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BUSINESS AND COMPANY LAW
SECTION A
QUESTION 1
a. (i) Section 2(a): a proposal is made when one person signifies to another his willingness to
do or to abstain from doing anything, with a view to obtaining the assent of that other to
such act or abstinence.
Section 2(b): when the person to whom the proposal was made signifies his assent
thereto, the proposal is said to be accepted.
(3 marks)
(ii) Proposal: as above.
Invitation to treat: a situation when the offer is actually an invitation to make a proposal.
When this situation occurs, the offer is actually known as an invitation to treat.
Fisher v Bell.
(3 marks)
(iii)Section 63: if the parties to a contract agree to substitute a new contract for it, or to
rescind or alter it, the original contract need not be performed; parties discharged.
Section 64: Every promise may dispense with or remit, wholly or in part, the performance
of the promise made to him, or may extend the time for such performance, or may
accept instead of it any satisfaction which he thinks fit. Parties are discharged
(3 marks)
b. (i) 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) 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
Polenghi Bros v Dried Milk co Ltd
(3 marks)
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c. Sources of unwritten law:
- Principles of English Law
- Judicial precedents
- Customs of local inhabitants
Sources of written law:
- Federal Contitution
- State Contitution
- Legislation enacted by Parliament
- Legislation enacted by the State Assemblies
(5 marks)
(Total : 20 marks)
QUESTION 2
(a) This question on company law tests the candidates’ knowledge on the exceptions of
principle in Salomon v Salomon where on occasions the court will be prepared to lift the ‘veil
of incorporation’ and ignore the separate legal personality of the company. This may occur:
At common law:
i. Where the corporate form is used to avoid an existing legal duty or to commit fraud.
Jones v Lipman (1962), Gilford Motor Co Ltd v Horne (1933) and Aspatra Sdn Bhd v
Bank Bumiputra Malaysia Bhd (1988).
ii. 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).
iii. Where the company is acting as the agent or partner of the controller. Aspatra Sdn
Bhd v Bank Bumiputra Malaysia Bhd.
iv. Where the law shows an intention that the corporate veil be disregarded. Daimler Co
v Continental Tyre and Rubber Co (1916).
Under the statute:
i.
Section 36 Companies Act 1965 – If the number of members of a company falls
below two (except in the case of a wholly owned subsidiary) and the company
carries on business for more than six months, any member who is aware of this is
personally liable for the debts incurred after the first six months.
ii. Section 121 Companies Act 1965 – Where an officer signs on the company’s behalf
any bill of exchange, cheque, promissory note etc, and the company’s name is not
properly or legibly written, he will be personally liable to the holder of the bill etc, or
order for the amount due (unless it is paid by the company).
iii. Section 304(1) Companies Act 1965 – where the company’s business has been
carried on with intent to defraud creditors or for other fraudulent purpose, any person
knowingly a party thereto may be made personally liable to pay the debts or other
liabilities of the company as the court deems fit.
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iv. Section 303(3) and 304(2) – In regards to insolvent and fraudulent trading, these
sections provide that an officer who knowingly contracts a debt with no reasonable or
probable ground of expectation that the company would be able to pay the debt is
guilty of an offence.
v. Section 169 and the Ninth Schedule of the Companies Act 1965 – By these
provisions the directors of a holding company are required to produce group
accounts in which the assets, liabilities, profits and losses of the group as a whole
are reflected. In this respect, the Companies Act does not regard each company in
the group as a separate legal identity but recognises the reality that a group of
related companies function as a single commercial entity.
vi. Section 140 of the Income Tax Act 1967 – The Director General of Inland Revenue
may ignore any transaction or disposition, which has the effect of avoiding or evading
tax.
(5 marks)
(b) This question tests the students’ knowledge on the comparison of a company with other
possible forms of business organisations.
i. A company:
(i) The law treats a company as being a separate person from its members and
those who manage its operation. This is the doctrine of separate legal personality.
See Salomon v Salomon.
(ii) This means that the company can incur and receive obligations and hold property
in its own name. For e.g. a company can lend or borrow money, enter into
contracts with its participants and with outsiders, be a lessee or lessor, operate a
bank account and take out insurance, and act as trustee of a trust in its own right.
(iii) A company can sue and be sued in its own name.
(iv) A company has perpetual succession.
ii.
Other forms of business organisations:
(i) Sole proprietorship or sole trader - It is used to describe the situation where an
individual person carries on a business in his or her own name. There is nor
separation between the business and personal assets or obligations of the person
conducting the business.
