Corporate and Business Law (Malaysia)

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3 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) June 2005 Answers 1 This question tests the candidates knowledge on fundamental liberties as provided for in the Federal Constitution. The phrase, Fundamental Liberties, refers to certain rights, which may be considered as basic and essential to ensure the freedom of the individual. These rights are stated in the Federal Constitution and are said to be entrenched or enshrined because these rights cannot be altered or taken away altogether unless the Constitution itself is amended. This would be quite difficult as it requires a majority of two thirds of all the members of Parliament. The main liberties so entrenched in the Federal Constitution are as follows: 1. No person may be deprived of his life or personal liberty except in accordance with the law. This means that the individual cannot be unlawfully imprisoned or put to death. Where the individual is unlawfully detained, he may obtain an order of the court through a writ of habeas corpus requiring that he be lawfully charged in court or be released. 2. No person may be subject to slavery or forced labour. However, this is subject to the right of Parliament to make laws providing for compulsory national service. 3. No person can be punished under a law, which was not in force when the alleged crime was committed. Thus, laws against crimes cannot be passed with retrospective effect. 4. A person cannot be tried more than once for the same crime, where he has already been acquitted or convicted earlier. However, this does not apply where a superior court has quashed the earlier proceeding and ordered a re-trial. 5. All persons are equal before the law and entitled to its protection. 6. Citizens cannot be discriminated against in relation to appointment to any office or employment under a public authority, or in relation to acquisition of property, establishing or carrying on of any trade, business, profession, vocation or employment, merely on grounds of religion, race, descent or place of birth. However, this right is subject to Article 153 of the Federal Constitution, which permits the granting of special privileges to bumiputras. 7. Citizens cannot be discriminated against in relation to the providing of education, merely on grounds of religion, race, descent or place of birth. This is also subject to Article 153 as stated above. 8. Every person has the right to profess, practice and propagate his own religion. However, as Islam is the religion of the country, restrictions may be placed upon the propagation of other religions among Muslims. 9. No citizen may be banished from the country. However, this right is subject to exceptions whereby the Federal Government is permitted to deprive a person of his citizenship under certain circumstances. 10. Every citizen has the right to freedom of speech, peaceful assembly and association. However, in the interests of security, public order or morality, Parliament may impose certain restrictions. For example, the Sedition Act 1948 provides that it is an offence to question the sovereignty, powers and prerogatives of the rulers and the special position of the Malays. It must be noted, however, that freedom of speech does not entitle a person to defame another. This will entitle the person defamed to sue the other under the law of defamation. 2 This question tests the candidates knowledge on who are minors, the general effect of contracts entered into by minors as well as the situations under which contracts entered into by minors will be valid. (a) (b) Section 11 of the Contracts Act 1950 states that only a person who is of sound mind and the age of majority is competent to contract. Further, he must not be disqualified from contracting by any law to which he is subject. The Age of Majority Act 1971 provides that the age of majority for purposes of contractual capacity is 18 years. The general rule under Malaysian law is that a contract entered into by a minor (i.e. person who has not attained the age of 18 years) is void Mohori Bibee v Dhurmodas Ghose (1903); Tan Hee Juan v Teh Boon (1934). This general rule that minors cannot validly enter into a contract is subject to a number of exceptions. Thus, contracts entered into by minors will be valid in the following situations: (i) (ii) Marriage contracts Minors have been held capable of entering into marriage contracts, and are therefore liable for breach of such a contract. This is illustrated in the case of Rajeswary & Anor v Balakrishnan & Others (1958) 3 MC 178. In this case, the parties to the action were hindus. The first plaintiff was a minor and she had agreed to marry the first defendant. Later the first defendant repudiated the contact. In an action for damages for breach of promise of marriage, the first defendant pleaded that the first plaintiff did not have the capacity to contract and that therefore the contract was void. The court held that the contract was valid and that marriage contracts differed from other classes of contracts. Thus the principle laid down in Mohori Bibee s case was not applicable. Contracts for necessaries By s.69 Contracts Act 1950, If a person, incapable of entering into a contract, or anyone whom he is legally bound to support is supplied by another person with necessaries suited to his condition in life, the person who has furnished such supplies is entitled to be reimbursed from the property of such incapable person. 9

