Part 2 Examination Paper 2.2(MYS)

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1 Answers

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3 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) December 2002 Answers 1 This question tests the candidates knowledge and understanding on fundamental liberties as provided for in the Federal Constitution. (Candidates are required to explain only five such liberties). The Federal Constitution contains several provisions which are designed to protect the freedom of the individual. These are referred to as fundamental rights or fundamental liberties. These rights are said to be entrenched or enshrined because these rights cannot be altered or taken away altogether unless the Constitution itself is amended. This can only be done with the approval of a twothirds majority of all the members of Parliament. The nature and effect of the liberties so enshrined in the Federal Constitution may be explained as follows: 1. No person may be deprived of his life or personal liberty except in accordance with the law. This provision protects the individual from being 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. This is an order of the court requiring that he be lawfully charged in court or be released. However, this right is not absolute. A person may still be deprived of his life or liberty in accordance with the law. Thus the Internal Security Act 1960, which was passed under powers conferred by Art.149 of the Constitution permits, among other things, preventive detention. 2. No person may be subject to slavery or forced labour. The constitution recognises that individuals should not be regarded as the property of others and thus bans all forms of slavery and forced labour. However, this right of the individual is given subject to the paramount interest of the nation. Thus, Parliament may 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 This protects the individual from being charged with a crime that was not recognised as a crime at the time the alleged wrongful act was done. Thus, for example, a person professing the Hindu religion cannot be charged with bigamy if his purported second marriage was entered into prior to the implementation of the Law Reform (Marriages and Divorce) Act 1976, which made non Muslim marriages monogamous. This effectively means that 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. This right recognises that an individual should not be placed in a position of double jeopardy, where he is made to undergo more than one trial for the same offence if he has already previously been tried and either acquitted or convicted. If the law were otherwise, there might be no end to the punishments meted out to the individual who has committed an offence, even if it is a minor one. However, this does not apply in cases where a higher court has quashed an earlier trial and ordered a re-trial. 5. All persons are equal before the law and entitled to its protection. Article 8 entrenches this right. However, clause 5 of the said article provides for some exceptions. These include, among other things: (ii) (iii) (iv) any provision regulating personal law any provision or practice restricting matters connected with religion to persons professing that religion only any provision for protection, well being or advancement of the aboriginal peoples of the Federation any provision restricting enlistment in the Malay Regiment to Malays In addition, State laws may provide for reservation of land for Malays. See: Art 89 and 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. (Further discussed below) 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 again is subject to Article 153 as stated above. (Art 153 is further discussed below) 8. Freedom of religion The constitution also entrenches the right of the individual 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. Further, the 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. 9

4 It must be noted that a number of these liberties may be overridden by Art 149 and 150 of the Constitution. Among other things, Art 149 empowers Parliament to make laws against subversion, whether or not an emergency is proclaimed. Such laws may be inconsistent with a number of the entrenched fundamental liberties such as liberty of the person, free movement and freedom of speech, assembly and association. The Internal Security Act 1960 is an example. Article 150 allows the Yang Di Pertuan Agung to proclaim an emergency if he is satisfied that there is imminent danger of the occurrence of such event. During such emergency, the Yang Di Pertuan Agung may proclaim Ordinances which would be valid even if they go against the provisions of the constitution or any other law. In addition to the above, Art 153 allows for special privileges to be accorded to Malays. This would validate laws which would otherwise go against the rights of equality and non-discrimination. 