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SECTION A
Question 1(a)
What is a judicial precedent?
It is the process of adjudication whereby after argument before a judge, a decision in a
dispute is given. It forms one of the most important means by which the law is created in
Malaysia. In reaching his conclusion, the judge will formulate and apply a legal principle. In
accordance with certain rules, this principle may form a guide (binding or persuasive) for
future references.
The decision inter parte is of interest and importance to the parties to the litigation and the
judge will give reasons for reaching this decision and in these reasons lies the ratio
decidendi (the reason for deciding) or the legal principle behind the decision. The ratio
decidendi may bind others in similar disputes in the future.
A decision of a superior court (such as the Supreme Court) binds the lower courts (eg; The
High Courts, Sessions Courts and Magistrates’ Courts). Therefore binding precedents would
depend on a court’s position in the hierarchy of the courts. Persuasive precedents are those
which are not binding authorities while binding precedents shall remain so until it is reversed
on appeal or overruled.
Advantages:
(i) It leads to an element of certainty in the law;
(ii) The law is able to grow as the needs of society alter; and
(iii) The law is flexible, in that new rules arise out of concrete facts or situations.
Disadvantages:
(i) Due to the hierarchy of binding precedents being established, the law becomes rigid;
(ii) To prevent rigidity, courts tend to be keen to distinguish cases on the facts; and
(iii) The development of the law through new precedents may be said to be slow and
irregular.
(4 marks)
Question 1(b)
(i) Proposal: Section 2 (a) of the Contracts Act, 1950 states that when one person
signifies to another his willingness to do or abstain from doing anything, with a view
to attaining the assent of that other to the act or abstinence, he is said to make a
proposal.
Section 2(c) of the Contracts Act, 1950 calls the person making the proposal a
‘promisor’.
Section 4(1) of the Contracts Act, 1950 states that, a communication of a proposal is
complete when it comes to the knowledge of the person to whom it is made.
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Acceptance: Section 2 (b) of the Contracts Act, 1950 provides that when the person
to whom the proposal is made signifies his assent thereto, the proposal is said to
have been accepted. A proposal when accepted, becomes a promise.
Section 2(c) of the Contracts Act, 1950 calls the person accepting the proposal a
‘promisee’.
Section 7 of the Contracts Act, 1950 provides that, for a proposal to be converted into
a promise, the acceptance of the proposal must be unqualified and absolute.
Section 9 of the Contracts Act, 1950 states that, so far as any acceptance of any
proposal is made in words, the acceptance is said to be expressed. If the
acceptance is made other than in words, the acceptance is said to be implied.
(3 marks)
(ii) A contract may be discharged by frustration when there is a change in circumstances
which renders the contract legally or physically impossible of performance.
Section 57(2) of the Contracts Act, 1950 provides that, a contract to do an act which,
after the contract is made, becomes impossible, or by reason of some event which
the promisor could not prevent, unlawful, becomes void when the act becomes
impossible or unlawful.
There are two instances of frustration, ie; when a contract to do an act becomes
impossible or unlawful. The frustration should be supervening and subsequent to the
formation of the contract. A self-induced frustration does not discharge a party of his
contractual obligations.
Cases: Maritime National Fish Ltd v Ocean Trawlers Ltd;
Yee Seng Plantations Sdn Bhd v Kerajaan Negeri Terengganu & Ors.
(3 marks)
Question 1(c)
Remedies for breach of contract:
(i)
Damages: Section 74 of the Contracts Act, 1950 provides damages to be
granted to a party as compensation for the damage, loss or injury he has
suffered through a breach of contract.
The illustrations to Section 74 clearly indicate that the party may recover
damages for:
• Other expenses incurred as a result of the breach;
• The loss of profits arising out of the breach; and
• The difference between the price of goods as contracted for and the
actual price the goods were sold for as a result of the breach.
The plaintiff is only allowed to recover a reasonable sum for breach of
contract (Section 75, Contracts Act, 1950) and is required to prove the actual
damage he has suffered.
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(ii)
Specific Performance: It is a discretionary remedy provided for by the Specific
Relief Act, 1950 (Revised 1974). Section 21 of the said Act provides the court
with discretion to refuse specific performance where the granting of it would
cause undue hardship to the defendant. The court will also exercise its
discretion not to decree specific performance under Section 20 of the Specific
Relief Act, 1950 where damages will provide an adequate remedy. Specific
performance will also be refused where:
• The terms of the contract are uncertain – Lim Nyuk Chan v Wong Sz
Tsin;
• There has been delay in bringing the action – Itam binti Saad v Chik
binti Abdullah;
• There is evidence of fraud – Siah v Tengku Nong;
• Contant supervision by the court would be required – Lee Sau Kong v
Liow Chang Chiang; or
• The contract is for personal services – Dato’ Abdullah bin Ahmad v
Syarikat Permodalan Kebangsaan & Ors.
(iii)
Injunction: An interlocutory injunction is used by a party to maintain the status
quo of the subject matter in a pending suit. An injunction is an equitable
remedy. It can therefore be varied or dissolved if the cpourt discovers
subsequently that the application for injunction was made on suppressed
facts or that the fact upon which the order was granted no longer exist. Type
of injunction include mandatory and prohibitory injunction. A mandatory
injunction is a court order requiring something to be done whilst a prohibitory
injunction stops something from being done.
