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

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3 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) June 2003 Answers 1 This question tests the candidates knowledge of the law making process in Parliament. The law making process is stipulated in the Federal Constitution and the standing orders of the Dewan Rakyat (House of Representatives) and the Dewan Negara (Senate). The initial step in the law making process is to prepare a draft of the proposed legislation. This is called a bill. The bill is then introduced into Parliament. This may be done either in the Dewan Rakyat or the Dewan Negara. However, it is more commonly introduced in the Dewan Rakyat. It will then undergo the following stages: (i) First reading this is a mere formality. At this stage the Minister concerned would only mention the title of the bill and give oral notice as to when the second reading would be moved. (ii) Second reading At this stage the Minister concerned would explain to the house the purpose of the bill and the main policy issues involved. (By this time they would have been printed and circulated to all members.) Debate on the bill is then carried out but this would be confined to its general principles. (iii) Committee stage At the completion of the second reading the house will automatically resolve itself into a committee of the whole house. This is the committee stage during which the details of the bill are discussed in a less formal manner and amendments are proposed, if necessary. Sometimes the bill would be considered by a Special Select Committee instead of a committee of the whole house if a motion to that effect is agreed upon by the house. This is an ad hoc committee appointed for a particular purpose. The committee of selection will determine its size and nominate its members. At the completion of the discussion at the committee stage the house will resume sitting. (iv) Third reading This stage is another formality. The Minister concerned would move a motion that the bill be read a third time and passed. When the motion is accepted the bill is accordingly passed. The bill must then be submitted to the other house (i.e. to the Dewan Negara if the bill originated in the Dewan Rakyat and vice versa) where it would undergo the similar stages of consideration. When the bill has been passed by both Houses of Parliament, it is sent to the Yang di Pertuan Agung for Royal Assent. Upon receiving the Royal Assent the bill becomes law (i.e. Act of Parliament). Note: By an amendment to Article 66 of the Federal Constitution which came into force with effect from 20 January 1984, the Yang Pertuan Agung must assent to a bill within 30 days of it being presented to him. In the case of non-money bills, he may return the bill to the house from which it originated with a statement of the reasons for his objection to the bill. The bill will then be reconsidered by both the houses and if it is passed by them again after such reconsideration, he must give his assent within 30 days of it being re-presented to him, failing which it becomes law as if it had been duly assented to. 2 This question tests the candidates knowledge on the liability of a retiring partner in respect of partnership debts incurred both before and after his retirement. Although a partner retires from the firm, he is not automatically freed of his liability for partnership debts whether incurred before or after his retirement. This is made clear by virtue of ss.19(2) and 38(1) of the Partnership Act By s.19(2), a partner who retires from the firm, does not thereby cease to be liable for partnership debts or obligations incurred before retirement. Further by s.38(1) where a person deals with a firm after a change in its constitution, he is entitled to treat all apparent members of the old firm as still being members of the firm, until he has had notice of the change. However, a retiring partner may, by taking appropriate measures, be released from his liability from both existing as well as future debts of the firm. In the case of existing debts, he may not be liable if there is an agreement between himself, the new firm and the creditors to the effect that he shall no longer be liable for such debts. Such an agreement may either be express or implied. The authority for this is s.19(3), which states, a retiring partner may be discharged from any existing liabilities by an agreement to that effect between himself and the firm as newly constituted and the creditors, and this agreement may be either express or inferred as a fact from a course of dealing between the creditors and the firm as newly constituted In the case of future debts, the retiring partner may protect himself from liability towards new creditors by advertisement in the Federal Gazette, Sabah Gazette, or Sarawak Gazette. See: s.38(2) Partnership Act In so far as existing creditors are concerned actual notice is necessary. A case that illustrates this is Re Siew Inn Steamship [1934] MLJ 80. In this case a retired partner had placed a notice of his retirement in certain newspapers which were regularly read by some old customers. Subsequent to his retirement these old customers lent money to the firm. They had not read the notice in the newspapers. The court held that the retired partner was liable. The newspaper advertisement was insufficient. It was held in Phillips Singapore Private Ltd v Han Jong Kwang & Anor [1989] 2 MLJ 323 that even a notice to the Registrar of Business, of the retirement of the partner, is not sufficient notice towards old customers of the firm. However, it is to be noted that retiring partners will not be liable after the retirement towards new persons who deal with the firm and who never knew them to be partners of the firm. In conclusion, as has been discussed above, a retiring partner does not automatically cease to be liable for the firm s debts. 9

