BUSINESS AND COMPANY LAW (MIAQE) SECTION A

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1 SET 1 BUSINESS AND COMPANY LAW (MIAQE) SECTION A ANSWER 1 (a) 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 (b) (i) Section 2(a): a proposal (offer) 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 (offer) was made signifies his assent thereto, the proposal (offer) is said to be accepted. Offer: 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. (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 (c) (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 1

2 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 ANSWER 2 (a) Agency may arise in the following ways: 1. By express agreement between the parties. (Section 139 of the Contracts Act 1950) Whereby the principal appoints his agent in writing or orally and the agent accepts the appointment; 2. By implied agreement between the parties (Section 141 (2) of the Contracts Act, 1950) whereby by words or conduct of the principal, an agent is appointed and he accepts the appointment; 3. By ratification. This is where the agent acts without authority or has exceeded his authority and the principal ratifies or adopts the transaction. Section 149, Contracts Act (b) (c) An agent s authority may be actual or apparent or ostensible. Actual authority is that which is expressly given by the principal to the agent orally or in writing or implied from the express authority given, from the circumstances of the case, the custom or usage of trade, or the situation and conduct of the parties. On the other hand, ostensible authority is that which is not expressly given by the principal but which the law regards the agent as possessing although the principal has not consented to his exercising such authority. Watteau v Fenwick. In this situation, the most relevant principle of agency should be, agency by necessity. A person may become an agent by necessity if the following three conditions are met: (i) (iii) It is impossible for the agent to get the principal s instruction Section 142, Contracts Act, 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. 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. Therefore, the manager may be justified in selling off the tomatoes at a low price in order to avoid a total loss, in the event the tomatoes go bad. This he did in the best interest of his 2

3 employer/principal and was done in good faith, since it was not possible for him to contact his principal for further instructions at the time. ANSWER 3 (a) In the absence of a partnership agreement, section 4, Partnership Act, 1961 sets down the following tests to determine whether partnership exists: - Section 4(a) shared ownership of properties - Section 4(b) Sharing of gross return - Section 4(c) Sharing of profit. (b) (c) (d) Dissolution of partnership by operation of law: - Section 34 (1)(a) if the duration of the partnership is fixed, upon expiry of that period; - Section 34(1)(b) if the partnership is entered into to undertake a certain task, after the completion of that task; - Section 34(1)(c) if the partnership is entered into for an undefined period of time, any partner may dissolve the partnership by giving notice. The date of the notice is regarded as the date of dissolution. Liability of partners: (Advising Kem): - Section 11, Partnership Act every partner is liable jointly with the other partners for all debts and obligations incurred while he is a partner; - Partners are jointly and severally liable for any tortuous acts or wrongs committed by one of the partners in the ordinary course of business with the authority of the partner; - Where there has been a misapplication of money or property of a third party by one partner who receives the property or money within the scope of his apparent authority, the firm/partnership is liable to make good the loss or where one of the partners misapplied the money or property which has been in the custody of the firm, the firm shall be liable for the loss; - If one of the partners is a trustee who improperly employs the trust property, the other partners will not be liable unless any of the partners have notice of the breach of trust. - In this situation, both Kem and Ari are trustees to the client s money, by way of the nature of their partnership s business. Therefore, although Kem has no notice of Ari s breach of trust, he may still be jointly and severally liable for the loss as a partner. Negligence is a breach of a legal duty to take care which results in damages, undesired by the defendant. The elements necessary to prove negligence: (i) (iii) Legal duty on the part of the defendant towards the plaintiff to exercise care in such conduct of the plaintiff as falls within the scope of the duty; Breach of that duty; and Consequential damage to the plaintiff. (e) The neighbour principle as stated by Lord Atkin in Donoghue v Stevenson is the principle of the foresight of the reasonable man. This is the test for the existence of a duty owed to the plaintiff. The test is whether the injury to the plaintiff was a reasonably foreseeable consequence of the defendant s acts or omissions. 3

