SCHEME SET 1 SUGGESTED ANSWERS. What is meant by judicial precedent? (4 marks)

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1 SCHEME SET 1 SUGGESTED ANSWERS SECTION A QUESTION 1 (a) What is meant by judicial precedent? The process of adjudication whereby after argument before a judge, a decision in a dispute is given, forms one of the 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 the future. The decision inter parte (as between the parties) is of interest and importance to the parties to the litigation. A 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 (e.g. the Federal Court or the Court of Appeal) binds the lower courts (i.e. the High Courts, Session Courts and Magistrates Courts). (b) Under the law of contract, case laws clearly indicate the necessity of an intention to create legal relations between parties. Under the law of contract, case laws clearly indicate the necessity of an intention to create legal relations between parties to constitute a valid contract. Although the Contracts Act, 1950 is silent on the intention to create legal relations as one of the requirements of a valid contract, case-laws clearly dictate the necessity for this requirement. There are, however, cases where no intention to enter into a legal relation can be imputed. i) Cases where the agreement merely represent family arrangements: Choo Tiong Hin & Ors v Choo Hock Swee (1959) MLJ 67 Phiong Khon v Chon Chai Fah (1970) 2 MLJ 114 ii) ii) Cases where concessions were made in the course of business negotiations: Yap Eng Thong & Anor v Faber Union Ltd; where there was a subject to contract Clause, in the agreement, it was held that there was no valid contract. Circumstances and conduct of parties indicating lack of such an intention: Guha Majumder v Donough (1974) 2 MLJ 114, Yap Eng Thong & Anor v Faber Union Ltd. (1973) 1 MLJ 191 2

2 iii) In domestic arrangements there is a presumption against the existence of an intention to create legal relations whilst in commercial arrangements the rebuttable presumption is that a legal relation is intended: Esso Petroleum Co. Ltd v Custom & Excise Commissioner (c) With reference to the Contracts Act, 1950, describe any two (2) circumstances which may render a contract voidable. Section 10, Contracts Act (CA): All agreements are contracts if made by free consent of parties; Section 14, CA: Consent is said to be free when not influenced by the following: 1. Coercion; defined under section 15, CA. Kanhaya Lal v National Bank of India Ltd; the definition of coercion in section 15 is limited to an unlawful act done with the intention of causing the person to enter into an agreement. 2. Undue Influence: Section 16, CA. Covers particular relations as is sometimes used as a comprehensive phrase to include cases of coercion, domination or pressure within or without those special relations. Raganath Prasad v Sarju Prasad AIR (1924) a) The relations between parties to each other must be such that one is in a position to dominate the will of the other; (b) The issue whether the contract has been induced by undue influence; (c) The burden of proving that the contract was not influenced by undue influence lies on the person in a position to dominate. 3. Fraud: Section 17 CA. Includes certain acts which are committed with intent to induce another party to enter into a contract. As a general rule, it may be stated that 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 fraud. Wong Cheong Kong Sdn Bhd v Prudential Assurance Sdn Bhd (1998) 3 MLJ Misrepresentation: Section 18 CA. Differentiated from fraud in that the person making the representation may believe in its truth. Silence, in certain circumstances, where duty to disclose is imposed, may amount to a misrepresentation. Tan Chye Chew & Anor v Eastern Mining & Metal Co (1965) 1 MLJ Section 19, CA. Where the consent to the contract was caused by misrepresentation, the contract is voidable at the option of the party who was so induced to enter into the contract. If the truth could be discovered with ordinary diligence by the innocent party, contract is not voidable at his option. (d) When a seller is in breach of a sale of goods contract, what are the remedies available to a buyer? State and explain any two (2) remedies. 3

