Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia)

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2 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) June 2007 Answers 1 This question tests the candidates knowledge of the main sources of Malaysian law. Malaysian law is derived from various sources. The main sources are the following: The Federal Constitution The Federal Constitution is the supreme law of Malaysia. It provides for a democratic system of government and the powers of the Federal and State Governments. It also establishes a constitutional monarchy and entrenches fundamental rights/liberties of the individual. The Federal Constitution can only be amended by a special majority of two-thirds of the total number of members of the legislature. The State Constitutions Every state in Malaysia has its own State Constitution. The State Constitutions contain provisions pertaining to state matters as provided under the Federal Constitution. Land matters, agriculture, forestry, local government and Islamic law are the main state matters. (c) Legislation Legislation refers to the laws passed by Parliament as well as the State Legislative Assemblies. The laws passed by Parliament since 1957 (i.e. after Malaysia s independence) are called Acts while those passed by the State Legislative Assemblies (except Sarawak) are called Enactments. The laws passed in Sarawak are called Ordinances. (d) Subsidiary legislation Subsidiary legislation refers to the rules, regulations, by-laws, orders and other instruments made by a person or body in accordance with the powers delegated to him/it under an enabling legislation. Such legislation is an increasingly important source of law because Parliament and the State Legislature lack the time and expertise to deal with specific technical details. (e) English common law and the rules of equity This is also a very important source of Malaysian law. The reception of English common law and equity in Malaysia is specifically permitted by virtue of ss.3(1) and 5(1) of the Civil Law Act (f) Judicial precedents This refers to the law as developed through cases decided in the superior courts. Sometimes referred to as judge-made law, it is another very important source of law. Under the doctrine of binding judicial precedent, which is also observed in Malaysia, the decisions of the higher courts must be followed by the lower courts in similar cases. (g) Customs This refers to the customs of the local inhabitants which have been accepted as law. It mainly relates to family matters, e.g. marriage, divorce and inheritance. The customs of non-muslims are no longer of much importance since the passing of the Law Reform (Marriage and Divorce) Act 1976, which abolished polygamous marriages among non-muslims. However, the customary laws of the Malays (also called adat law) remains an important source of law. (h) Islamic law This is another important source of Malaysian law. It is only applicable to muslims. Islamic law is administered at state levels by a separate system of courts called the syariah courts. 2 This question tests the candidates knowledge on the definition of agency and the ways in which an agency may come into existence. 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. An agency may come into existence in the following ways: (i) 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. (ii) By implied appointment This arises 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: 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) By ratification by the principal An agency by ratification arises where the agent acts outside the scope of his authority but the principal subsequently, accepts or ratifies the act of the agent. 11

3 (iv) (v) 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 effect will follow as if they had been performed by his authority. By necessity Sometimes 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: (1) It must be impossible to obtain the principal s instruction. (2) The agent s action must be necessary in the given circumstances, to prevent loss to the principal. (3) 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. 3 This question on partnership law, tests the candidates knowledge on the extent to which persons who are not partners may be held liable as partners towards third parties. Candidates are expected to discuss the concept of holding out under s.16 of the Partnership Act A person who is not a partner of a firm may sometimes, either by words spoken or written, represent himself as a partner in the firm or knowingly allow himself to be represented as a partner in the firm. In such cases there is said to be a holding out that the person is a partner. This may be illustrated by the case of Bevan v The National Bank Ltd (1906) 23 TLR 65. In this case Bevan carried on business as MW & Co and employed MW as the manager of the business. It was held by the court that these facts amounted to a holding out that MW was a partner. By s.16 of the Partnership Act 1961, persons may be made liable as partners for such holding out. The liability is based on the doctrine of estoppel. To make a person so liable under s.16, the following requirements must be satisfied: (i) there must have been a representation by a person that he is a partner or he must have knowingly allowed someone else to represent that he was a partner when in fact he was not; (ii) the representation could be oral, written or by conduct; (iii) the third