(Answer any 2 : 4 marks)
Question 1 (d)
(i)
Implied condition as to quality or fitness:
Section 16(1)(a) provides that if goods are sold in the course of business and
the buyer expressly or impliedly makes known the purpose for which he
requires the goods, there is an implied condition that the goods supplied will
be reasonably fit for that purpose. The condition does not apply where the
buyer does not rely, or it is unreasonable for him to rely on the seller’s skill
and judgment.
Priest v Last (1903).
Griffiths v Peter Conway
Khong Seng v Ng Teong Biscuit Factory
(3 marks)
(ii)
Implied condition in a sale ‘by sample’:
Section 17(2): there is an implied condition for a contract of sale when:
- The bulk shall correspond with sample in quality;
- The buyer shall have reasonable opportunity of comparing the bulk with
the sample
- The goods are free from any defects rendering them unmerchantable,
which would not be apparent on reasonable examination of the sample.
Godley v Perry
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Polenghi Bros v Dried Milk co Ltd
(3 marks)
(Total : 20 marks)
Question 2(a)
Duties of an agent towards his principal under the Contracts Act, 1950:
-
S. 164: Agent’s duty in conducting principal’s business; in accordance to
the principal’s directions or in the absence of such directions to conduct
business in accordance with the custom which prevails in doing business
of the same kind;
-
S. 165: Skill and diligence required from agent; to conduct business with
as much skill as is generally possessed by persons engaged in similar
business, unless the principal has notice of his lack of skill;
-
S. 166: An agent is bound to render proper accounts to his principal on
demand;
-
S. 167: It is an agent’s duty to communicate with the principal and in
cases of difficulty, to use all reasonable diligence in communicating with
his principal;
-
S. 168:If an agent deals on his own account in the business of the
agency, without first obtaining the consent of his principal, and
acquainting him with all material circumstances which have come to his
own knowledge on the subject, the principal may repudiate the
transaction; if the case shows either that any material fact has been
dishonestly concealed from him by the agent, or that the dealings of the
agent have been disadvantageous to him.
-
S. 169:If an agent without the knowledge of his principal, deals in the
business of the agency on his own account instead of on account of his
principal, the principal is entitled to claim from the agent any benefit which
may have resulted to him from the transaction.
-
S. 170: An agent may retain, out of any sums received on account of the
principal in the business of the agency, all monies due to himself in
respect of advances made or expenses properly incurred by him in
conducting such business, and also such remuneration as may be
payable to him for acting as agent.
-
S. 171: It is an agent’s duty to pay sums received for the principal subject
to deductions of all monies due to himself as prescribed under Section
170.
(Answer any 3 : 8 marks)
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Question 2 (b)
Ways by which an agency may arise:
(i) By express appointment by the principal: it may be either written or oral. Even a
letter written or words spoken may be effective as an express appointment.
(ii) By implied appointment: the law can infer the creation of an agency by implication
when a person, by his words or conduct holds out another person as having authority
to act for him: Section 140, Contracts Act, 1950.
(iii) By ratification: it can arise in any one of the following situations:
o An agent who was duly appointed has exceeded his authority; or
o A person who has no authority to act for the principal has acted as if
he has the authority.
When any one of the above situation arises, the principal can either reject the
contract or accept the contract so made: Section 149, Contracts Act, 1950.
When the principal accepts and confirms such a contract, the acceptance is
called ratification and it may be expressed or implied. Section 150, Contracts
Act, 1950.
(Answer any 2 : 6 marks)
Question 2(c)
Advising Steve:
This case involves the principles on agency. When Bob engages Steve to do
something, Bob is the principal and Steve is his agent. In the absence of an express
contract, the employer of an agent is bound to indemnify the agent against the
consequences of all lawful acts done by the agent in exercise of the authority
conferred upon him: Section 175, Contracts Act, 1950.
Steve is advised that he cannot recover the RM100,000.00 as well as his legal
expenses since the act which he was employed to do, is a criminal act (i.e. selling of
counterfeit products and passing it off as original; it may also be categorized as an
offence of cheating, under the circumstances). By virtue of Section 177 of the
Contracts Act, 1950: where one person employs another to do an act which is
criminal, the employer is not liable to the agent, either upon an express or an implied
promise, to indemnify him against the consequences of that act.
Section 176 of the Act however, does provide for situations where agents may be
indemnified against consequences of acts done in good faith, although it cause injury
to the rights of third persons. In this situation, had Steve not known that the computer
tablets were fakes, he may claim to have done the act in good faith or out of
innocence. This was not the case, however, since Steve was fully aware of the state
of things from the very beginning.
Therefore, Bob is not liable to indemnify Steve due to the fact that the act done by
Steve was unlawful. In this situation, Steve will have to bear the losses on his own.
(6 marks)
(Total : 20 marks)
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Question 3(a)(i)
Liabilities of partners for ordinary torts committed in the course of business:
Section 12, Partnership Act, 1961:
Where any wrongful act or omission of any partner acting in the ordinary course of the
business of the firm or with the authority of his co-partners, loss or injury is caused to any
person not being a partner in the firm, or any penalty is incurred, the firm is liable thereafter
to the same extent as the partner so acting or omitting the act.