2 This question tests the candidates knowledge on the situations under the Partnership Act 1961 in which a court may order a dissolution of a partnership. Section 37 of the Partnership Act 1961 states that a partner may apply to the court for a dissolution of the partnership in six different situations. The power of the court under this section is entirely discretionary as the section states that the court may decree a dissolution. The various situations are as explained below. (b) (c) (d) (e) (f) Insanity of a partner Section 37 provides that when a partner is found lunatic or is shown to be of permanently unsound mind, an application may be made to the court for a dissolution of the partnership. The application can be made not only by the other partners but also on behalf of the partner who is of unsound mind, by his committee, next friend or any person having title to intervene. Permanent incapacity By s.37(b) the court may also order a dissolution where one partner becomes in any other way, permanently incapable of performing his part of the partnership contract. The application in such a case can only be made by the other partner. For example, if A and B are partners in a hair dressing business and A suffers from permanent paralysis of his arms, B may apply to the court for a dissolution on this ground. Prejudicial conduct By s.37(c) a partner may apply to the court for a dissolution of the partnership when another partner has been guilty of such misconduct as, in the opinion of the court, is calculated to prejudicially affect the carrying on of the business, regard being had to the nature of the business. An example is provided by the case of Carmichael v Evans (1904). In this case, C and E were partners. C was convicted of travelling on the railway without a ticket with intent to defraud. It was held by the court that as the conviction was for dishonesty, it was calculated to be detrimental to the partnership business. Wilful or persistent breach Section 37(d) provides that where one partner wilfully or persistently commits a breach of the partnership agreement or otherwise conducts himself in matters relating to the partnership business that it is not reasonably practicable for the other partner or partners to carry on business in partnership with him, then they (the other partners) may apply to the court for a dissolution. An example may be seen in the case of Cheeseman v Price (1865). In this case, the offending partner had failed to enter small sums of money received from customers into the accounts as he was required to do under the agreement. This had happened 17 times. The court held that there was persistent breach and ordered a dissolution. Carrying on the business at a loss By s.37(e) the court may order a dissolution if the business can only be carried on at a loss. It must be shown that there is no more possibility of making a profit. Where there is still some possibility that the business could be made profitable if more attention is given in the future, the court will not order a dissolution. Just and equitable ground By s.37(f) the court has a wide discretion to order a dissolution of the partnership when the circumstances of the case are such that, in the opinion of the court, it is just and equitable to do so. An example of a situation where the court would consider it just and equitable to wind up the company is where the partners can no longer work together and have reached a deadlock. See: Re Yenidge Tobacco Co Ltd (1916); Ebrahimi v Westbourne Galleries Ltd (1973). 10

5 3 This question tests the candidates comprehension of the concept of consideration in contract law and the exceptions to its requirement for a valid contract under the Contracts Act Consideration is one of the essential ingredients of a valid contract. Consideration may be said to be the price paid by one party to another in order to obtain the other s consent to the agreement. 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. Thus, the consideration need not be in the form of 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. Consideration may be classified as executory, excuted or past. It is said to be executory when neither party has fulfilled his obligation. It is said to be executed when one party has fulfilled his obligation. Consideration is said to be past when the promise is made after the act is done. In English law, past consideration is not valid. However, in Malaysia it is valid. By s.26 of the Contracts Act 1950, an agreement without consideration is void. However, not all agreements without consideration are void. Section 26 itself provides for several exceptions as follows: (b) (c) (d) 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. An agreement to compensate wholly or in part a person who has already voluntarily done something for the promisor. The following illustration is provided by the section: A finds B s purse and gives it to her. B promises to give A $50. This is a contract. An agreement to compensate wholly or in part a person who has done something which the promisor was legally compellable to do. The following illustration is provided by the section. A supports B s infant son. B promises to pay A s expenses in so doing. This is a contract. 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 authorised agent. The following illustration is provided by the section: 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. 4 This question tests the candidates knowledge on the definition of agency and the ways in which an agency may arise. (b) By s.125 of the Contracts Act 1950 an agency is the relationship which subsists between the principal and the agent who has been authorised to act for him or represent him in dealings with others. Thus, if A (the principal) appoints B (the agent) to perform some work on his behalf, an agency relationship arises between them. An agency may arise in the following ways: (ii) By express appointment by the principal. This is the most common way of creating an agency. The principal may make the appointment either orally or in writing. A good example of an express appointment in writing is the granting of a power of attorney. By implied appointment An agency may arise by implied appointment where it can be implied from the surrounding circumstances that the principal had given authority to the agent to act on his behalf. An illustration of this is provided in s.140 of the Contracts Act 1950 as follows: 11