party must have relied on the representation; (iv) the third party must have given credit to the firm on the strength of that representation. There is no requirement that the representation be communicated to the person giving credit by or with the knowledge of the apparent partner. That apparent partner will be liable as a partner even if it was communicated to the person giving credit without his knowledge. See: Martyn v Gray (1863). The apparent partner s liability is only towards persons who have given credit to the firm on the strength of the representation. Credit does not only refer to monies lent to the company. It has been given a wider interpretation. This may be illustrated by the case of Lynch v Stiff (1944). In this case, the plaintiff had placed some money with a firm of solicitors for investment purposes relying on a representation that the defendant was a partner (when in fact he was only employed as a solicitor). The court held that the plaintiff had given credit to the firm and that the defendant was liable as a partner for holding out. It must be further noted that the liability in respect of the estate of deceased partners is limited by s.16. It states that where, after a partner s death, the partnership business is continued in the old firm name, the continued use of that name or of the deceased partner s name as part thereof shall not make the deceased person s estate liable for any partnership debts contracted after his death. 4 This question tests the candidates knowledge of the presumptions used by the courts to determine whether the parties to a contract had the necessary intention to create legal relations. Intention to create legal relations is one of the essential requirements for a valid contract. As the Contracts Act 1950 does not provide for this requirement English law in this respect is applicable. Intention to create legal relations essentially means that parties to a contract must have had the intention that the contract should have legal consequences in the event of breach by either party. It had been said that, to create a contract there must be a common intention of the parties to enter into legal obligations mutually communicated expressly or impliedly. See: Rose and Frank Co v Crompton Bros (1923). However, sometimes the contracting parties do not clearly indicate their intention. In such situations the courts will encounter serious problems in determining whether the parties did in fact have the intention to create legal relations. 12

4 Two presumptions have been developed by the courts to assist in determining whether such intention existed between the parties. The first presumption is that in commercial and business agreements the parties did have the necessary intention to create legal relations. This may be illustrated by the case of Edwards v Skyways (1964). In this case the plaintiff s employer had promised him an ex-gratia payment in view of his redundancy. The employer contended that there was no intention to create legal relations because of the word ex-gratia. The court, applying the presumption, held that there was the necessary intention to create legal relations. However, this presumption is a rebuttable one and will not be applied where one party can prove that there was in fact no such intention, for example where the agreement itself expressly states that no legal relations was intended. See: Rose and Frank Co v Crompton Bros (1923). The second presumption is that in social and domestic agreements there is no intention to create legal relations. The case of Balfour v Balfour (1919) 2 KB 571 is illustrative. In this case, the husband who was stationed in Sri Lanka had promised to pay his wife a monthly allowance as she could not accompany him to Sri Lanka due to poor health. The court held that she could not enforce the agreement as the parties had not intended that it should have legal consequences. This presumption is also a rebuttable one. Thus, where circumstances do in fact show such intention the agreement will be binding. This may be illustrated by the case of Merritt v Merritt (1970) 2 All ER 760, where an agreement was made between a husband and wife upon their separation that he would pay her a monthly allowance. The agreement was recorded in writing and signed by the husband. The court held that there was an intention to create legal relations and the agreement was legally binding. 5 This question tests the candidates knowledge on specific performance as a remedy for breach of contract. Specific performance is an order of the court requiring the party who is in breach of the contract to perform his part of the bargain. It is an equitable remedy. In Malaysia, the remedy of specific performance is provided for under the Specific Relief Act By s.11(1), specific performance of any contract may be granted at the discretion of the court in the following circumstances: (i) When the act agreed to be done is in the performance wholly or in part of a trust. For example, A holds certain stock in trust for B. A wrongfully disposes of the stock. B may sue for specific performance. (ii) Where there exists no standard for ascertaining the actual damage caused by the non performance of the act agreed to be done. For example, A agrees to buy and B agrees to sell, a picture by a dead painter and two rare China vases. A may obtain specific performance as there is no standard for ascertaining the actual damage which would be caused by its non-performance. (iii) When