Corporate and Business Law (Malaysia)

Transcription

1 Answers

2 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) December 2003 Answers 1 This question tests the candidates knowledge of the principle in Salomon v Salomon & Co Ltd as well as its exceptions, i.e. the situations where the courts will be prepared to lift the veil of incorporation. (Candidates are only required to state any six instances of lifting the veil of incorporation.) The statement by Lord McNaghten in the case of Salomon v Salomon & Co Ltd means that once a company is incorporated, it is clothed with a veil of incorporation and becomes in law a separate legal entity distinct and separate from the members. Consequently, the company is regarded as an artificial legal person having its own rights, duties and liabilities. Inter alia, the company has power to hold land, may sue and be sued in its own name, enjoys perpetual succession in that the death of one or more of its members does not automatically result in a dissolution of the company (unlike the partnership) and in the case of a limited company its members enjoy limited liability in the sense that their liability to contribute to the assets of the company in the event of a liquidation is limited to the amount, if any, unpaid on their shares. See also: s.16(5) Companies Act This principle, however, is not always followed. It has been found that the veil of incorporation has sometimes been used by the incorporators and controllers for their own selfish ends much to the detriment of minority shareholders, creditors and other stakeholders. Thus there has been a necessity for the courts and Parliament to intervene and disregard this principle. This is often referred to as the lifting of the veil of incorporation. The veil of incorporation may be lifted either by virtue of a statutory provision or by established case law as follows: Under Case Law (i) In times of war to determine the enemy character of the company. This is illustrated by the case of Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) Ltd (1916) 2 AC 307 where the court lifted the veil of incorporation to look at the nationality of the persons in effective control of the company. (ii) (iii) (iv) (v) (vi) Where the company has been set up to perpetrate a fraud or to avoid a legal obligation. A case in point is Jones v Lipman (1962) 1 WLR 832. In this case the defendant who had agreed to sell property to the plaintiff sold it instead to a company which he formed, in order to avoid an order of specific performance. The court lifted the veil of incorporation, holding that the defendant and the company were one and the same. See also: Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988) 1 MLJ 97. For tax purposes See: Unit Construction Ltd v Bullock (1960) AC 351. In this case the court held that three subsidiary companies in Kenya were in fact resident in UK for purposes of tax because central control and management was with the holding company in UK. On the basis that a company is in fact the agent of its controllers. This may be illustrated by the case of Smith Stone & Knight Ltd v Birmingham Corpn (1939) 4 All ER 462, where the court held that the subsidiary company was acting as the holding company s agent in carrying on a business, thus enabling the holding company to get compensation for the disruption of business following a compulsory acquisition of its land. Group Enterprise Sometimes the courts are prepared to treat groups of companies as one. See: DHN Food Distributors Ltd v Tower Hamlets LBC (1976) 3 All ER 462; Hotel Jaya Puri Bhd v National Union of Hotel Bar & Restaurant Workers (1980) 1 MLJ 109. When the justice of the case requires the veil to be lifted. In recent times the Malaysian courts seem to show a greater willingness to lift the veil of incorporation when the justice of the case so requires. See: Tengku Abdullah Ibni Sultan Abu Bakar v Mohd latiff bin Shah Mohd (1996) 2 MLJ 265. Under Statute (vii) Section 36 Companies Act By this section where the number of members of a company falls to one and the sole remaining member knowingly carries on business for a period longer than six months, he will be personally liable for the debts incurred after the first six months. (viii) Section 121 Companies Act By this section where an officer signs on behalf of the company, a cheque, promissory note etc, and the company s name is not properly stated therein, he will be personally liable to the holder of that bill etc, if the company does not pay. (ix) Section 304 (1) Companies Act 1965 By this section where the company s business has been carried on with intent to defraud creditors or for other fraudulent purpose, any person knowingly a party thereto may be made personally liable to pay the debts or other liabilities of the company as the court deems fit. (x) Sections 303 (3) and 304 (2) By these sections where the company had incurred a debt when there was no reasonable prospect of the company being able to repay, the person or persons responsible for it may be made personally liable to repay it. (xi) Section 169 and the Ninth Schedule of the Companies Act By these provisions a holding company is required to produce group accounts in which the assets, liabilities, profits and losses of the group as a whole are reflected. 9

