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SECTION A
QUESTION 1
(a)
There are certain advantages and disadvantages in applying the system of binding
judicial precedents. State three advantages of applying this system.
1. The law evolved is more practical since it evolved through actual experiences and is
not a result of abstract theory;
2. It is more flexible when compared to statute law enacted by Parliament as law once
enacted can only be repealed or amended through legislative proceedings that are
often cumbersome and time consuming;
3. Case law is richer in legal detail than statute law.
(3 marks)
(b)
In relation to the law of contract, write short notes on any two (2) of the following:
(i)
Coercion
(ii)
Undue influence;
(iii)
Fraud;
(iv)
Misrepresentation;
(v)
Mistake.
Section 10 Contracts Act, 1950: agreements are contracts if made by free consent;
Section 14: consent is aid to be free when NOT caused by ant of the following:
(i)
Coercion: Section 15, Contracts Act, 1950- the committing or threatening to
commit any act forbidden by the Penal Code, or the unlawful detaining or
threatening to detain any property, to the prejudice of any person whatever, with
the intention of causing any person to enter into an agreement;
(ii)
It is a development of equity to cover cases of particular relations and is
sometimes used as a comprehensive phrase to include cases of coercion,
domination or pressure within or without those special relations. It is embodied in
Section 16 of the Contracts Act, 1950;
(iii)
Section 17, Contracts Act, 1950: to include certain acts which are committed with
intent to induce another party to enter into a contract. General rule: wherever a
person causes another to act on a false representation which the maker himself
does not believe to be true, he is said to have committed a fraud;
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(iv)
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Section 18, Contracts Act, 1950: Misrepresentation includes:
1. Positive assertion, in manner not warranted by the information of the person
making it, of that which is not true, thought he believes it to be true;
2. Any breach of duty which, without an intent to deceive, gives an advantage to
the person committing it, or anyone claiming under him, by misleading
another to his prejudice, or to the prejudice of anyone claiming under him;
and
3. Causing, however innocently, a party to an agreement to make a mistake as
to the substance of the thing which is the subject of the agreement.
(v)
Section 21, Contracts Act, 1950: Mistake of fact:
Where both parties to an agreement are under a mistake of fact as to a matter of
fact essential to the agreement, the agreement is void.
Explanation: an erroneous opinion as to the value of the thing which forms the
subject-matter of the agreement is not to be deemed a mistake as to a matter of
fact.
(5 marks)
(c)
John entered City Grocer’s Supermarket and selected some groceries, canned food,
detergents, eggs and milk. He puts these items into his shopping trolley.
Has a contract been concluded at this stage? Explain your answer.
The display of goods in City Grocer Supermarket is only an invitation to treat. When
John selects the items or articles he is merely making an offer to buy those items. A
contract has not yet been made between City Grocer Supermarket and John.
The contract is only made at the cashier’s desk when the customer pays for the items.
Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd.
(6 marks)
(d)
Explain the remedies available to a buyer of goods, when a seller is in breach of a sale
of goods contract.
Remedies available:
1. Damages for non-delivery
2. Action for specific performance
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3. Remedies for breach of warranty
4. Action in tort.
(6 marks)
(Total: 20 marks)
QUESTION 2
(a)
This question on company law tests the candidates’ knowledge on the exceptions to the
general rule that each company must be treated as separate legal person. As in the
case of Salomon v Salomon (1897), because a company has separate legal personality
from the people who own or run it (the members/shareholders/directors), people can
look at a company and not know who or what owns or runs it. The fact the members are
‘hidden’ in this way is sometimes referred to as the ‘veil of incorporation’. Literally, the
members are ‘veiled’ from view. In exceptional circumstances, courts may lift the
corporate veil and disregard the separate legal personality of the company. This may
occur:
(i) At common law
(1)
Where the corporate form is used to avoid an existing legal duty or to commit
fraud or improper purpose. The court will not allow the Salomon principle to
be used as an engine to commit fraud. The courts have a discretion to lift the
corporate veil for the purpose of discovering any illegal or improper purpose.
See Jones v Lipman (1962), Gilford Motor Co Ltd v Horne (1933) and
Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988).