4 3 This question tests the candidate on the circumstances in which an agency may be terminated by operation of law. An agency may be terminated by operation law in the following circumstances by virtue of s.154 of the Contracts Act 1950: (i) By the performance of the contract of agency. For example, where the agency was created for a single specific transaction and the transaction has been performed. (ii) By the expiration of the period fixed or implied in the contract of agency. Where the duration of the agency is expressly fixed or may be implied in the contract of trade, the agency is terminated when the period for which it was created to endure has expired, even if the business has not been completed, unless there are other terms to the contrary. (iii) By the death of either the principal or agent. The general rule is that an agency is terminated when either the principal or the agent dies. However, by s.161, the termination of the authority of an agent does not, so far as regards the agent, take effect before it becomes known to him, or, so far as regards third persons, before it becomes known to them. A good example is provided in illustration (c) to s.161 as follows: A directs B, his agent, to pay certain money to C. A dies and D takes out probate to his will. B, after A s death, but before hearing of it, pays the money to C. The payment is good as against D, the executor. Further, by s.155, where the agent has an interest in the property which forms the subject-matter of the agency, the agency is not terminated on death of either party. On the death of the principal, the agent may continue to exercise his authority and if the agent dies, his authority is exercisable by his personal representatives. In addition, it is provided by s.162 that on the termination of the agency by death of the principal, the agent must, on behalf of the representatives of the deceased principal, take all reasonable steps to protect and preserve the interests entrusted to him. (iv) By the principal or agent becoming of unsound mind. As persons of unsound mind are not competent to contract, an agency is terminated by reason of such unsoundness of mind. On the termination of the agency due to the unsoundness of mind of the principal, the agent must take all reasonable steps to protect and preserve the interests entrusted to him: s.162. (v) By the bankruptcy or insolvency of the principal. On a principal becoming insolvent or being declared a bankrupt, his rights and liabilities are vested in the official assignee thus putting an end to the agency. However, there is no specific statutory provision in respect of the bankruptcy of an agent and its effect on the agency. Under the general law, whether the bankruptcy of the agent terminates the agency depends on the agreement between the parties and the circumstances of the case. In the absence of specific terms in the contract of agency it would seem that bankruptcy of the agent also brings the agency to an end. (vi) By the happening of an event which renders the agency unlawful. This falls within the doctrine of frustration applying to contracts generally. The case of Stevenson v Aktiengesellschaft Fur Cartonnagen Industrie (1918) AC 239 serves as an example. Here, a principal was declared an enemy alien as a result of an outbreak of war. The court held that the agency was thereby terminated. In addition to the above, it must be noted that by s.163, the termination of an agent s authority also ends the authority of all sub agents appointed by him. 4 This question tests the candidates knowledge on the ultra vires doctrine as it applies to companies. It also expects the candidate to display some ability to analyse the usefulness of the doctrine in the light of the provisions of s.20 of the Companies Act (a) The doctrine of ultra vires at common law is one which dictates that a company must act within the scope of its objects clause in the memorandum of association and that any activity of the company outside its capacity is void. Neither the company nor the third party could enforce such a transaction. See: Ashbury Railway Company v Riche (1875); Re Jon Beauforte (1953). (b) The purpose of the doctrine was to protect the investors of the company i.e. its members as well as its creditors, who could rest assured that their money would be applied only for the purposes stipulated in the objects clause. However, the doctrine had the tendency of creating hardship especially upon third parties dealing with companies without being aware that the transaction was outside the capacity of the company, i.e. ultra vires. Sometimes it also posed a problem to the company itself which could not venture into new activities without altering the objects clause. The harshness upon third parties was justified on the ground of constructive notice i.e. third parties dealing with the company were deemed to know the contents of its memorandum and articles as they were its public documents. These were registered with the Registrar of Companies and could be inspected by anyone. (c) The operation of the ultra vires doctrine has been modified in Malaysia as a result of s.20 of the Companies Act By s.20(1), no act or purported act of a company, and no conveyance or transfer of property to or by a company shall be invalid by reason only that it is ultra vires. Thus, by virtue of this section, ultra vires transactions are valid and binding upon the company. However, this does not mean that the ultra vires doctrine has been abolished in Malaysia. Companies are still expected to act within the scope of the objects clause. This is evident from s.20(2). By s.20(2)(a), any member of the company or debenture holder secured by a floating charge on the company s property or the trustees for such debenture holders may take proceedings against the company to restrain the company from doing any ultra vires act, or conveyance or transfer of any property to or by the company. Section 20(3) provides that the court may allow compensation to the company or other party for loss suffered as a result of granting the injunction. 10