the act agreed to be done is such that pecuniary compensation for its non-performance would not afford adequate relief. For example, where A transfers without endorsement but for valuable consideration a promissory note to B. A becomes insolvent and C is appointed his assignee. B may compel C to endorse the note, for C has succeeded to A s liabilities and a decree for pecuniary compensation for not endorsing the note would be fruitless. Specific performance cannot be granted in certain circumstances. This is provided for in s.20 which states that that the following contracts cannot be specifically enforced: (i) a contract for the non-performance of which compensation in money is an adequate relief: (ii) a contract which runs into such minute or numerous details or which is so dependent on the personal qualifications or volition of the parties or otherwise from its nature is such that the court cannot enforce specific performance of its material terms; (iii) a contract whose terms the court cannot find with reasonable certainty; (iv) a contract which is in its nature revocable; (v) a contract made by trustees either in excess of their powers or in breach of their trust; (vi) a contract made by or on behalf of a corporation or public company created for special purposes or by the promoters of the company which is in excess of its powers; (vii) a contract which involves the performance of a continuous duty extending over a longer period than three years from its date; and (viii) a contract of which a material part of the subject-matter supposed by both parties to exist, has, before it has been made, ceased to exist. 6 This question on company law contains two parts. Part tests the candidates knowledge on alteration of the articles of association. Part tests their knowledge on reduction of capital. A company may alter the articles of association by passing a special resolution in accordance with s.31 of the Companies Act However, any such alteration is subject to the following restrictions: (i) The alteration must not contain anything illegal. (ii) The alteration cannot contravene the provisions of the Companies Act (iii) The alteration cannot authorise anything forbidden by the memorandum of association. 13

5 (iv) 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). Further, case law has established that any alteration must be done bona fide for the benefit of the company as a whole. This effectively 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). A company may reduce its share capital in accordance with the provisions of s.64. This section states that the following requirements must be met: (i) The articles must authorise a reduction of capital; (ii) The company must pass a special resolution; and (iii) A confirmation by the court must be obtained. If the above conditions are satisfied, the company may reduce capital in any way. However, three ways are specifically mentioned in s.64 as follows: (i) It may extinguish or reduce liability on any of its shares in respect of share capital not paid up; (ii) It may cancel any paid up capital which is lost or unrepresented by available assets; and (iii) It may pay off any paid up share capital which is in excess of the needs of the company. 7 This question on company law, tests the candidates knowledge of the nature of a floating charge as well as the weaknesses of the floating charge as a form of security. The floating charge is a type of charge that, unlike a fixed charge, does not immediately attach to the assets concerned. It gives the chargor the freedom to continue to deal with the assets comprised in the charge, in the ordinary course of its business. A charge will be a floating charge if it has the following three characteristics as stated by Romer J in Re Yorkshire Woolcombers Association (1903) 2 Ch 284: (i) It is a charge on a class of assets present and future. (ii) (iii) The class of assets fluctuates in the ordinary course of business. 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. 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. (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 ER 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 This question on employment law which contains two parts, tests the candidates knowledge on constructive dismissal and due inquiry. 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. 14

6 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). By s.14 of the Employment Act 1955 an employer may dismiss the employee without notice on the ground of misconduct by an employee. However, the employer may only do so after due inquiry. The Employment Act does not state what constitutes due inquiry. However, recourse may be had to the following guidelines laid down by the Industrial Court in the case of KJJ Cleetus and Unipamol (M) Sdn Bhd (IC Award 66 of 1975): (i) the inquiry is to be instituted as early as possible after the suspension of the complainant; (ii) the complainant is to be given particulars of the misconduct, preferably in writing; and a reasonable time is to be given to him before the inquiry to enable him to prepare his case; (iii) where applicable, the complainant is to be accompanied by his Union or Committee Representative, if any, at the inquiry; (iv) the inquiry is to be conducted, as far as possible, by such Officer(s) as not directly connected with the investigation of the misconduct, so as to give the hearing impartiality; (v) (vi) examination of relevant witnesses