6 A owns a shop in Kajang living himself in Kuala Lumpur and visiting the shop occasionally. The shop is managed by B and he is in the habit of ordering goods from C in the name of A for the purpose of the shop and of paying for them out of A s funds with A s knowledge. B has implied authority from A to order goods from C in the name of A for the purpose of the shop. (iii) (iv) (v) By ratification by the principal Sometimes the agent may do something on behalf of the principal without his authority. However, the principal may accept or ratify the act of the agent subsequently. When this happens, an agency by ratification is said to have arisen. Reference may be made to s.149 of the Contracts Act 1950 which states, where acts are done by one person on behalf of another but without his knowledge or authority, he may elect to ratify or to disown the acts. If he ratifies them, the same effects will follow as if they had been performed by his authority. By necessity An agency may arise as a result of an emergency or urgency of the situation. This may be referred to as an agency by necessity. This is provided for in s.142 of the Contracts Act An agency by necessity will arise if the following conditions are satisfied: (ii) (iii) It must be impossible to obtain the principal s instruction. The agent s action must be necessary in the given circumstances, to prevent loss to the principal. The agent must have acted in good faith. By estoppel An agency by estoppel will arise where a person (the principal) has led a third party to believe that someone (B) was his agent when in fact he (B) was not; and the third party has relied on that representation to his detriment. This is provided for in s.190 of the Contracts Act Illustration of s.190 provides the following example: A consigns goods to B for sale, and gives him instructions not to sell under a fixed price. C, being ignorant of B s instructions, enters into a contract with B to buy the goods at a price lower than the reserved price. A is bound by the contract. 5 This question tests the candidates knowledge on undue influence as a vitiating factor in a contract. One of the essential requirements for a valid agreement is the free consent of the contracting parties. Section 10(1) of the Contracts Act 1950 provides that agreements are contracts, if they are made by the free consent of parties competent to contact. Consent will not be considered to be free if it was obtained, among other things, through undue influence. Undue influence is said to occur where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Thus, there are two important requirements for undue influence. The first is that one party must be in a position to dominate the will of the other and the second is that an unfair advantage must have been obtained as a result of that domination. Section 16(2) of the Contracts Act 1950 provides that a person shall be deemed to be in a position to dominate the will of another in three situations as follows: (ii) (iii) Where he holds a real or apparent authority over the other. Illustration of s.16 provides the following example: A having advanced money to his son, B during his minority, upon B s coming of age obtains by misuse of a parental influence a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. Where he stands in a fiduciary relation to the other. The relationships between a solicitor and a client or a trustee and a beneficiary are examples of this fiduciary relation. Where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress. Illustration (b) of s.16 provides the following example: A, a man enfeebled by disease or age, is induced, by B s influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. The effect of a contract caused by undue influence is stated in s.20. It provides that such a contract is voidable at the option of the party whose consent was so caused. Such a contact may be set aside either absolutely, or if the party who was entitled to avoid it has received any benefit under it, upon such terms and conditions as the courts consider just. 12

