreted by the courts over the past two centuries. Directors, both individually and as a board, are responsible for fulfilling their duties towards the company. However, introducing a separate management structure, such as a BOG and Senate, between the company and the PHEI creates confusion. This is because neither the Companies Act 2016 nor the prescribed constitutions provide clear provisions to reconcile the governance and management structure.

13.  Importantly, no reference is made to section 11 of the Act which makes approval to establish a PHEI dependent on the applicant company’s ability to provide adequate facilities, for the PHEI, adequate and efficient management and administration for the proper conduct of the PHEI and to maintain the standards of education provided by the PHEI and establishing a proper system of governance of the private higher educational institution with a constitution that shall be approved by the Registrar General. Section 11 is unambiguous about the company’s responsibilities for the facilities, governance, management, administration, and academic standards of the PHEI it seeks to establish. It is also clear that the object of the constitution required by s. 11 is to tie the company to the responsibilities stipulated in the same section.

14.  The failure to align the management of the PHEI with the company’s management structure inevitably results in the creation of two separate management regimes, each with different roles and functions that would lead inevitably to uncertainties over questions of legal responsibility and liability.

15.  The preamble to the draft constitutions declares that ‘for the purposes of establishing and managing the University, there has been incorporated a company in Malaysia under the Companies Act 2016’. That declaration is undermined by the rest of the constitution because, if the purpose of the company is to manage the university, then the university must be managed by the Board of Directors of the company, which is where the management powers of the company reside. If, as is provided in the Act, the company is required to manage the university through a constitution, that constitution must be authorised by the company’s Board of Directors and be linked to the company if it is to have any legal effect.

16.  Even if it is to be inferred that the company will adopt the prescribed constitution through its Board of Directors, the terms of the constitution place no such obligation on the company. Yet, it is the company that established the PHEI and is the entity that carries the financial responsibility for the maintenance and operation of the institution. The Act is even silent on the company’s responsibility to maintain the institution financially other than the stipulations on minimum paid-up capital at the establishment of the institution. Nothing in the Act lays down the company’s duty to maintain the operations of the institution or any duty to its employees, or students.

17.  What ensues from these and the provisions relating to the chief executive is an attempt to wrest control over the PHEI from the company and place it under the control of the regulatory authorities. This, it is submitted, is neither practical nor prudent, because it would mean that the ministry by usurping control over the PHEI will end up assuming responsibility for the conduct of the PHEI.

The Chief Executive

18.  The role and position of the chief executive add to the confusion over who controls the PHEI.

19.  The company establishing a PHEI is required under s. 31 to appoint a chief executive whose appointment is subject to the approval of the Registrar General.  The chief executive occupies an enigmatic if not an invidious position under the current provisions of the Act. Straddling the PHEI, the company and the MOHE, the chief executive has to balance many loyalties and navigate through a maze of obligations that are imposed on him by law.  Although appointed by the company, he is subject to directions from the Registrar General and Minster. He is vested with powers that he may exercise without consulting the company yet he is an employee of the company.

20.  The statutory role of the chief executive is, among other things, to exercise general supervision over the arrangements for instruction, administration, day-to-day affairs, welfare, and discipline in the private higher educational institution and all its branches.  Stated in such broad terms, the chief executive is effectively in charge of all the functions and activities of a higher education institution. The company cannot appoint any other person to oversee the operations of the PHEI because under s. 31(4) the duties or functions of a chief executive cannot be carried out by any other person who is not registered as a chief executive. Any person who contravenes the provisions of subsection (4) shall be guilty of an offence.

21.  Although the Act requires the company to appoint the chief executive, it does not describe the chief executive’s relationship or responsibilities to the company. On the other hand, various provisions of the Act hold the chief executive accountable to the Minister and other officials in the Ministry thereby placing the chief executive in a position of conflict.

The Act does not require the chief executive to be appointed to the board of directors of the company but fails to recognise that the chief executive may legally be regarded as a director of the company because of the definition of director in the Companies Act 2016. A director includes a ‘person primarily responsible for the management of the company. . .’ Since the company’s sole object is to establish and manage a PHEI, the chief executive as the manager of that business will legally be a director of the company, whether that was intended by the statutory provisions relating to the chief executive’s appointment.

22.  As mentioned earlier, the intention of the Act in its provisions on the constitution and the chief executive appears to be to place control of the PHEI in the hands of the regulators. This conflicts with the general scheme of the Act as laid down in other provisions of the Act, which is to establish and regulate PHEIs through the agency of registered companies. The registered company provides a ready-made regulated legal entity that is eminently suited for managing a public good such as higher education. Unfortunately, that efficiency is whittled away by those provisions of the Act that were discussed earlier

Conflicting policies

23.  The controls and the uncertainties they engender can be traced to the two conflicting policies on higher education that the Act attempts to resolve.

a.      The first of these was the liberalization and privatization of higher education which put an end to the government’s monopoly over higher education. Two decades earlier the government, through litigation carried to the highest court in the land, resisted a petition brought by a group to establish a private university under the Universities and University Colleges Act 1971 (UUCA).[10] The decision in the Merdeka University case ended the possibility of private universities being established outside the control of the government.

The Act reverses that position. In its preamble, it recognises the role of private institutions in providing efficient higher educational infrastructure and increasing capacity to meet the demand for higher education.

b.      But the same preamble also emphasizes the need to regulate private education, which is the other policy underpinning the Act. In 1996, when the Act was passed, there was already a large and vibrant private higher education sector which through its initiatives had expanded higher education capacity in the country. Although private colleges could not award degrees, innovative arrangements with local foreign universities allowed them to teach degree courses from those universities. Some even offered courses that allowed local students to complete postgraduate programmes from foreign universities without having to travel to those universities. Despite the great strides made in the sector, private higher education was not regulated by any specific legislation at that time but fell under the insufficient provisions of the Education Act 1961.

The tone of the Act and its regulatory provisions appear to have been formulated to control the sector as it was in 1996 rather than what is made possible by its provisions to create a whole new regime for the regulation of these institutions. The regulatory approach of the Ministry, supported by the inconsistent provisions of the Act, attempts to regulate private higher education in the same manner they were regulated before the enactment of the Act.

What is urgently required is a re-examination of the provisions of the Act to give effect to the purpose of the Act. A new thinking must be developed to support the private sector of higher education to make it more competitive in the rapidly changing environment of global higher education. This requires a clearer streamlining of the regulatory framework.

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[1] [2020] 2 MLRA 659

[2] [2023] 5 MLRH 575

[3] Private Higher Educational Institutions (Amendment) Act 2017

[4] Section 30(1) of the Act.

[5] When first passed, the Act allowed the company to determine the terms of the PHEI’s constitution. However, amendments to the Act introduced by the Private Higher Educational Institutions (Amendment) Act 2017 require the constitution to contain provisions that are prescribed by regulations made under the Act. Under the Private Higher Educational Institutions (Constitutions) Regulations 2017 two template constitutions are provided, one for colleges and one for universities that are established under the Act. The (Constitutions) Regulations 2017 are not yet in force.

[6] Subregulation 3(1)(a).

[7] Subregulation 3(1)(b)

[8] Section 8 of the UUCA and the First Schedule to the Act

[9] Section 211, Companies Act 2016

[10] Merdeka University Berhad v Government of Malaysia, [1982] 2 MLJ 243. Although the main grounds for the High and Federal courts’ rejection of Merdeka University’s challenge of the rejection of the petition were the status of universities under the UUCA as statutory authorities and the issue of the language of instruction that was to be used, there was also a judicial view that the government bore a duty to maintain even private universities that were in financial distress.