3 (xii) Section 140 of the Income Tax Act 1967 By this section the Director General of Inland Revenue may ignore any transaction or disposition which has the effect of avoiding or evading tax. (candidates are only required to state any SIX instances.) 2 This question tests the candidates knowledge on the common law rule that a company cannot issue shares at a discount, and the extent to which the Companies Act 1965 permits such an issue. (a) (b) An issue of shares at a discount refers to an issue of shares at a price below the par value of the shares. For example, where the company issues a one ringgit share at the price of eighty sen. The purpose of the rule was to ensure that a company s capital is maintained in line with the doctrine of maintenance of capital which was primarily designed for the protection of creditors of the company. Indirectly it would also serve the purpose of protecting shareholders in the sense that capital would not be unnecessarily wasted away and their chances of getting a return of their capital are much better. The rule established in Ooregum Gold Mining Co v Roper, that a company cannot issue shares at a discount is applicable in Malaysia subject to the modifications made by s.59 of the Companies Act By that section a company may issue shares at a discount of a class already issued if: (i) (ii) (iii) (iv) the issue of the shares at a discount is authorized by resolution passed in general meeting of the company, and is confirmed by order of the Court; the resolution specifies the maximum rate of discount at which the shares are to be issued; at the date of the issue not less than one year has elapsed since the date on which the company was entitled to commence business; and the shares are issued within one month after the date on which the issue is confirmed by order of the Court or within such extended time as the Court allows. By s.59 (2) the court, if having regard to all the circumstances of the case it thinks proper to do so, may make an order confirming the issue on such terms and conditions as it thinks fit. By s.59(4) notwithstanding any provision of its articles, a company shall not issue at a discount shares of any class unless it first offers the shares to every holder of shares of that class in the company proportionately to the number of those shares held by him. It is to be noted that a company is only allowed to issue shares at a discount of a class already issued. The company is still bound by the rule in Ooregum s case in relation to the first issue of shares of any class. 3 This question tests the candidates knowledge on the structure of the Malaysian Court system and the advantages of having a hierarchy of courts. The present court structure in Malaysia, which has been in effect since June 1994, following the Constitution (Amendment) Act 1994, is as follows: At the apex of the court system is the Federal Court. It is headed by the Chief Justice. Below the Federal Court is the Court of Appeal. This court is headed by the president of the Court of Appeal. Below the Court of Appeal are two High Courts with co-ordinate jurisdiction. One is the High Court (Malaya) which serves Peninsula Malaysia while the other is the High Court (Sabah and Sarawak) which serves East Malaysia, i.e. Sabah and Sarawak. The head of each High Court is a Chief Judge. Below the High Courts are the subordinate Courts, the highest of which are the Sessions Courts each of which is headed by a Sessions Court Judge. This is followed by the Magistrates Courts each of which is presided by a magistrate. Parallel to the Magistrates Court is the Juvenile Court which is also presided over by a magistrate. In Peninsular Malaysia (West Malaysia) there are Penghulu s Courts below the Magistrates Courts. These are headed by a penghulu or village headman. He has very limited jurisdiction and usually deals with local disputes in an informal manner. There are also some courts which operate only at the state level. These consist of the Native Courts which exist only in Sabah and Sarawak dealing with native rights and the Syariah Courts which deal with matters pertaining to Islamic law. 10

4 Having a court system with a hierarchy of courts has various advantages. These may be summarized as follows: (a) It facilitates a system of appeals. The court hierarchy distinguishes between higher and lower courts so that persons who are dissatisfied with the decision of a lower court have an avenue to have the decision reviewed by a higher court. (b) It facilitates the application of the doctrine of binding judicial precedent which requires the lower courts to follow the decisions of the higher courts, thus achieving greater uniformity in the application of the law. (c) It facilitates specialization in the judicial process. The higher courts which are presided by more senior and experienced judges handle the more serious criminal offences such as murder, and kidnapping and more serious civil matters where larger sums of money are involved. The lower courts are left to handle the less serious offences and civil disputes involving smaller amounts of money. (d) It results in greater administrative convenience, efficiency and cost effectiveness. The practical effect of a court hierarchy is that it provides for an extensive system of lower courts dispensing justice inexpensively in local areas and superior courts in the main centres. 