5 By s.20(2)(b), the issue of ultra vires may be relied upon by the company or any member in proceedings against the present or former officers of the company. By s.20(2)(c), the issue of ultra vires may be relied upon in any petition by the minister to wind up the company. In conclusion it may be said that completed transactions remain valid as between the company and the third party and either party may sue the other upon it. Thus the doctrine of ultra vires is no longer applicable against third parties in respect of completed transactions. However, as mentioned above, uncompleted transactions may be stopped on grounds of ultra vires. Further, the present and former officers of the company may be made liable to the company for the ultra vires transactions. In addition, the company may also be wound up by the minister. This serves to protect the investors of the company, i.e. the members and the creditors. Thus, the rationale behind the ultra vires doctrine still remains intact, and, while the doctrine may have lost some of its importance it is still applicable in Malaysia to the extent discussed above. 5 This question tests the candidates knowledge on the weaknesses of the floating charge as a security to the lender. A floating charge, unlike a fixed charge, is not a charge on a specific asset or assets of a company. While a fixed charge attaches immediately to the asset concerned and prevents the company from disposing of the asset thereafter, the floating charge does not immediately attach to the assets concerned. Further it gives the chargor freedom to continue to deal with the assets in the ordinary course of business. According to Romer J in Re Yorkshire Woolcombers Association (1903) 2 Ch 284 a floating charge has the following three characteristics: (i) It is a charge on a class of assets present and future. (ii) The class of assets fluctuates in the ordinary course of business. (iii) Until such time that the lender takes steps to enforce his security, the company is free to deal with the assets in the ordinary course of business. The floating charge is considered as a vulnerable form of security to a lender as it suffers from a number of disadvantages in comparison with the fixed charge. These may be summarized as follows: (i) The value of the security is uncertain as the company is free to use the assets in the ordinary course of business. (ii) The floating charge ranks lower in priority in comparison with a fixed charge over the same assets, even if the floating charge was created before the fixed charge, unless the floating charge restricts the creation of subsequent charges ranking in priority to the floating charge and the subsequent chargee has notice of it. (iii) Assets subject to a floating charge may themselves be subject to a retention of title clause in favour of a seller of goods. In such a case, if the chargor had not paid for the goods, the seller of the goods would be entitled to those goods and the floating chargee would have no claim to them. See: Aluminium Industrie Vaasen B V v Romalpa Aluminium Ltd (1976) 2 All E R 592. (iv) The assets subject to a floating charge may be lost to judgement creditors who have levied execution on the goods. Prior to crystallisation the floating chargee cannot prevent judgement 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 utilized 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, tests the candidate on the distinction between a contract of service and a contract for services and the importance of such distinction. A contract of service is basically a contract between an employer and an employee under which the employee agrees to work for the employer. A contract of service is defined in the Employment Act 1955 as any agreement whether oral on in writing and whether express or implied, whereby one person agrees to employ another as his employee and that other agrees to serve his employer as employee and includes an apprenticeship contract. Such a contract is also defined in the Industrial Relations Act However, this Act refers to it as a contract of employment. This is defined as any agreement whether oral or in writing and whether express or implied whereby one person agrees to employ another as a workman and that other agrees to serve his employer as a workman. Despite the differences in wording, it has generally been accepted that there is no distinction between the two phrases. See: American International Assurance Co Ltd and Dato Lam Peng Chong & Others (Award 275 of 1988). Therefore only a contract of service/employment will give rise to an employer/employee relationship which is regulated by the Employment Act 1955 and the Industrial Relations Act Further, such employer/employee relationship must exist before an employer can be made vicariously liable for the negligent acts of his employee done in the course of his employment. 11