(ii) General partnership - A partnership is an association of people carrying on
business in common with a view of a profit. A partnership is not a separate legal
entity. Like sole proprietors, the individual partners in a partnership must own the
assets of and incur the obligations relating to the partnership’s business
personally and in their own names.
(5 marks)
(c) This question on company law tests the candidates on the classification of a company. A
private company is defined in section 4(1) of the Companies Act as follows:
i. Any company which immediately prior to the commencement of the Companies Act
was a private company under the repealed written law;
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ii. A company incorporated as a private company pursuant to section 15;
iii. Any company converted into a private company pursuant to section 26(1); and
iv. A private company limited by shares must always include the words ‘Sendirian
Berhad’ or the abbreviation ‘Sdn Bhd’ in its name (section 22(4), Companies Act).
v. It may either be exempt private companies or non-exempt private company. A
private company is exempt if it has less than 20 members and none of its members
are themselves companies. Exempt private companies can keep their financial
information private.
Any company that is not incorporated as, or converted to, a private company is treated as a
public company (section 4(1) of the Companies Act). Thus, if the company does not have
the characteristics and restrictions set out in section 15 of the Companies Act, it must be a
public company. A company limited by shares will be formed as a public company (or
converted to public company status) only if it is intending to have public shareholders, or it is
proposing to engage in activities only permitted to public companies. Public company may
be listed or unlisted.
(5 marks)
(d) This question on company law tests the candidates’ knowledge on classification of
companies according to the members’ liability. Under the Companies Act, companies are
classified according to the members’ liability in the following ways:
i. Companies limited by shares - These are the most common form of companies in
Malaysia. They are appropriate form of companies for general business activities. A
company limited by share is ‘a company formed on the principle of having the liability
of its members limited, by the memorandum of association, to the amount (if any)
unpaid on the shares respectively held by them’ (sec 4(1)). Section 18 of the
Companies Act requires these companies to state in their memorandum of
association, the amount of share capital and its division into shares of a fixed
amount. It must also state that the liability of its members is limited.
ii. Other types of companies:(i) Unlimited companies, in which members have no limit placed on their liability
(sec 4(1)). This type of company may or may not have a share capital.
(ii) Companies limited by guarantee, which are companies formed on the principle of
having the liability of its members limited to the respective amounts that the
members guarantee to contribute to the property of the company if it is wound up
(sec 4(1)). This type of company does not have a share capital and is rarely used
for trading.
(iii) Companies limited by both shares and guarantee, where members are liable as
shareholders (to the extent of the unpaid portion of the nominal value of their
shares) and as guarantors (to the amount stated in the memorandum of
association that is payable upon the company being wound up).
(5 marks)
(Total : 20 marks)
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SECTION B
QUESTION 3
a.
(i)
Duties of Agent:
- Obey principal’s instruction: Setion 164;
- If there is no instructions, to act according to prevailing custom;
- Exercise care and diligence or act according to skills possessed: section 165;
- Render true and proper accounts: section 166;
- Duty to communicate with principal: section 167;
- Act in good faith, avoiding any conflict of interest with that of principal;
- Not to make any secret profit: section 168;
- To pay principal all sums received on his behalf: section 171;
- Not to delegate authority.
(5 marks)
(ii)
Agency is the relationship which subsists between the principal and agent who
has been athorised to act for him in dealings with others; Section 135.
An agent is the person who has been appointed by a principal, to act on the
principal’s behalf, in dealing with a third party.
Two types of contracts under agency:
- Contract between the principal and agent;
- Contract between the principal and the third party.
(4 marks)
b. (i)
Agent who has been appointed but has exceeded his authority when he entered
into a contract with a third party;
-
(ii)
c.
A person who has no authority to act for the principal but he acted as if he
has the authority to enter into a contract with a third party.
According to Section 149: the principal may either reject the contract or
accept the contract.
Ratification can be made either expressly or impliedly.
(5 marks)
Secret profit is: bribe, such as payment of a secret commission by a third party,
outside the knowledge of the principal;
- Any financial advantage the agent received from a third party on top of the
commission or remuneration that has been agreed by the agent and principal.
(3 marks)
A person may become an agent by necessity if the following three conditions are met:
(i)
It is impossible for the agent to get the principal’s instruction – Section 142,
Contracts Act, 1950.
(ii)
The agent’s action is necessary, in the circumstances, in order to prevent loss to
the principal with respect to the interest committed to his charge, eg. When an
agent sells perishable goods belonging to his principal to prevent them from
rotting.
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The agent of necessity must have acted in good faith.
In an emergency, an agent has authority to do all such acts for the purpose of protecting
his principal from loss as would be done by a person of ordinary prudence, in his own
case, under similar circumstances.