4 In Haley v London Electricity Board, where this test was applied, the court held that a reasonable man would foresee that the safety precautions taken by the defendants were insufficient and therefore they were held liable for the plaintiff s injury. ANSWER 4 (i) In this question candidates are tested on the extent to which the ultra vires doctrine applicable to companies operates in Malaysia and the remedies available to the company and its members if the directors of a company embark on activities outside its objects clause. 1. Common Law, any company can only deal or transact with matters contained in its object clause in the Memorandum of Association. Any act done outside the purview or in contravention of its object clause is deemed to be ultra vires act. Any ultra vires act is void. 2. Neither the company nor the other contracting party can enforce it. Further, members cannot validate an ultra vires act or transaction by passing a resolution, even though the resolution was passed unanimously: Ashbury Railway Co Ltd v Riche (1875). 3. Malaysia adopts a somewhat different approach by codifying the principle in s.20 Companies Act s.20(1) validates any act or purported act of a company and any conveyance or transfer of property (whether movable or immovable) to or from the company done even though the company was without capacity or power to do the act or to execute or take the conveyance or transfer. 4. Given the statutory provision, the transaction contracted by Zam Zam Sdn Bhd cannot be set aside simply because they were ultra vires acts. Instead, all parties involved in those transactions i.e. Zam Zam Sdn Bhd and Dorey are bound and must honor their respective contractual obligations under their respective contracts. In short neither party to a transaction may raise ultra vires to escape that party s legal obligation or obligations under the transaction (Public Bank v Metro Const. Sdn Bhd (1991). 1. Despite the existence of s. 20 (1), the doctrine of ultra vires has not been completely shed. 2. It must be appreciated that s.20(2)(a) contains provision in which where a company is engaged in, or is about to engage in, an activity which is outside its objects as stated in the memorandum, any member of the company or, where the company has issued debentures secured by a floating charge, by the holder of any of the debentures or by the trustee for the holders of such debentures, to apply to court for an injunction to restrain the doing of such activity. 3. The phrase the doing in s.20(2)(a) indicates that the power to restrain only applies if the alleged ultra vires activity has not been completed. Based on this sub-section, Mee may succeed in obtaining the injunction to 4

5 restrain the proposed project since no contract has been executed by both Zam Zam Sdn Bhd and Alakazam Sdn Bhd. (iii) 1. The attention of the directors must also be drawn to s.20(2)(b). By this provision the company s lack of capacity or power may be asserted in any proceedings for damages by the company or by any member of the company against the present or former officers of the company. 2. While there is statutory provision that will implicate liability on the directors for committing ultra vires act, Mee will only succeed if there is actual loss suffered by Zam Zam Sdn Bhd relating to the purchase of the land from Dorey. ANSWER 5 (a) (i) 1. This line of questioning is aimed at testing the knowledge of candidates on the principle of fiduciary duty both under the Common Law and also as provided in the Companies Act Common Law establishes a canon rule in that directors owe a fiduciary position in relation to their company. These are the duties :- 1.1 Duty to act in the best interest of the company. A director must only make decision beneficial to the company. If any decision made only serves his own or a third party s benefit, he would be in breach of this fiduciary duty. See: Re W & M Roith Ltd (1967). 1.2 Duty to act for a proper purpose. A director must exercise his powers for the right purpose and nothing else. To best illustrate this, two cases of Hogg v Cramphorn (1967) and Howard Smith v Ampol Petroleum Ltd (1974) would be of assistance. Here, the directors exercised the power to issue shares for the purpose of forestalling a takeover bid. The court held that the primary purpose of the power to issue shares is to increase the share capital of the company in the event the company is in need of such funds. It is not to frustrate a possible takeover of the company and hence, such power when exercised was considered a breach of the fiduciary duty to act for a proper purpose. 1.3 Duty to avoid conflict of duty and personal interest This duty requires the director not to use his position as a director to make a personal profit for himself or for another. Thus he cannot make secret profits nor usurp corporate opportunities. See: Regal (Hastings) Ltd v Gulliver; IDC v Cooley. 2. s. 132 contains the duties of a director and they are :- 2.1 s. 132 (1) - A director of a company shall at all times exercise his powers for a proper purpose and in good faith in the best interest of the company. 5