7 Illustrations and (b) to s.20, provide the following examples: (ii) A s son has forged B s name to a promissory note. B, under threat of prosecuting A s son, obtains a bond from A for the amount of the forged note. If B sues on this bond, the court may set the bond aside. A, a money lender, advances $100 to B an agriculturist, and by undue influence, induces B to execute a bond for $200 with interest at 6% per month. The court may set the bond aside, ordering B to repay the $100 with such interest as may seem just. See: Chait Singh v Budin bin Abdullah (1918)1 FMSLR 348; Salwath Haneem v Hadjee Abdullah (1894) 2 SSLR This question tests the candidates knowledge of the veil of incorporation in company law as well as the exceptions where that veil may be lifted (Candidates are only required to state any six instances of lifting the veil of incorporation). (b) The veil of incorporation is a phrase that is used to denote that once a company is incorporated, it becomes in law a separate legal entity distinct and separate from the members. 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 (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: Salomon v Salomon & Co Ltd (1897); 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. Such lifting of the veil of incorporation may occur either by virtue of a statutory provision or by established case law. The main instances are as discussed below: (Candidates are required to discuss only six of these situations) Under case law 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 UK for purposes of tax because central control and management was with the holding company in UK. (iv) On the basis that a company is in fact the agent of its controllers. (v) 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. 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. 13

8 (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, for the amount stated therein, if the company does not pay. (ix) Section 304 (1) Companies Act 1965 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. (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 of 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 1967 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 SIX instances.) 7 This question on employment law which contains three parts, tests the candidates knowledge of constructive dismissal and redundancy. (b) An employee may be said to have been constructively dismissed in circumstances where the employer has breached the contract of employment thereby entitling the employee to resign. Thus, 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 an illustration of this. 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. 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); Wong Chee Hong v Cathay Organisation (M) Sdn Bhd (Civil appeal No. 194 of 1986). Redundancy refers to a situation where the employer has excess employees and their services are no longer required by the employer. It does not relate in any way to the misconduct, wrongdoing or breach on the part of the employee. (c) A redundancy may be said to occur in the circumstances mentioned in s.12(3) (d) of the Employment Act 1955 i.e. where: (ii) The employer has ceased, or intends to cease to carry on the business for the purposes of which the employee was employed; The employer has ceased or intends to cease to carry on the business in the place at which the employee was contracted to work; (iii) The requirements of that business for the employee to carry out work of a particular kind have ceased or diminished or are expected to cease or diminish; See also: Food Specialities Sdn Bhd and Esa bin Mohamad (Award 74 of 1989). 14

9 8 This question tests the candidates knowledge and understanding of the rule in Royal British Bank v Turquand and the exceptions to it. Candidates are expected to explain how the rule protects third parties contracting with the company. The rule in Royal British Bank v Turquand is one which protects third parties contracting with the company. By that rule, where an officer contracting on behalf of the company has exceeded his authority as found in the articles of association of the company, and such excess of authority was due to non-compliance with an internal procedure of the company the third party may presume that such internal procedure has been complied with. He may thus enforce the contract against the company despite the lack of authority of the officer concerned.the rule will only apply where the officer s lack of authority was due to non-compliance with an internal procedure of the company. The facts of the case are as follows: The directors of a company issued a bond to the Royal British Bank. The articles of association of the company stated that they had the power to do so, if authorised by a general resolution of the company. The company claimed that there was no resolution passed authorising the issue of the bond and that therefore it was not liable. The court held that the bank was entitled to sue on the bond. As the requirement for the resolution was a matter of internal regulation for the company and the bank could not know whether such resolution had in fact been passed, it was entitled to presume that it had indeed been passed. This rule is also known as the indoor management rule. The purpose of this rule is to assist third parties dealing with a company in good faith by estopping the company from denying liability in circumstances where some internal procedure of the company had not been followed and the third party could not be expected to know of the irregularity. If not for the rule, the transaction would be voidable at the option of the company. However, there are limits to the rule as it does not apply in certain circumstances. These may be summarised as follows: (ii) (iii) (iv) Where the person seeking to rely on it was not aware of the contents of the articles. Case: Rama Corporation Ltd v Proved Tin & General Investment Ltd (1952) 2 QB 147. Where the person seeking to rely on it has notice of the irregularity. Case: Howard v Patent Ivory Co (1888) 38 ChD 156. Where the document on which the person seeks to rely is a forgery. Case: Ruben v Great Fingall Consolidated (1906) AC 439. Where the person seeking to rely on it was put on inquiry and the irregularity would have been discovered if he had made due inquires. Case: A.L. Underwood Ltd v Bank of Liverpool (1924) 1 KB 9 This problem question on company law, which contains four parts, tests the candidates ability to identify and apply the law relating to the ultra vires doctrine and the contractual effect of the articles of association. (b) A company may only carry out those activities which are permitted by its objects clause. Any activity that is outside its objects clause is said to be ultra vires. At common law, any activity that was ultra vires was void. See: Ashbury Rly Co v Riche; Re Jon Beauforte. However, in Malaysia, the ultra vires doctrine has been modified by virtue of s.20 of the Companies Act By that section any act or transaction done by a company cannot be invalidated solely on the ground of lack of capacity of the company. Thus, completed transactions will be valid and either party is entitled to sue the other to enforce it. In addition, the section states that any member or debenture holder secured by a floating charge over the company s assets may obtain an injunction to stop the company from proceeding with the ultra vires act or transaction. See: s.20(2) Companies Act Further, the officers of the company may be made liable to the company for the loss occasioned to the company as a result of the ultra vires transaction. Applying this law to the present problem, the company may be advised that as the transaction is not a completed one, there is a possibility that a member or debenture holder may get an injunction to stop it from proceeding with the proposed transaction. Further, even if they proceeded and completed the transaction, the directors may be sued to make them personally liable. Thus, the major obstacle for the company is the possibility of an injunction being obtained against it. There is also a remote possibility that the minister may petition to have the company wound up. The company could overcome the obstacles referred to above, by altering its objects clause to include the building of highways. Section 28(1) of the Companies Act 1965 states that a company may alter its objects clause by special resolution. This is a resolution that has been approved by a majority of three fourths of the members present and voting, at a meeting of which no less than 21 day s notice has been given. 15

10 (c) (d) By s.33(1), the memorandum and articles, when registered, bind the company and its members. It is regarded as if the terms of the articles were the terms of a contract between the company and its members. Thus, the company can sue to enforce such a term. Similarly, the member may also sue the company if it breaches the terms of its articles of association. However, only those articles which affect a member in his capacity as a member can be enforced by or against the company. See: Eley v Positive Life Assurance Co. In this case the articles of association stated that Eley is to be the solicitor of the company. However, he was later removed as solicitor. The issue which arose was whether he could enforce the article and be re-appointed as solicitor. The court held that he was not so entitled. Section 31 allows a company to alter its articles by special resolution. However, there are several restrictions. Among them are that the alteration must not be illegal and must not conflict with the Companies Act 1965 and the memorandum of association. In addition, there is a requirement that any alteration must be done bona fide for the benefit of the company as a whole. What this means is that the alteration must affect every member in the same way and must not be discriminatory. This is best explained in the words of Evershed MR in the case of Greenhalgh v Arderne Cinemas. He said that the alteration would be liable to be impeached if the effect of it were to discriminate between the majority shareholders and the minority shareholders so as to give the former an advantage of which the latter were deprived. Applying this principle to the present problem, it could be concluded that the proposed alteration would be permitted as it affects every member equally and does not discriminate between groups of shareholders. Thus the company can successfully proceed to pass a special resolution to alter its articles of association as proposed. 