2 This question tests the candidates knowledge on the requirement of consideration in the law of contract and the exceptions to it.

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3 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) December 2004 Answers 1 This question tests the candidates knowledge of the main sources of Malaysian law. Malaysian law indeed is derived from both written and unwritten sources. The following are the written sources: The Federal Constitution. The supreme law of Malaysia is the Federal Constitution, which is a written constitution. It provides for a democratic system of government and the powers of the Federal and State Governments. It also establishes a constitutional monarchy and entrenches fundamental rights/liberties of the individual. The Federal Constitution is not easily amended. It provides for a special majority of two-thirds of the total number of members of the legislature in order to amend it. (b) The State Constitutions. Each of the thirteen states of Malaysia has its own State Constitution. These contain provisions pertaining to state matters as provided under the Federal Constitution. The State Constitutions largely deal with land matters, agriculture, forestry, local government and Islamic law. (c) Legislation. Legislation comprises the laws passed by Parliament as well as the State Legislative Assemblies. The laws passed by Parliament since 1957 (i.e. after Malaysia s independence) are called Acts while those passed by the State Legislative Assemblies (except Sarawak) are called Enactments. The laws passed in Sarawak are called Ordinances. (d) Subsidiary legislation. Subsidiary legislation refers to the rules, regulations, by-laws, orders and other instruments made by a person or body in accordance with the powers delegated to him/it under an enabling legislation. Such legislation is an increasingly important source of law because Parliament and the State Legislature lack the time and expertise to deal with specific technical details. Unwritten law comprises the following: English common law and the rules of equity. This is also a very important source of Malaysian law. The reception of English common law and equity in Malaysia is specifically permitted by virtue of ss.3(1) and 5(1) of the Civil Law Act However this is subject to certain exceptions. In particular, English law may only be applied where (1) there is no local law governing the matter and (2) if it is suitable to the local circumstances. (b) Judicial precedents. This refers to the law as developed through cases decided in the superior courts. Sometimes referred to as judge-made law, it is another very important source of law. Under the doctrine of binding judicial precedent, which is also observed in Malaysia, the decisions of the higher courts must be followed by the lower courts in similar cases. This generally ensures a fairer and uniform application of the law. (c) Customs. This refers to the customs of the local inhabitants which have been accepted as law. It mainly relates to family matters, e.g. marriage, divorce and inheritance. The customs of non-muslims are no longer of much importance since the passing of the Law Reform (Marriage and Divorce) Act 1976 which abolished polygamous marriages among non-muslims. However the customary laws of the Malays (also called adat law) continues to be an important source of law. (d) Islamic law. This is another important source of Malaysian law. It is only applicable to muslims. Islamic law is administered at state levels by a separate system of courts called the syariah courts. 2 This question tests the candidates knowledge on the requirement of consideration in the law of contract and the exceptions to it. Consideration is one of the elements of a valid contract. Consideration may be said to be something of value, which is given by one party to a contract in return for the promise of the other party to it. In Malaysia, consideration is defined in s.2(d) of the Contracts Act 1950 as follows: When at the desire of the promisor, the promisee or any other person has done or abstained from doing or promises to do or abstain from doing, something, such act or abstinence or promise is called consideration of the promise. Consideration may consist of anything of value and not necessarily money. It may be in the form of an act done or even an abstinence or forbearance from doing something. See: Osmain bin Abdul Ghani & Others v United Asian Bank (1987) 1 MLJ 27. In this case the court held that forbearance to sue on the part of the bank was good consideration for a second guarantee executed by the appellants. 9

4 (b) By s.26 of the Contracts Act 1950, an agreement without consideration is void. However, not all such agreements are void. Section 26 itself provides for several exceptions as follows: (i) Agreements made on account of natural love and affection between parties standing in near relation to each other. Such agreements must be made in writing and must be registered under the law (if any) for the time being in force for the registration of such documents. The following example is provided in s.26 as an illustration of this exception: A, for natural love and affection, promises to give his son, B, $1,000. A puts his promise to B in writing and registers it under a law for the time being in force for the registration of such documents. This is a contract. However, the phrase near relation is not defined. Thus, it would be left to the courts to decide on the facts of a particular case whether the parties were in near relation. In Re Tan Soh Sim (1951) 1 MLJ 21, it was held by the Court of Appeal that Chinese adopted children could not be regarded as being in near relation to the uncles and aunts of their adoptive mother. (ii) An agreement to compensate wholly or in part a person who has already voluntarily done something for the promisor. The section provides the following illustration: A finds B s purse and gives it to her. B promises to give A $50. This is a contract. (iii) An agreement to compensate wholly or in part a person who has done something which the promisor was legally compellable to do. The section gives the following illustration: A supports B s infant son. B promises to pay A s expenses in so doing. This is a contract. (iv) An agreement to pay wholly or in part a statute-barred debt. The agreement must be in writing and signed by the person to be charged therewith or his lawfully authorized agent. The section gives the following illustration: A owes B $1,000 but the debt is barred by limitation. A signs a written promise to pay B $500 on account of the debt. This is a contract. 