6 2.2 s. 132 (1A) - A director of a company shall exercise reasonable care, skill and diligence with (a) the knowledge, skill and experience which may reasonably be expected of a director having the same responsibilities; and (b) any additional knowledge, skill and experience which the director in fact has. 2.3 s. 132(1B) - (1B) A director who makes a business judgment is deemed to meet the requirements of the duty under subsection (1A) and the equivalent duties under the common law and in equity if the director :- (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. 2.4 s. 132 (1C) - (1C) A director, in exercising his duties as a director may rely on information, professional or expert advice, opinions, reports or statements including financial statements and other financial data, prepared, presented or made by (a) any officer of the company whom the director believes on reasonable grounds to be reliable and competent in relation to matters concerned; (b) any other person retained by the company as to matters involving skills or expertise in relation to matters that the director believes on reasonable grounds to be within the person's professional or expert competence; (c) another director in relation to matters within the director's authority; or (d) any committee to the board of directors on which the director did not serve in relation to matters within the committee's authority. 2.5 s. 132 (2) - (2) A director or officer of a company shall not, without the consent or ratification of a general meeting: (a) (b) (c) use the property of the company; use any information acquired by virtue of his position as a director or officer of the company; use his position as such director or officer; 6

7 (d) (e) use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company; or engage in business which is in competition with the company, to gain directly or indirectly, a benefit for himself or any other person, or cause detriment to the company. 1. Since the act of Samad was in direct contravention of s. 132 (2) then Samad is liable under s. 132 (3). In this respect, Samad liability is two-fold: 1.1 he is liable to make good any profit that he has made for himself; or 1.2 he is also liable for any damages/losses suffered by Henpon Sdn Bhd. 2. In addition to that, he is also guilty of an offence under the said provision and is punishable with 5 years imprisonment or fine of RM30, (b) (i) 1. The question sets out to test candidates basic knowledge on payment of dividends. 2. The profits upon which dividends are to be paid out must be the profit of the company making the dividend. In this respect, the doctrine of separate legal entity comes into play even though the companies are managed as part of a group. Since the profits were made by Sir-Mart Bhd, no dividend should be made from such profit to members and shareholders of Tzar- Mart Bhd. 1. It is settled law a company pays out dividends from its current revenue profits without the need of making good the previous years losses. Each accounting period is treated in isolation and not as part of a continuous process. See: Ammonia Soda Co Ltd v Chamberlain (1918). 2. Based on the aforesaid, Tzar-Mart Bhd may declare and pay out the dividends from the revenue profits of the succeeding year without having to offset the revenue losses of the preceding year. (iii) 1. It is settled law that dividends are only be paid from profits and when there is available profits to be declared and paid out. 2. s.365(1) of the Companies Act 1965 prohibits the payment of dividend to the shareholders of any company except out of profits or pursuant to s s.60 relates to the share premium account, which is regarded as capital. The share premium account may only be utilized for the payment of 7

8 dividends, if such dividends are satisfied by the issue of shares to members of the company. 4. Therefore, Tzar-Mart Bhd cannot pay cash dividends to members utilizing the share premium account. ANSWER 6 (a) 1. The courts are quite vigilant in allowing this relief to any petitioner. The court normally would scrutinize the factual matrix of each case and examine whether there exists any circumstances or instances which fulfill the criteria for a just and equitable ground to have the company wound up. In this respect, the list is not conclusive but forms the most common features in cases of this nature. 2. Among the criteria which will move the court to grant a winding up order under this ground are :- 2.1 Where the main object of the company has failed. The court will examine whether the relationship affects the ongoing business of the company. If the purpose upon which the company was incorporated is no longer achievable, then it can be said that the company has lost its object. In this situation, it is most likely the court would order a winding up of the company. Case: Re German Date Coffee Co (1882). 2.2 Where there is no bona fide intention on the part of the directors to carry on business in a proper manner (i.e. where the company is a bubble ) case: Re London & County Coal Co (1866). 2.3 Where the company is formed to defraud. Case: Re Thomas Edward Brinsmead and Sons Ltd (1897). 2.4 Where mutual trust and confidence which was the basis on which the company was carried on, has gone. Case: Ebrahimi v Westbourne Galleries Ltd (1970) AC 360. In certain situation, there are companies being run in the mode of a partnership. There is only a number of members, who in turn would be the directors as well. The fact that the directors can no longer work together would have a very significant bearing to the survival of the company upon being tested with a winding up petition under this ground. 2.5 Where there is a deadlock in the management. Case: Re Yenidje Tobacco Co Ltd (1916) 2 Ch 426. Since there are only 2 directors and shareholders and both are no longer on speaking terms, this would necessarily create a deadlock. 3. Given the scenario, there is a high likelihood that the court would grant an order to wind up Besi Panas Inc. The punch incident was widely reported and the fact that it became a litigation matter would certainly sway the court s mind into allowing the petition. 8