(3 marks)
(Total : 20 marks)
QUESTION 4
a. Any partner may make an application for the dissolution of partnership on the following
grounds:
- Insanity of a partner: section 37(a);
- Permanent incapacity which affect the said partner’s ability to perform his
duties: Section 37(b);
- The conduct of the said partner is prejudicial to the partnership business:
Section 37(c);
- Wilfull or persistent breach of partnership agreement: Section 37(d);
- When the business can only be carried on with a loss: Section 37(e);
- Any other circumstances the court deems just and equitable: Section 37(f).
(5 marks)
b. (i)
Liabilities of partners for contracts entered in the course of business: Section 11;
explanation on joint and several liabilities of partners;
- Extra right acquired by the creditor in the event of a demise of one of the
partners: section 19;
- Liability of partners for misappropriation of client’s money: section 13 & 14.
(4 marks)
(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.
(4 marks)
c. (i)
Section 19(2): A partner who retires from a firm does not thereby cease to be
liable for partnership debts or obligations incurred before retirement.
Section 19(3): Whereby there has been a mere abandonment and inactivity by a
partner; the partner may be discharged from liability by an agreement made
between himself, the new firm and the creditors.
Section 38: Once a partner has retired, he has to give express notice that he is
no longer a partner. If he fails to do so, he will still be liable for debts incurred
after his retirement.
(4 marks)
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Section 19(1): a peron who is admitted as a partner into an existing firm does not
thereby become liable to the creditors of the firm for anything done before he
became a partner.
Mim was not yet a partner when the firm caused the losses to their client.
Therefore, he shall not be liable.
(3 marks)
(Total : 20 marks)
QUESTION 5
(a)
This question on company law tests the candidates’ knowledge on auditor’s duties and
persons to whom the duty is owed. 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. To certify the correctness of the company’s accounts;
ii. To detect errors and fraud;
iii. To take care that errors are not made, be they errors of computation, or errors of
omission or commission, or downright untruths;
iv. 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;
v. To report to the members on the accounts laid before the general meeting and on
the company’s accounting and other records. See section 174(1);
vi. 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 section
175(1).
vii. If an auditor discovers any breach or non-observance of the Act, he/she must
report the matter in writing to the Registrar. See section 174(8)(a).
viii. 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. Case: Pacific Acceptance Corporation
Ltd v Forsyth (1967).
Persons to whom the duty is owed:
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 section 174(2)(a)(ii) of the Companies Act 1965, the auditor is required
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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].
(6 marks)
(b) This question tests the candidates’ knowledge on the duty of an auditor to detect fraud
which is generally regarded as being of primary importance. See Frankston & Hastings
Corporation v Cohen (1960). The issue in this question is whether an auditor of a company
who had discovered that fraud or dishonesty had been committed is bound to disclose it to
the members of the company.
At common law, the auditor is to take care to see that fraud is not committed against the
company. See Fomento (Sterling Area) Ltd v Selsdon Foundation Pen Co Ltd (1958). Like
all professionals, an auditor is obliged to exhibit a reasonable degree of care and skill in the
performance of his duties. See Nelson Guarantee Corporation Ltd v Hodgson [1958]. This
duty arises in contract or in tort. He has a duty to be honest, in that he must not certify what
he/she does not believe to be true. An auditor’s duty will be owed primarily to the company
that he/she is auditing, as that is the person with whom he has contractual relations. Unlike
other officers of the company, auditors are appointed by the shareholders rather than as
agents of the directors. In Re London and General Bank (No 2) [1895], auditors are to be
appointed by the shareholders and are to report to them directly and not to or through the
directors. This was 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.
Under the Companies Act 1965, this function is discharged by making a report to the
members of the company in accordance with section 174 of the Companies Act 1965, and in
the appropriate case, by reporting to the management of the company or the Registrar any
irregularities that he/she has discovered. Section 174(1) requires an auditor to report to the
members on the account laid before the general meeting and on the company’s accounting
and other records. This suggests that an auditor owes a duty to the members as well as to
the company. See Mooney v Peat, Marwick, Mitchell &Co [1967] where Raja Azlan Shah J
declined to strike out a statement of claim filed by members of a company against the
auditors alleging negligence.
According to section 174(2)(a), in his/her report, the auditor must state whether in his/her
view the accounts are properly drawn up so as to give a true and fair view of the company’s
affairs and profit or loss and whether the accounting and other records of the company have
been properly kept in accordance with the Act. See section 174(2)(b). By section 174(2)(e),
if the auditor is not satisfied that the accounts or records and registers are in order, he must
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state this in his/her report, together with his/her reasons. More importantly, if there is any
deficiency, failure or shortcoming in respect of any of these matters, the auditor is bound to
state so in his/her report. See section 174(3).