3 This question tests the candidates knowledge on the definition of a partnership and its essential characteristics. Partnership is best defined in the words of s.3(1) of the Partnership Act By that sub-section, Partnership is the relation which subsists between persons carrying on business in common with a view of profit. The definition of a partnership encompasses several elements. Firstly, in order for a partnership to arise, there must be an association of persons. This means that there must be more than one person. However, the number of persons cannot exceed twenty in the case of ordinary partnerships. See: s.47(2) of the Partnership Act 1961 and s.14(3)(b) of the Companies Act However, by s.14(3) of the Companies Act 1965, this limit does not apply in the case of partnerships formed for purposes of carrying on any profession or calling. Further, the relation between members of any company or association registered as a co-operative society will not constitute a partnership. See: s.3(2) Partnership Act. Secondly, the persons must be carrying on a business. Business is defined in s.2 of the Partnership Act to include every trade, occupation or profession. Thus, clubs, societies and other voluntary organizations formed for charitable or religious purposes will not be considered as partnerships. In Soh Hood Beng v Khoo Chye Neo (1897) SSLR 115 several persons had set up a loan association with the purpose of giving loans among themselves. Each member would get his turn to receive the loans. The court held that this did not amount to the carrying on of a business and could not constitute a partnership. It must also be shown that the business is currently being carried on. The ordering of goods in anticipation of carrying on a business in the future will not satisfy this requirement. See: Keith Spicer Ltd v Mansell (1970) 1 All ER 462. In this case one of the promoters of a proposed company ordered goods from the plaintiff company intending them to be used by the proposed company. The goods were delivered to the other promoter s address. The issue was whether there existed a partnership between the promoters. The court held there was no partnership, as they were not currently carrying on a business, though they had the intention of carrying on a business in the future in the form of a company. Thirdly, the business must be carried on in common. This means that the partners must have possessed a common intention to carry on the business. It does not mean that all partners must be actively involved. The case of Sithambaram Chetty & Others v Hop Hing & Others (1928) SSLR 53 is illustrative. In this case two persons established a business in Penang, but their connection with it was not made public. They took no part in carrying it on, leaving its entire control to two managers. The court held that they were liable as partners to third parties who had lent money to the firm. Fourthly, the business must be carried on with a view of profit. This means that the business must be carried on with a profit motive. There has been some doubt as to whether a division of the profits is essential, but the better view seems to be that it is not necessary to divide profits. See: Lindley on Partnership. Social, recreational and other non-profit organizations will not be considered as partnerships as they do not operate with a view of profit. 10

5 4 This question on agency tests the candidates knowledge on the agent s fiduciary duty not to make secret profits and the remedies for breach of such duty. (b) A person is said to be in a fiduciary position towards another when the relationship between the two is one of trust and confidence. As such a person in a fiduciary position has to act honestly and in utmost good faith in all his dealings with the other and his undertakings on his behalf. He must in no circumstances make use of his position to obtain an advantage for himself without the principal s consent. One of the most common situations where an agent is likely to breach his fiduciary duty is where he makes a profit out of his position as agent without the knowledge of the principal. This is known as a secret profit. This may take the form of a bribe received by the agent from the third party or any other form of financial advantage over and above the commission or other remuneration agreed to between the agent and the principal. An example of a secret profit made by a agent may be seen in the case of Tan Kiong Hwa v Andrew S.A.Chong (1974) 2 MLJ 188. In this case the plaintiff had authorized the agent to sell a flat for RM45,000. The agent sold it for RM54,000, without the plaintiff s knowledge. The court held that the difference of RM9,000 amounted to a secret profit. There are several remedies available to a principal where the agent has breached his fiduciary duty and made a secret profit. These may be summarized as follows: (i) By s.168 of the Contracts Act 1950, if an agent deals on his own account in the business of the agency without first obtaining the consent of the principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction if the case shows either that any material fact that has been dishonestly concealed from him by the agent or that the dealings of the agent have been disadvantageous to him. See also: illustration to s.168. (ii) By s.169 of the Contracts Act 1950 the principal is entitled to claim from the agent any benefit which may have been obtained by the agent without the knowledge of the principal. The right to recover the bribe or secret profit extends to transactions where an agent has passed on the secret profit to some other person. In Tan Kiong Hwa v Andrew S.H. Chong, the agent