is to be allowed at the reasonable discretion of the officer-in-charge of the inquiry; and notes in the form of questions and answers and the final decision are to be recorded to show that the inquiry was proper, and that the decision arrived at was fair. 9 This question on company law tests the candidates knowledge and ability to apply the law relating to ultra vires transactions as well as the rule in Royal British Bank v Turquand. The first matter in the given problem relates to the decision of the directors to purchase a ship costing RM5 million for the purposes of venturing into the pleasure cruise business. By virtue of the ultra vires doctrine, a company is only permitted to act within the scope of its objects clause. Any activity outside its objects clause would be ultra vires. At common law such ultra vires transactions are void. See: Ashbury Rly Co v Riche. In order to mitigate the harshness of the ultra vires doctrine, several methods of drafting the objects clause were resorted to. One such method was to use a subjectively phrased objects clause. An example of such a clause is seen in the case of Bell Houses Ltd v City Wall Properties Ltd. In this case, Bell Houses Ltd was in the business of housing development. There was a clause in its objects clause which permitted the company, to carry on any other trade or business whatsoever, which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or as ancillary to any of the above businesses or the general business of the company. City Wall Properties Ltd required financing from a Swiss financier. The directors of Bell Houses Ltd were prepared to introduce the directors of City Wall Properties to the financiers provided that City Wall Properties agreed to pay Bell Houses Ltd a commission of 2% of any amount borrowed. After City Wall Properties borrowed 1 million from the Swiss financiers, it refused to pay the promised commission to Bell Houses Ltd on the ground that such a payment was ultra vires the objects of Bell Houses Ltd. The court, relying on the aforementioned clause, held that it was intra vires. In the given problem the objects clause of the company states that the object of the company is to manufacture biscuits and snack foods. Thus, the purchase of a ship would fall outside the scope of the objects clause. However, there is a clause which states that the company could carry on any other related business which, in the opinion of the directors may be advantageously carried on by the company. So the question arises whether the purchase of a ship for purposes of venturing into the pleasure cruise business would be a related business, which in the opinion of the directors was advantageous to the company. On the facts of the case, it is unlikely that the pleasure cruise business would be regarded as a business related to biscuit manufacturing. Therefore, if the company proceeded to purchase the ship, it would be acting ultra vires. However, even if it was acting ultra vires, the transaction would not be void in Malaysia in view of s.20 of the Companies Act By this section, the validity of an act or transaction done by a company cannot be invalidated on the ground that it is ultra vires. However, such lack of capacity on the part of the company can be relied on in three circumstances as stated in s.20(2), namely: (i) In proceedings against the company by any member or debenture holder to restrain the company from doing any ultra vires transaction. (ii) In proceedings by the company or any member of the company against the present or former officers of the company. (iii) In a petition by the minister to wind up the company. Therefore, in relation to the first matter, Mano may be advised that he, as a member, may institute a legal action to restrain the company from proceeding with the decision to purchase the ship. If they had completed the purchase, he may sue the directors concerned, under s.20(2) as explained above. In relation to the second and third matters, the issue concerns the application of the rule in Royal British Bank v Turquand. This rule, which is also known as the Indoor Management Rule, is a rule by which third parties dealing with a company in circumstances where the officer, acting on behalf of the company, has exceeded his authority as found in its articles of association, are entitled to enforce the transaction in question against the company despite the lack of authority. 15

7 The rule is applicable only where the officer s lack of authority was due to non-compliance with an internal procedure of the company. In the said case, the directors of a company issued a bond to the Royal British Bank. Under the articles of association of the company they had the power to do so, if authorised by a general resolution of the company. The company disclaimed any liability on the ground that there was no resolution passed authorising the issue of the bond. 