In this situation, Barry was negligent and had caused injuries to the passer-by. This accident
happened in the course of the partnership business and at the partnership’s business
premises. Subject to evidence and principles of the law of torts, the partnership may most
probably be liable for the injuries caused to the passer-by as a result of the explosion.
(5 marks)
Question 3(a)(ii)
In the event that one of the partners misappropriates a client’s money, while the money is in
the possession of the firm or under its control, all of the partners may be liable for the
misappropriation. However, if a partner, acting in his individual capacity, misappropriates
client’s money, as a general rule, his partners are not liable.
Section 15: Partnership Act, 1961.
If a partner, being a trustee, improperly employs trust property in the business or on account
of the partnership, no other partner is liable for the trust property to the persons beneficially
interested therein as follows:
(a) This section shall not affect any liability incurred by any partner by reason of his having
notice of a breach of trust; and
(b) Nothing in this section shall prevent trust money from being followed and recovered from
the firm, if still in its possession or under its control.
In this situation, Saroopa misappropriated the client’s money without Sesame’s knowledge
nor consent. By virtue of the above provision, the partnership may not be held liable to
indemnify the losses. It should be borne solely by Saroopa. Since the money was all lost in
the investment scheme, there is nothing that could be recovered from the partnership firm.
Saroopa may most probably be liable personally for the misappropriation.
(5 marks)
Question 3(b)
Definition of a partnership:
Section 3(1) of the Partnership Act, 1961:
Partnership is the relation which subsists between persons carrying on business in common
with a view of profit.
A partnership is formed where there is free consent and consideration and it must be for a
lawful purpose. The parties must also be competent to contract. (An insane person is not
competent to enter into a partnership agreement.)
(2 marks)
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Question 3 (c)
It is advised that KIM Bank may succeed in suing Mr Barring of KO Firm for damages
allegedly caused by the fraudulent valuation based on the grounds of professional
negligence.
KIM Bank would need to prove:
(i) Duty of care;
(ii) Breach of that duty;
(iii) Damages.
The duty of care owed by a professional (e.g. valuer) to his clients is stated in lamphier v
Phipos that the professional undertakes to bring a fair, reasonable and competent
degree of care and skill.
Here the negligence is judged by the test of the ordinary skilled man exercising and
professing to have that special skill. He need not have the highest expert skill.
Arising out of his duty, the professional has breached this duty and due to that breach,
damages resulted.
In professional negligence the following additional elements also need to be proven by
KIM Bank:
(i) The negligence had been committed in the ordinary course of business or
professional affairs;
(ii) One person must have sought information or advice from another. The person need
not be the professional’s client. The duty of care includes giving of negligent
information and statements (fraudulent valuation report).
(iii) The person who gave the information or advice was not under a contractual or
fiduciary obligation to give the information or advice;
(iv) The information or advice must have been given in circumstances in which a
reasonable man so asked would know that he is being trusted or that his skill or
judgement is being relied upon – Hedley Byrne v Heller.
(v) The person asked for this information or advice chose to give that information or
advice. There was no disclaimer or a clear qualification which shows that the
giver was not accepting responsibility.
Cases: Manjit Singh s/o Gurdial Singh v R.K. Nathan, Neogh Soo Oh & Ors v.G
Rethinasamy and Bank Bumiputra Malaysia Berhad v Yeoh Ho Huat.
Although there is no contractual relationship between KIM Bank and KO Firm, it was very
clear that KO Firm was aware that the report was intended to be acted upon and he
thereby owed a duty to KIM Bank which acted upon the report.
Mr Barring of KO Firm also had no honest belief in the truth of the false statements in his
valuation report. He had made the false statement knowingly and recklessly. KIM bank’s
reliance on the valuation report had resulted in their advancing the RM 200,000 loan to
Mr Konna and they thus suffered damages as the land was eventually sold at RM
175,000 as against the value put in the report at RM 700,000.
(8 marks)
(Total : 20 marks)
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SECTION B
Answers 4(a)
The legal principle on company law established in this case is the separate legal entity
principle. A corporation under Company law or corporate law is specifically referred to as a
"legal person"- as a subject of rights and duties that is capable of owning real property,
entering into contracts, and having the ability to sue and be sued in its own name. In other
words, a corporation is a juristic person that in most instances is legally treated as a person,
and empowered with the attributes to own its own property, execute contracts, as well as
ability to sue and be sued. This principle is also known as veil of incorporation. Cases which
applied this principle include Lee v Lee’s Farming Ltd and Macura v Northern Assurance Co.
One of the main motivations for forming a corporation or company is the limited liability it
offers its shareholders. By this doctrine (limited liability), a shareholder can only lose only
what he or she has contributed as shares to the corporate entity and nothing more.
Nevertheless, there is a major exception to the general concept of limited liability. There are
certain circumstances in which courts will have to look through the corporation, that is, lift the
veil of incorporation, otherwise known as piercing the veil, and hold the shareholders of the
company directly and personally liable for the obligations of the corporation.
Section 36 –Where the number of members of a company falls below two other than the
case of a company whose issued shares are wholly held by a holding company. If the
number of shareholders is reduced to below two and it carries on business for more than six
months while the number is so reduced, the shareholder concerned would be personally
liable for the debts of the company contracted after those six months. The company and that
shareholder shall be guilty of an offence against the Companies Act.