10 This question on company law tests the candidates ability to identify legal issues relating to the giving by companies of financial assistance for the purchase of their own shares as well as purchase by companies of their own shares. It also tests the candidates knowledge of and ability to apply the law to a given problem. (b) (c) The legal issue that arises in this problem is whether the company can give any form of financial assistance to anyone to enable him/her to purchase its shares. Section 67(1) of the Companies Act 1965 clearly states that a company cannot, whether directly or indirectly, give any form of financial assistance to facilitate the purchase of its shares. Financial assistance includes the giving of loans as well as the provision of security in respect of loans given by any other party to facilitate such a purchase. However, s.67(2) allows for three exceptions as follows: The company may lend money if lending is part of its ordinary business and the money is lent in the ordinary course of its business. (ii) The company may provide financial assistance under an employee share scheme for the benefit of employees of the company or its subsidiary (including directors). (iii) The company may provide financial assistance to employees to enable them to buy shares in the company for their own benefit. Applying the above law to the given problem, the directors may be advised that they cannot legally proceed with their proposals as they contravene s.67(1) and do not fall within any of the exceptions in s.67(2). In the event the directors proceed with their proposed course of action, the following are the consequences as provided in s. 67(3): Each officer in default will be guilty of an offence and be liable to imprisonment for up to five years or a fine of 100,000 ringgit. (ii) The person so convicted may also be ordered to pay compensation to the company or other person for the loss or damage suffered by them as a result of the contravention. As a general rule a company cannot purchase its own shares. This prohibition was established in the old case of Trevor v Whitworth (1887). The purpose of the prohibition was to prevent a company from wasting away its capital, i.e., to ensure that a company maintains its capital. However, following the recession in 1997, the Companies Act was amended allowing for a public company to purchase its own shares subject to certain conditions being satisfied. These are found in s.67a of the Companies Act The section provides that a company may purchase its own shares if: it is a public listed company with a share capital; (ii) the articles of association of the company permit such a purchase; (iii) the company is solvent at the date of the purchase and does not become insolvent as a result of the purchase; (iv) the purchase is made through the stock exchange on which the shares are quoted and is in accordance with the relevant rules of the stock exchange and (v) the purchase is made in good faith and in the interest of the company. 16

11 Applying the law to the present problem, the directors may be advised that they may proceed to make the company purchase the shares subject to the conditions stated above. In particular, the directors must be reminded that the purchase must be made in good faith and for the benefit of the company. In so far as they wish to arrest the fall in the share price and restore investor confidence, they would certainly be acting in good faith for the benefit of the company. But the facts indicate that they might also have an intention to ultimately profit themselves. If that were so, they may not be acting in good faith and the validity of the intended purchase may be challenged as not being in good faith for the benefit of the company. 11 This problem question on company law, which contains three parts, tests the candidates knowledge and application skills in relation to directors duties as well as the rule in Foss v Harbottle and the derivative action. It is quite clear that the directors have breached their fiduciary duties towards the company. It has long been established that directors are fiduciaries in relation to the company and as such they must at all times act honestly and in good faith for the benefit of the company. Their fiduciary duties can broadly be divided into the following main categories: (ii) Duty to act in the best interest of the company. This means that a director must, in making a decision for the company, consider whether it would be for the benefit of the company. If the decision is primarily for his own or a third party s benefit, he would be in breach of this fiduciary duty. See: Re W & M Roith Ltd (1967). Duty to act for a proper purpose. This means that a director must exercise the powers bestowed upon him for the right purpose. The best example of a breach of this duty can be found in cases such as Hogg v Cramphorn (1967) and Howard Smith v Ampol Petroleum Ltd (1974), where 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. To utilise that power to frustrate a possible takeover of the company was considered a breach of the fiduciary duty to act for a proper purpose (iii) The 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. In the given problem the facts indicate that the directors had squandered the company s funds on matters which were not beneficial to the company. The purchase of the Rolls Royce and the expenditure of RM1 million in entertainment expenses are possibly matters which are not in the best interest of the company. However if these matters are within the powers of the directors, it may be difficult to challenge them in practice. See: Re Kong Thai Sawmill Sdn Bhd where the court held that there was no oppression against minority shareholders where the majority had incurred expenses in the name of the company which, though