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. The importance of the rule is that it assists 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 the rule is subject to several exceptions. Among them are the following: (i) Where the person seeking to rely on it has notice of the irregularity. Case: Howard v Patent Ivory Co (1888) 38 Ch.D (i) Where the document on which the person seeks to rely is a forgery. Case: Ruben v Great Fingall Consolidated (1906) AC 439. (iii) 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 775. The rule will also not apply where the third party is deemed to have constructive notice of matters which are required to be lodged with the registrar, for example the Form 49 (Return Giving Particulars in Register of Directors, Managers, and Secretaries and Changes of Particulars) and special resolutions. See: KL Engineering Sdn Bhd & Anor v Arab Malaysian Finance Bhd (1994) 2 MLJ 201, Irvine v Union Bank of Australia (1877) 2 App Cas 366 and Pekan Nenas Industries Sdn Bhd v Chang Ching Chuen (1998) 1 AMR 169. In the given problem, Anna borrowed RM500,000 on behalf of the company from Kwik-Cash Bank without obtaining the resolution of the members. Kwik-Cash Bank is entitled to rely on the rule in Turquand s case as such a resolution is an internal matter and it is entitled to presume that such a resolution had been duly passed. Thus it can validly claim the full amount of RM500,000 from Maju Sdn Bhd. (c) As for Tanamura Sdn Bhd, it would not be able to rely on the rule in Turquands case to enforce the contract for the sale and purchase of the land as the articles clearly required purchases of land to be approved by a special resolution. Special resolutions are registered with the Registrar and third parties are deemed to have notice of it. Thus, Maju Sdn Bhd would not be bound by this contract. See: Irvine v Union Bank of Australia (1877). Mano may be advised accordingly. 10 This question on company law contains two parts. Part tests the candidates knowledge and application of the law prohibiting companies from giving loans to directors while part tests them on the law prohibiting companies from giving financial assistance for the purchase of their own shares. By s.133(1) of the Companies Act 1965, a company (other than an exempt private company) may not give loans to its directors or enter into any guarantee or provide any security in connection with a loan made to such a director. Where there has been a contravention of this section, the company may recover not only the loan given in contravention of the section but also any amount for which it becomes liable under any guarantee entered into or in respect of any security given contrary to the section. See: Co-operative Central Bank Ltd v Feyen Development Sdn Bhd (1995) 3 MLJ 313 where the Federal Court overruled Che Wan Development Sdn Bhd v Co-operative Central Bank (1990) 2 MLJ 265, which had held that a guarantee or security granted in breach of s.133(1) was void. However, the section has provided for several exceptions. First, the prohibition does not apply to exempt private companies. These are companies which have no more than 20 members all of whom are individuals and not corporations. The individuals must be holding the shares on their own behalf and not as trustee for any company. Secondly, as provided in s.133(1), the company may provide a director with funds to enable him to meet expenditure incurred or to be incurred by him for the purposes of the company or to enable him to properly perform his duties as an officer of the company. Thus, for example, he may be granted a loan for the purchase of a car if he requires it for the purpose of performing his duties. Thirdly, as provided in s.133(1), the company may provide a director, who is in the full time employment of the company, with funds to enable him to purchase a home. Fourthly, as provided in s.133(1)(c), the company may, if it has an employee loan scheme approved at a general meeting, give a director in full time employment of the company, a loan in accordance with that employee loan scheme. 16

8 However, in the case of the exceptions under s.133(1) and 133(1), prior approval must be given at a general meeting. Alternatively, the loan may be given first subject to the condition that if the approval is not given at the next following annual general meeting, the loan shall be repaid or the liability under the guarantee or security discharged, within six months from the conclusion of that meeting. Applying the law as stated above, Abu, being a director of the company, cannot be granted a loan by the company unless he comes within any of the exceptions stated above. As Sharin n Carin is a public company, it is not an exempt company. The only possible exception which may apply is the second one, i.e. a loan to enable a director to meet expenses to enable him to perform his duties. As he needs the fur clothing to enable him to carry out his duties properly in the Arctic, he may qualify for such a loan, subject to obtaining the relevant approval from the general meeting. As the loan has not been so approved by the general meeting nor made by the directors subject to the approval of the next following annual general meeting, the loan is in contravention of the Companies Act It has been a long established principle in company law that a company cannot purchase its own shares. This rule is found in the case of Trevor v Whitworth (1887). The purpose of the rule was to ensure that a company s share capital is properly maintained. Any purchase by a company of its own shares will certainly reduce the company s capital. The rule was later extended by statute to include the giving of financial assistance for the purchase of its own shares. The relevant statutory provision is s.67 of the Companies Act By s.67(1), a company cannot give, whether directly or indirectly, and whether by means of a loan, guarantee or the provision of security or otherwise, any financial assistance for the purpose of, or in connection with, a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company, or