6 The contract for services, on the other hand, is rather different from that of the contract of service/employment. It does not create an employer/employee relationship and does not therefore come within the purview of the Employment Act and the Industrial Relations Act. Instead it creates a contractual relationship between an employer and an independent contractor. Thus it is very important to distinguish between the two categories. However, as a matter of practice, it is sometimes quite difficult to determine whether there in fact exists a contract of service or a contract for services. The courts have developed three tests to help determine it, viz the control test, the integration test and the multiple test. The control test relates to the extent of control which the employer has over the employee in relation to the manner in which the employee is to do his work. The greater the control the greater the possibility that there is a contract of service. See: Yewens v Noakes (1880). The control test has been seen as inadequate especially in occupations of a skilled or professional nature because the employer may be unable to exercise such control. The integration test relies on the extent to which a person can be considered as part and parcel of the organisation. The greater the integration with the organisation the greater the possibility of a contract of service. See: Whittaker v M.P. Ali (1967). However, the integration test is not much used today. Greater reliance is placed on the economic reality or multiple test which takes into account multiple considerations in order to determine whether a contract of service exists. Among other things, the courts will take into consideration the extent of control, the power of selection and appointment, the power to suspend and dismiss the employee, the intention of the parties and the agreement between them. 7 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 contract exactly as he had promised. This is said to be an equitable remedy as it was first recognized by the courts of equity. 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 Chinese vases. A may obtain specific performance as there is no standard for ascertaining the actual damage which would be caused by its nonperformance. (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. Section 20 stipulates 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 the terms of which the court cannot find with reasonable certainty: (iv) a contract which is in 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 the performance of 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. 12

7 8 This question on contract law, tests the candidates knowledge on fraud as a vitiating element in a contract. A valid contract requires the free consent of the contracting parties. One of the factors which vitiate such free consent is fraud. The House of Lords in Derry v Peek (1889) 14 App Cas 337 stated that fraud would exist where the false representation was made (1) knowingly, or (2) without belief in its truth or (3) recklessly, careless whether it be true of false. Fraud is defined in s.17 of the Contracts Act It states that fraud includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract: (a) a suggestion, as to a fact, of that which is not true by one who does not believe it to be true; (b) the active concealment of a fact by one having knowledge of belief of the fact; (c) a promise made without any intention of performing it; (d) any other act fitted to deceive; and (e) any such act or omission as the law specially declares to be fraudulent. Essentially fraud refers to the doing of something by one contracting party with the intention of deceiving the other party to induce him to enter into the contract. A case in point is Weber v Brown (1908) 1 FMSLR 12. Here, the court found that the defendant had falsely and fraudulently misrepresented to the plaintiff the number of trees on an estate. This had induced the plaintiff to enter into the contract with the defendant. The court held that the plaintiff was entitled to damages. The active concealment of a fact may also constitute fraud. An example is illustration (c) to s.19, which states: B having discovered a vein of ore on the estate of A, adopts means to conceal, and does conceal, the existence of the ore from A. Through A s ignorance B is enabled to buy the estate at an undervalue. The contract is voidable at the option of A. Where it is a proved that the consent was obtained by fraud, the contract is voidable at the option of the party whose consent was so obtained. See: s.19 Contracts Act The case of Kheng Chwee Lian v Wong Tak Thong [1983] 2 MLJ 320 serves as an illustration. In this case the respondent had under an earlier agreement bought a piece of land from the appellant. He later entered into a second agreement to buy another piece of land. The appellant had falsely represented to the respondent that the land area was the same as that of the land under the first agreement. The Federal Court held that the respondent had been induced by the fraudulent misrepresentation and the contract was therefore voidable at the option of the respondent. However, it must be noted that the contract will not be voidable if the fraud or misrepresentation did not cause the consent of the party on whom the fraud was practised. See: Explanation to s.19. Further, s.19 also provides that even if such consent was caused by misrepresentation or silence which is fraudulent within the meaning of s.17, the contract is not voidable if the party whose consent was so caused had the means of discovering the truth with ordinary diligence. 9 This question contains three parts. Part (a) tests the candidates ability to identify issues relating to disqualification of directors and to apply them to the given problem. Part (b) tests the candidates knowledge on the law and procedure for the removal of directors and part (c) touches on the issue of resignation of directors. (a) Jamilah may be advised that all the three directors may be disqualified. In the case of Charlie, he was convicted of fraudulent trading five years ago. He may be disqualified under s.130 of the Companies Act Among other things, s.130(1) states that where a person has been convicted of any offence involving fraud or dishonesty and that person, within a period of five years after his conviction, or, if he is sentenced to imprisonment after his release from prison, without the leave of the court, is a director or promoter of or is in any way whether directly or indirectly concerned or takes part in the management in Malaysia of a corporation, he shall be guilty of an offence against this