3 When a seller is in breach of a sale of goods contract, the remedies available are: 1. Damages for non-delivery. Where the seller wrongfully neglects or refuses to deliver the goods to the buyer, the buyer may sue him for damages for nondelivery. 2. Action for specific performance. The buyer may bring an action for the specific performance of the contract by the delivery of specific or ascertained goods. Since the remedy is given at the discretion of the courts, the usual condition will have to be of a special kind such as a valuable painting or a certain classic car model. Specific performance, if granted, may be unconditional or made upon such terms and conditions as to damages, payment of the price or otherwise, as the court may deem just. 3. Remedies for breach of warranty. Where there is a breach of warranty by the seller or where the buyer elects or is forced to treat a breach of condition as a breach of warranty, the buyer is not entitled to reject the goods. However, the buyer may set up the breach of warranty in diminution or in extinction of the price and he may also sue the seller for a breach of warranty. 4. Action in tort. If the property in goods has passed to the buyer and he is entitled to possession which is withheld, he may bring an action in detinue against the seller claiming possession of the goods. Detinue is the wrongful detention of chattels (goods) belonging to another after their return has been demanded by the actual or true owner. This may be combined with an action for damages for the conversion of the goods by the seller. (e) Define the word goods as laid down under the Sale of Goods Act, 1957 (SOGA 1957). Section 2, Sale of Goods Act, 1957 (SOGA): every kind of movable property other than actionable claims and money; and include stock and shares, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale. Goods are broadly defined and include all chattels personal other than things in action and money. QUESTION 2 (a) Explain three (3) ways in which an agency may be created. (6 marks) Answer: Section 138, CA: No consideration is necessary to create an agency. Agency may be created: 4

4 i) By express appointment by the principal (actual express authority); ii) By implied appointment by the principal (actual implied authority); iii) By the agent occupying a position which (would normally) carry with it authority to do an act of the kind in question (usual authority); iv) By the principal adopting the act of an agent via the process of ratification when the agent acted without the authority of the principal (agency by ratification); v) By necessity; by the law constructing an agency between a putative principal and a putative agent under the operation of law doctrine (agency by operation of law); vi) By the doctrine of estoppels or holding out, that is, by the principal representing to a third party that the agent had authority to do the act in question, when in fact there was no underlying grant of authority for the agent so to act (agency by representation). (b) In relation to the law of agency: (i) List three (3) exceptions to the general principle that an agent cannot delegate the authority given to him by his principal. (6 marks) The exceptions are: i) Where the principal approves or consents to the delegation of the authority; ii) Where it is presumed from the conduct of the parties that the agent has the power to delegate his authority; iii) Where the custom or practice of the trade or business permits delegation; iv) Where the nature of the agency is such that delegation of the authority to another person is necessary to complete the business; and v) In case of necessity or an unforeseen emergency. (Another exception is where the act to be done is purely ministerial or clerical and does not involve the exercise of discretion). (ii) State three (3) types of agents based on their various functional classifications, commonly known in the commercial world. Types of agents: a) A broker an agent who is engaged to make contracts between two principals (as counter parties) engaged in some aspect of trade, commerce or navigation; b) A factor (also called a mercantile agent), an agent who has more extensive powers to act for a principal than a broker possesses. At common law, the factor is an agent for sale who is entrusted with possession of goods belonging to the principal for sale and who sells the goods in the name of the agent without disclosing the name or existence of the principal; c) A commission agent (commission merchant) an agent appointed by a principal to sell goods (more commonly) or to buy goods (less commonly) on behalf of the principal; d) A del credere agent an agent who assumes a super added duty to ensure the principal is paid by the third party; 5

5 e) Powers of attorney legal instruments under which principals ( donors ) confer authority on agents ( attorneys or donees ) to perform certain acts for the principal. Unlike most other agency relationships, powers of attorney are governed by statute (Powers of Attorney Act, 1949). (c) Messa is a businessman who runs numerous business activities. One of his businesses is money-lending. Messa has set up a few money-lending firms all over the city. All of these firms were run by a manager who is also acting as his agent. All required capital is provided by Messa, while the managers receive a fixed salary as well as commissions based on the amount of loan repayment received by their respective firms. All of Messa s businesses are legal and complied with the relevant laws. Recently he set up a new firm and appointed Jojo as the manager. I running the business, the interest rates imposed by Jojo on lenders, exceed the rate allowed under the law. This is classified as an offence. Jojo never disclosed to Messa about the excessive rates he imposed on lenders. He had also advanced some of his money towards the business of the firm, in view of more profit. The firm was later raided by the authorities and Jojo and Messa were both charged for illegal money-lending activities. Meanwhile, Jojo wants to recover from Messa all the money he had advanced towards the firm s business. According to Jojo, he is entitled to be indemnified as Messa s agent. Advise Jojo whether he may be successful in his claims. Advising Jojo: This case involves the principles on agency. When Messa engages Jojo to do something, Messa is the principal and Jojo 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, Jojo is advised that he cannot recover the losses suffered when he advanced money towards an illegal venture. The initial act which he was employed to do was legal but he chose to transgress the law by imposing an excessive interest rate on the loans given. This is an offence under the money-lending laws. 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 causes injury to the rights of third persons. In this situation, had Messa been the one originally running the business against the law, and this fact was unknown to Jojo while he runs the business on behalf of Messa, he may claim to have done the act in good faith or out of innocence. Therefore, Messa is not liable to indemnify Jojo due to the fact that the act done by Jojo was unlawful. In this situation, Jojo will have to bear the losses on his own. 6