(2)
Where justice requires that the corporate veil be lifted. Aspatra Sdn Bhd v
Bank Bumiputra Malaysia Bhd, Tengku Abdullah Ibni Sultan Abu Bakar v
Mohd Latiff bin Shah Mohd (1996) and Tan Guan Eng v Ng Kweng Hee
(1992).
(3)
Where the company is acting as the agent or partner of the controller.
Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd.
(4)
Where the law shows an intention that the corporate veil be disregarded.
Daimler Co v Continental Tyre and Rubber Co (1916).
(ii) Under the statute
(1)
Section 36 Companies Act 1965 (carrying on business with fewer than the
statutory minimum number of members). A sole remaining member of a
company may be liable for the payment of the debts of the company under
sec 36 if at any time the number of members of a company is reduced to
below two and it carries on business for more than six months while the
number is so reduced.
(2)
Section 121 Companies Act 1965 provides that an officer of a company who
signs or is authorised to sign on the company’s behalf any bill of exchange,
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(3)
(4)
(5)
(6)
(7)
(b)
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cheque or promissory notes where the company’s name is not properly or
legibly written is guilty of an offence and is liable to the holder of the
instrument or order for the amount due (unless it is paid by the company).
Section 132D Companies Act 1965 prohibits the directors from exercising any
power of the company to issue shares unless the power is exercised with the
prior approval of the company in general meeting.
Section 169 and the Ninth Schedule of the Companies Act 1965 provides that
where companies are in the relationship of holding and subsidiary, the Act
generally puts aside the independent legal entity concept by requiring a
consolidated profit and loss account of the holding company and of its
subsidiary companies.
Section 304 Companies Act 1965 provides that an officer can be personally
liable to creditors for debts incurred by the company. This can occur if the
company is being wound up but it continues to trade and incur debts with
intent to defraud creditor or for any fraudulent purpose.
Section 303(3) Companies Act 1965 provides that an officer of a company
may be guilty of an offence, if in the course of the winding-up of the company
or in any proceedings against a company, it appears that the officer who was
knowingly a party to the contracting of a debt had no reasonable or probable
ground of expectation, after taking into consideration the other liabilities, if
any, of the company at the time, of the company being able to pay the debt.
The Income Tax Act 1967 also makes allowance for piercing corporate veil
and the company’s members or officers to be made liable for its action of
avoiding or evading tax.
(8 marks)
This question on company law, tests the candidates’ knowledge on the different forms of
business organisation. A company is the most popular form of business association and
it is incorporated under the Companies Act 1965. Other forms of business organisation
include sole proprietorship, partnership and unincorporated joint venture. Sole
proprietorship or sole trader is where an individual person carries on a business in his or
her own name. A partnership is an association of person carrying on business in
common with a view to a profit where it is governed by the Partnership Act 1961. An
unincorporated joint venture is simply a contractual arrangement between two or more
people that they will join together to conduct a particular venture.
The principal distinctions between a company incorporated under the Companies Act
1965 other forms of business organisation may be summarised as follows:
(i)
Separate legal personality
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After the landmark decision of the House of Lords in Salomon v Salomon & Co
Ltd [1897], it is settled law that a company incorporated under the Act is an
independent legal entity separate and distinct from its members. As a general
rule, a member of a company is not personally liable for the debts of the
company unless the veil of incorporation is lifted by the Act or by the court. In the
case of other forms of business mentioned above, there is no separate legal
personality. The owner or members of the business are liable for all debts and
obligation incurred in the business.
(ii)
Property
Property of the company belongs to the company itself and not its members. In
Macaura v Assurance Co [1925], a member, though he might hold practically the
whole of the share capital, was held not to have an insurable interest in the
property of the company. In the case of for example a partnership, the property of
the firm, in principle, belongs to the individual partners and they are collectively
entitled to it.
(iii)
Perpetual succession
Section 16(5) provides that a company once incorporated shall have perpetual
succession. The existence of a company is not affected, for example, by the
death, or bankruptcy of any or even all, of its members. On the other hand, sole
proprietorship or a partnership is dissolved in the event of the death or
bankruptcy of any member.
(iv)
Number of members
Except in the case of a private company, there is not limit as to the number of
members a company may have. The number of members in a private company,
membership is limited to not more than 50. A maximum number of 20 persons
are imposed on partnerships (this does not apply to the legal profession and
accounting profession).