4 This question tests the candidates knowledge on proposal (offer) and its revocation in the law of contract. By s.2(a) a proposal is made, when one person signifies to another his willingness to do or to abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence. For example, if A offers to buy B s car for RM50,000 in the expectation that B will accept, A said to be making a proposal. A proposal (offer) will remain valid until it is revoked by the proposer as there is no legal obligation to keep his proposal open indefinitely. Section 5(1) of the Contracts Act 1950 provides that a proposal may be revoked at any time before the communication of its acceptance is complete as against the proposer. Section 6 provides that a proposal may be revoked in the following ways: (a) by the communication of notice of revocation by the proposer to the other party. Under this section the proposer is required to communicate the revocation. Communication by third parties not authorised by the proposer will probably not be valid. Thus, the English case of Dickinson v Dodds (1876), which held that revocation would be effective so long as the offeree becomes aware of the revocation, irrespective of who conveys the information to the offeree, may not apply in Malaysia. The following illustration provided in s.5 serves as an example: A proposes, by a letter sent by post, to sell his house to B. B accepts the proposal by a letter sent by post. A may revoke his poposal at any time before or at the moment when B posts his letter of acceptance, but not afterwards. See also: Byrne v Van Tienhoven (1880) 5 CPD 344 (b) (c) (d) by the lapse of time prescribed in the proposal for its acceptance, or if no time is prescribed, by the lapse of a reasonable time, without communication of the acceptance. What amounts to a lapse of a reasonable time depends on the facts of each case. In Ramsgate Victoria Hotel Co v Montefiore (1866) LR 1 Ex Ch 109, the defendant had applied for shares in the plaintiff company in June and was informed by the plaintiff company in November that he was allotted the shares applied for. The defendant refused to accept the shares. The court held that as the plaintiff had not accepted within a reasonable time, the refusal was justified. See also: Macon Works and Trading Sdn Bhd v Phang Hon Chin & Anor (1976) 2 M.L.J By the failure of the acceptor to fulfil a condition precedent to acceptance. For example, if A offers B employment on condition that B passes a medical examination, the offer will be revoked if B fails the medical examination. In Financings Ltd v Stimson (1962) 3 ALL E R 386 the court held that there was a failure by the acceptor to fulfil an implied condition that the car (the subject matter of the contract) would be in substantially the same condition when the offer was accepted as when it was made. In this case the car had been substantially damaged between the time of the offer and the acceptance. By the death or mental disorder of the proposer, if the fact of his death or mental disorder comes to the knowledge of the acceptor before acceptance. Death or mental disorder of the offeror does not automatically result in the revocation of the offer. Knowledge of the acceptor is a crucial factor. Thus if the acceptor, in ignorance of the death or mental disorder of the offeror, accepts the offer such acceptance would be valid. 11

5 5 This question tests the candidates knowledge on the classification of terms in a contract. Terms of a contract are those matters which have been agreed between the parties to a contract and which have been incorporated into the contract. These terms are usually classified into two main categories, viz, conditions and warranties depending on the intention of the parties. In more recent times the court has recognized a third category called intermediate or innominate terms. These may be explained as follows: (a) Conditions Essentially a condition may be said to be a term of a contract which is so important to the main purpose of the contract that the breach of it by one party will entitle the other to terminate it altogether. Although the Contracts Act 1950 does not define a condition, the Sale of Goods Act 1957 states that a condition is a stipulation essential to the main purpose of the contract, the breach of which gives rise to the right to treat the contract as repudiated. (b) Warranties A warranty on the other hand is referred to in the Sale of Goods Act 1957 as a stipulation collateral to the main purpose of the contract, the breach of which gives rise to a claim for damages but not a right to reject the goods and treat the contract as repudiated. Hence a warranty may be said to be a term of a contract which is not so important to the main purpose of the contract. A breach of a warranty will entitle the innocent party to claim damages only. It must be noted that a party who is entitled to terminate the contract for breach of a condition, may choose to continue the contract and treat the breach as a breach of warranty only. In such cases he will only be entitled to damages. An illustration is seen in the case of Associated Metal Smelters Ltd v Tham Cheow Toh (1971) 1 MLJ 271 where the subject matter of the contract was the sale and purchase of a metal furnace. One of the conditions of the contract was that the furnace would have a temperature of not less than 2600 F. The furnace did not meet this requirement. However, the plaintiff had chosen to continue with