4 While there is no statutory definition of what amounts to necessaries, it certainly would include bare essentials such as food, clothing, shelter and medical attention. However, what constitutes necessaries varies from case to case depending on the minor s station in life. Education too has been held to be necessaries Govt of Malaysia v Gurcharan Singh (1971) see also: Nash v Inman. (c) Scholarship agreements By virtue of the Contracts (Amendment) Act 1976 scholarship agreements between a minor and an appropriate authority cannot be invalidated on the ground of his minority. Appropriate authority refers to the Federal Government, State Government, statutory authority or an educational institution, e.g. university. (d) Contracts of insurance By virtue of the Insurance Act 1963 (Revised 1972), a minor may enter into a contract of insurance, if he is aged above 10. However, if he is below 16, he has to have the consent of his parent or guardian. (e) Contracts of Service (Apprenticeship) Under the Children & Young Persons (Employment) Act 1966 minors are permitted to enter into contracts of service, otherwise than as employers. 3 This question tests the candidates knowledge on fraud as a vitiating element in a contract. Free consent of the parties is one of the requirements of a valid contract. By s.14 of the Contracts Act 1950, consent is said be free when it is not caused by, among other things, fraud. Section 17 of the Contracts Act 1950 defines what is fraud. It states that fraud includes any of the following acts committed by a party to a contract or with his connivance, or by his agent, with intent to deceive another party thereto or his agent to enter into a contract: (a) the suggestion, as to a fact, of that which is not true by one who does not believe it to be true; (b) the active concealment of a fact by one having knowledge of belief of the fact; (c) a promise made without any intention of performing it; (d) any other act fitted to deceive; and (e) any such act or omission as the law specially declares to be fraudulent. Generally, it may be said that fraud occurs when one party to a contract says or does something with intent to deceive the other party and to induce him to enter into the contract. It must be further noted, as provided in the explanation to s.17 of the Contracts Act 1950, that mere silence as to facts likely to affect the willingness of a person to enter a contract is not fraud unless the circumstances of the case are such that, regard being had to them, it is the duty of the person keeping silence to speak, or unless his silence, in itself, is equivalent to speech. The following illustrations as provided in the section itself may serve as examples of this: (a) A sells, by auction to B, a horse which A knows to be unsound. A says nothing to B about the horse s unsoundness. This is not fraud by A. (b) B is A s daughter and has just come of age. Here, the relationship between the parties would make it A s duty to tell B if the horse is unsound. Fraudulent misrepresentation also falls within the scope of s.17. This may be illustrated by the case of Kheng Chwee Lian v Wong Tak Thong (1983) 2 M.L.J In this case the respondent had been persuaded to enter into a contract by false respresentation as to the size of the land to be transferred. The High Court held that this fell within the scope of s.17 (a) and (b) and the Federal Court upheld this finding, on appeal. Another case in point is that of Letchemy Arumugan v Annamalay (1982) 2 M.L.J Here the plaintiff, an illiterate woman, was induced by fraudulent representation to enter into a sale and purchase agreement. The defendant had tricked her into believing that the document she was required to sign was for a loan she took and to free the land from a charge. When consent to an agreement is caused by fraud, the agreement is voidable at the option of the party whose consent was so caused (see : s.19). In the case of Letchemy Arumugan v Annamalay, referred to above, the court held that the agreement was voidable at the option of the plaintiff, and the agreement was therefore rescinded. However, s.19 provides for an exception. If such consent was caused by the misrepresentation or by silence, fraudulent within the meaning of s.17, the contract nevertheless is not voidable, if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. 10

5 4 This question, on employment law, tests the candidates knowledge on the distinction between a contract of service and a contract for services and the importance of such distinction. It is indeed important to make a distinction between a contract of service and a contract for services. A contract of service is basically a contract between an employer and an employee under which the employee agrees to work for the employer. The Employment Act 1955 defines a contract of service as, any agreement whether oral or in writing and whether express or implied, whereby one person agrees to employ another as his employee and that other agrees to serve his employer as employee and includes an apprenticeship contract. The Industrial Relations Act 1967 also defines such a contract but refers to it as a contract of employment. Under this Act, a contract of employment is defined as, any agreement whether oral or in writing and whether express or implied whereby one person agrees to employ another as a workman and that other agrees to serve his employer as a workman. It has generally been accepted that there is no distinction between the two phrases. See: American International Assurance Co Ltd and Dato Lam Peng Chong & Others (Award 275 of 1988). From the definition stated above, it can be seen that only a contract of service/employment will give rise to an employer/employee relationship, which is regulated by the Employment Act 1955 and the Industrial Act Further such employer/employee relationship must exist before an employer can be made vicariously liable for the negligent acts of his employee done in the course of his employment. The contract for services, on the other hand, is essentially different from that of the contract of service/employment. It does not create an employer/employee relationship and does not therefore come within the purview of the Employment Act and the Industrial Relations Act. Instead it creates a contractual relationship between an employer and an independent contractor. Thus, it is very important to distinguish between the two categories. In practice, however, it is sometimes quite difficult to determine whether there in fact exists a contract of service or a contract for services. To assist in this respect, the courts have developed three tests, viz, the control test, the integration test and the multiple test. The control test related to the extent of control which the employer had over the employee in relation to the manner in which the employee was to do his work. The greater the control the greater the possibility that there was a contract of service. See: Yewens v Noakes (1880). The control test has been seen as inadequate especially in occupations of a skilled or professional