(v)
Management
In principle where the management of a company is expressly entrusted to the
board of directors of the company by the Articles (e.g., see Table A, art. 73), the
members either individually or in general meeting cannot interfere in the
management of the company. In a partnership firm, every partner may take part
in the management of the partnership.
(vi)
Transfer of share
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Subject to such restrictions as may be imposed by the memorandum and
articles, a member in a company is entitled to transfer his shares in the company
to anyone he wishes.
(vii)
Borrowing
A company, as compared to a partnership firm, has more avenues to borrow
funds. A company may create a charge, both a fixed and floating charge, against
its property to secure a loan. A company may also issue debentures. A
partnership firm cannot create a floating charge.
(viii)
Inspection of accounts
The annual accounts of a company, except in the case of an exempt private
company, must be lodged with the Registrar. Since the accounts are public
documents, they are open to public inspection. A partnership firm for example, is
not required to lodge its annual accounts with the Registry of Businesses.
(4 marks)
(c)
This question, on company law, tests the candidates’ knowledge on company’s
promoters. Persons who take steps related to establishing a new company are known as
the company’s promoters. The Companies Act does not define the term ‘promoter’
except for the purpose of liability in regards to the company’s prospectus (sec 4(1)). At
common law, it was held in Twycross v Grant (1877), that a promoter is one who
undertakes to form a company with reference to a given project and to set it going, and
who takes necessary steps to accomplish this purpose. Duties and responsibilities of
promoters as follows:
(i)
Fiduciary relationship
A promoter of a company stands in a fiduciary relation to the company he was
creating (see Erlanger v New Sombrero Phosphate co (1878). This fiduciary
relationship is grounded on the basis of the active influence and direct control
which promoters can have over the company they have formed.
(ii)
Fiduciary duties
Promoters, being fiduciaries, should act with utmost good faith and not make
secret profits out of their promotion (see Fairview Schools Bhd v Indrani
Rajaratnam [1998].
(iii)
Full disclosure
The law requires the disclosure by the promoters to be full, frank and explicit, and
to contain, at least, information relating to the nature of the interest of the
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promoters and all other material facts. A disclosure by a promoter which is half
truth can be defective and may not have legal force (see Gluckstein v Barnes
[1900].
(4 marks)
(d)
This question on company law, tests the candidates’ knowledge on pre-incorporation
contract. At common law, a contract entered into before the incorporation of a company
is void. Further, such pre-incorporation contract cannot be ratified after its corporation by
its agent since there is no principal in existence (Kelner v Baxter (1886)). In Kepong
Prospecting v Schmidt [1968], the Privy Council held that the services rendered to a
company before formation cannot amount to consideration and a company cannot bind
itself to pay for them. Therefore, although a person may purport to contract for the
company, there is in law no contract in existence since there is no company which can
be the principal for the agent to contract on behalf. Nevertheless, in Malaysia, the law
allows a company to ratify any contract or other transaction purporting to have been
entered into or on its behalf before its incorporation. Firstly, under sec 35 of the
Companies Act, where a person enters into, or attempts to enter into, a contract on
behalf of, or for the benefit of, a company before it is registered, the company can, by
ratifying (or approving) that contract, become bound by it and entitled to the benefit of it
after registration. In such an event, the company shall become bound by and entitled to
the benefit of the contract as if it had been in existence at the date of the contract or
other transaction and had been a party thereto.
Secondly, prior to ratification by the company, the person or persons who purported to
act in the name or on behalf of the company shall in the absence of express agreement
to the contrary be personally bound by the contract or other transaction and entitled to
the benefit thereof (see s 35(2), Companies Act). In Perman Sdn Bhd v European
Commodities Sdn Bhd [2006], it was held that since there was nothing to show that the
first defendant had ratified the joint venture agreement and neither was there any
evidence to suggest the contrary express agreement as required by s 35(2), thus the
contract should be held binding on the executants personally and not the company.
Applying the above principles to the given problem and assuming that the contract
entered by Jay was for the benefit of the company, in such event the company can ratify
the contract and be bound by it. However, if it is otherwise, then T-Rex does not have to
ratify the pre-incorporation contract and thus the contract should be held binding on Jay.