6 QUESTION 3 (a) Meme and Jolly are partners of a firm trading under the name of MJ & Associates. The firm borrowed RM 100,000 from Aman Bank. When MJ & Associates failed to repay the loan, Aman Bank commenced legal action against Meme and obtained judgement for RM 100,000. Meme paid RM 50,000 to Aman Bank. Explain whether: (i) (ii) The bank may proceed to sue Jolly for the balance of the judgement sum; Meme may claim any contribution from Jolly for the amount she had already paid. (a) (i) The bank had commenced legal action against only Meme and not Jolly; therefore the bank cannot now take another action against Jolly to recover the balance of the outstanding debt. Section 11, Partnership Act, 1961: every partner is liable jointly with the other partners for all contractual debts and obligations of the firm incurred while he is a partner. Joint liability means all partners must be sued jointly in one action as there is only one single cause of action in this case. The plaintiff may however choose to sue only one of the partners. The partner sued cannot put up a defense stating that he is only liable for a certain portion of the partnership debts. If the plaintiff elects to sue only one of the partners, he is deemed to have discharged the partners who were not sued. In this situation, the bank cannot now sue Jolly to recover the remaining balance of the debt. (a) (ii) Meme may claim contribution from Jolly for the amount paid to the bank (RM 50,000). This claim is however, only proportionate to Meme s entitlement in the partnership agreement. In the alternative, should Jolly refuse to repay Meme the amount so stated, Meme may proceed with a legal suit against Jolly for breach of (partnership) agreement. This is due to the fact that Meme s entitlement to the contribution is governed by the partnership agreement. Section 11 also provides that, after the death of a partner, his estate is severally liable for debts and obligations incurred while he was a partner, so far as they remain unsatisfied. (b) Briefly describe the formation of a partnership, with reference to the Partnership Act,

7 Section 3(1) of the Partnership Act,1961 defines a partnership as the relation which subsists between persons carrying on business in common with a view of profit. In Peninsular Malaysia, a partnership business must be registered under the Registration of Businesses Act, 1956 (centrally administered by the Companies Commission of Malaysia); in Sarawak, under the Sarawak Cap. 64 (Business names) and Cap. 33 (Business, Professions and Trade Licensing); and in Sabah, under the Trade Licensing Ordinance No. 16 of However, the mere failure to register the partnership under these statutes would not mean that the partners cannot enforce their rights against each other if on the facts a partnership exists. Section 3(1) infers that there must be a minimum of two partners in a firm, while section 47(2) of the Partnership Act, 1961 sets a maximum number of twenty partners. By virtue of section 14(3) (a), professional partnership firms are not subject to a maximum number of partners. (c) Hayley Sdn. Bhd. through its banker Bank Seettee had requested the bank to provide a credit reference on a company by the name of Roogee Sdn. Bhd. Roogee Sdn. Bhd. is a well known and long-standing customer to Bank Seettee. Without proper checking, Bank Seettee confirmed that Roogee Sdn. Bhd. was creditworthy. Hayley Sdn. Bhd. relied on Bank Seettee s confirmation and extended a certain credit to Roogee Sdn. Bhd. Roogee Sdn. Bhd. subsequently went into liquidation and Hayley Sdn. Bhd. suffered losses. Advise Hayley Sdn. Bhd. of possible remedies against Bank Seettee. (8 marks) In this situation, there was never a contractual relationship between Hayley Sdn Bhd and Bank Seettee. However, there was a special relationship that exists between a banker and customer in that the bank (Seettee) owes a duty of care towards Hayley Sdn Bhd. In seeking the bank s help with authenticating a particular creditworthiness of a party, Hayley had relied on the bank s special position and diligence. The bank on the other hand, was aware of this reliance. In Hedley Byrne v Heller & Partners, it was held that, even though there was no contractual relationship between the plaintiff and the defendant, the defendant owed a duty of care to the plaintiff. There was a special relationship between them. A duty of care would arise towards a plaintiff in special circumstances, namely: Where the party seeking information or advice was trusting the other to exercise such a degree of care as the circumstances required; Where it was reasonable for the defendant to know that the plaintiff would be relying on his advice; and Where the defendant gave the information or advice when he knew or ought to know that the plaintiff was relying on him. 8