nature because the employer may be unable to exercise such control. The integration test relies on the extent to which a person can be considered as part and parcel of the organisation. The greater the integration with the organisation the greater the possibility of a contract of service Whittaker v M.P.N.I. (1967). The multiple test, which is more relied upon nowadays, takes into account multiple considerations in order to determine whether a contract of service exists. Among other things, the courts will take into consideration the extent of control, the power of selection and appointment, the power to suspend and dismiss the employee, the intention of the parties and the agreement between them. 5 This question on partnership law tests the candidates knowledge on the situations in which the presumption that sharing of profits gives rise to a partnership, may be rebutted under the Partnership Act One of the requirements of a valid partnership is that the partners must be carrying on the business with a view of profit. Section 4(c) of the Partnership Act 1961 states that the receipt by a person of a share of the profits of the business, is prima facie evidence of a partnership. However, the section itself provides for five situations in which this presumption may be rebutted. (i) By s.4(c)(i), the receipt by a person of a debt or other liquidated amount, by instalments or otherwise, out of the accruing profits of the business does not of itself make him a partner or liable as such. Thus, where a person lends money to a firm and the loan is repaid using the profits of the firm, this does not make the lender a partner of the firm though he is in fact receiving a part of the profits of the firm. See: Cox v Hickman (1869) 8 H.L.Cas.268. (ii) By s.4(c)(ii), a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such. Thus, if an employee or agent were to be paid his salary or fees by a share of the profits of the firm, that would not make the employee or agent a partner of the firm. (iii) See: Walker v Hirsch (1884) Ch.D By s.4(c)(iii), payment of an annuity to a widow or child of a deceased partner, out of the profits of the firm, does not of itself make the widow or child a partner of the firm. See: I.R.C. v Lebus s Trustees (1946) All.E.R

6 (iv) (v) By s.4(c)(iv), the advance of money by way of loan to a person engaged or about to engage, in any business on a written contract with that person that the lender shall receive a rate of interest varying with the profits or shall receive a share of the profits does not of itself make that person a partner or liable as such. Thus, a person who pays money to a business firm for the purpose of buying goods for the business, in consideration of a fixed rate of interest and a share of the profits of a specified branch of the business, is not a partner. See: Meyer v Schacher (1878) 38 LT 97. By s.4(c)(v), a person receiving by way of an annuity or otherwise, a portion of the profits of a business in consideration of the sale by him of the goodwill of the firm, does not of itself make him a partner or liable as such. See: Re Young (1896) 2 Q.B This question on the law of agency, tests the candidates knowledge on the meaning of the terms principal and agent as well as the main duties of a principal towards his agent as provided for under the Contracts Act (a) (b) An agent is defined in s.135 of the Contracts Act 1950 as a person employed to do any act for another or to represent another in dealings with third persons. The principal is defined as the person for whom such act is done or who is so represented. Sections 175 to 178 of the Contracts Act 1950 stipulate the duties of a principal towards his agent. These may be explained as follows, together with relevant illustrations: (i) (ii) (iii) By s.175, the principal is bound to indemnify the agent against the consequences of all lawful acts done by the agent within the scope of his authority. An example of this duty is found in illustration (a) of s.175: B at kelang, under instructions from A, of Taiping, contracts with C to deliver certain goods to him. A does not send the goods to B and C sues B for breach of contract. B informs A of the suit, and A authorises him to defend the suit, and is compelled to pay damages and costs and incurs expenses. A is liable to B for such damages, costs and expenses. Where the principal has employed the agent to an act, and the agent does the act in good faith, the principal is liable to indemnify the agent against the consequences of that act, even if it causes an injury to the rights of third persons. Illustration (b) of s.176 serves as a good example: B, at the request of A, sells goods in the possession of A, but which A had no right to dispose of. B does not know this, and hands over the proceeds of the sale to A. Afterwards C, the true owner of the goods, sues B and recovers the value of the goods and costs. A is liable to indemnify B for what he has been compelled to pay to C and for his own expenses. By s.178, the principal must make compensation to his agent in respect of injury caused to the agent by the principal s neglect or want of skill. The section provides the following example: A employs B as a bricklayer in building a house, and puts up the scaffolding himself. The scaffolding is unskillfully put up, and B is in consequence hurt. A must make compensation to B. It must be noted, however, that where the principal employs the agent to do an act which is criminal, the principal is not liable to the agent, either upon an express or an implied promise to indemnify him against the consequences of that act. Thus, if, for example, the principal employs the agent to beat C and agrees to indemnify the agent against all the consequences of doing so, he (principal) will not be liable to so indemnify the agent if the agent has to pay damages to C for beating him. See: Illustration(a) of s This question on company law, tests the candidates knowledge and understanding of the differences between a fixed charge and a floating charge as well as the weaknesses of the floating charge as a form of security. (a) A fixed charge is a charge on a specific asset or assets of a company. Such a charge attaches immediately to the asset concerned and a company may not freely dispose of the asset thereafter. Any disposition of such an asset without the consent of the chargee will remain subject to the charge. Land is frequently the subject of fixed charges. The floating charge, on the other hand, is one which does not immediately attach to the assets concerned and gives the chargor freedom to continue to deal with the assets in the ordinary course of business. According to Romer J in Re Yorkshire Woolcombers Association (1903) 2 Ch 284 a floating charge has the following three characteristics: (i) It is a charge on a class of assets present and future. (ii) The class of assets fluctuates in the ordinary course of business. (iii) Until such time that the lender takes steps to enforce his security, the company is free to deal with the assets in the ordinary course of business. 12