(4 marks)
(Total: 20 marks)
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QUESTION 3
(a)
Describe the nature of a relationship between a banker and a customer in the context of
an agency relationship.
The nature of the relationship between a banker and a customer is generally that of a
debtor and creditor or vice versa depending on the state of accounts at a particular time.
When a banker receives money from a depositor, he is said to be a debtor to his
customer: Foley v Hill. However, where a banker advances credit facilities or a loan to
his customer, his position is that of a creditor.
With the added obligation arising out of banking custom for bankers to honour cheques
of their customers, the banker is an agent for his customer in the collection and payment
of the customer’s money, cheques and bills of exchange, or in keeping the customer’s
valuables for safe custody.
(5 marks)
(b)
Bob engaged Jack to transport some mangrove trunks on his behalf, from Kalimantan
into Malaysia and agreed to pay for all expenses related to the task. It is known to both
parties that the mangrove trunks are stolen from Kalimantan. Jack, nevertheless, agreed
to carry out the task due to the lucrative fee Bob is willing to pay him. On the way, the
boat carrying the mangrove trunks was seized by the authorities. Jack was charged,
found guilty and paid the fine. Jack wants to recover from Bob the amount of the fine he
paid and all his legal expenses when defending the charge. Advise Jack.
This case involves the principles of agency. When Bob engages Jack to do something,
Bob is the principal and Jack is his agent. In the absence of an express contract, the
employer of an agent is bound to indemnify the agent against the consequence of all
lawful acts done by the agent in exercise of the authority conferred upon him (Section
175, Contracts Act, 1950).
Jack is advised that he cannot recover the amount of the fine he had to pay as well as
his legal expenses since the act which he was employed to do is a criminal act –
transporting stolen property. This is by virtue of section 177 of the Contracts Act, 1950,
which states that 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.
(6 marks)
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(c)
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A contract of agency can be express or implied from certain circumstances and conduct
of the parties. Describe three ways by which an agency relationship may arise.
Agency may arise in the following ways:
(d)
1.
By express agreement between the parties. (Section 139 of the Contracts Act
1950) Whereby the principal appoints his agent in writing or orally and the agent
accepts the appointment;
2.
By implied agreement between the parties (Section 141 (2) of the Contracts Act,
1950) whereby by words or conduct of the principal, an agent is appointed and
he accepts the appointment;
3.
By ratification. This is where the agent acts without authority or has exceeded his
authority and the principal ratifies or adopts the transaction. Section 149,
Contracts Act 1950.
(5 marks)
In relation to agency, distinguish between actual authority and apparent or ostensible
authority.
An agent’s authority may be actual or apparent or ostensible. Actual authority is that
which is expressly given by the principal to the agent orally or in writing or implied from
the express authority given, from the circumstances of the case, the custom or usage of
trade, or the situation and conduct of the parties.
On the other hand, ostensible authority is that which is not expressly given by the
principal but which the law regards the agent as possessing although the principal has
not consented to his exercising such authority.
Watteau v Fenwick.
(4 marks)
(Total: 20 marks)
QUESTION 4
(a)
Explain how a partnership may be dissolved by ‘operation of law’.
Dissolution of partnership by operation of law (unless otherwise agreed by the partners)
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(i)
(b)
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If the partnership was entered into for a fixed term and the term expires – Section
34(1)(a), Partnership Act, 1961;
(ii)
If the partnership was entered into for a single adventure or undertaking, and that
adventure or undertaking terminates – Section 34(1)(b), Partnership Act, 1961;
(iii)
If the partnership was entered into for an undefined time, by any partner giving
notice to the other partner(s) of his intention to determine (or end) the partnership
– Section 34(1)(c), Partnership Act, 1961. Sukhinderjit Singh Muker v Arumugam
Deva Rajah.
(6 marks)
Jim and Joe are partners of JJ Hardware, a hardware shop. Jim’s friend, Nancy, went to
JJ Hardware to complain about a hammer she bought from the shop a week earlier. Joe
became angry and hit Nancy with the hammer. Nancy brought a charge against Joe for
causing her grievous hurt. Jim is worried that he would also be charged for the same
offence since he is Joe’s partner.
Advise Joe as to his liability as a partner in this situation.