in any way purchase, deal in or lend money on its own shares. Thus, by the section, a company cannot purchase its own shares, cannot give a loan to any person to enable that person to purchase its shares, and also cannot give a guarantee or provide security in respect of a loan made by some other party to enable a person to purchase its shares. Many cases illustrate this prohibition, e.g. Selangor United Rubber Estate Ltd v Craddock (1968); Chung Khiaw Bank v Hotel Rasa Sayang (M) Sdn Bhd (1988); Kidurong Land Sdn Bhd v Lim Gaik Hua & others (1990). However, s.67(2) provides the following exceptions to the general prohibition: (i) where the lending of money is part of the ordinary business of a company, the company may lend money in the ordinary course of its business. (ii) The provision of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, if the purchase or subscription is by trustees for the benefit of employees, including directors holding a salaried employment. (iii) The giving of financial assistance to employees (excluding directors) to enable them to purchase fully paid shares in the company or its holding company. Applying the law as stated above, the directors of Do Re Mi Sdn Bhd may be advised that unless the company s ordinary business includes the lending of money (which is not stated in the given facts) or Tina is an employee of the company (which is also not stated), all the contemplated courses of action by the directors are prohibited under the Companies Act This question on company law contains two parts. Part tests the candidates knowledge and application of the law relating to the qualifications and disqualifications of a company secretary while part tests the candidates on the law relating to the removal of company directors. Best Systems Sdn Bhd may be advised that the appointment, qualifications and disqualifications of a company secretary are governed by ss.139 and 139A to 139D of the Companies Act (i) By s.139(1) every company must have at least one secretary. Each secretary must be a natural person of full age. He must have his principal or only place of residence in Malaysia. The first secretary is required to be named in the memorandum or articles of association of the company: s.139(1a). Subsequent secretaries are appointed by the directors: s.139(3). By 139A a person may be qualified to act as secretary of a company only if he is: (1) licensed by the Registrar for that purpose, or (2) is a member of a professional body prescribed by the Minister by notification published in the gazette. The professional bodies which have been prescribed include the Malaysian Institute of Accountants, the Malaysian Association of the Institute of Chartered Secretaries and Administrators, the Malaysian Bar and the Malaysian Association of Company Secretaries. Section 139B states that a licence may be granted by the Registrar only if, after considering the character, qualification and experience of the applicant as well as the interest of the public, he is of the opinion that the applicant is a fit and proper person to hold a licence. 17

9 (ii) (iii) The disqualifications of a company secretary are stipulated in s.139c. By this section, a person will be disqualified to act as a company secretary if: (1) he is an undischarged bankrupt; (2) he is convicted of an offence under s.130(1) (which relates to offences in connection with the promotion, formation or management of a corporation, offences involving fraud or dishonesty punishable with imprisonment for a period of three months or more, offences involving dishonesty and lack of reasonable diligence, insider dealing, and offences involving situations where proper company accounts are not kept); (3) he ceases to be a member of the body prescribed by the minister or (4) he ceases to be a holder of a valid licence. Applying the law to the given facts, Terry does not automatically qualify to be a company secretary. His master s degree in public and corporate administration is not one of the recognised qualifications under s.139a. Thus he may only become a company secretary if he obtains the necessary licence from the Registrar. By s.128(1), a director of a public company may be removed from office by an ordinary resolution before the expiry of his term of office, notwithstanding anything in its memorandum or articles of association or in any agreement between it and him. See also: Tuan Haji Ishak bin Ismail v Leong Hup Holdings Bhd (1996) 1 MLJ 661. Further, by s.128(8), a director of a public company shall not be removed by, or be required to vacate his office by reason of, any resolution, request or notice of the directors or any of them, notwithstanding anything in the articles or any agreement. Before such a director can be removed by ordinary resolution, special notice must be given to the company of the resolution to remove a director. Upon receiving such a notice, the company is required forthwith to send a copy of the said notice to the director concerned. The director concerned has the right to make written representations of a reasonable length and require that copies of them be forwarded to the members. If the company does not comply either because it received the representations too late or due to its own default, the director may require the representations to be read out at the meeting. He is also entitled to attend the meeting and to be heard orally. See: s.128 (2)-(4). Where a director is removed