sold a flat at a higher price than that required by the plaintiff. The difference was paid into the account of the defendant s company which had later gone into liquidation. The court held that the money could be recovered from the agent. (iii) The principal may refuse to pay the agent his commission or other remuneration, or recover any commission already paid. See: Andrews v Ramsay & Co [1903] 2 KB 635. (iv) The principal may sue the agent as well as the third party for damages for any loss he may have sustained through entering into the contract. A case in point is Mahesan v Malaysian Govt Officers Co-operative Housing Society Ltd [1978] 1 MLJ 149. In this case, Mahesan was a director and secretary of the Government Officers Co-operative Society Ltd, which bought certain land for RM944,000. The vendor had previously only paid RM456,000 for it. This fact was known to Mahesan who did not inform the Co-operative society, and who also had received a secret payment of RM122,000 from the vendor. The Privy Council held that the Co-operative society was entitled to recover either the secret profit received by Mahesan, or the amount of actual loss suffered by it as a result of entering into the transaction. (v) The principal may also dismiss the agent for breach of his duty. See: Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 ChD This question tests the candidates knowledge on two types of remedies for breach of contract, viz, injunction and damages. Injunction An injunction is essentially an order of the court which prevents or stops the defendant from doing or continuing to do something in breach of the terms of the contract between him and the plaintiff. An injunction is a discretionary remedy and not one which is obtainable as of right. In Malaysia, the remedy of injunction may be obtained in accordance with the Specific Relief Act 1950, which provides for two types of injunctions viz, temporary injunctions or perpetual injunctions. By s.51 temporary injunctions are such as are to continue until a specified time or until the further order of the court. This temporary injunction is sometimes called an interlocutory or interim injunction and is usually granted by the court pending the outcome of a full hearing by the court. An application for an interlocutory injunction would normally be granted so long as the plaintiff has shown that there is a serious question to be tried. The purpose of the temporary injunction is to preserve the status quo of the parties until the final outcome of the court case. A case in point is American Cyanamid Co v Ethicon (1975) 2 WLR 316. See also: Mohamed Zainudin bin Puteh v Yap Chee Seng (1978) 1 MLJ 40. The perpetual injunction, on the other hand, is one that is granted by the court at the end of the hearing and upon the merits of the suit. The defendant is thereby perpetually enjoined from the assertion of a right, or from the commission of an act, which would be contrary to the rights of the plaintiff. 11

6 A case in point is Neoh Siew Eng & Anor v Too Chee Kwong (1963) MLJ 272, where a perpetual injunction was granted ordering a landlord to keep all communication pipes in proper repair so that water supply to the premises rented out by the landlord to the plaintiff will not be discontinued. An injunction will not be granted to prevent the breach of a contract if the contract is one that cannot be specifically enforced. This is the effect of s.54(f) of the Specific Relief Act (b) Damages An order for damages refers to an order of the court requiring the party in breach to pay the other party monetary compensation for the loss or other inconvenience suffered as a result of the breach. The measure of damages recoverable is stipulated in s.74 of the Contracts Act This is similar to the measure of damages payable under common law as established in the case of Hadley v Baxendale (1854) 9 Ex 341. By virtue of this section, when a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him: (i) which arose naturally in the usual course of things from the breach, or (ii) which the parties knew when they made the contract to be likely to result from the breach of it. However, the section also states that such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. See: Bee Chuan Rubber Factory Sdn Bhd v Loo Sam Mooi [1976] 2 MLJ 14; Tham Cheow Toh v Associated Metal Smelters Ltd [1972] 1 MLJ 171. Damages may be classified as substantial, nominal or exemplary. Substantial damages refers to the compensation which is intended to put the aggrieved party in the position that he would have been in had the breach not occurred. Nominal damages refers to a token award granted by the court where the plaintiff has proved the defendant s breach but has suffered no actual loss. Exemplary damages refers to an award of damages which is intended to penalize a defendant for his breach. The plaintiff in this case will be awarded more than his actual financial loss. It is only awarded in special circumstances such as breach of promise of marriage. 6 This question, which contains two parts, tests the candidate on the meaning of constructive dismissal and the remedies for an employee who has been unjustifiably dismissed. Constructive dismissal refers to a situation where the employee has resigned in circumstances where the employer has made it intolerable for the employee to continue working for the employer. This may occur where the employer has breached the contract of employment thereby entitling the employee to resign. For example, if the employer had demoted the employee or subjected him to unfair or oppressive working conditions designed to humiliate him to the extent that the employee can no longer tolerate it and feels forced to resign, he may be said to have been constructively dismissed. The case of Bumpus v Standard Life Assurance Co Ltd (1974) IRLR 232, provides a good illustration. In this case, the employee was faced with demotion. He wrote a letter of resignation to his employer indicating his refusal to accept the demotion and thereby accepting the repudiation by the employer. The court held that he had been constructively dismissed. The Supreme Court, in the