Section 121(2)(c) – Publications of company’s name. When the name of the company does
not appear in instrument issued by behalf of the company especially when signing or
authorizing certain documents like promissory notes, bill of exchange, and checks in which
the name of the company is not stated properly. If the company fails to honor such
documents then the person who signs will be liable.
Section 303 (3) and 304(2) - When debts contracted at the time the company has no ability
of repayment and when there is no reasonable or probable expectations of these debts
being paid. When debts are contracted, the officer must really find about the ability of the
company to repay debts. If he knew or has reasons to believe that the company is not in a
position to repay debts, but still entered into the contract, he will be personally liable for the
debts, if the company goes into liquidation.
Section 304(1) - Where in the course of winding-up proceeding against a company or in any
proceedings against a company. If it appears to the court that the business of the company
has been carried on with intent to defraud creditors or in that the case involving fraudulent
trading and if the company is formed or the business of the company is carried for fraudulent
purposes, the person who is knowingly a party to the carrying on the business in that
manner will be personally liable for the debts of the company. See also Re William C. Leitch
Brs Ltd (no.1) (1932)
Section 169 and the Ninth Schedule - When holding and subsidiaries company are not really
treated as separate legal entities although according to the separate legal entities principle,
they are in fact separate from each other. Especially when producing group or consolidated
accounts. See also D.H.N. Food Distributors Ltd v Tower Hamlets London Borough Council
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(1976), Hotel Jaya Puri Bhd. v National Union of Hotel Bar & Restaurant Workers & Anor
(1979) and Smith, Stone & Knight Ltd v Birmingham Corporation (1939).
Section 365(2)(b) – When dividends are paid out of capital. Where dividends are paid even
though there are no available profits out of which to pay them, then directors who declared
the dividend will be liable to the creditors of the company. If the company is unable to pay
the creditors in the event of liquidation, to the extent by which the dividend exceed the
available profits.
Section 140(1) of the Income Tax Act –avoiding of payment of tax
(10 marks)
Answers 4(b)
Companies Limited By Shares
Company limited by shares is a company created by shares. Members will subscribe the
company’s shares. S.4 defines ‘company limited by shares’ as a company formed on the
principle of having the liability of its members limited by the memorandum to the amount (if
any) unpaid on the shares respectively held by them. Required to state in its memorandum
of Association the amount of its share capital and its division into shares of a fixed amount,
limited liability of members also must be stated S18(1)(c). Members cannot be asked to pay
more than the amount unpaid on his share when the company woud up. (Section 214).
Requires limited company to have the word ‘Berhad’ as part of and at the end of its name
S22(3).This is the most common form of company. The liability of a member of this company
will depend on whether his shares are fully paid or not. If he holds fully paid shares, he has
no further liability to the company. If the company becomes insolvent he cannot be made to
contribute to the assets of the company. Only if his shares are partly paid, he will be liable to
contribute to the company’s assets, up to the amount still unpaid on his shares.
Company Limited By Guarantee
A company limited by guarantee is defined by section 4 as ‘a company in the principle of
having the liability of its members limited by the memorandum to such amount as the
members may respectively undertake to contribute to the assets of the company in the event
of its being wound up’. (Section 214)
This type of company does not have a share capital and so does not require the members is
specified in the memorandum of association. If the company is wound up, then a person who
has been its member may be required to contribute up to his amount of guarantee towards
payment of debts incurred by the company while he was a member. This liability extends to
those who has left the company but was a member within a year before the company wound
up.
Although this type of company does not have a share capital, it is a separate legal entity. It is
not normally used for trading, but is often formed to run clubs and other organizations that is
maintained by subscription, social activities and donations.
Company limited by both share and guarantee
A member of such a company is liable to pay the amount, if any unpaid on any shares held
by him or her, in addition to meeting her or his guaranteed undertaking to contribute a
specified amount in the event the co. is wound up. Section 214(4)
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Unlimited company
A company formed on the principle of having no limit placed on the liability of its members.
Section 4(1) i.e the liability of members to contribute to the assets of the company on
winding up is not limited. (section 214(1))
(4 marks)
Answers 4(c)
The above provision signifies that the memorandum and articles of association of a company
constitutes a contract between the company and its members and between a member and
other members. The effect of the memorandum and articles is like a contract under seal.
Each member will observe all the provision of the MOA & AOA. Where a company has
breached the articles, the member may sue the company to enforce the articles. Similarly,
where a member has breached the terms of the articles, the company may sue. The articles
may also be enforced by one member against another because the articles also form the
basis of a contract between members inter se: Borland’s Trustee v Steel Bros & Co Ltd.
The articles, however, do not form a contract between the company and the outsider:
Eley v Positive Life Assurance Co.
Between members
In the case of Rayfield v Hands (1960) the AOA required every director to be a shareholder
and provided that if a member intended to transfer his shares, he should inform the directors
who would take the said shares equally between them at fair value. The directors refused to
purchase the Rayfield’s shares. Rayfield took legal action against them to make them
comply with the articles. It was held by the court that there was a binding contract between
Rayfield and the defendants constituted by the AOA as they were all members and therefore
they have to purchase the shares.