7 (b) The floating charge is considered as a weak form of security to a lender as it suffers from a number of disadvantages in comparison with the fixed charge. These may be summarised as follows: (i) The value of the security is uncertain as the company is free to use the assets in the ordinary course of business. (ii) The floating charge ranks lower in priority in comparison with a fixed charge over the same assets, even if the floating charge was created before the fixed charge, unless the floating charge restricts the creation of subsequent charges ranking in priority to the floating charge and the subsequent chargee has notice of it. (iii) Assets subject to a floating charge may themselves be subject to a retention of title clause in favour of a seller of goods. In such a case, if the chargor had not paid for the goods, the seller of the goods would be entitled to those goods and the floating chargee would have no claim to them. See: Aluminium Industrie Vaasen v Romalpa Aluminium Ltd (1976) 2 All E R 592. (iv) The assets subject to a floating charge may be lost to judgment creditors, who have levied execution on the goods. Prior to crystallisation the floating chargee cannot prevent judgment creditors from so levying execution. (v) Prior to crystallisation, the assets may be seized and sold by a landlord who has taken distress proceedings for overdue rent. (vi) The assets subject to a floating charge may be utilised to pay off certain preferential creditors, if the company does not have sufficient funds to pay them. See: ss.191 and 292(4) Companies Act (vii) Floating charges created within six months of the commencement of a winding up will be invalid except to the amount of cash paid to the company at the time of or subsequent to the creation of the charge, unless the company was solvent immediately after the creation of the charge. See: s.294 Companies Act (Candidates are only required to explain any four of these disadvantages). 8 This question, on company law, has two parts. Part (a) tests the candidates understanding of the term, oppression while part (b) tests their knowledge on the orders that the court can make as a remedy for oppression in favour of a successful petitioner. (a) (b) The Companies Act itself does not provide any definition of oppression'. Guidance has therefore to be obtained from relevant case law. Viscount Simonds in the case of Scottish Co-operative Wholesale Society Ltd v Meyer (1959) A.C.324, defined oppression as conduct which is, burdensome, harsh and wrongful. In that case there was a holding company, which held a majority of shares in a subsidiary. The majority of the directors were appointees of the holding company. The raw materials for the business of the subsidiary came through the holding company. At a later stage, the holding company decided to carry on the business by itself and stopped the supplies to the subsidiary company. This resulted in the subsidiary company not being able to carry on its activities. The minority brought an action for a remedy on the ground of oppression. The court held that there was such oppression. Oppression has also been described as a visible departure from the standards of fair dealing see: Elder v Elder & Watson Ltd (1952) SC. 49. In Re Kong Thai Sawmill (Miri) Sdn Bhd ( ) MSCLC 14, Lord Wilberforce stated that, There must be a visible departure from the standards of fair dealing and a violation of the condition of fair play which he is entitled to expect before a case of oppression may be made out. However, the oppression must be continuing at the time of the legal action. In Re Kong Thai, the oppression, if any, had ceased by the time of the action in court and the petitioner was, therefore, unsuccessful. Mere mismanagement or negligence will not amount to oppression Re Five Minute Car Wash Service Ltd (1966) 1 W.L.R.745. By s.181(2) of the Companies Act 1965, the court may make any order that it considers proper to remedy the situation, but in particular it may make the following orders: (i) direct or prohibit any act or cancel or vary any transaction or resolution; (ii) regulate the conduct of the affairs of the company in future; (iii) provide for the purchase of the shares or debentures of the company by other members or holders of debentures of the company or by the company itself; (iv) in the case of a purchase of shares by the company, provide for a reduction accordingly of the company s capital; or (v) provide that the company be wound up. 13

8 9 This question, on company law, contains two parts. Part (a) tests the candidates on qualifications and removal of auditors while part (b) tests their knowledge on company resolutions. (a) (i) By virtue of s.9(1) of the Companies Act 1965, a person may be disqualified from being appointed, or from acting as auditor of a company: (a) if he is not an approved company auditor; (b) if he is indebted to the company, or to a corporation that is deemed to be related to that company by virtue of s.6, in an amount exceeding RM2,500; (c) if he is (i) an officer of the company; (ii) a partner, employer or employee of an officer of the company; (ii) (iii) (iv) a partner or employee of an employee of 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 (d) if he is responsible for, or if he is the partner employer or employee of a person responsible for, the keeping of the register of members of the register of holders of debentures of the company. As Jenny has just graduated with a degree in business administration, it is unlikely that