In the given problem, the auditor had discovered the fraud but failed to disclose it to the
members of the company. Instead, he/she had given the company a clean bill in relation to
the accounts. Applying the law to the given problem, James may be advised that relying on
section 174(1), the company may take court proceedings against the auditor for breaches of
his/her duty to the company. See AWA Ltd v Daniels t/as Deloitte Haskins & Sells (No 2)
(1992). However, it is also possible that James, as a minority shareholder may sue the
auditor for the breach of his/her duty to him. This would be a personal rather than a
corporate action. See Teoh Peng Phe v Wan & Co [2001].
(7 marks)
(c) This question on company law tests the candidates’ knowledge on the authority of secretary.
The issue in the given problem is whether Swift Sdn Bhd is bound by the transaction
entered by Baba who is the secretary of the company.
In Mohamed bin Othman & Anor v Abdul Shattar bin Abdul Rahim & Ors [1987], the court
has described a company secretary as an ‘administrative officer’ of the company and having
the authority to ‘negotiate contracts necessary for the carrying on the administration of the
company’s organisation, such as contracts for the appointment of staff etc.’ If a secretary of
a company possesses an express authority to perform certain acts on behalf of the
company, such acts will bind the company. The general rule is that a principal is bound by
the acts of its agents only if those agents are acting within their actual authority (express or
implied). If the company’s agent acts outside the scope or his actual authority, the company
will normally not be bound unless it is precluded from denying the authority of that agent.
See Chew Hock San v Connaught Housing Development Sdn Bhd [1985].
In addition to actual authority, every agent has ostensible or apparent authority to bind his
principal. This might occur if the agent acted within the scope of his ostensible or apparent
authority, albeit outside his actual authority. The ostensible authority is the authority that the
agent ‘appears’ to the outside world to have. Hence, ostensible authority is a legal
relationship between the principal and the contracting party created by a representative
made by or on behalf of the principal. See Freeman & Lockyer v Buckhurst Park Properties
(Mangal) Ltd [1964].
In the given problem, Baba hired cars from James Motors and told them that the cars are for
the purposes of his company. He signed the hiring contract and described himself as the
‘company secretary’. However, Baba used the cars for himself and not for the purpose of the
company. The question is whether he has the ostensible authority to enter into the contract?
In the case of Panorama Development (Guildford) Ltd v Fidelis Furnishing Fabrics Ltd
[1971], where the court held that the company secretary had ostensible authority to enter
into contracts for the hire of the cars for which the defendant must pay. Lord Denning in that
case held that the ostensible authority of a secretary would include signing ‘contracts
connected with the administrative side of the company’s affairs, such as employing staff,
and ordering cars, and so forth.’ If Baba acted outside the scope of his actual authority, Swift
Sdn Bhd will normally not be bound unless it is precluded from denying the authority of that
agent. See Chew Hock San v Connaught Housing Development Sdn Bhd [1985]. However,
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applying the principle in the Panorama case, it may be that Baba has authority to make
representations on behalf of the company and to enter into contracts in the course of his
administrative function. Hence, Swift Sdn Bhd may be precluded from raising Baba’s lack of
authority by the doctrine of estoppel. The company is bound by his act.
(7 marks)
(Total : 20 marks)
QUESTION 6
(a) This question on company law tests the candidates on the appointment and functions of a
liquidator.
Once a company is in liquidation the board of directors is effectively functus officio. The
power to run the company vests with the liquidator. Section 8 of the Companies Act 1965
requires that all liquidators be approved by the Ministry of Finance. A person is disqualified
from acting as a liquidator if he or she:
i.
ii.
Is not an approved liquidator;
Is indebted to the company or a related corporation in an amount exceeding RM2,500;
or
iii. Is:
(i) An officer of the company;
(ii) A partner, employer or an employee of an officer of the company; or
(iii) A partner or employee of an employee of an officer of the company;
(iv) Becomes a bankrupt;
(v) Assigns his estate for the benefit of his creditors or makes an arrangement with
creditors; or
(vi) Is convicted of an offence involving fraud or dishonesty punishable with a term of
imprisonment for three months or more.
See section 10(1) of the Companies Act.
The functions of a liquidator are as follows:
i.
ii.
iii.
iv.
v.
vi.
To take possession of the company’s assets: section 233 and section 236;
To ‘realise’ the company’s assets (this normally involves selling the assets separately or
selling the company’s business).
To work out what debts are payable by the company, and any valid claims that exist
against the company (e.g. claims for damages for breach of contract);
To distribute the proceeds of the realised assets among the creditors and others with
legitimate claims against the company;
If there are any surplus funds, to distribute these among the members; and
To bring about the deregistration of the company.