Act. As Charlie was convicted less than five years ago, of the offence of fraudulent trading (i.e. an offence involving fraud and dishonesty) he is committing an offence by being a director, unless he has obtained leave the court. Presuming he has not obtained such leave of the court, he is therefore disqualified from being a director. In the case of Desmond, a disqualification order may possibly be made against him under s.130 A of the C.A By that section, a disqualification order may be made against a director or former director of the company if: (i) He is or has been a director of a company which has gone into insolvent liquidation; and (ii) He is or has been a director of another company which has gone into liquidation within five years of the date on which the first company went into liquidation, and (iii) His conduct as a director makes him unfit to be concerned in the management of a company. Under the section the court has the power to make an order for a period not exceeding five years, that such a person shall not, without the leave of the court, be a director of or in any other way be concerned or take part in the management of a company. 13

8 The facts show that Desmond had been a director of Desmo Sdn Bhd which went into insolvent liquidation four years ago, and was also a director of another company, Mondes Bhd, which went into insolvent liquidation one month ago. Thus he has been a director of two companies which have gone into insolvent liquidation within five years of each other. If it can be shown that his conduct as a director makes him unfit to be involved in the management of a company he may be made subject to a disqualification order and thereby disqualified to act as director of Evergreat Sdn Bhd. In the case of Bakri, he is disqualified as a director by virtue of s.124 of the Companies Act By that section, every director, who is by the articles required to hold a specified share qualification and who is not already so qualified, shall obtain his qualification within two months after his appointment or such shorter period as is fixed by the articles. Under the section a director must vacate office if he does not obtain his share qualification within the stipulated period, or if after obtaining it, he ceases at anytime to hold his qualification. The question provides that under the articles of association of Evergreat Sdn Bhd, all directors must own at least 1,000 shares in the company. Bakri has been a director since 1990 (i.e. for the last thirteen years), but has still not satisfied the share qualification. Thus he is disqualified as a director and must vacate office. (b) (c) 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. However, before such a director can be removed, the section requires that special notice must be given to the company of any 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. 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. In the case of private companies such as Evergreat Sdn Bhd, the procedure for removal of a director will depend on its articles of association. If Evergreat Sdn Bhd has its articles in the form of Table A, article 69 would apply. It provides that a company may, subject to s.128, remove a director by ordinary resolution. Hence, Jamilah may be advised that the directors may be removed in accordance with the procedure discussed above. If the removal results in a breach of contract the company would have to pay damages. A director may be able to resign from office at anytime he wishes. A director s resignation is subject to s.129(6) of the Companies Act It states that notwithstanding anything contained in this Act or in the memorandum or articles of a company or in any agreement with a company, a director of a company shall not resign or vacate his office if, by his resignation or vacation from office, the number of directors of the company is reduced below two, i.e. the minimum required under the Companies Act. Any purported resignation or vacation of office in contravention of this section shall be deemed to be invalid. However, by s.129(7) this rule does not apply where a director is required to resign or vacate his office by reason of not obtaining his share qualification or by reason of his disqualification under this Act or any other written law. Jamilah may therefore be advised accordingly. 10 This question tests the candidates ability to identify, analyze and apply the law relating to duties and liabilities of promoters and the effect of pre-incorporation contracts. The given problem involves the law on promoters and pre-incorporation contracts. Promoters are persons who are responsible for the formation of the company. Cockburn CJ in the case of Twycross v Grant (1877) defined a promoter as one who undertakes to form a company with reference to a given project and to set it going and who takes all the necessary steps to accomplish that purpose. Promoters are said to be in a fiduciary position in relation to the company. This means that they must act honestly, i.e. in good faith and for the benefit of the company, make adequate disclosure to the company and must not make any secret profit out of the promotion. Disclosure would be adequate if it is made either to an independent board of directors or to all the present shareholders. Where the promoters have breached their duties the company has the following remedies available to it: (i) It may rescind any contract made with the promoter, as in Erlanger v New Sombrero Phosphate Co (1978) 3 App Cas (ii) It may sue the promoter to recover any secret profit made by him, as in Gluckstein v Barnes [1900] AC 240. (iii) It may sue the promoter for damages for breach of fiduciary duty, as in Re Leeds and Hanley Theatres of Varieties Ltd [1902] 2 MLJ 180. Promoters often enter into contracts on behalf of the company prior to its formation. Such contracts are called pre-incorporation contracts. At common law, such contracts were totally void. See: Kelner v Baxter (1866) LR 2 CP 174. However, in Malaysia, pre-incorporation contracts are governed by section 35(1) and 35(2) of the Companies Act