Jim is advised that partners are not jointly liable in criminal cases. This is illustrated in
Chung Shin Kian & Anor v Public Prosecutor. Section 14 of the
Partnership Act, 1961 provides for joint liability of partners for contracts and recovery of
damages and fines, not criminal liability. It would be otherwise if the partnership (firm)
was the subject of the charge. Jim would, therefore not be charged for the crime his
partner committed. The crime was not committed by the firm.
(4 marks)
(c)
With reference to the provisions of the Partnership Act, 1961, explain three situations
whereby the court may decree a dissolution of a partnership.
Section 37, Partnership Act, 1961: the court may decree a dissolution of partnership in
cases:
(i)
When a partner is found lunatic or is shown, to the satisfaction of the court, to be
of permanently unsound mind, in either of which cases the application may be
made as well on behalf of that partner, by his committee, or next friend, or person
having title to intervene as by any other partner;
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(ii)
(iii)
(d)
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When a partner, other than the partner suing, becomes in any other way
permanently incapable of performing his part of the partnership contract;
When a partner, other than the partner suing, has been guilty of such conduct as,
in the opinion of the court, regard being had to the nature of the business, is
calculated to affect prejudicially the carrying on of the business.
(5 marks)
Aman is a new partner in a partnership. He is concerned about certain matters within the
partnership and seeks your advise on the following:
(i)
(ii)
(iii)
Whether a written partnership agreement is necessary;
Whether it is necessary to have the firm formally registered; and
The extent of each partner’s liability for the debt of the firm.
(i)
In accordance with the Partnership Act, 1961, as partnership can be formed
orally or in writing, a written partnership agreement is not strictly necessary;
(ii)
Partnerships are required to be registered with the Registry of Business;
(iii)
Each partner is liable for the firm’s debts and his/her liability is unlimited. Section
11 of the Partnership Act, 1961 provides that every partner is liable jointly with
the other partners for all debts and obligations of the firm incurred while he is a
partner.
(5 marks)
(Total: 20 marks)
QUESTION 5
(a)
This question on company law, tests the candidates’ knowledge on disqualification of
directorship. In order to be eligible for appointment as a director, the person must not be
disqualified from holding the office of director. The articles often embody the statutory
grounds of disqualification and add some optional extra grounds. Articles 72 of Table A
and the statutory provisions provide for several grounds for disqualification:
(i) Articles of Association
(1) Ceases to be a director by virtue of the Companies Act;
(2) Being bankrupt;
(3) Is prohibited from being a director by reason of an order made under the
Companies Act;
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(4)
(5)
(6)
(7)
(8)
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Is insane or if the person or his/her estate is liable to be dealt with in anyway
under the law relating to mental disorder;
Resigns his/her office by notice in writing;
Is absent for more than six months without permission of the directors from
meetings of the directors held during this period;
Holds any other office for profit under the company without the consent of the
company in general meeting, except for the post of managing director or
manager; and
Is directly or indirectly interested in any contract or proposed contract with the
company and fails to declare his interest in the manner required by the
Companies Act.
(ii) Statutory rules
(1) If he/she is convicted of certain types of offences, in relation to the promotion,
formation or management of a company or involving fraud or dishonesty
punishable on conviction with imprisonment for three months or more, they are
automatically disqualified from managing companies for a specified period (sec
130 Companies Act);
(2) Being convicted of an offence under sec 132 (breach of statutory duty to act
honestly and use reasonable diligence in the affairs of the company), sec 132A
(not to abuse corporate information), sec 303(1) (failure to keep proper accounts
and books) or sec 303(3) (personal liability for wrongful trading);
(3) Being an undischarged bankrupt (sec 125);
(4) Disqualification or unfitness of conduct in relation to a company which has gone
into liquidation (sec 130A);Disqualification of directors of public listed companies
for unfitness of conduct; and
(5) Has been convicted of an offence under the Capital Markets and Services Act
2007.
(3 marks)
(b)
This question on company law, tests the candidates’ knowledge on the doctrine of ultra
vires. Ultra vires is where a company exceeds its objects and acts outside its capacity.