case of Wong Chee Hong v Cathay Organisation (M) Sdn Bhd (Civil appeal No. 194 of 1986), stated that whether there has been a constructive dismissal is to be determined by two factors. First, did the employer s conduct amount to a breach of the contract of employment going to the root of the contract, or had he shown an intention not to be bound by the contract, thereby entitling the employee to resign? Secondly, did the employee make up his mind and act within a reasonable time after the employer s conduct? See: MPH Bookstores Sdn Bhd and Lim Jit Sing (Award 179 of 1987). (b) There are three possible remedies available to an employee who has been unjustifiably dismissed. (i) Reinstatement and backpay This is a remedy whereby the employee is put back into the position he would have been in had it not been for the unjustifiable dismissal. Reinstatement requires that the employee should be restored to his previous position so far as his capacity, status and emoluments are concerned. He is then entitled to backpay, i.e. arrears of salary from the time of his dismissal to the time of his reinstatement. See: Western India Automobile Association v Industrial Tribunal (1949) LLJ 256. (ii) Compensation in lieu of reinstatement and backpay The court may order compensation in lieu of reinstatement and backpay where it is not possible or advisable to order reinstatement. Reinstatement may be refused where the employer has lost confidence in the employee or where such reinstatement may lead to an apprehension of breach of industrial peace. Reinstatement will of course be impossible, for example, where the employee has died after the commencement of legal proceedings. The compensation payable is usually at the rate of one month s pay for each year of service subject to a maximum of 24 months. 12

7 (iii) Re-engagement. Sometimes the employer is not reinstated but is merely re-engaged or re-employed. This means that the employee is given an opportunity to work for the employer. All past services will be lost. The employee will start afresh and he is not entitled to any backpay. See: Restu Motor Sdn Bhd and Nazaruddin bin Abdul Samad (Award 276 of 1985). 7 This question tests the candidates knowledge of the principle in Salomon v Salomon & Co Ltd as well as the exceptions where the courts will be prepared to lift the veil of incorporation. (Candidates are only required to state any five instances of lifting the veil of incorporation.) The case of Salomon v Salomon & Co Ltd established a very important principle in company law, i.e, that once a company is incorporated, it is clothed with a veil of incorporation and becomes in law a separate legal entity distinct and separate from the members. As a result, the company is regarded as an artificial legal person having its own rights, duties and liabilities. Among other things, the company has power to hold land, may sue and be sued in its own name, enjoys perpetual succession in that the death of one or more of its members does not automatically result in a dissolution of the company (unlike the partnership) and in the case of a limited company its members enjoy limited liability in the sense that their liability to contribute to the assets of the company in the event of a liquidation is limited to the amount, if any, unpaid on their shares. See also: s.16(5) Companies Act Although the company is a separate legal entity, there are a number of circumstances where this principle will be disregarded by the courts. This is often referred to as the lifting of the veil of incorporation. The veil of incorporation may be lifted either by virtue of a statutory provision or by established case law as follows: Under Case Law: (i) In times of war to determine the enemy character of the company. This is illustrated by the case of Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd (1916) 2 AC 307 where the court lifted the veil of incorporation to look at the nationality of the persons in effective control of the company. (ii) Where the company has been set up to perpetrate a fraud or to avoid a legal obligation. In Jones v Lipman (1962) 1 WLR 832, the defendant who had agreed to sell property to the plaintiff sold it instead to a company which he formed, in order to avoid an order of specific performance. The court lifted the veil of incorporation, holding that the defendant and the company were one and the same. See also: Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988) 1 MLJ 97. (iii) For tax purposes See: Unit Construction Ltd v Bullock (1960) AC 351. In this case the court held that three subsidiary companies in Kenya were in fact resident in the UK for purposes of tax because central control and management was with the holding company in the UK. (iv) On the basis that a company is in fact the agent of its controllers. This may be illustrated by the case of Smith Stone & Knight Ltd v Birmingham Corpn (1939) 4 All ER 462, where the court held that the subsidiary company was acting as the holding company s agent in carrying on a business, thus enabling the holding company to get compensation for the disruption of business following a compulsory acquisition of its land. (v) Group Enterprise Sometimes the courts are prepared to treat groups of companies as one. See: DHN Food Distributors Ltd v Tower Hamlets LBC (1976) 3 All ER 462; Hotel Jaya Puri Bhd v National Union of Hotel Bar & Restaurant Workers (1980) 1 MLJ 109. (vi) When the justice of the case requires the veil to be lifted. In recent times the Malaysian courts seem to show a greater willingness to lift the veil of incorporation when the justice of the case so requires. See: Tengku Abdullah Ibni Sultan Abu Bakar v Mohd latiff bin Shah Mohd (1996) 2 MLJ 265. Under Statute: (vii) Section 36 Companies Act By this section where the number of members of a company falls to one and the sole remaining member knowingly carries on business for a period longer than six months, he will be personally liable for the debts incurred after the first six months. (viii) Section 121 Companies Act By this section where an officer signs on behalf of the company, a cheque, promissory note etc, and the company s name is not properly stated therein, he will be personally liable to the holder of that bill etc, if the company does not pay. (ix) Section 304(1) Companies Act By this section 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. 13