(5 marks)
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(b)This question on company law tests the candidates’ knowledge on the principle of maintenance
of capital. It is an underlying principle of company law, that a company’s share capital should be
maintained during the life of the company. The common law rule on purchase of own shares is
very strict, that purchase by a company of its own shares will be void even though the purchase
may be authorised by its articles or is sanctioned by a general meeting of members. See
Flitcroft’s case (1882). Once the rule comes into play, it is entirely irrelevant that the purchase of
the shares might be beneficial to the company or is in any way in the interests of the company
or its members as a whole. The purchase by the company of its own shares would account to a
diminution of capital which would not be valid unless confirmed by the court. See Re Dronfield
Silkstone Coal Co (1880).
The leading English authority is the House of Lords case of Trevor v Whitworth (1887). In that
case, the articles, but not the memorandum, authorised a company to purchase its own shares.
It was held that the company had no power under the then companies legislation to purchase its
own shares in the circumstances of the case notwithstanding the express provision of the
articles. The court held that directors of a company could not legitimately expend the moneys of
the company to any extent they pleased in the purchase of its own shares. The rationale for the
prohibition is that the purchase of its own shares by a company would amount to a return of
capital to the members.
The prohibition on a company purchasing its own shares exists under the Companies Act as
well. Section 67(1) prohibits a company from acquiring its own shares or units of shares in itself.
This rule exists because allowing a company to acquire or hold shares in itself may be
undesirable for a number of reasons, including:
i.
It may allow the current board and senior management to entrench their
control, by giving them a block of shares, purchased at the company’s
expense, which they could use to vote in favour of themselves;
ii.
It may allow for manipulation of the share price by company management;
iii.
It may allow for members to be treated unfairly as between themselves, with
some members being given the opportunity to sell their shares to the
company on advantageous terms.
However, a new section 67A was introduced by the 1997 Amendment Act and subsequently
amended by the Companies (Amendment) (No. 2) Act 1998 which now provides for public
companies with share capital to purchase their own shares. The reason behind this is to
stabilise the supply and demand as well as the price of the shares of the company on the Stock
Exchange and to ultimately create a healthy environment for the capital market in this country.
However certain conditions are imposed by section 67A(2) when effecting shares buy-back, in
that:
i.
The public company must be solvent at the date of the purchase;
ii.
The purchase is made through the Stock Exchange on which the shares of the
public company are quoted; and
iii.
The purchase is made in good faith and in the interests of the public company.
(5 marks)
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(c) This question on company law contains three parts. Part (i) tests the candidates’ knowledge
and understanding on whether a company can pay dividends out of its capital, Part (ii) tests
the candidates’ understanding as to whether a holding company can declare its dividends
from profit its gets from its subsidiary company while Part (iii) test the candidates on whether
dividends can be paid otherwise than in cash. The answers are as follows:
i. A dividend is a share of profits in a company. According to section 365 of the
Companies Act 1965, companies may pay dividends only out of available profits or
pursuant to section 60 which allows the company to issue bonus shares from the
share premium account. Hence, Belum may be advised that dividend may not be paid
out of capital. See Hilton International Ltd v Hilton & Anor (1988). To allow dividends to
be paid out of capital would amount to a return of capital to members in a way not
authorised in the Companies Act. If a dividend is paid when there are no profits
available, every director or manager of the company who wilfully paid or permitted the
payment of the dividend is guilty of an offence (see section 365(2)(a), Companies Act).
(3 marks)
ii. It is quite basic that the source of the profits to be used for paying the dividend must
derive from the company itself which declares and pay the dividend and not from
another company. In Industrial Equity Ltd v Blackburn (1977) the High Court of
Australia decided that the profits belonging to a subsidiary could not be applied to pay
for the dividend of its holding company, partly because ‘it is a natural consequence of
the separate personality of each company.’ Applying the rule in Industrial Equity,
hence, Mega Sdn Bhd may be advised that it cannot declare its dividends from profits
its gets from its subsidiary company.
(3 marks)
iii. The answer to this question is YES. Since it is a share of profits, dividends need not
be paid in cash. Payment can be satisfied by distribution to the shareholders by way
of bonus shares. See Dickson v Federal Commissioner of Taxation (1939-1940).
Indeed, under section 365(5) it defines a dividend as including a payment by way of
bonus. Unless it is permitted by the memorandum or articles, a company may not pay
some shareholders in cash and others in kind. See Industrial Equity Ltd v Blackburn
(1977).
(4 marks)
(Total : 20 marks)
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