Any other activity performed outside the capacity of the company is considered as ultra
vires and the transaction is void. The rational of the doctrine is to protect the company’s
shareholders and creditors. At common law any ultra vires act or transaction was held to
be totally void. Shareholders have the right to expect that the money they have invested
are applied strictly to the stated objects of the company (see Ashbury Railway Carriage
& Iron Co v Riche (1875). The doctrine had created hardship to third parties who had
dealt with a company without being aware that the transaction was outside the capacity
of the company. The doctrine of Ultra vires was also causing difficulty to the company
itself, which could not venture into new activities without altering the object clause.
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In Malaysia, the doctrine has been modified by virtue of sec 20 of the Companies Act.
Section 20 states that the fact that the company did not have the capacity to enter into a
particular transaction is irrelevant as against third parties. As a result of this section, ultra
vires transactions are valid and binding upon the company and the third party. However,
this does not mean that the ultra vires doctrine is not applicable in Malaysia. Companies
are still expected to act within the scope of the objects clause. The approach taken by
the Companies Act is to give security to commercial transactions to third parties, whilst
preserving the rights of shareholders to restrain directors from entering an ultra vires
action.
(4 marks)
(c)
This question on company law, tests the candidates’ understanding on statutory
protections for minority shareholders in a company. Under sec 181 of the Companies
Act, actions of majority members can be held to be invalid if the effect is that other
members are oppressed, unfairly prejudiced or unfairly discriminated against. Another
protection which may be relied on by minority shareholders is the statutory derivative
action under sec 181A. This section enables shareholders of the company to apply for
the leave of court to bring an action, defend or intervene in any proceedings on behalf of
the company.
Mary, Roger, Wong and Maniam may commence legal action if they believe that they
have been oppressed or unfairly discriminated against or unfairly prejudiced. Section
181(1)(b) allows the court to provide a remedy to a member where the court finds that:
(i)
An actual or proposed act by or on behalf of the company; or
(ii)
A resolution, or a proposed resolution, or members, debenture holders or a class
of members of the company is either:
i.
Unfairly discriminatory to a member or members, shareholders or
debenture holders including the petitioner; or
ii.
Prejudicial to, a member or members, shareholders or debenture holders
including the petitioner.
(5 marks)
(d)
This question on company law, tests the candidates’ knowledge on issues of shares.
The issue of shares by a company at a discount is prohibited at common law, because in
principle, it constitutes a reduction of share capital without confirmation by the High
Court as required by what is now sec 64 of the Companies Act. This general rule was
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established in the case of Ooregum Gold Mining Co of India Ltd v Roper & Anor (1892).
However, the Ooregum principle is, to a certain extent, modified by sec 59(1). This
section allows a company to issue shares at a discount provided that certain conditions
are met, in that:
(i)
(ii)
(iii)
(iv)
(v)
(e)
The shares are part of an existing class of shares already issued;
The discount issue is authorised by resolution passed in general meeting and is
confirmed by an order of the High Court;
The resolution specifies the maximum rate of discount at which the shares are to
be issued;
At the date of the issue not less than one year has elapsed since the date of
which the company was entitled to commence business; and
The issue are issued within the time frame of one month after the date on which
the issue is confirmed by order of the High Court or within such extended time as
the High Court allows.
(3 marks)
This question on company law, test the candidates’ understanding of the liquidator’s
duties and powers. The duties of the liquidator under the Company Act include:
(i)
Taking into his custody or control all the property and things in action to which
the company is or appears to be entitled (sec 233);
(ii)
Conducting an impartial investigation of the company’s affairs;
(iii)
Collecting and administrating the company’s assets;
(iv)
Keeping proper books, entries and minutes of proceedings at meetings and other
matters as may be prescribed during the winding up (sec 277);
(v)
Lodging various notices and reports with the SSM, including:
1. Half yearly accounts, notice of appointment as liquidator;
2. A report to the court whether there are any breaches of the Companies Act
(sec 235);
3. A statement of the financial position in the winding up at six monthly intervals.
In addition, a liquidator is an agent of the company and stands in a fiduciary relationship
with (and therefore owes fiduciary duties to) the company. If a liquidator breaches any of
these duties, they may be liable to pay compensation or a civil penalty.