she is an approved company auditor. If that were so, then she is not qualified to be appointed as a company auditor. Even if the appointment is valid, an auditor may be removed from office in accordance with the procedure prescribed in s.172. By s.172 (4) an auditor of a company may be removed from office by resolution of the company at a general meeting of which special notice has been given but not otherwise. A special notice is notice of not less than 28 days given to the company by those proposing to pass the resolution. By s.172 (5), where such special notice is received by the company it must forthwith send a copy of the notice to the auditor concerned and to the Registrar. The auditor may, within seven days after the receipt of such notice, make written representation of a reasonable length and request that copies of it be sent by the company to the members. The auditor may request that the representation be read out at the meeting. He is also allowed to make oral representations at the meeting itself. By s.172 (8), a company shall, forthwith after the removal of an auditor from office, give notice in writing of the removal to the Registrar. (b) (i) An ordinary resolution is one which is passed by a simple majority of the members present and voting, at a meeting of which no less than 14 days notice has been given. (Shorter notice may be given in accordance with s.145(3)). A special resolution on the other hand, is, by virtue of s.152(1), one that has been passed by not less than three fourths of the members present and voting at a meeting of which not less than 21 days notice specifying the intention to propose the resolution as a special resolution has been duly given. (shorter notice may be given in accordance with s.152(2)). The Companies (Amendment) (No.2) Act 1992 introduced a new s.152a to the C.A By this section, a resolution signed by or on behalf of all persons for the time being entitled to receive notice of, and to attend and vote at general meetings of a company shall be treated as a resolution duly passed at a general meeting of the company and where relevant as a special resolution so passed. (ii) (iii) Section 153 of the Companies Act 1965 deals with resolutions requiring special notice. By the section where special notice is required of a resolution, the resolution will not be effective unless notice of the intention to move it has been given to the company not less than 28 days before the meeting at which it is moved. The company is required to give at least 14 days notice of the intended resolution to the members. The resolution can then be passed by a simple majority. Special notice of a resolution is required under the Companies Act 1965 only in three instances. The first is for the removal of a director under s.128, the second is for the appointment of a director in place of the director being so removed under s.128 and the third is for the removal of an auditor under s.174. (iv) A special resolution is required in the following instances: (a) for a change of the name of the company s.23. (b) for converting a company from an unlimited company to a limited company s.25. (c) for a conversion of a company from private to public and vice versa s.26. (d) for an alteration of the objects of the company s.28. (e) for an alteration of the articles of association s.31. (f) for a reduction of capital s.64. (g) for a voluntary winding up of the company s.254(1)(b). (students need only state any two of these). 14

9 10 This question, which contains four parts, tests the candidates ability to identify, as well as to apply their knowledge on certain aspects of company law, viz, variation of class rights, the contractual effect of the articles of association and alteration of articles. (a) Preffo may be advised that the preference shareholders will be able to challenge the validity of the alteration if it amounts to a variation or abrogation of their class rights: s.65 (1). A variation of a class right is one which directly alters the right of a class of shareholders. A distinction must be drawn between a variation of a class right and a mere variation of the enjoyment of ciass rights. In Greenhalgh v Arderne Cinemas, the company had issued ordinary shares of 1/ each as well as preference shares of 20s each. All shares carried the right to one vote per share. The ordinary shareholders passed a resolution to sub-divide their shares into 20s shares. The preference shareholders objected to this claiming that there had been a variation of their class rights and that the procedure for so doing had not been followed. The court held that there was no variation of the rights of the preference shareholders as their rights remained the same as before. At best it was only a variation of the enjoyment of their class rights. By article 4 of Table A, class rights may only be varied with the consent in writing of the holders of three fourths of the issued shares of that class or with sanction of a special resolution passed at a separate meeting of the holders of the class of shares. In the present case the company wishes to issue new preference shares carrying the same rights as the present preference shares. This will not in any way change the rights of the present preference shareholders. Therefore such an issue will not amount to a variation of class rights. See: White v Bristol Aeroplane Co Ltd (1953) Ch 65. If the new preference share were to be issued ranking pari passu with the preference shares issued earlier, then it would amount to a variation of class rights under s.65(6) and the company will have to follow the procedure in its articles of association. (The Malaysian position is different from the common law position in White v Bristol Aeroplane, which held that even an issue of preference shares ranking pari passu with an earlier one, will not amount to a variation of class rights.) As the company s articles are in the form of Table A and the prescribed procedure has not been followed, the variation of class rights is not valid and preference shareholders will be able to successfully challenge it. (b) (c) (d) By virtue of s.33(1) Companies Act 1965, the memorandum and articles of association, when registered, bind the company and the members to the same extent as if they have signed and sealed covenants to observe