8 (x) Sections 303(3) and 304(2). By these sections where the company had incurred a debt when there was no reasonable prospect of the company being able to repay, the person or persons responsible for it may be made personally liable to repay it. (xi) Section 169 and the Ninth Schedule to the Companies Act By these provisions a holding company is required to produce group accounts in which the assets, liabilities, profits and losses of the group as a whole are reflected. (xii) Section 140 of the Income Tax Act By this section the Director General of Inland Revenue may ignore any transaction or disposition, which has the effect of avoiding or evading tax. (Candidates are only required to state any five instances.) 8 This question tests the candidates knowledge on reduction of capital under the Companies Act 1965 and the adequacy of the protection afforded to creditors under it. (b) A company may reduce its capital in accordance with s.64. By this section a company may reduce its capital if there is authority in its articles and the company passes a special resolution to do so. In addition, the court must confirm the reduction. If these conditions are met the company can reduce its capital in any way, but s.64(1) specifically states that the company may do so in the following ways: (i) by extinguishing or reducing the liability on any of its shares in respect of share capital not paid up; (ii) by cancelling any paid up share capital which is lost or unrepresented by available assets; (iii) by paying off any paid up share capital which is in excess of the needs of the company. At first glance it appears that a reduction of capital goes against the doctrine of maintenance of capital as creditors may be prejudiced. However, a close examination of the provisions of s.64 proves otherwise. By s.64(2), where the proposed reduction involves either diminution of liability in respect of unpaid share capital or the payment to any shareholder of any paid up share capital, then every creditor who is entitled to any debt or claim is entitled to object to the reduction. The court must settle a list of creditors so entitled to object. For this purpose the court must ascertain as far as possible without requiring an application from any creditor, the names of those creditors and the amount and nature of their claims. The court may also publish notices fixing a final day for creditors who are not listed to enter their claims. The court would then set a day for the hearing of the application during which the claims and objections of the various creditors would be heard and evaluated. Where a creditor who has a valid claim does not consent to the reduction, the court has power to dispense with such consent upon the company making payment into court of the full amount of the claim or such sum which the court considers appropriate. The court would only make an order for the reduction of capital if it is satisfied with respect to every creditor entered on the list, that either his consent to the reduction has been obtained, or his debt or claim has been discharged or has determined or has been secured. See: s.64(4). Thus it can be concluded that creditors are adequately protected under the Companies Act 1965, in a reduction of capital. 9 This question, which contains four parts, tests the candidates ability to identify and apply the law relating to four aspects of contract law namely, capacity to contract, consideration, certainty and frustration. The general rule is that only persons of full age and sound mind are competent to contract. This is stated in s.11 of the Contracts Act By virtue of the Age of Majority Act 1971, the age of majority is 18 years. As Jamie is only 16 years of age, she is a minor and does not have the capacity to contract. Under Malaysian law contracts entered into by minors are totally void. This was decided in the Privy Council case of Mohori Bibee v Dhurmadas Ghose (1903) 1LR30 Cal 539, which has been adopted in Malaysia in the case of Tan Hee Juan v Teh Boon Keat [1934] MLJ 96. See also: s.10(1) Contracts Act However, there are several exceptions to this general rule. One such exception is a scholarship agreement. By s.4 of the Contracts (Amendment) Act 1976, no scholarship agreements shall be invalidated on the ground that the scholar entering into such an agreement is not of the age of majority. However, the Act only affects scholarship agreements made with governmental bodies, because scholarship agreements are defined as, any contract or agreement between an appropriate authority and any person. The Act does not affect the general law relating to contracts, including scholarship agreements, between minors and private parties. Thus, Jamie may be advised that even if her agreement with her uncle constitutes a scholarship agreement, it is void under the present law and her uncle will not be able to legally enforce it against her. 14

9 (b) This question concerns the issue of revocation of a proposal. The general rule is that once a proposal is communicated it remains open until it lapses or is withdrawn. Under s.5(1) of the Contracts Act 1950 a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer. Further, by s.6(1), one of the ways by which a proposal may be revoked is by the communication of notice of revocation by the proposer (offeror) to the other party. In the present case, Bakar only made his acceptance by telephone after he received the letter of revocation of offer from Ali. However, Ali had promised to keep the offer open for seven days, and Bakar s acceptance on 6 January 2004 is well within the seven days period. Can the revocation by Ali be challenged on the ground that there was a breach of promise to keep the offer open for seven days? The law is quite clear on this point. There is no obligation to keep the offer open at all. The right to withdraw the offer at any time before acceptance by the other party remains the