A member’s rights and liabilities under the AOA is a matter of contractual obligations the
court will not look at whether it is fair to enforce it. Even if it may be unfair, it may be
enforced. Since it is a matter of contractual obligation, the members must comply. Case :
Wong Kim Fatt v Leong & Co Sdn Bhd (1976), In this case a company’s AOA provided
that if holders of 7/10 of issued capital requested the company to transfer to them any
particular shares held by others, then the company is bound to do it. One shareholder held
250,000 shares out of total 300,000 shares. He asked the company to transfer Wong’s share
i.e. he served a requisite to buy out Wong’s shares. Wong objected to this and went to court
to get an order restraining the company from transferring his shares. It was held that, Wong
has to sell the shares because AOA is a contract between the members and therefore, this
is a matter of contractual obligations and the plaintiffs has to do the obligations he had
undertaken
Between company and members
In the case of Hickman V Kent or Romney Marsh Sheep Breeders Association (1915)
The company’s AOA included a clause to the effect that all disputes between the company
and its members were to be referred to arbitration. When a dispute arose between Hickman
and the association, he brought the matter to court. The association prevented Hickman’s
case from being heard by relying on the articles. The court agreed as the articles were a
contract between the association and its members, the provision for arbitration was binding
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on Hickman. He had to refer his disputes to arbitration.
In the case of Salmon V Quinn & Axtens Ltd (1909), a company AOA provided that certain
types of contracts could be entered into by the company only if both Salmon & Axtens agree
to it. Salmon did not agree to purchase certain properties of the company. The refusal was in
accordance with the articles. In order to overcome Salmon’s objections, the members
passed a resolution that allowed the decision to need only Axten’s approval. Salmon sued
for restraining the company from acting on the resolution. It was held that the resolution was
invalid because it was against the AOA, an injunction was granted.
Between company and outsiders
In the case of Raffles Hotel Ltd V Malaysian Banking Bhd (1966), MBB was the lessor of
the land on which Raffles Hotel was built. It was provided in the hotel’s AOA that the lessor
has a right to appoint a director of the company. MBB appointed itself as director. The
company went to get this appointment declared invalid. It was held that the appointment was
invalid because MBB was not a member and therefore AOA could not constitute a contract
between a company and an outsider and therefore it did not confer on MBB any enforceable
right even if it is provided in the AOA
In the case of Southern Foundaries (1926) Ltd. Shirlaw (1940), the House of Lords held
that there was a breach of contract by putting the altered articles into effect, but the company
cannot be prevented from altering their own articles. The company also cannot use the
alteration of the articles as a defence against a suit for breach.
(3 marks)
Answers 4(d)
A Promoter is in a fiduciary relationship with the Company he promotes and as such he
owes fiduciary duties towards it. This means that he is in a position of trust and must at all
times act honestly and in good faith for the Company as a whole. Therefore the law requires
that at all times he must act honestly and in good faith for the benefit of the company as a
whole.
However, the most important aspect of his duty is not to make a secret profit at the expense
of the Company. In the case of Fairview Schools Sdn. Bhd v Indrani a/p Rajaratnam
(No1)[1998] 1 MLJ 110 Mahadev Shanker JCA said," Promoters have a legal duty not to
make a secret profit out of the promotion of the Company without the Company's consent
and also to disclose to the Company any interests the promoters have in any transaction
proposed to be entered into by the Company"
The disclosure must be by him either to an independent board of directors or to all the
members of the company. There are three remedies in situations where the Promoters have
breached the Fiduciary Duties. There are rescission; recovery of the secret profit and
damages for breach of fiduciary duties.
Rescission
Upon the discovery of the breach by the promoter, the Company is entitled to rescind the
contract. Under Sect 34(1) Specific relief Act 1950 the Company can apply to the Court to
rescined the contract. Once the contract is rescinded, restitution has to take place. This is
where the Company has to return whatever it received from the Promoter and the Promoter
has to return all monies received from the company.
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Erlanger v New Sombrero Phosphate Co. (1878), in this case, Erlanger bought an island
containing phospates for 55,000 pounds. Later, Erlanger promoted a Company and sold the
property to it for 110,000 pounds. All the Directors of that Company were nominees of
Erlanger and two of them were directly under his control. Later the old board was replaced
by a new board which brought an action to rescind the contract with Erlanger.
The Court held that there had been no adequate disclosure of the circumstances of the sale
and the Company was entitled to rescind the contract.
However it should be noted that recission is an equitable remedy and courts may grant a
remedy if its inequitable to do so. Thus the remedy of rescission may be lost, for example
where the parties cannot be restored to their original position. See Lagunas Nitrate v
Syndicate (1899).
Recovery of secret profit
Gluckstein v Barnes (1900) in this case the Defendants bought debentures cheaply in a
Company at a time when the Company was faring very badly. Later they bought over the
Company for 140,000 pounds. The debentures were redeemed at full value and they made a
good profit.
Here they made a profit of 20,000 pounds. Later still, they formed another company and sold
the Company to a new Company at a profit of 40,000 pounds. This profit was disclosed in
the prospectus but not the amount of profit they made on the redemption of the
debentures.(20,000 pounds)
The Court held that there were in breach of their duties as promoters and the Company was
entitled to recover the profit from them. The Company can recover the secret profit even
though they chose not to rescind the contract. The liability of the promoters is "joint or
several". A Promoter who is found liable may recover contributions from the other promoters.