9 (b) 1. This question deals with basic knowledge of the candidates on the composition and functions of the Audit Committee. This Audit Committee is required to be established by public listed companies under the Bursa Malaysia Listing Requirements, pursuant to the recommendations of the Malaysian Code on Corporate Governance. 2. Under Part C, Chapter 15 of the Bursa Malaysia Listing Requirements, the Audit Committee must comprise of at least three members. The majority of this members must be independent directors. It prohibits the appointment of an alternate director to the committee. 3. It further requires that at least one member of the Audit Committee must also be a member of the Malaysian Institute of Accountants. If otherwise, that person must either have at least three years working experience and have passed the requisite examinations specified in part one of the 1st Schedule of the Accountants Act 1967, or be a member of one of the associations of accountants specified in Part II of the 1st Schedule of the Accountants Act Alternatively, if he is not a member of the Malaysian Institute of Accountants, he must fulfill such other requirements as may be prescribed by the Stock Exchange (Bursa Malaysia). 4. The functions of the Audit Committee are amply specified in Para of Part C Chapter 15 and they are: 4.1 reviewing the following and reporting to the board of directors:- a. with the external auditor, the audit plan; b. with the external auditor, his evaluation of the system of internal controls; c. with the external auditor, his audit report; d. the assistance given by the employees of the company to the internal auditor; e. the adequacy of the scope, functions, and resources of the internal audit functions and that it has the necessary authority to carry out its work; f. the internal audit programme, processes, the results of the internal audit programme, processes or investigation undertaken and whether or not appropriate action is taken on the recommendations of the internal audit function; g. the quarterly results and year end financial statements, prior to the approval by the board of directors, focusing particularly on: i. changes in or implementation of major accounting policy changes; ii. significant and unusual events; and iii. compliance with accounting standards and other legal requirements; h. any related party transaction and conflict of interest situation that may arise within the listed issuer (i.e. the listed company) or group including any transaction, procedure or course of conduct that raises questions of management integrity; i. any letter of resignation from the external auditors of the listed issuer; and j. whether there is reason (supported by grounds) to believe that the listed issuer s external auditor is not suitable for re-appointment; and 9

10 4.2 recommend the nomination of a person or persons as external auditors. (Candidates need only state any FIVE of these functions) (c) 1. s. 176 (10) of the Companies Act 1965 empowers the court to restrain any proceedings against any company which has entered a proposal for a scheme of compromise or arrangement with its creditors or any class of the creditors. There must be an application made to the court, either by the company or any member of the company. 2. s. 176 (10A) states that the court can only allow the restraining order for not more than 90 days or any time longer as the court for good reason may allow if the following are met :- 2.1 the court must be satisfied that there is already a proposal in place for a scheme of compromise or arrangement between the company and its creditors or with any class of creditors. This proposal must represent at least one-half value of all creditors of the company. 2.2 the restraining order is necessary to enable the company and its creditors to materialize the said scheme for the approval of the members or creditors. For purpose of this approval, candidates must cross refer to s. 176 (1) i.e. the court may order for a meeting be held between the members or class of members of the company with the creditors or class of creditors in a manner where the court deems fit. 2.3 the applicant must lodge a statement in the prescribed form on the affairs of the company. This statement must contain affairs up to a date of not more than 3 days before the application is filed into court. This statement has to be filed with the application for the restraining order. 2.4 the court approves a person nominated by a majority of the creditors to act as a director. If that person is not a director yet, the court must appoint that person to act as the director. 3. s. 176 (10B) states that the person approved or appointed by the court to act as director would have a right to access at reasonable times to all the accounting and all records of the company. He is also entitled to require from any officer of the company any information and explanation he may require to discharge his duty. 4. s. 176 (10C) provides that any disposition of property belonging to the company after the grant of the restraining order is void, unless the court validates the same. This prohibition applies to any action and any acquisition of property by the company except for those done in the ordinary course of business. 5. s. 176 (10D) states that any disposal or acquisition of property done without the leave of the court will attract liability to every officer of the company of an offence which can be penalized with 5 years imprisonment or fine of RM1million or both. 6. s. 176 (10E) requires the company within 7 days after obtaining the restraining order to lodge a copy of the order with the Registrar and publish a notice of that 10

11 order in a daily newspaper circulating throughout Malaysia. Any contravention would attract an offence and any office who is in default if liable to a fine of RM100, s. 176 (10F) makes it clear that this restraining order only applies to protect the company which has applied for it. The order does not extend to any action or proceedings filed against any other person. 11