right of the proposer despite any promise to keep the offer open for a stated period, unless of course the acceptor had given consideration for the promise to keep the offer open for a stipulated period. In the present case there was no consideration given by Bakar to Ali to keep the offer open for seven days. Thus, Ali s revocation is valid and no contract has arisen between Ali and Bakar. See: Voo Syun Mui v Yap Mooi Mooi [1984] 2 MLJ 48. (c) This question touches the issue of certainty of subject matter as an essential ingredient of a valid contract. By s.30 of the Contracts Act 1950, Agreements the meaning of which is not certain, or capable of being made certain, are void. An example is provided in illustration of s.30 as follows: A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. Another example of a contract which was held to be void for uncertainty is seen in the case of Karupan Chetty v Suah Thian (1916) FMSLR 310, where the agreement was for a lease for as long as he likes. Applying this to the given problem, it can be concluded that the agreement between Maniam and Chong is void for uncertainty, as the agreement merely refers to first class seeds and does not specify what seeds were required. Thus, Chong may be advised that he is unlikely to be successful if he sues Maniam for breach of contract. (d) This question relates to the issue of frustration of contracts. Section 57(2) of the Contracts Act 1950 now embodies the common law doctrine of frustration. By that section, a contract to do an act which after the contract is made becomes impossible or by reason of some event which the promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. In the present case, after the construction of the additional room and the extension to the kitchen, the foundations of the house gave way due to soil conditions and the entire house has collapsed. As it is now impossible for the contract to be performed, it can be said that the contract is void for frustration. By s.66 of the Contracts Act 1950, when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it. By s.15(2) of the Civil Law Act 1956, money due but not paid before frustration ceases to be payable. However, under this sub section, the court is given a discretion to order payment in favour of a party who has incurred expenses prior to the frustration, if it considers it just to do so. Further, by s.15(3) where one party has obtained a valuable benefit before the time of discharge as a consequence of anything done by the other party for the performance of the contract, the latter may recover from the former such sum, not exceeding the value of the benefit enjoyed, as the court considers just. Applying the law to the present case, it is clear that the contract between Darul and AB Contractors Sdn Bhd is void for frustration as it has become impossible for the contract to be performed in its entirety. Money due ceases to be payable. AB Contractors Sdn Bhd will therefore not be able to claim from Darul any amount due under the contract. However, in this case, AB Contractors Sdn Bhd is only claiming for work already done prior to frustration. As stated above, s.15(2) of the Civil Law Act gives the court a discretion to order payment for expenses incurred prior to frustration and where one party has received a benefit from the other party before the time of discharge, that other party can recover from the first party a sum that the court considers just. In the present case, AB Contractors Sdn Bhd had already completed the extension to the kitchen, and the construction of the additional room before frustration. AB Contractors Sdn Bhd may therefore claim from Darul the value of the benefit provided by it to Darul. As AB Contractors Sdn Bhd has already done work valued at RM50,000 before frustration took place, it may be advised that it could claim this sum if the court considers it just to do so. 15

10 10 The first part of this question tests the candidates on the duties of promoters and remedies for breach of such duties while the second part tests them on the effect of pre-incorporation contracts. (b) Anjali and Banu have taken relevant steps to form the company to be called Anba Sdn Bhd. They may be regarded as the promoters of the company. In the words of Cockburn C.J. in Twycross v Grant (1877) 2 C.P.D.469 a promoter is, one who undertakes to form a company with reference to a given project and to set it going and who takes the necessary steps to accomplish that purpose. Promoters are persons who are likely to influence or affect the future of the company after its incorporation. Promoters are regarded as fiduciaries in relation to the company. As such they are in a position of trust and must at all times act honestly and for the benefit of the future company. Very importantly, promoters must not take a profit from the promotion of the company unless they make adequate disclosure. Such disclosure must be made either to an independent board of directors or to all the present and intended shareholders (if necessary, through a prospectus). Where a promoter has made secret profits, the company has several remedies available to it. First, the company may seek to rescind the contract made with the promoters. For example, in the case of Erlanger v New Sombrero Phosphate Co (1878) 3 App.Cas. 1218, the promoters had bought an island for 55,000 and later sold it to a company they formed, for a price of 110,000. No disclosure had been made as to the profit they were making. The court held that the company was entitled to rescind the contract of sale. (see also: Habib Abdul Rahman v Abdul Cader (1886) 4 Ky 193. The company may also seek to recover the secret profit made by the promoters. This is illustrated in the case of Gluckstein v Barnes (1900) AC 240, where the promoters had made a profit of some 20,000 without making the necessary disclosure. The court ordered them to repay such profit to the company. The promoters may also be held liable for damages for breach of fiduciary duty. See: Re Leeds & Hanley Theatres of Varieties Ltd (1902) 2 Ch 809. Based on the law as stated above, Anba Sdn Bhd may therefore be advised that as