Damages for breach of fiduciary
In the case of Re Leeds & Hanley Theatres of Varieties Ltd.(1902) the Court ordered the
Promoter to pay damages to the Company. The Court held that the Promoters had
fraudulently omitted to disclose the profit made by them on the sale of the property to the
Company. The amount of damages was equivalent to the amount of profit made by the
promoter.
(3 marks)
(Total : 20 marks)
Answers 5(a)
1. Duty to act bona fide in the best interests of the company
This duty is the most basic of all duties. What is meant by bona fide and in the best interests
of the company is that a director must at all times ensure that his actions are consistent with
the well being of the company’s. An example would be found in the case of Re W & M Roith
Ltd [1967] a director, Mr Roith, entered into a service contract with his company providing
for pension to be given to his wife in the event of his death without taking into consideration
as to whether the contract was for the benefit of the company. The object of the contract was
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considered not to be binding on the company as it did not benefit the company but Mrs
Roith.
The statutory expression for this principle obtains in Section 132(1) of the Companies
Act 1965.
2. Duty to disclose all material information
This duty is to avoid potential conflict of interest. In Aberdeen Railway Co v Blaikie Bros
(1843-1860) for example, the director involved was sitting on the boards of both Aberdeen
Railway and Blaikie Bros and failed to disclose this when the two companies contracted with
each other. This was found to be a failure to disclose material information. Similarly in
Guinness plc v Saunders [1990], the company had as its consultant one of its directors,
and this was only later realised by the rest of the board, and so was held to be nondisclosure.
The duty to disclose finds expression in Section 131 of the Companies Act 1965. Section
132(2) of the Act as amended by the Companies (Amendment) Act 2007 also prohibits
generally competing with the company.
3. Duty to avoid conflict of interest
Conflict of interest can be described as one situation whereby one profits by one’s position
as a director at the company’s expense. In Cook v Deeks [1916] three out of four directors
in a railway company diverted contract in which the company was interested to another
company formed by them. The contract was held belonging to the company and the
directors were not entitled to expropriate it to make a present to themselves. This duty is so
strict it applies even when the company by some reason is incapable of performing the
contract, for example, where the offeror dislikes most of the board, but likes one of the
directors and offers the contract personally to him, as in the case of Industrial
Development Consultants Ltd v Cooley [1972]. The statutory expression for this rule can
be found in Section 131(7B) of the Companies Act 1965 which was added by the Companies
(Amendment) Act 2007, which makes voidable all contracts done in conflict of interest at the
option of the company involved.
The newly added Section 131A also makes it impossible for the interested director to vote on
the issue.
4. Duty to retain discretion
As company director, what powers invested within one to do cannot generally be subdelegated. This is not a rule followed too strictly, however, as then the directors would not be
capable of taking more important, abstract decisions at the board level as held in Dovey v
Cory [1901]. In Re Brazilian Rubber Plantations & Estates Ltd [1911] it was held that a
director is justified in trusting officers of the company to perform all duties that, having regard
to the exigencies of business, may properly be left to such officers.
The board of directors is also not prevented from relying on information provided by others in
the dispensation of their duties, as stated in Section 132(1C) of the Companies Act 1965.
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5. Duty to exercise reasonable care and skill
Lastly in this part of the series we consider the common law contribution to the realm of
directors duties, the duty to exercise reasonable care and skill in the performance of one as
a company director. This was first laid down by Romer J in the case of Re City Equitable
Fire Insurance Co Ltd [1925]. Romer J only laid down generally lax standards back then,
for example, the standard that a directors skills need not be greater then his skill that may
reasonably be epected from a person of his knowledge. I.e. if the director were trained as a
lawyer, then the standard of care that would be expected from him would be that of a lawyer.
If the director were just a sweeper, it would be a different matter. Romer J also held that
there was no need for a director to attend ALL board meetings, provided he makes an effort.
However these standards were held too lax. In subsequent cases such as AWA Ltd v
Daniels (1992) and Dorchester Finance Co Ltd & Anor v Stebbing & Ors [1989]
standards were raised much higher.
(4 marks)
Answers 5(b)(i)
Despite having distinctions, both debentures and shares also posses certain similarities. The
transfer procedure is similar. Where debentures are issued to the public, the same principles
apply as in relation to an issue of shares pertaining to a prospectus or listing particulars.
Distinctions :
- Debenture holder is a creditor
- Shareholder is a member
- Company can purchase its own debentures
- Company cannot purchase its own shares (in general)
- Debentures may be issued at a discount
- Shares cannot be issued at discount
(2 marks)
5(b)(ii)
Floating charge is a charge that does not attach to any fixed asset, until it is ‘crystallized’.The
floating charge can be created over the whole of the company’s assets and undertaking. It is
not effective until something happens to cause the charge to crystallize. It is beneficial to the
company in that it enables the company to borrow money and to mortgage back to the
lender of the money all the company’s assets and undertakings, including work in progress,
finished products and raw materials.
(2 marks)
5(b)(iii)
A floating charge will crystallize in the following circumstances :
-
If the company goes into liquidation. All floating charges automatically crystallizes;
If there is cessation of the company’s trade or business;
If a receiver is appointed, either by the court, creditor or under the terms of the
debenture.