all the provisions of the memorandum and of the articles. As a result of this it has been held that where a company has breached the articles, the member may sue the company to enforce the articles. Similarly, where the member has breached the terms of the articles the company may sue to enforce them. The articles are also regarded as the terms of a contract among members themselves. Therefore, where one member breaches the terms of the articles another member may sue to enforce them. Thus, Alice may sue to insist on her right to purchase the shares of Girlie. See: Greenhalgh v Arderne Cinemas (1951). Soh Lee will not be able to enforce article 225 as the articles do not form the basis of a contract between the company and the outsider. The authority for this is the case of Eley v Positive Life Assurance Co (1876). In this case the articles of a company stated that Eley was to be the solicitor of the company. Eley was appointed as solicitor for some time but was later removed and some other person was appointed as solicitor. The court held that Eley being a non member could not sue to enforce the article. The company may alter the articles of association in accordance with s.31. The section provides that the articles may be altered by the passing of a special resolution. However, any such alteration is subject to the following restrictions: (i) The alteration must not contain anything illegal. (ii) The alteration cannot authorise anything forbidden by the memorandum of association. (iii) The alteration must not require members to take, or subscribe for more shares or increase their liability to the company unless they have given their written consent: s.33(3). In addition, any alteration must be done bona fide for the benefit of the company as a whole. Basically this means that the alteration must be fair to all the members and must not discriminate between classes of shareholders. See: Greenhalgh v Arderne Cinemas (1951); Brown v British Abrasive Wheel Co Ltd (1919). In Brown v British Abrasive Wheel Co Ltd, a company was in financial difficulties. The majority were willing to inject more capital to save the company from liquidation but wanted to get rid of the minority shareholders. They therefore proposed an alteration of the articles to the effect that the majority could compel the minority to sell their shares to them (the majority) at a fair price. The court held that this was not bona fide for the benefit of the company. It amounted to a fraud on the minority and the alteration was not valid. Applying this law to the present problem, Kechik may be advised that the proposed alteration could be challenged on the ground that it is not bona fide for the benefit of the company because such alteration will only benefit Mr Kam and Mr Goh and will not be for the benefit of all the shareholders. 15

10 11 This question, which contains two parts, tests the candidates ability to identify and apply the law relating to directors duties as well as the rule in Foss v Harbottle and the right of minority shareholders to sue on behalf of the company. (a) This part of the question concerns breach of directors duties. Directors are persons who are in a fiduciary position in relation to the company. Inter alia, the fiduciary duties are: (i) to act bona fide for the benefit of the company as a whole. (ii) to act for a proper purpose. (iii) to avoid conflict of duty and personal interest. In relation to the issue of shares, the directors may be considered to be in breach of their duty to act bona fide for the benefit of the company as a whole as well as in breach of their duty to act for a proper purpose. They will be in breach of their duty to act bona fide for the benefit of the company where they have acted in their own interests instead of the company. A case that illustrates this is Re W & M. Roith (1967). In this case a director had entered into a service agreement with his company under which his widow was to receive a pension for life. The court held that as the sole object was to benefit the widow and not the company, the transaction was not binding. Further, where the directors have not acted for a proper purpose they will also be regarded as being in breach of their fiduciary duty. The case of Hogg v Cramphorn (1964) CH 254 illustrates this duty. In this case, directors, in an attempt to prevent a take-over bid, issued shares with special voting rights to trustees of a scheme for the benefit of employees. The court held that this was an improper use of the power to issue shares. Further, the Companies Act 1965 now provides in s.132d (subject to exceptions which do not apply to the present problem) that directors may not exercise their power to issue shares unless they obtain the approval of the company in a general meeting. See also Howard Smith Ltd v Ampol Petroleum (1974). Applying this law to this part of the given problem we could conclude that the directors purpose in issuing shares was to strengthen their overall voting strength in the company. Hence they have also breached their duty to act for a proper purpose. Thus, the company may sue them for breach of fiduciary duty. Further, as they have not obtained the required approval from the general meeting for the issue of shares as required by s.132d, they are also in breach of the section. Section 132D (6) further provides that any issue of shares made by a company in contravention of this section shall be void and consideration given for the shares is recoverable. In addition, by 132D (2), any director who knowingly contravenes or authorises the contravention of the section is liable to compensate the company and the person to whom the shares were issued for the loss or damage sustained as a result of the contravention. In relation to the contract made in April 2004 with Tanahku Sdn Bhd, the directors Anand, Bakri and Chan are also in breach of their fiduciary duty to the company. One well established principle at common law is that directors must not put themselves in a position of conflict between their duties to the company and their personal interest. Such conflict may arise where the directors are interested in a contract with the company or where they make use of their position as directors to obtain a profit or advantage for themselves. At common law where a