9 By s.35(1), a pre-incorporation contract may be ratified by a company after its incorporation. Once it is ratified, the contract becomes binding between the company and the other party and each may sue the other to enforce it. See also Cosmic Insurance Corpn. Ltd v Khoo Chiang Poh [1981] 1MLJ. 61. By s.35(2), prior to ratification by the company the person or persons who purported to act in the name of the company shall, unless there is an agreement to the contrary, be personally bound by the contract or other transaction and entitled to its benefit. Applying the above law to the given problem, advice may be given as follows: (i) the agreement to appoint Rahim as the manager was made by Jamal on behalf of Mal & Mal Sdn Bhd, prior to its incorporation. Hence it is a pre-incorporation contract. As has been explained above, such a contract was void at common law. By s.35(1) it may be ratified by the company after its incorporation. However, the company has not ratified the contract. Therefore the company may be advised that it is not bound by contract. (ii) The contract to supply office equipment to Mal and Mal Sdn Bhd cannot be enforced against it by All Trade Sdn Bhd as it is a pre-incorporation contract. As has been explained, by s.35(1) such a contract may be ratified by the company after it is incorporated. Since Mal & Mal Sdn Bhd has not ratified the contract, after its incorporation, the contract is not binding against it. However, by s.35(2) of the Companies Act, prior to ratification the person who acted on behalf of the future company may be personally bound by the contract, unless there is an express agreement to the contrary. Thus, All Trade Sdn Bhd may enforce the contract against Jamal personally. (iii) Jamal is a promoter of Mal & Mal Sdn Bhd. As explained above, promoters owe fiduciary duties to the company. As such they cannot make any profit at the expense of the company. They are required to make disclosure to the company of any such profit. Where they have breached their duties the company may sue for rescission of the contract, for recovery of the secret profit or for damages for breach of contract. In the present case, Jamal bought the computer for RM5,000 in his capacity as promoter. The company is thus entitled to purchase it at that price. As Jamal made a profit of RM5,000 by selling it to the company for RM10,000, the best remedy for the company is to sue Jamal for recovery of the secret profit of RM5,000. See: Gluckstein v Barnes [1900] AC 240. The company may be advised accordingly. (iv) The company may be advised that it is unlikely to be successful if it sues Kamal for the recovery of the profit made by him on the sale of his land to the company. Although Kamal as the promoter of the company has breached his fiduciary duty by failing to disclose to the company the original purchase price of the land, he did not purchase the property in his capacity as a promoter. The company in such case only has the option of rescinding the contract or affirming it. See: Re Cape Breton Co (1885) 35 Ch D 795; Tracy v Mandalay (1953) 88 CLR This question contains two parts. Part (a) tests the candidates on the effect of a forged transfer of shares while part (b) tests the candidates on special resolutions and resolutions requiring special notice. (a) (i) A forged transfer is a total nullity as no title can pass under such transfer. This is so even if the company has informed the original owner that a transfer of his shares has been lodged with the company and the owner has not responded. Therefore ABC Sdn Bhd is bound to restore the true owner to the register of members. As Ah Kong has been removed from the register of members, he is entitled to be put back on the register. A case in point is Barton v London & North Western Railway (1889) 24 QBD 77. In this case, a company wrote to an executor of a deceased shareholder stating that a transfer of the testator s stock had been lodged with it and that unless she sent a reply within a week, the stock would be transferred to the transferee. She did not reply and the company proceeded to register the transfer in the name of the transferee. Later, she brought an action to have her name restored to the register of members. The court held that she was entitled to be so restored. (ii) The issue of a share certificate by a company is a representation by the company that the person named therein is the owner of the shares. Thus it gives rise to estoppel as to title. As Mei Mei had relied on the share certificate issued by ABC Bhd to John Chin, it would be estopped from denying Mei Mei s right to the shares. A case to illustrate this point is Daily Telegraph Co v Cohen (1905) 5 SR (NSW) 520, where, as a result of a forged transfer, the original owner was removed from the register of members and replaced by the first transferee, X, who was duly issued with a new share certificate by the company. X in turn transferred the shares to Y, who was the registered shareholder when the forgery was discovered. The court held that the original owner was to be restored to the register of members, but Y was entitled to damages from the company as it was estopped from denying Y s title. Therefore Mei Mei would be entitled to damages from ABC Sdn Bhd. John Chin, on the other hand, does not have a right to claim anything from ABC Sdn Bhd. To make matters worse, the company may claim an indemnity from him. Cases have held that when a person lodges a transfer with the company, he impliedly promises that the transfer is genuine. When it is later discovered that it was not so genuine he has to indemnify the company for the loss that it suffers. A case in point is Sheffield Corporation v Barclay (1905) AC 392. In this case, A and B were joint owners of some stock in a company. A forged B s signature and had the stock transferred to a bank as consideration for a loan. The bank later transferred the stock to a third party. When B discovered the forgery, he sued the company which was compelled by the court to buy equivalent stock and have it registered in B s name. The company in turn sued the bank for an indemnity. The court held that the bank was liable to pay the indemnity. 15