If an event occurs which, by the terms of the debenture, causes the floating charge to
crystallise.
Company defaulted in the loan (interest of principal sum)
(2 marks)
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5(b)(iv)
A floating charge although useful but is peculiarly vulnerable as a security. Mortgaging
property is one of the incidents of a company’s normal business.
A floating charge created within 6 months of the commencement of the winding up is void,
unless it can be shown that the company was solvent at the time the charge was created.
This to prevent some unsecured creditors being given priority over other creditors by the
creation of a floating charge when insolvent liquidation is imminent.
The value of the security is uncertain as the company is free to use the assets in the
ordinary course of business.
The assets subject to a floating charge may be lost to judgment creditors who have levied
execution on the goods. Prior to crystallization the floating charge cannot prevent judgment
creditors from so levying execution.
The assets subject to a floating charge may be seized and sold by a landloard who has
taken distress proceedings for overdue rent. Before crystallization the creditor generally
cannot prevent this.
The assets subject to a floating charge may be utilized to payoff certain preferential
creditors, if the company does not have sufficient funds to pay them. See Section 191 and
292(4) Companies Act 1965.
(2 marks)
Answers 5(c)
1. Company cannot make gratuitous allotment of shares, shares must be paid in full by
shareholders.
2. Shares cannot be issued at a discount. - Ooregum Gold Mining Co of India v.
Roper (1892)
3. According to section 67(1), company cannot provide financial assistance to buy
shares unless it falls under the exceptions of section 67(2)-(beneficial ownership,
lending money is the ordinary course of business, employee share scheme)
4. According to section 67(1), company cannot purchase its own shares unless:
- it is a redeemable shares
- it is share buyback for listed company, provided that provisions in section
67A are complied.
5. Subsidiary company cannot hold shares in holding company.
6. Dividends can only be paid out of distributable profits.
7. Dividends cannot be paid out of capital. Company cannot reduce share capital unless
section 64 is complied with.
Exceptions to the prohibitions
1. Exception under Section 67(2) – purchasing own shares; If lending is part of its
ordinary business; Section 67(2)(a) See case : Trevor v Whitworth (1887)
2. Company mat redeem its redeemable preference shares under Section 61;
3. Court makes an order for the company to purchase shares of the applicant under
Section 181(2)(c);
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4. A public listed company purchases its own shares through Kuala Lumpur Stock
Exchange (KLSE) under Section 67A
(4 marks)
Answers 5(d)
A company can only carry out those activities, which are within the scope of its object clause
in the Memorandum of Association. Any act or transaction which is outside the object clause
is said to be ultra vires.
At common law any act of the company must not be beyond the objects clause, other wise it
will be ultra vires and, therefore, void and cannot be ratified even if all the members wish to
ratify it. This is called the doctrine of ultra vires, which has been firmly established in the
case of Ashbury Railway Carriage and Iron Company Ltd v.Riche (1875)
The purpose of the doctrine was to protect the investors and creditors of the company. This
doctrine protects the creditors of the company by ensuring them that the funds of the
company to which they must look for payment are not dissipated in unauthorized activities.
Thus, the investors and the company may be assured by this rule that their investment will
not be employed for the objects or activities which they did not have in contemplation at the
time of investing their money in the company. The wrongful application of the company’s
assets may result in the insolvency of the company, a situation when the creditors of the
company cannot be paid.
In Malaysia, ultra vires transactions are governed by Section 20 of the Companies Act 1965.
By this section acts or transaction done by a company cannot be invalidated solely on the
ground that the company was without capacity or power to do so. This is to protect any third
party who had entered into a contract with the company. The company cannot raise that the
contract entered by it was ultra vires.
It should be noted that ultra vires transaction in Malaysia appears to be valid in other words
ultra vires doctrine does not apply at all. However, this do not permits a company to enter
freely into ultra vires transaction. There are three (3) exceptions where the doctrine of ultra
vires may be raised :
1. Section 20(2)(a) – Proceeding to restrain company from completing an ultra vires
transaction. Cases : Pamaron Holdings Sdn Bhd v Ganda Holdings Bhd (1988)
and Executive Aids Sdn. Bhd. v Kuala Lumpur Finance Bhd (1992).
2. Section 20(2)(b)- Company’s officer sued for ultra vires transaction
3. Section 20(2)(c)- Petition for winding up by Minister
(4 marks)
(Total : 20 marks)
Answers 6(a)
Section 174(4) and (5)
- Rights to access accounting book/records, vouchers, and other records of the
company and its subsidiaries
- Entitlement to require from any officer of the company and any auditor of a related
company or of any subsidiaries, such information and explanation as he desires for
the purpose of carrying out his duties
Section 174(7)
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The entitlement to attend any general meeting of any company and to speak on any
part of the business of that meeting that concern him in his capacity as auditor
- Rights to receive all notices of any other communication relating to any general
meeting in which a member entitled to receive
Section 172 (6)
- Auditor has a right to be heard at the meeting
-
Statutory Duties (S174)
- Duty to carry out audit
- Duty to report to appropriate management
- Duty to be independent
- Duty to use reasonable care and skill
(4 marks)
Answers 6(b)
-
The first secretary shall be named in the articles
Appointment is effective from the date of incorporation.