Anjali, being a promoter, made a profit of RM30,000 from the sale of the property to it without making the necessary disclosure, it may be entitled to rescind the sale, or alternatively to recover the secret profit of RM30,000 from Anjali. The question concerns pre-incorporation contracts. A pre-incorporation contract is one which is purportedly made by or on behalf of a company at a time when the company has not yet been formed. At common law such contracts were totally void. This was because until a company was incorporated it had no capacity to contract. Further, it also could not ratify the contract after its incorporation. This is illustrated in the case of Kelner v Baxter (1866) LR 2 CP 174. In this case A, B and C purportedly acting on behalf of the Gravesend Royal Alexandra Hotel Co Ltd which was in the process of being formed, entered into a contract for the purchase of wine from K. The wine was delivered to the company after its formation, but it went into liquidation before K was paid. The court held that the company was not liable. However, it held that A,B and C were personally liable, and no ratification could release them from such liability. The Malaysian position is governed by s.35(1) and (2) of the Companies Act By s.35(1) any contract or other transaction purporting to be made by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of the contract or other transaction and had been a party thereto. By s.35(2), prior to ratification by the company the person or persons who purported to act in the name of, 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. Thus, in Malaysia, a pre-incorporation contract is ratifiable by the company after its incorporation. Once ratified, either party can sue the other upon the contract. This is illustrated in the case of Cosmic Insurance Co Ltd v Khoo Chiang Poh (1981) 1 MLJ 61. If the company does not ratify, the person purporting to act on behalf of the company will incur personal liability. Thus, in the given problem, as the contract has not been ratified by the company (Anba Sdn Bhd) after it was incorporated, Suria Sdn Bhd may be advised to sue Banu personally on the contract, The answer would be different if Banu had expressly excluded personal liability as s.35(2) states that the person purporting to act on behalf of the company would be personally bound only in the absence of an agreement to the contrary. 16

11 11 This question tests the candidates on disqualification of directors and the effect of contracts entered into by them. Directors may be disqualified from being appointed or from acting as directors in a number of situations, under the Companies Act The relevant provisions for the purposes of the given problem may be summarized as follows: (i) By s.124, every director who is by the articles, required to hold a specified share qualification and who is not already qualified, shall obtain his qualification within two months after his appointment or such shorter period as is fixed by the articles. A director must vacate his office, if he has not obtained his share qualification within the stipulated period or if after so obtaining it he ceases at any time to hold his qualification. (ii) By s.129, no person of or over the age of 70 years shall be appointed or act as director of a public company or of a subsidiary of a public company. The section also provides that the office of a director of a public company shall become vacant at the conclusion of the annual general meeting next after he attains the age of 70 years. Such an over aged director may nevertheless be appointed as director by a special procedure. See: s.129(6). (iii) By s.130, persons convicted of certain offences are disqualified from being directors of companies or, whether directly or indirectly, taking part in the management of companies. The offences referred to are (1) offences in connection with the promotion, formation or management of a corporation, (2) offences involving fraud or dishonesty punishable on conviction with imprisonment for three months or more and (3) offences under ss.132, 132A and 303 of the Companies Act A person convicted under these sections will be disqualified for a period of five years from the date of conviction, or if he has been sentenced to imprisonment, from the date of release from prison. However, he may be a director or otherwise be involved in the management of companies if he obtains leave of the court. (iv) By s.130a, a disqualification order may be made by the court against a person on the application of the Registrar or Official Receiver, if it appears to the court that the person: is, or has been, a director of a company which has at any time gone into liquidation and was insolvent at that time and (b) is, or has been, a director of such other company which has gone into liquidation within five years of the date on which the first mentioned company went into insolvent liquidation and (c) that his conduct as a director of any of those companies makes him unfit to be concerned in the management of a company. The disqualification order made by the court would disqualify that person from being a director of, or in any way, whether directly or indirectly, being concerned or taking part in the management of a company, except with leave of the court. The order may be made for a maximum period of five years. Applying the law as explained above, Ozimi may be advised that: (i) Jenny is by virtue of s.124, disqualified to act as a director as she does not hold any shares in the company. She should have obtained her share qualification within two months of appointment. As such she should vacate office. (ii) Kenny is disqualified to act as director by virtue of s.129 because he is above the age of 70 years. He could have been appointed through the special procedure under s.129(6), but the question does not indicate that this was done. (iii) Lam is not disqualified from acting as director of the company. Although he has previously been convicted of reckless driving and sentenced to imprisonment, this offence does not fall within the types of offences stipulated in s.130. Hence Lam may legally continue to hold office as