10 (b) (i) A special resolution is defined in s.152(1) of the Companies Act It states that a resolution shall be a special resolution when it has been passed by a majority of not less than three-fourths of such members as being entitled so to do, vote in person or by proxy, at a general meeting of which not less than 21 days notice has been given to the members. On the other hand, a resolution requiring special notice is not a special resolution at all. Section 153 of the Companies Act 1965 deals with resolutions requiring special notice. By the section where special notice is required of a resolution, the resolution will not be effective unless notice of the intention to move it has been given to the company not less than 28 days before the meeting at which it is moved. The company is required to give at least 14 days notice of the intended resolution to the members. The resolution can then be passed by a simple majority. (ii) (iii) Special notice of a resolution is required under the Companies Act 1965 only in three instances. The first is for the removal of a director under s.128, the second is for the appointment of a director in place of the director being so removed under s.128 and the third is for the removal of an auditor under s.174. Under the Companies Act 1965, there are a number of instances in which a special resolution is required. Among them are the following: (a) for the alteration of the name of the company under s.23 (b) for the alteration of the objects clause under s.28 (c) for the conversion of a company from unlimited to limited under s.25 (d) for the conversion of a public company to a private company and vice versa under s.26 (e) for the alteration of articles of association under s.31 (f) for the reduction of capital under s.64 (g) for the winding up of the company by the court under s.218(1)(a) (h) for the voluntary winding of the company under s.254(1)(b). (Candidates are required to mention any four instances only) 12 This problem question on contract law, contains four parts testing the candidates ability to identify and apply different aspects of the law relating to the validity of a contract. Part (a) concerns exclusion clauses, Part (b) touches the issue of certainty, and parts (c) and (d) concern capacity of minors and persons of unsound mind to contract. (a) The issue in this case is whether the exclusion clause in the contract between Oyls Sdn Bhd and Bala is valid. As a general rule, the courts will not interfere with the terms that parties to a contract have agreed upon. This is illustrated in the case of Playing Cards (M) Sdn Bhd v China Navigation Co Ltd (1980) 2 MLJ 182. In this case the appellants had ordered paper board from a company overseas. The goods which were to be loaded onto the respondent s ship which were to arrive on 25 December 1973, were in fact loaded onto another ship which only arrived on 13 June The appellant sued for breach of contract. In defence the respondent sought to rely on an exclusion clause which exempted the carrier from liability for any loss or damage arising or resulting from delayed or early arrival... The court held that the clause was valid. Thus, the respondents were not liable. See also: Chartered Bank of India, Australia and China v British India Steam Navigation Co Ltd (1906) AC 369. However, the courts do intervene if the terms of the exclusion clause are ambiguous or capable of more than one meaning. In such cases the courts will apply a rule of construction known as the contra proferentum rule to interpret the exemption clause. By this rule the courts will construe the clause against the party asserting it. A good example is the case of Wallis Son & Wells v Pratt & Haynes (1911) AC In this case there was a contract for the sale of seeds described as common English Sanfoin. An exclusion clause in the contract stated that the seller gave, no warranty express or implied as to the growth, description, or any other matters. The seeds supplied were of a much inferior variety. The supplier sought to rely on the exemption clause to avoid liability. The court held that the term describing the seeds was a condition of the contract. The exclusion clause related only to warranties and not to conditions. Hence the supplier could not rely on the exclusion clause. As Bala has been supplied a much lower grade of oil than that contracted for, and the exclusion clause only refers to a warranty as in the case stated above, it is likely that the exclusion clause will be similarly interpreted and the supplier will not be able to rely on the exclusion clause. Bala is therefore likely to be successful in an action for breach of contract against Oyls Sdn Bhd. 16