The powers of a liquidator are provided in sec 236(1) which is as follows:
(i)
(ii)
to sell the company’s property, or dispose of it in some other way;
to carry on the company’s business-but only to the extent necessary for the
beneficial winding up of that business;
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(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
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to make a compromise or arrangement with creditors or others with claims
against the company, or with people who owe money to the company other than
calls and liabilities for calls;
to bring or defend legal proceedings in the company’s name;
to make calls on contributories – for example, a call on owners of partly paid
shares;
to obtain information about the company;
to pay any class of creditors in full subject to sec 292;
to appoint an advocate to assist him;
to do all acts and execute in the name of the company, all deeds, receipts and
other documents;
to raise money on the security of the assets of the company;
to take out letters of administration of the estate of any deceased contributory or
debtor;
to appoint an agent; and
to do all such things as are necessary for winding up the affairs of the company
and distributing its assets.
(5 marks)
(Total: 20 marks)
QUESTION 6
(a)
This question on company law, test the candidates’ knowledge on proceeding of the
board. The procedural rules that apply to meetings of directors (board meetings) are
typically contained in the company’s articles. The matters included in the company’s
articles include the method for calling the board meetings, the quorum, voting procedure,
the conduct of board meetings by the chairperson, as well as the appointment and role
of board committees. The procedural requirements are as follows:
(i)
(ii)
(iii)
(iv)
Calling a directors’ meeting. It is usually the case that that a board meeting may
be convened by any of the directors.
The company’s articles will usually specify what period of notice is required for
meetings. The proper period required to notify of board meetings depends on the
reasonableness of the notice as well as any previous practice of the company.
The articles will also specify the number of directors who must be present in
order for there to be a quorum. Article 83, Table A of the Companies Act states
that the quorum is to be fixed by the directors and if none is fixed, it shall be two.
A quorum is needed to hold the board meeting as well as throughout the conduct
of the board meeting’s business.
Decisions at board meetings are usually taken by majority vote. Each director is
entitled to one vote although it is possible for the company’s articles to provide
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(vii)
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that a director has more than one vote in some circumstances. It is common for
the articles to provide that the chairperson of directors is to have a casting vote
where votes are tied. The articles may also restrict a director from voting on a
transaction or proposed transaction in which he has an interest. If he does vote,
his vote is not counted: see Art 81, Table A.
Minutes must be kept of resolutions passed at board meetings: sec 156(1)(a).
Directors do not have to be physically present for a meeting to be valid. A
meeting of directors may be held using any technology (such as telephone or
video conferencing technology) consented to by all the directors based on Art 79,
Table A. Article 79 states that the directors may regulate their meetings as they
think fit.
It is usual for a company to have a provision in its articles that allows resolutions
to be passed without an actual meeting being held if the resolution is signed by
all directors. It is often the case that the board conducts paper meetings by using
a directors’ circular resolution to decide on management matters.
(4 marks)
This question on company law, tests the candidates’ knowledge on company resolution.
A meeting can pass two types of resolution. The Companies Act, the Bursa Malaysia
Listing Requirements and a company’s Article of Association will specify whether a
particular resolution, in order to be effective, must be an ordinary resolution or a special
resolution. This refers to the percentage of votes cast by members on the resolution who
must be in favour of the resolution for it to be passed.
(i)
An ordinary resolution:
An ordinary resolution requires that votes cast in favour of the resolution
represent more than 50% of all votes cast by members present (in person or by
proxy) and voting. In other words, ordinary resolutions are carried by a simple
majority. Examples of decisions requiring an ordinary resolution include removal
of public company directors (sec 128) and subdivisions and consolidations of
capital (sec 62).
(4 marks)
(ii)
A special resolution
A special resolution requires that votes cast in favour of the resolution represent
at least 75% of all votes cast by members present (in person or by proxy) and
voting. Further, the notice of a special resolution must have been given to
members in accordance with sec 144(5) and sec 152 of the Companies Act. In
other words, a special resolution is required for major changes in the company.
Examples of decisions that require a special resolution include amendments to
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the company’s Articles of Association (sec 31), variation of class rights (sec 65)
and capital reductions (sec 64).
(4 marks)
(c)
This question tests the candidates’ understanding on duties of auditors in company law.