pursuant to the procedure above but such removal results in a breach of contract between the director and the company, the director is entitled to damages. See: Southern Foundries Ltd v Shirlaw (1940) AC 701. See also: s.128(7). Hence, Joe may be advised that his removal is not valid. As regards the appointment of Azman, who is 75 years old, Joe may be advised that the general rule is that under s.129 of the Companies Act 1965, no person of or over the age of 75 may be appointed or act as a director of a public company or a subsidiary of a public company. However, the same section does provide for a special procedure for the appointment of such over-aged directors. They may be re-appointed by a resolution passed by a three-fourths majority at a general meeting of the company of which 14 days notice has been given. Joe may therefore be advised that, as the company has not followed the proper procedure for the appointment of Azman, who is above 70 years of age, his purported appointment as managing director is not valid. 12 This problem-based question on contract law contains three parts. Part tests the candidates ability to identify and apply the issue of counter offer while part relates to the issue of adequacy of consideration. Part (c) tests the candidates knowledge and ability to apply the law on undue influence as a vitiating factor in a contract. By s.2 and of the Contracts Act 1950, an agreement will arise where one party has made a proposal (offer) to another party and that other has unconditionally accepted it. 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 1,000. The plaintiff replied by letter that he was willing to purchase at 950. 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. See also: Malayan Flour Mills Bhd v Saw Eng Chee (1997) 1 MLJ 763. In the given problem, the price at which Tok Misai offered to sell his car to Pak Janggut was RM40,000. When Pak Janggut asked whether Tok Misai would consider selling the car for RM35,000, he was in fact making a counter offer, which had the effect of destroying the original offer. Thus Pak Janggut may be advised that he will not be successful if he sues Tok Misai for breach of contract. By s.2(e) of the Contracts Act 1950, every promise and every set of promises, forming the consideration for each other is an agreement. By s.10(1), all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void. Further, the law requires that consideration needs only to be sufficient and need not be adequate. This means that so long as there is valuable 18

10 consideration the courts will not question its adequacy. Explanation 2 of s.26 may be cited as authority for this. It states, An agreement to which the consent of the promisor is freely given is not void merely because the consideration is inadequate; but the inadequacy of the consideration may be taken into account by the court in determining the question whether the consent of the promisor was freely given. In the present case, Sam agreed to sell his watch to Subra although the price was well below the market value. Now, however, he has decided not to sell as the price was too low. As discussed above, consideration needs only to be sufficient. It need not be adequate. The fact that the price of RM1,000 is much lower than market value of the watch will not invalidate the contract. An example is provided in illustration (f) of s.26 as follows: A agrees to sell a horse worth $1,000 for $10. A s consent was freely given. The agreement is a contract notwithstanding the inadequacy of the consideration. See also: Phang Swee Kim v Beh I Hock (1964) MLJ 383. In the given problem there is nothing to indicate that Sam s consent was not freely given. Subra may therefore be advised that there is a binding contract between him and Sam and that he can successfully sue Sam for breach of contract. (c) Contracts must be entered into with the free consent of the parties to it. Section 14 states, inter alia, that consent is said to be free when it is not caused by undue influence or duress. The issue in this problem is whether the validity of the transfer of the property by Thatha to Alice can be challenged on the grounds of undue influence. Section 16 of the Contracts Act 1965 defines undue influence. It states that a contract is said to induced by undue influence, 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 two elements must be shown: (i) The domination of the will of one party by the other and (ii) obtaining an unfair advantage as a result of that domination. Section 16(2) states that a person is deemed to be in a position to dominate the will of another: (i) (ii) where he holds a real or apparent authority over the other or where he stands in a fiduciary relation to the other or where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reasons of age, illness or mental or bodily distress. A transaction induced by undue influence is voidable at the option of the party whose consent to it was so caused. Applying the law to the facts given it is difficult to state with certainty whether the transfer of the property to Alice was caused by undue influence. Alice seems to have been in a position to dominate the will of her father as he was aged and ailing and tended to do whatever Alice told him to do. She certainly has obtained an advantage over her brothers, as the property was transferred to her absolutely. Section 16(3) states that where a person who is in a position to dominate the will of another enters into a contract which appears on the face of it to be unconscionable, the burden of proving that the contract was not induced by undue influence is on the person in that dominant position. See: Salwath Haneem v Hadjee Abdullah (1884) 2 SSLR 57; Datuk Jaginder Singh & Ors v Tara Rajaratnam (1983) 2 MLJ 196; Rosli Darus v Mansor Hj Saad [2001] 4 CLJ 226. Thus, Ben and Charles may be advised that there is a presumption of undue influence and it would rest on Alice to prove that she did not in fact exert such undue influence over Thatha to make him transfer his property to her. 19