seemingly extravagant, were within the scope of their power. In relation to the donation of RM2 million to the Blissful Old Folks Home, at first glance it seems to be within the scope of the power of the directors. However, as the facts indicate that such donations may have been given to ensure that Bibee s mother was well taken care of, it may be concluded that the directors had not acted in the best interest of the company and are therefore in breach of the fiduciary duty. See: Re W & M Roith Ltd. With regard to the purchase of the piece of land from Ratu for RM3 million, when its true market value was only RM1 million, it is clear that the directors have breached their fiduciary duty to act honestly and in the best interest of the company. They have taken a gift of RM300,000. This amounts to a secret profit. Hence they may also be considered to be in breach of their duty not to make secret profits. See also: Mahesan v Malaysian Government Officers Cooperative Housing Society (1978) (b) In relation to the purchase of the land from Ratu, the directors are also in breach of ss.132c and 132E of the Companies Act Section 132C states, among other things, that directors cannot carry into effect any transaction for the acquisition of an undertaking or property of a substantial value, which would materially and adversely affect the performance or financial position of the company, unless it has been approved by the company in general meeting. Section 132C(5) states that any director who contravenes the provision of the section will be guilty of an offence. The penalty is imprisonment for five years or a fine of 30,000 ringgit or both. It is not clear whether the purchase of the land for RM3 million would be regarded as a transaction of substantial value as the section does not define substantial value. However, in the event of any doubt, the safer option would be to get approval of the members in general meeting. As no such approval has been given, the directors are likely to be held liable under this section. In addition to s.132c, the transaction may also fall foul of s.132e. By that section a company may not enter into any agreement or transaction with a director of the company or director of its holding company or with a person connected with a director, to dispose to or acquire from such a director or person, a non cash asset of the requisite value unless the arrangement or transaction is first approved by a resolution of the company in general meeting. 17

12 The section only applies to non cash assets of the requisite value. A non cash asset is any asset other than cash. Requisite value will include any asset whose value exceeds RM250,000. As the transaction in issue is land worth well above RM250,000 it is caught by the prohibition in s.132e. Ratu, being the sister of the director, Bibee, is a person connected with a director. See: s.122a. As no resolution has been obtained from the members in general meeting, the directors are in breach of s.132e. By s.132e(3) the director concerned and the person connected with him and any other director who authorised the arrangement shall, in addition to any other liability be liable: to account to the company for any gain which he had made directly or indirectly by the arrangement or transaction, and (ii) jointly and severally with any person liable under this subsection, to indemnify the company for any loss or damage resulting from the arrangement or transaction. Further, by s.132e(6) the director or person connected and any director who authorised the transaction will be guilty of an offence and may be imprisoned for five years and fined a maximum of RM30,000 or both. (c) As the company is a separate legal entity and the directors have breached their fiduciary duties to the company, only the company may sue the directors to remedy the wrong. This is the essence of the rule in Foss v Harbottle. One aspect of the rule is the proper plaintiff rule. This rule states that where a wrong is done to a company only the company may sue to remedy it. However, there are several exceptions to the rule in Foss v Harbottle. The most important one is where the wrongdoers are in control of the company and their acts amount to a fraud on the minority. There would be a fraud on the minority where the wrongdoers have breached their fiduciary duties and in particular have expropriated company property for themselves. See: Cook v Deeks (1916). Where the minority can show that there is a fraud on the minority, they may be allowed to institute an action on behalf of the company through a procedure known as a derivative action. On the facts of the case, it is likely that Chong and Rani will be able to institute a derivative action on behalf of the company to make Jalil and Bibee liable to the company for the loss resulting from the breach of their fiduciary duty to the company. 