company has entered into a contract in which a director is interested the contract is voidable at the option of the company. This is illustrated in the case of Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq 461. Here the railway company ordered a quantity of chairs from the firm of Blaikie Bros. It was later discovered that one of the directors of the company was a partner in Blaikie Bros. The court held that the company was entitled to avoid the contract. Applying this principle, ABCD Sdn Bhd will be entitled to avoid the contract with Tanahku Sdn Bhd as Anand, Bakri and Chan are also the only directors and shareholders of Tanahku Sdn Bhd. Further, by s.131 of the Companies Act 1965, every director of a company who is in any way interested in a contract or proposed contract with the company shall as soon as practicable after the relevant facts have come to his knowledge declare the nature of his interest at a meeting of the directors of the company. Contravention of the section results in a penalty of imprisonment for seven years or fine of RM150,000 or both. As the directors have failed to comply with this section they will be liable as mentioned. With regard to the act of the directors in transferring the benefit of the RM2,000,000 contract to Kleen Deals Sdn Bhd, they are in breach of the fiduciary duty to avoid conflict of duty and personal interest by usurping for themselves a corporate opportunity. The case of Cook v Deeks (1916) AC 554 is illustrative. In that case there were four shareholders, who, were also directors. Three of them negotiated a contract on behalf of the company but later diverted the contract to another company formed by them. When the fourth director (Cook) protested, resolutions were passed by the three of them as shareholders approving the transaction. The Privy Council held that the three directors had breached the duty to avoid conflict of duty and personal interest. The purported ratification was not valid as it constituted a fraud on the minority. The company was entitled to get back the benefit of the contract. Applying this law to the problem it may be concluded that ABCD Sdn Bhd could successfully sue Anand, Bakri and Chan for breach of fiduciary duty and have the benefit of the contract returned to the company. 16

11 (b) This part of the question concerns the application of the rule in Foss v Harbottle and the right to institute a derivative action. By virtue of this rule, where a wrong is done to the company, only the company itself may sue to remedy the wrong. Therefore, as the directors have breached their duty to the company, David may not sue on behalf of the company unless he can rely on any exception to the rule in Foss v Harbottle. One of the exceptions which may apply in the present case is where there has been a fraud on the minority by the majority. It has been well established that appropriation of the company s property amounts to a fraud on the minority (See: Cook v Deeks (1916)). It has also been considered that abuse of power by those in control in the sense that they acted for a collateral purpose rather than the true purpose for which the powers were granted may also amount to a fraud on the minority (See: Abdul Rahim bin Aki v Krubong Industrial park (Melaka) Sdn Bhd (1995) 3 MLJ 417). Where there has been fraud on the minority, a minority shareholder is entitled to institute an action called a derivative action on behalf of the company. However, such action will only be allowed if it is further shown that the wrongdoers are in control of the company and are refusing to lend the name of the company to an action to remedy the wrong. Thus, David may be advised that he is likely to succeed in bringing a derivative action as the wrongdoers are in control and their actions amount to fraud on the minority. 12 This problem based question on contract law, which contains four parts, tests the candidate on his ability to identify and apply the law relating to certain aspects of consideration as well as intention to create legal relations, to given fact situations. (a) (b) (c) The issue here is whether a payment of a lesser sum by a third party will constitute sufficient consideration to discharge a debt of a larger sum owed by the defendant to the plaintiff. In English law this is allowed as an exception to the rule that payment of a lesser sum cannot discharge the obligation to pay a larger sum. This was recognised in the case of Hirachand Punamchand v Temple (1911) 2 KB 330. This is also the position in Malaysia by virtue of s.64 of the Contracts Act Illustration (c) of s.64 provides the following example: A owes B $5,000. C pays to B $1,000 and B accepts them in satisfaction of his claim on A. This payment is a discharge of the whole claim. Applying this to the facts of the given problem, it can be concluded that the payment by Emma to Ken of RM5,000 in satisfaction of Lemmy s debt of RM10,000 to Ken is a discharge of Ken s claim against Lemmy. Thus Ken will not be able to claim the balance of RM5,000 from Lemmy. Anisah promised to pay Bantoo the sum of RM3,000 as a reward. The issue is whether the promise to pay is supported by consideration. One of the basic elements for a valid contract is consideration. This may be defined as the price paid, or to be paid, by the one party to the other in return for that other s promise. Consideration may be executed, executory or past. Consideration is said to be past when the promisor promises to do something only after the promisee has already done or abstained from doing something. Such past consideration is not valid in English law but is valid in Malaysia. By virtue of s.2(d) consideration may be validly given, when, at the desire of the promisor, the promisee or any other person, has done or abstained from doing.... On the facts of the case however, s.2(d) may not apply as Bantoo did not repair the fence at the desire of Anisah. Hence, there may not be a valid contract due to lack of consideration. However, s.26 provides for several exceptions to the rule that contracts without consideration are void. One of the exceptions is s.26 (b), by virtue of which a promise to compensate, wholly or in part, a person, who has already voluntarily done something for the promisor is valid. Thus, Bantoo may be advised that he is likely