the contract and treat the breach of the condition only as a breach of a warranty. Thus he was only entitled to damages. (c) Intermediate terms Intermediate or innominate terms, as they are otherwise referred to, are terms which are too complex to be classified either as a condition or a warranty. They lie somewhere between a condition and a warranty. In such cases the court has the task of determining the seriousness of the breach and determine whether such breach should entitle the plaintiff to the right to terminate the contract or merely to claim damages. This may be illustrated by the case of Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1963] 2 QB 26. In this case a charterparty stated that the ship was, in every way fitted for ordinary cargo services. Breach of this term occurred when the ship was delivered with too few engine-room staff. The ship was also found to be unseaworthy and took about seven months to repair. It was held by both the High Court and the Court of Appeal that the breach did not entitle the agreed party to terminate the contract. The term was regarded as too complex to be classified either as a condition or a warranty. 6 This question tests the candidates understanding of the term wages in relation to employment law and the circumstances in which employers are permitted to make advances on wages in favour of employees under the Employment Act (a) (b) The term, wages is defined in s.2 of the Employment Act 1955 to mean basic wages and all other payments in cash payable to an employee for work done in respect of his contract of service but does not include the following: (i) value of accommodation, or the supply of food, fuel, light, water, medical attendance, amenity, or service; (ii) employer s contribution to pension fund, provident fund, superannuation scheme, retrenchment, termination, lay-off or retirement scheme, thrift scheme, or any other fund/scheme for the employee s welfare; (iii) sum payable to the employee to defray special expenses incurred by nature of his employment; (iv) travelling allowances or value of travelling concessions; (v) gratuity upon discharge or retirement; and (vi) annual bonus. Payment of advances on wages is governed by s.22 of the Employment Act By that section an employer may not during any one month make advance of wages not already earned by such employee which exceeds in the aggregate the amount of wages which the employee earned in the preceding month from his employment with such employer, or if he has not been so long in the employment of such employer, the amount which he is likely to earn in such employment during one month, unless such advance is made to the employee: (1) to enable him to purchase a house or to build or improve a house; (2) to enable him to purchase livestock; (3) to enable him to purchase a motorcar, a motorcycle or a bicycle; (4) for any other purpose: (i) in respect of which an application in writing is made by the employer to the Director General; (ii) (iii) which is, in the opinion of the Director General, beneficial to the employee; and which is approved in writing by the Director General, provided that in granting such approval, the Director General may make such modifications thereto or impose such conditions thereon as he may deem proper; (5) for such other purpose as the Minister may, from time to time, by notification in the Gazette, specify either generally in respect of all employees, or only in respect of any particular employee, or any class, category or description of employees. 12

6 7 This question, which contains two parts, tests the candidate on the law of agency. Part (a) requires the candidate to explain the terms, named principal, disclosed principal and undisclosed principal while part (b) requires the candidate to explain the extent to which an agent may be held personally liable to the third party for acts done on behalf of the principal. (a) (i) A named principal is a principal whose identity has been brought to the knowledge of the third party. Thus the third party would be fully aware of who exactly the agent is contracting on behalf of. (ii) A disclosed principal is a principal whose existence is made known to the third party but whose identity has not been disclosed to the third party. Thus the third party would know that the agent is contracting on behalf of someone else but does not know who exactly that principal is. (iii) An undisclosed principal is a principal whose existence is not made known to the third party. Thus the third party would be contracting with the agent under the impression that he is contracting personally with the agent and that there is no third party involved. It is only subsequently brought to the knowledge of the third party that the person with whom he was contracting was in fact acting on behalf of someone else. (b) The general rule is that where the agent has acted on behalf of the principal he incurs no liability under the contract. The contract is regarded as one between the principal and the third party. Only the principal can sue or be sued upon it: s.179 Contracts Act However, this general rule is subject to several exceptions. The agent may be held personally liable to the third party in the following circumstances: (i) where the agent agrees to accept personal liability or contracts in such manner as to make himself personally responsible. See: Ching