Subsequent appointment apart from first secretary must be by the board.
Subsequent appointment only requires formal board resolution.
The first form 49 required to be filed with Registrar of Companies within one month
from the date of incorporation.
The particulars of the first secretary shall be entered into the register book.
(4 marks)
Answers 6(c)(i)
A meeting of a company other than for the passing of a special resolution shall be called by
notice in writing of not less than 14 days or such longer period as it provided in the articles of
association. The notice is to be given to every member and the auditor of the company, if
listed notice also given to Bursa Malaysia. Passing resolution meeting – 21 days notice
(Section 152) AGM - 21 days notice.
(2 marks)
6(c)(ii)
Quorum
Section 147(1) - A quorum is minimum two members personally present
A meeting cannot be constituted by one member and any resolution purported to be passed
at such a ‘meeting’ are invalid
Case: United Investment & Finance Ltd V Tee Ching Yong & Ors
Case: Sum Hong Kum V Li Pin Furniture Industries Pte Ltd
The articles of a company provided that no business could be transacted unless a quorum
was present. The plaintiff was removed as D at a meeting convened without the requisite
quorum. Held: The Singapore High Court granted a declaration that the meeting was invalid.
The court held that the procedural irregularity in the meeting caused by substantial injustice
to the plaintiff and could not be validated.
Case: Tan Guang Eng V BH Low Holdings Sdn Bhd & Ors
The HC construed the relevant articles to mean that a quorum was required only at the time
when the meeting proceeded business, ie the continued meeting with the presence of only
bolder of a valid proxy was a valid meeting. Therefore the resolution passed was a valid
resolution.
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Chairman
Section 147(1) - Any member present at the meeting may be elected to chair the meeting.
Chairman duties, to direct the meeting; preserve order; ensure that proceeding are
conducted at proper manner
Voting
The power to vote is not a fiduciary power and a shareholder owes no duty to anybody as to
how he or she will exercise their vote.
Table A Article 54 states that by providing a show of hands each member or representative
of a member has one vote.
Case: Bin Hee Heng V Management Corp Strata Title No 647 was held that the term
‘show of hands’ included a ‘voice vote’
Section 146(1)-Any provision in the articles excluding the rights is void
Proxies
It is a person authorized to vote on behalf of the appointing member. It also describes the
instrument of appointment.
Section 149(1)- The proxy need not be a member
Section 149(2)- A member are entitled to appoint one or two proxies who need not be
members
Section 149(1)(a) – A proxy has the same right to speak at a meeting as the appointing
member, but can only vote on poll, unless the articles allow the proxy to vote on show of
hands
Case: Ansett v Butler Air Transport Ltd
Motions
It is a proposal which is being put forward at a meeting for discussion before it is formally
accepted, passed or adopted
It is moved by a ‘mover’ or ‘proposer’ and unless it is a formal motion does not require a
‘seconder’ unless the Articles provide so.
It is common for the Chairman to ask for a seconder to gauge whether or not there is support
for the motion
If there is no seconder, it may imply that there is no support for the motion and the chairman
usually proceeds to the next business
Manner in which motion may be adopted or rejected is by way of vote by common method
such as (i) by voice, (ii) by show of hands, (iii) by poll and (iv) by ballot
Resolution
It is a motion or proposal that has been accepted or passed by the necessary majority at a
meeting duly convened and held
Several aspects to consider to pass or adopt:
- Content and duration of any notice required to be given
- Majority required for adopting the motion as a resolution
- Persons affected by the resolution
- Proper person having been in the chair
- Presence of a quorum
- Ordinary resolution passed by a simple majority of those present and voting
- Special resolution are resolutions passed at meetings requiring
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written notice at least 21 days
approval of ¾ of such members of the company present at the meeting
Minutes
Minutes are records of proceedings and resolutions passed at the meetings
The minutes that have been signed and entered in the record are conclusive evidence that a
meeting has been duly held and convened that all appointments of officers shall be deemed
to be valid and that all proceedings were duly conducted
The minutes book shall be kept at the registered office and any member could inspect them
without charge.
(6 marks)
Answers 6(d)(i)
Section 27(1) of CA 1965 provides that the following persons may petition for the winding up
of a company:
- The company itself
- Any creditor, including a contingent or prospective creditor of the company
- A contributor or any person who is the personal representative of a deceased
contributory or the trustee in bankruptcy or the Official Assignee of the estate of a
bankrupt contributory.
- The liquidator
- The minister pursuant to section 205 or on the ground specified in section 218(1)(d)
- Bank Negara Malaysia
- The registrar on the grounds specified in section 218(1)(m) or (n)
(2 marks)
6(d)(ii)
Contributory include every person liable to contribute to the assets of the company in the
events of its being wound up. It includes the present members and certain past members of
the company. It has been held that a holder of fully paid up share is a contributory and
entitled to present a petition. Section 217(2) provides exceptions whereby contributory may
not present a petition on any of the grounds specified in section 218(a),(b),(c),(e) or (l)
unless :
- The number of members is reduced below two, or
- The shares allocated to the contributor, or have been held by him and registered in
his name at least 6 months during the 18 months before the presentation of the
petition or have devolved on him through the death or bankruptcy of a former holder.
(2 marks)
(Total : 20 marks)
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