11 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) June 2007 Marking Scheme Very good answer clearly explaining the various sources of Malaysian law. 5 6 Reasonable answer explaining some of the more important sources of law An accurate answer will fall into the upper part of this band while an inaccurate one will fall into the lower part. 6 8 Very good answer explaining the different ways in which an agency may be created. 4 5 Reasonable answer defining agency and explaining some of the ways in which an agency may arise. 0 3 Incomplete or inaccurate answer Very good answer explaining the concept of holding out under s.16 of the Partnership Act and the circumstances in which a person who is not a partner can be held liable as a partner. 5 6 Average answer explaining some of the more important aspects of what is required Very good answer displaying sound knowledge of the presumptions used by the courts to determine whether parties to a contract had the intention to create legal relations. 5 6 Average answer, sufficiently explaining some of the more important aspects of what is required An accurate answer will fall into the upper part of this band while an inaccurate one will fall into the lower part. 6 8 Very good answer clearly explaining, with reference to the Specific Relief Act, the circumstances in which the courts may or may not grant such a remedy. 4 5 Average answer sufficiently explaining the remedy of specific performance and some of the circumstances when the court may or may not grant such a remedy. 0 3 Incomplete or inaccurate answer Good to average answer stating how a company may alter its articles as well as the restrictions upon such alteration. 3 5 Good to average answer stating the requirements under the Companies Act 1965 which need to be satisfied before a company can reduce its capital and the ways in which such reduction may be done An accurate answer describing the nature of a floating charge will fall into the upper part of this band while an inaccurate one will fall into the lower part. 6 7 An excellent answer explaining fully the various weaknesses of the floating charge as a form of security. 4 5 Average answer explaining some of the more important weakness of the floating charge as a form of security. 0 3 Incomplete or inaccurate answer. 21

12 8 3 5 A good to average answer accurately explaining what amounts to a constructive dismissal in the context of employment law. 3 5 Good to average answer explaining what constitutes due inquiry for purposes of termination of a contract of service for misconduct Excellent answer identifying the issue of ultra vires with full explanation and application to the given problem. 5 6 Average answer identifying the issue of ultra vires with reasonable explanation and application to the given problem. 6 7 Very good answer identifying the issue of the rule in Royal British Bank v Turquand with clear explanation of the rule and its exceptions and application to the given problem. 4 5 Average answer identifying the issue of the rule in Royal British Bank v Turquand with a reasonable explanation and application to the given problem. 0 3 Incomplete or inaccurate answer. (c) 0 3 An accurate answer identifying and applying the relevant exception to the rule in Royal British Bank v Turquand will fall into the upper part of this band while an incomplete or inaccurate one will fall into the lower part Very good answer accurately identifying the issue of prohibition on loans to directors, with good explanation of the law and the exceptions and correct application of the law to the given problem. 5 6 Average answer identifying the issue of prohibition on loans to directors with some explanation and correct application to the given problem Very good answer identifying the issue of prohibition on companies giving financial assistance for the purchase of their own shares with accurate explanation of the law and the exceptions and correct application to the given problem. 5 6 Average answer identifying the legal issue with some explanation and correct application to the given problem. 11 (i) 0 4 An accurate answer, explaining clearly the qualifications required to become a company secretary with reference to the Companies Act will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part. (ii) 0 4 An accurate answer, explaining clearly the disqualifications of a company secretary with reference to the Companies Act will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part. (iii) 0 2 An accurate answer will fall into the upper part of this band while an inaccurate one will fall into the lower part Very good answer clearly explaining the procedure for the removal of a director of a public company with correct application to the given problem and accurate advice to Joe. 5 6 Average answer with a reasonable explanation of the procedure for removal of a director and advise to Joe. 22