8 Therefore, in this situation, Hayley may be able to succeed in claiming damages from Bank Seettee for the losses he suffered due to Bank Seettee s negligence. SECTION B ANSWER 4 (a) Both parliament and courts of law have recognized circumstances in which the veil of incorporation may be lifted and regard had to the individual members of the company and its subsidiaries are treated as one of regard it had to the economic realities of the group. These circumstances are exceptions to the rule in Salomon s case. Legislative or parliamentary or statutory exceptions (Companies Act 1965) Section 67(3) Section 304(2) read in conjunction with Section 303(3) Section 169 Section 304(1) Section 121(2) Section 140(1) Situations where the veil was not lifted and situations where the veil was lifted under case law. Cases : Aron Salomon v A Salomon & Co Ltd (1897) AC 22. Hotel Jaya Puri Sdn Bhd v National Union Bar & Restaurant Workers & Anor (1980) 1 MLJ 109. Yap Sing Hock v Public Prosecutor (1992) 2 MLJ 714 Aspatra Sdn Bhd & Ors v Bank Bumiputra Malaysia Bhd (1988) 1MLJ 97 Tay Tian Liang v Hong Say Tee & Ors (1995) 4 MLJ 529. (b) (i) Refer to s.139(a) and s.139(b) of the Companies Act 1965 (b) (ii) 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. (c) Section 133 : giving loans and securities for loans granted to its directors or directors of its related companies. Section 133A : giving loans and securities for loans granted to persons connected with its directors or with directors of its holding company. Section 67 : purchasing the company or holding company's shares. Section 67 : giving financial assistance to the purchaser of its shares or it's holding company's shares. 9

9 (d) (i) 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. (d) (ii) Certain conditions are imposed by section 67A(2) when effecting shares buy-back, in that: The public company must be solvent at the date of the purchase; The purchase is made through the Stock Exchange on which the shares of the public company are quoted; and The purchase is made in good faith and in the interests of the public company. ANSWER 5 (a) (i) In this scenario, the creditors may be advised that as general rule secured creditors will rank in priority to unsecured creditors in the event of the company not being able to pay its debts in full to all its creditos. However the order of priority of charges may be affected in certain circumstances. Firstly whether fixed or floating. required to be registered under section 108(i). If it is not registered within 30 dyas of its creation the charge will be void against the liquidator and any creditor of the company. Secondly, in relation to floating charge it has been held in Re Automatic Bottlemakers Ltd (1926) Ch. 412 that a company may create a subsequent floating charge over part of the assets comprised in the first floating charge ranking in pari passu with or in priority to the earlier loating charge. However, a company may mot create a subsequent floating charge over the same assets as comprised in the first floating charge. See Re Benjamin Cope & Sons Ltd (1914) 1 Ch 800. Thirdly a floating chargee may seek to protect the priority of his charge by the use of a negative pledge. Fourthly the priority of the floating charges may also be affected if such charges were created within six months of the commencement of winding up of the company. See : section 294 of the Companies Act Hence apllying to the above arguments, it is clear that the fixed chrages in favour of Cashduit Bank will have priority over Creditcash Bank. The floating charge in favour Cashduit should have priority over Creditcash as it was created earlier. However as Cash duit floating charge was not registered, the charge is void against subsequent creditors. Hence Credit cash Bank shall have priority over Cashduit Bank. 10