director of the company. (iv) Mani may be made the subject of a disqualification order by the court, through the application of the Registrar or Official Receiver. As Mani has been a director of a string of companies all of which have gone into insolvent liquidation within the last five years, a disqualification order may be made against him if it could be further shown that his conduct as a director makes him unfit to be concerned in the management of companies, as required under s.130a. (b) In relation to the contracts entered into by Jenny and Kenny, who are both disqualified to act as directors, Ozimi may be advised as follows: (i) By s.127, the acts of a director or manager or secretary shall be valid not withstanding any defect that may afterwards be discovered, in his appointment or qualification. Thus, the contract entered into by Jenny will still be valid and binding upon the company despite her lack of share qualification. (ii) By s.129(3) any act done by a person as a director shall be valid notwithstanding that it may afterwards be discovered that there was a defect in his appointment or that his appointment had terminated by virtue of sub-section (2), i.e. by virtue of the director having exceeded the age limit. Thus, the contract entered into by Kenny on behalf of the company will still be valid and binding upon the company despite his disqualification by reason of age. 17

12 12 This question tests the candidates knowledge of and ability to apply, the law on company charges and the order of priority of such charges in the event of the company becoming insolvent. The creditors may be advised that, as a 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 creditors. Among secured creditors those secured by fixed charges will have priority over those secured by floating charges. Where there are several fixed charges over the same assets, the first in time will prevail. Similarly, a company may create several floating charges over the same assets in favour of different creditors. In such a case, the earlier floating charge will rank in priority to the later floating charge. However, the order of priority of charges may be affected in certain circumstances. First, where a charge (whether fixed or floating) required to be registered under s.108(1) is not duly registered within 30 days of its creation, the charge will be void against the liquidator and any creditor of the company. Secondly, in relation to floating charges, it has been held in the case of Re Benjamin Cope & Sons Ltd (1914) 1 Ch 800 that a company cannot create a subsequent floating charge ranking in priority to, or in pari passu with, the first floating charge unless the first floating charge permits it. However, in Re Automatic Bottlemakers Ltd (1926) Ch. 412, it was held 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 floating charge. Thirdly, a floating chargee may seek to protect the priority of his charge by the use of a negative pledge. This is a clause which expressly stipulates that the company (chargor) is prohibited from creating any other subsequent charge ranking in priority to or in pari passu with the floating charge. This clause will be effective against all those who have notice of the restrictive clause. It was held in the case of Wilson v Kelland (1910) 2 Ch 306, that registration of a charge is notice of the fact that a charge exists but it is not sufficient to show that a subsequent chargee has notice of the restriction itself. This was also the view of the Supreme Court in UMBC Bhd v Aluminex (M) Sdn Bhd (1993) 3 MLJ 587. However, it must be noted that the relevant forms for registration of charges have been amended to require particulars of restrictions on the creation of subsequent charges to be stated. Where such particulars have been included in the relevant registration form, it would amount to notice of the restriction and such a chargee will be able to safeguard his priority. Further, priority of floating charges may also be affected if such charges were created within six months of the commencement of winding up of the company. By s.294, floating charges on the undertaking or property of a company created within six months of the commencement of winding up are invalid except to the amount of cash paid to the company at the time of or subsequent to the creation of and in consideration for the charge. However, the charge will still be valid if the company was solvent at the time of the creation of the charge. Applying the above law to the facts given, and presuming that all the charges have been duly registered, the liquidator may be advised as follows: (i) The fixed charge in favour of Samokesh Bank will have priority over all the other charges. (ii) As between Fine Finance Bhd and Freeloan Bank, Fine Finance Bhd will have priority because both their floating charges are on the same assets and on the authority of Re Benjamin Cope, a company cannot create a second floating charge on the same assets ranking in priority to or in pari passu with the earlier charge, unless the earlier charge expressly permitted it. Further, the charge in favour of Fine Finance Bhd contains a restrictive clause. (iii) As between Mr Las Risot and Fine Finance Bhd, based on the authority of Re Automatic Bottlemakers, Mr Las Risot may have priority as his floating charge is only over part of the assets comprised in Fine Finance Bhd s charge. However, as the floating charge was created in August 2004 and the company went into liquidation last week, the charge may be partially invalid under s.294. As explained above, floating charges created within six months before the winding up of the company are void except to the amount of cash paid to the company at the time of, or subsequent to, the creation of the charge. As Mr Las Risot only lent RM200,000 at the time of the creation of the charge, it may be valid only to the tune of RM200,000 and not for the full amount of RM300,000. (iv) Mr Las Risot would remain an unsecured creditor in respect of the loan of RM100,000, and would only be paid after all the secured creditors have been paid. As the company is insolvent, he is unlikely to be paid at all. 18