to be successful in his claim against Anisah. This question concerns the issue of consideration and statute-barred debts. One of the elements of a contract is consideration, which may be said to be the price paid by one party to a contract to obtain a reciprocal promise by the other. In the absence of consideration, the contract is void. In the present problem, Ah Leng lent RM10,000 to Ah Meng in Ah Meng promised to repay it within one month but has not done so to-date. Ah Leng wishes to sue Ah Meng to recover the amount. Ah Leng may be advised that he will not be successful in such action against Ah Meng as the debt is now statute-barred. By the Limitation Act 1953, actions to enforce a debt must be commenced within six years from the date it became due. It is now over seven years since the debt became due. Hence, Ah Leng will fail in any action to recover the debt. However, if Ah Meng has subsequently made a fresh promise to repay the debt then Ah Leng may sue Ah Meng. This is because of s.26(c) of the Contracts Act 1950, which provides an exception to the rule that contracts without consideration are void by providing that a statute-barred debt may be enforced subject to the following conditions being satisfied: (i) The debtor must have made a fresh promise to pay in whole or in part a statute-barred debt and (ii) The promise must be made in writing and signed by the person to be charged or his lawfully authorised agent. In the given problem Ah Meng had only orally promised Ah Leng to repay the loan. Therefore the debt remains statute barred and Ah Leng cannot legally recover the debt from Ah Meng. 17

12 (d) The question here is whether a valid contract exists between Maniam and his wife Jamuna. On the facts of the case the validity of the contract may be challenged on the ground that there is no intention to create legal relations. This is one of the essential elements of a valid contract. The Contracts Act 1950 is silent as to this requirement. Hence, English law will apply. Intention to create legal relations means that parties to a contract must have intended that their contract will be subject to legal consequences in the event of a breach by either party. It is sometimes difficult to determine whether the parties had the relevant intention to create legal relations. The courts developed two presumptions to assist in determining this. The first presumption is that in business agreements there is an intention to create legal relations. However, this may be rebutted by evidence to the contrary, for example, by the use of a subject to contract clause see Winn v Bull (1877) 7 Ch D 29 and Low Kar Yit & Ong v Mohd Isa & Anor (1963) MLJ 165. In social or domestic agreements there is a presumption that no such intention exists. An example of such agreement is the case of Balfour v Balfour (1919) 2KB 571, where the defendant had promised to pay his wife a monthly allowance while he was away on leave. She had been ill and was unable to accompany him. The court held that there was no intention to create legal relations and so the agreement could not be legally enforced. However, this presumption is also rebuttable by evidence to the contrary. See: Merrit v Merrit (1970) 2 A11 E. R. 760; Pettit v Pettit (1970) AC 777. In the given problem, it is arguable that there was more than a mere domestic arrangement in that Jamuna gave up her part time job to look after her husband full time, in consideration of his promise to give her a diamond necklace. Therefore there may be an enforceable agreement and Jamuna may be so advised. 18

13 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) June 2005 Marking Scheme Very good answer clearly explaining the meaning of fundamental liberties and stating the main liberties of the individual under the Federal Constitution. 5 6 Reasonable answer stating what is meant by fundamental liberties and some of the main liberties under the Federal Constitution. 0 4 Incomplete or inaccurate answer. 2 (a) 2 3 Accurate answer stating who is a minor and the general effect of contracts entered into by them. 0 1 Incomplete or inaccurate answer. (b) 4 7 Good to excellent answer explaining clearly the various situations where contracts by minors will be valid. 0 3 Incomplete or inaccurate answer An excellent answer explaining the nature and effect of fraud in relation to the validity of contracts with reference to the Contracts Act Reasonable answer explaining the nature and effect of fraud on the validity of contracts. 0 4 Incomplete or inaccurate answer An excellent answer explaining what is a contract of service as opposed to a contract for services in relation to employment law, and the importance of such distinction. 5 6 Average answer explaining the difference between a contract of service and a contract for services. 0 4 Incomplete or inaccurate answer A very good answer explaining the relevance of sharing of profits as evidence of a partnership and the situations under the Partnership Act 1961 in which the mere sharing of profits will not be considered as giving rise to a partnership. 5 6 Average answer stating the main situations under the Partnership Act 1961 in which the mere sharing of profits will not be considered as giving rise to a partnership. 0 4 Incomplete or inaccurate answer. 6 (a) 0 2 An accurate answer will fall into the upper part of this band while an inaccurate one will fall into the lower part. (b) 6 8 Excellent answer accurately explaining the main duties of a principal to his agent, with reference to the Contracts Act Average answer stating some of the more important duties of a principal to his agent. 0 3 Incomplete or inaccurate answer. 7 (a) 2 4 Good to average answer explaining the difference between a fixed charge and a floating charge. The better answers will refer to the case of Re Yorkshire Woolcombers Association. 0 1 Incomplete or inaccurate answer. (b) 0 6 One and a half marks for each disadvantage of a floating charge accurately explained. 8 (a) 0 4 An accurate answer clearly explaining the meaning of oppression with reference to relevant cases will fall into the upper part of this band while an incomplete or inaccurate one will fall into the lower part. (b) 0 6 Approximately one and a half marks for each order accurately stated, with reference to the Companies Act