It is important to note that company auditors are not officers of the company (sec 9(3)
Companies Act 1965). However, they can play a very important role in ensuring that
corporate governance practices are adopted. Auditors are placed in a position to review
the documents and financial data in the company. Most fraudulent acts can usually be
detected through the financial records and reports of the company. When an auditor
enters into a contract to perform his task as an auditor, he promises to perform those
tasks using a degree of care and skill at common law (see Re Thomas Gerrard & Son
Ltd [1967]). Section 174 of the Companies Act 1965 imposes various duties on the
auditor as regards to the company’s accounting and other records.
The main duties of an auditor are:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
To certify the correctness of the company’s accounts;
To detect errors and fraud;
To take care that errors are not made, be they errors of computation, or errors of
omission or commission, or downright untruths;
Making a report to the members of the company in accordance with section 174
and in the appropriate case, by reporting to the management of the company or
the Registrar any irregularities that he/she had discovered;
To report to the members on the accounts laid before the general meeting and
on the company’s accounting and other records (see sec 174(1));
Where the company has issued debentures to the public, the auditor is obliged to
send a copy of his report to the trustee for the debenture holders (see sec
175(1));
If an auditor discovers any breach or non-observance of the Act, he/she must
report the matter in writing to the Registrar (see sec 174(8)(a)).
Where an auditor discovers any irregularities or suspects fraud or dishonesty, he
has an obligation to bring these matters to the attention of the company’s
management or directly to the members (see Pacific Acceptance Corporation Ltd
v Forsyth (1967)).
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Persons to whom the duty is owed:
(d)
(i)
Duty to the Company – An auditor’s duty will be owed primarily to the company
that he is auditing. The auditor owes a contractual duty of care to the company
and is under a fiduciary duty to the company to treat any information and trade
secrets acquired by him in the course of his/her professional work as confidential.
Thus, the person most likely to sue the auditor would be the company which was
audited.
(ii)
Duty to the shareholders – The auditor is under a duty to ensure that the
shareholders received independent and reliable information respecting the true
financial position of the company at the time the audit was concluded. Case: Re
London and General Bank (No 2) [1895]. Under sec 174(2)(a)(ii) of the
Companies Act 1965, the auditor is required to state in his report whether in his
opinion the accounts are properly drawn up and are in accordance with the
provisions of the Act so as to give a true and fair view of the financial position. It
therefore possible that the members might sue the auditor if he/she breaches
his/her duty to them.
(iii)
An auditor may also be liable to persons other than the company and its
members. For instance, in a takeover situation, the offeror might rely upon an
auditor’s certification of the accounts as representing a true and fair view of the
company’s financial state in deciding whether or not to make a bid. Thus, a duty
of care will be owed to such persons on the basis of the principle established in
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963].
(4 marks)
This question on company law, tests the candidates’ knowledge on the Malaysian Code
on take-over regulations. ‘Take-over offers’ is defined in sec 216 of the Capital Markets
and Securities Act 2007 as offers to acquire all or part of the voting shares of a
company. These are mainly regulated by the Malaysian Code on Take-overs and
Mergers 1998 (Take-over Code), the Practice Notes to the Take-overs Code (Practice
Notes) and Div 2, Pt VI of the CMSA. The Take-over Code refers to three types of offers:
(i)
Mandatory offer;
(ii)
Partial offers; and
(iii)
Voluntary offers.
A mandatory offer is an offer which, unless it falls within the exemptions given by the
Practice Notes, must be made by an acquirer of a company’s voting shares, to buy the
remaining voting shares of the company. The triggering events of a mandatory offer
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must have arisen as a result of an ‘acquisition’ where for example an acquirer acquires
more than 33% of voting shares of a target company.
A partial offer is an offer to buy from all shareholders, at the same percentage, an
aggregate of less than 100% of the voting shares of the company (sec 2(1), Take-over
Code). It is a type of voluntary offer and may only be made with the prior approval of the
SC.
A voluntary offer is an offer, the making of which is not mandatory under the Take-over
Code, but due to the own free will of the offeror. A voluntary offer which is not a ‘partial
offer’ will become a mandatory offer if the amount of voting shares acquired pursuant to
the ‘voluntary offer’ reaches the levels where the Take-over Code requires the making of
a mandatory offer.
(4 marks)
(Total: 20 marks)