11 (b) (c) (d) The issue in this question is whether the contract entered into by Clooney can be invalidated on the ground that she did not have capacity to enter into the contract by reason of her rare mental condition. One of the essential elements of a valid contract is that the contracting parties must have the capacity to enter into a contract. Section 11 of the Contracts Act 1950 states, every person is competent to contract who is of the age of majority and of sound mind and who is not disqualified from contracting by any law to which he is subject. Section 12 states what is a sound mind for purposes of contracting. By s.12(1), a person is said to be of sound mind for the purpose of contracting if at the time when he makes it he is capable of understanding it and of forming a rational judgment as to its effect upon his interests. Further by s.12(2), a person who is usually of unsound mind but occasionally of sound mind may make a contract when he is of sound mind. Further, by s.12(3) a person who is usually of sound mind but occasionally of unsound mind may not make a contract when he is of unsound mind. The first question which therefore has to be answered is whether Clooney was of sound mind at the time of entering into the contract. The question is silent on this. If she was, the contract is clearly valid. However, if she was not of sound mind at the relevant time there is a possibility that she could avoid the contract. The Act itself does not state whether such contracts are void or voidable. There is no Malaysian case on this point. It is likely that English law will be followed. Under English Law such contracts are voidable at the option of the person of unsound mind if that fact is known to the other party. See: Imperial Loan Co v Stone (1892) 1 QB 599. It may thus be concluded that if Clooney was indeed of unsound mind at the time of entering into the contract and the housing developer was aware of this, the contract could be avoided by Clooney. The legal issue in this problem is whether the contract between Tan and Lim is void for uncertainty. Section 30 provides that agreements, the meaning of which is not certain, or capable of being made certain, are void. This is illustrated in illustration (a) of the section as follows: A agrees to sell to B a hundred tons of oil. There is nothing whatever to show what kind of oil was intended. The agreement is void for uncertainty. See also: Karuppan Chetty v Suah Thian (1916) 1 F.M.S.L.R 300, where the parties had agreed to a lease at a rent of $35 a month for as long as he likes. In the given problem Tan granted to Lim a lease, for as long as Lim wishes. Applying the case of Karuppan Chetty v Suah Thian, Tan may be advised that the purported lease is void for uncertainty. Tan is therefore not bound by it. This question concerns the validity of contracts made by minors. Section 11 of the Contracts Act 1950 requires that contracting parties must have attained the age of majority, i.e. 18-yearsof-age. Subject to certain exceptions, contracts with minors are void. A case in point is Tan Hee Juan v Teh Boon Keat [1934] MLJ 96. Here the plaintiff, a minor, had executed transfers of land in favour of the defendant. He sought to have transfers set aside. The High Court held that the transfer was void and ordered the restoration of the property to the minor. See also: Mohori Bibee v Dhurmodas Ghose (1903) I.L.R. 30 Cal. 539; The main exceptions to the rule that contracts by minors are void, are contracts for necessaries and contracts of scholarship, apprenticeship and insurance. These exceptions do not apply to the given problem. Therefore, Sonny, who is only 15, may be advised that he is not legally bound to sell the mountain bike to Tom. 17

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13 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) June 2003 Marking Scheme Very good answer clearly explaining the process by which laws are made in Parliament. 5 6 Reasonable answer explaining the main stages through which a bill undergoes in Parliament before it becomes an Act. 0 4 Incomplete or inaccurate answer An excellent answer discussing accurately, the position of retiring partners for the firm s debts incurred both before and after their retirement with a conclusion as to whether the candidate agrees with the given statement. 5 6 Fair answer explaining reasonably the position of retiring partners for the past and future debts of the firm. 0 4 Incomplete or inaccurate answer An accurate answer explaining five circumstances in which an agency may be terminated by operation of law. The better answers will refer to the appropriate sections of the Contracts Act 1950, with relevant examples and decided cases. 5 6 Fair answer clearly explaining at least three situations in which an agency may be terminated by operation of law. 0 4 Incomplete or inaccurate answer. 4 (a) 0 2 An accurate answer explaining what is the ultra vires doctrine at common law will fall into the upper part of this band while an inaccurate answer will fall into the lower part. (b) 2 3 Good answer stating the purposes of the ultra vires doctrine at common law as well as its pitfalls. 0 1 Incomplete or inaccurate answer. (c) 3 5 Good to excellent answer clearly explaining the Malaysian position in relation to the ultra vires doctrine under s.20 of the Companies Act Incomplete or inaccurate answer Excellent answer explaining clearly what is a floating charge as a form of security to a lender and the reasons why it is considered as a vulnerable form of security. 5 6 Reasonable answer explaining the main reasons for the vulnerability of the floating charge as a form of security. 0 4 Incomplete or inaccurate answer Excellent answer displaying the ability to accurately distinguish between a contract of service and a contract for services in employment law as well as explain the importance of the distinction. 5 6 Average answer indicating sufficient knowledge of the distinction between a contract of service and a contract for services. 0 4 Incomplete or inaccurate answer. 7 (a) 0 2 An accurate answer explaining what is meant by the remedy of specific performance will fall into the upper part of this band while an inaccurate one will fall into the lower part. (b) 6 8 Very good answer stating most of the circumstances in which the court may or may not grant an order of specific performance as provided under the Specific Relief Act Average answer stating accurately some of the instances when the court may or may not grant specific performance. 0 3 Incomplete or inaccurate answer. 19