10 (a) (ii) This is a clause or paragraph in a debenture to the effect that the Company shall not create a charge in priority to the current one. Company is prohibited from creating any other charge ranking in priority or in pari passu with the floating charge. This clause will be effective against all those who have notice of the restrictive clause. (b) (i) No, the liquidator can only call on Mr Wazi to pay RM3,000 only, which is his unpaid shares. (i.e the lower of the amount due to creditors which is RM200,000 and the amount unpaid on his shares which is RM3,000). Section 214(1)(d) of the Companies Act ensures that a member will be liable for the debts of the company only up to the amount unpaid on his shares. The maximum amount of his liability to the company's creditors is amount unpaid on his shares. (b) (ii) The liquidator will distribute the excess to the members according to the company's memorandum and articles of association if the proceeds from the company's assets are more than the company's liabilities. (c) Preference Shareholders Rights which is prescribed under the Memorandum and Articles of Association : Repayment of capital; Participation in surplus assets and profits; Voting; Participation in cumulative or non-cumulative dividends; Priority of payment of capital and devidends. (d) (i) Section 152 of the Companies 1965 provides that a special resolutionis a resolution which is passed only if it is accepted by at least 75% of the members of the company present and voting at the meeting or such higher threshold as may be prescribed by the company's articles of association. (d) (ii) Section 153 of the Companies Act 1965 provides that such notice that must be given by the members not later than 28 days before the scheduled meeting. Upon receipt of the notice, the company is to give at least 14 days' notice to the members before the meeting is schedule to be held. ANSWER 6 (a) Section 148(1) of the Companies Act provides that every member is entitled to vote notwithstanding the company's memorandum and articles of association. However there are exceptions to this rule. These exceptions are stated as follows: 11

11 The company's articles may provide that the member's right to vote is suspended until he has paid all calls or or other sums payable in respect of his shares. The company's articles may suspend the rights of preference shareholders to attend and vote at general meeting upon such conditions stated therein. In the view of the abovesaid exceptions, it could be concluded that, the Article of Undivote Sdn Bhd. is not effective as it provides that only a member who has been holding shares in the company for more than six months is entitled to vote. On the matter pertaining to the unpaid shares, the company'sarticles may provide that the member's right to vote is suspended until he has paid all calls or or other sums payable in respect of his shares. (b) (i) An approved company auditor is disqualified from acting as auditor for a company under certain circumstances set out in the Companies Act 1965 are as follows : indebted to the company or its related company for an amount exceeding RM2,500 (Section 9(1)(b)) responsible for, or if he is a partner, employer or employee of a person responsible for, the keeping of the register of members or the register of holders of debentures of the company. (Section 9(1)(d)) a partner/employer/employee if an officer of the company; or a shareholder or his spouse is a shareholder of a corporation whose employee is an officer of the company; or (see Section 9(c)(iv)) (b) (ii) Rights accorded to an auditor to enable him perform his duties as the auditor of a company are as follows : Right to examine the company s books, vouchers and other relevant documents. Right to access to the Company s books vouchers, accounts etc. Right to demand an explanation from officers of the company. Right to seek professional advise whenever necessary. Right to attend all general meetings of the Company. Right to be heard in general meeting on any matter concerning him as an auditor. Right to all notices and other communication to members. Right to rely on information provided by trusted servants of the company (in absence of suspicion) Right to remuneration for services rendered. Right to indemnity for any loss or liability arising in the course of discharging his obligations as auditor. (c) (i) The subsidiries of Wisesmart Sdn Bhd. are Gowise Sdn Bhd; Geraklaju Sdn Bhd; Eradinamik Bhd and Majudaya Sdn Bhd. 12

12 Section 5 provides that a corporation ("S") is deemed to be subsidiary of another corporation ("H") if : a. H controls the composition of the board of director of S, i.e if H could appoint or remove all or majority of the directors of S (Section 5(1)(a)(i)); b. H controls more than 50% of the voting power of S (Section 5(1)(a)(ii)); c. H holds more than 50% of the issued share capital (excluding preference shares) of S (Section 5(1)(a)(iii)); or d. S is a subsidiary of any corporation which is a subsidiary of H (Section 5(1)(b)) (c) (ii) Section 6 of the Companies Act 1965 provides circumstances when companies are deemed to be related. Where a corporation is the holding company of another corporation; is a subsidiary of another corporation; or is a subsidiary of the holding compamy of another corporation. Briefly, companies are deemed to be related if one company is either the other company's holding company; subsidiary; or subsidiary of its holding company. (d) All four requirements set out in section 132(1B)(a)-(d) are : a) makes the business judgment in good faith for a proper purpose; b) does not have a material personal interest in the subject matter of the business judgment; c) is informed about the subject matter of the business judgment to the extent the director reasonably believes to be appropriate under the circumstances; and d) reasonably believes that the business judgment is in the best interest of the company. 13