12 This problem question on contract law, contains four parts. Parts and(b) test the candidates knowledge and ability to identify and apply the law relating to certain basic elements of a contract. Part (c) concerns frustration of contracts and part (d) relates to agreements to pay statute barred debts. (b) The legal issue in this problem is whether silence will amount to consent, thereby giving rise to a valid contract. The general rule is that an agreement will only come into existence where one party has made a proposal (offer) to another and that other has accepted the proposal. The acceptance must be communicated to the proposer. By s.7(b) of the Contracts Act 1950 the acceptance may be expressed in some usual and reasonable manner, unless the proposal prescribes a manner in which it is to be accepted. While the offeror (proposer) may waive the need for communication of acceptance, the offeree must do something positive to accept, for example, by performing the conditions of the proposal. Section 2(b) of the Contracts Act 1950 requires the offeree to signify his assent to the proposal. Thus, silence on the part of the offeree cannot amount to an acceptance. Neither can a proposer state in the proposal that if the offeree does not reply within a stipulated time, the offer is deemed to be accepted. This may be highlighted by the case of Felthouse v Bindley (1862). In this case the plaintiff wrote to his nephew offering to buy his horse at a certain price. The letter also stated, If I hear no more about him, I consider the horse mine at that price. The nephew did not reply the letter. The court held that there was no valid acceptance. The silence on the part of the nephew did not amount to consent. Applying the law to the present problem, Ali may be advised that he will not be successful in suing Bidin for breach of contract. An agreement will arise where one party has made a proposal (offer) to another party and that other has unconditionally accepted it. See: ss.2 and (b) Contracts Act By s.7 the acceptance must be absolute and unqualified. In the event the person to whom the proposal is made varies the terms of the proposal, he is deemed to be making a counter-proposal (counter-offer). A counter offer has the effect of destroying the original offer. This is well illustrated in the case of Hyde v Wrench (1840). In this case the defendant offered to sell his estate to the plaintiff for 1000 pounds sterling. The plaintiff replied by letter that he was willing to purchase at 950 pounds sterling. When the defendant did not reply, the plaintiff sent another letter to the defendant accepting the original offer price. The court held that there was no contract between the parties. The counter-offer made by the plaintiff destroyed the original offer. Applying the law to the given problem, Chee Seng may be advised that he will not be successful if he sues Mohan for breach of contract. 18

13 (c) (d) The issue in this case is whether the contract has been discharged by impossibility of performance (frustration). Frustration may be said to occur, whenever the law recognises without the default of either party a contractual obligation has become incapable of being performed because circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. See: Davis Contractors Ltd v Fareham UDC [1956]. Section 57(2) of the Contracts Act 1950 states that 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. Based on case law, it is well established that destruction of the subject matter of the contract results in frustration of the contract. The contract may therefore be said to be discharged by impossibility of performance. A case in point is Taylor v Caldwell (1863) where a music hall hired by the defendant to the plaintiff for a series of concerts was accidentally burnt down before the date of the concert. The court held that there was frustration and the contract was therefore void. By s.66 of the Contracts Act 1950, when an agreement becomes void, any person who has received any advantage or benefit under it is bound to restore it, or make compensation for it to the person from whom he received it. Further, by s.15(2) of the Civil Law Act 1956, money due but not paid before frustration, ceases to be payable. Any money actually paid must be restored. S.57 of the Contracts Act also provides for restitution when a contract becomes impossible to be performed. Applying the above law to the given problem, Khalid may be advised that he will be successful in suing ABC Sdn Bhd for a refund of the deposit of RM1000 as the contract is frustrated and void. This question concerns agreements to pay statute-barred debts. As a general rule, agreements made without consideration are void. However, s.26 of the Contracts Act 1950 provides for several exceptions. One of them is an agreement to pay a statute-barred debt. A statute-barred debt is a debt which cannot be recovered as the period of limitation for enforcement of the debt has expired. (The period of limitation for enforcement of a debt is six years). Section 26 (1) provides that a statute-barred debt may still be enforced if the following conditions are satisfied: The debtor must have made a fresh promise to pay the statute-barred debt. (ii) The promise must be in writing and signed by the person to be charged or his authorised agent on his behalf. Applying the law to the given problem, it is clear that the debt of RM10,000 owed by Orkid to Rose is statute barred, as more than six years has lapsed from the date the debt fell due. Thus, Rose cannot recover the loan. The answer would not be different even if Orkid told Rose that she would repay the loan, as the fresh promise to repay the loan was only made orally and not in writing as required by s.26(c). 19