Yuen Tung v Bep Aketik [1978] 1 MLJ 211; Pernas Trading Sdn Bhd v Persatuan Peladang Bakti Melaka [1979] 2 MLJ 124 (ii) Where the agent executes a deed in his own name, unless he has a power of attorney. See: Mootiah Chitty v Palianiappa Chitty (1909) 5 SSLR 51 (iii) Where the agent signs a negotiable instrument in his own name without making it clear that he is signing it only in his capacity as agent. See: Kavena Syed Meydin v Komarappa Chitty (1909) SSLR 70 (iv) Where the agent exceeds his authority and the principal has not ratified the action. In this case the agent will be personally liable for breach of warranty of authority. (v) Where the custom of the trade makes the agent liable. Further, by virtue of s.183 of the Contracts Act 1950, an agent is presumed to be personally liable: (a) Where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad. (b) Where the agent does not disclose the name of the principal and (c) Where the principal, though disclosed, cannot be sued. 8 This is a question on the law of partnership. It tests the candidates understanding of the main elements of a partnership within the definition in s.3(1) of the Partnership Act The definition of a partnership in s.3(1) of the Partnership Act 1961 envisages several elements. First, in order for a partnership to arise, there must be an association of persons. This means that there must be more than one person. However, the number of persons cannot exceed twenty in the case of ordinary partnerships. See: s.47(2) of the Partnership Act 1961 and s.14(3)(b) of the Companies Act This limit does not apply in the case of partnerships formed for purposes of carrying on any profession or calling: s.14(3)(a) Companies Act It must also be noted that the relation between members of any company or association registered as a co-operative society will not constitute a partnership. See: s.3(2) Partnership Act. Secondly, the persons must be carrying on a business. Business is defined in s.2 of the Partnership Act to include every trade, occupation or profession. Thus, clubs, societies and other voluntary organizations formed for charitable or religious purposes will not be considered as partnerships. In Soh Hood Beng v Khoo Chye Neo (1897) (SSLR 115) several persons had set up a loan association with the purpose of giving loans among themselves. Each member would get his turn to receive the loans. The court held that this did not amount to the carrying on of a business and could not constitute a partnership. Further, the business must be currently carried on. The ordering of goods in anticipation of carrying on a business in the future will not satisfy this requirement. This is well illustrated by the case of Keith Spicer Ltd v Mansell (1970) 1A11 ER 462. In this case, one of the promoters of a proposed company ordered goods from the plaintiff company intending them to be used by the proposed company. The goods were delivered to the other promoter s address. The issue was whether there existed a partnership between the promoters. The court held there was no partnership, as they were not currently carrying on a business, though they had intention of carrying on a business in the future in the form of a company. 13

7 Thirdly, the business must be carried on in common. This means that the partners must have possessed a common intention to carry on the business. It does not mean that all partners must be actively involved. This may be illustrated by the case of Sithambaram Chetty & Others v Hop Hing & Others (1928) SSLR 53. In this case two persons established a business in Penang, but their connection with it was not made public. They took no part in carrying it on, leaving its entire control to two managers. The court held that they were liable as partners to third parties who had lent money to the firm. Fourthly, the business must be carried on with a view of profit. This means that the business must be carried on with a profit motive. There has been some doubt as to whether a division of the profits is essential, but the better view seems to be that it is not necessary to divide profits. See: Lindley on Partnership. Social, recreational and other non-profit organizations will not be considered as partnerships as they do not operate with a view of profit. 9 This question on company law contains two independent parts. Part (a) tests the candidates ability to identify and apply the law relating to the effect of the articles of association and the restrictions on its alteration. Part (b) test the candidates knowledge on the main duties of a company secretary. (a) (i) By s.33 (1), subject to the Companies Act, the articles and memorandum shall when registered bind the company and its members to the same extent as if they have been signed and sealed by each member, and contained covenants on the part of each member to observe all the provisions of the memorandum and of the articles. As a result of this section, the terms of the articles of association are regarded as the terms of a contract between the company and its members. Cases have further held that the terms of the articles are regarded as the terms of a contract among members themselves, and therefore one member may enforce the articles against another member. The case of Wong Kim Fatt v Leong v Co Sdn Bhd [1976] 1 MLJ 140 serves as an example. In this case the articles provided that the holders of seven tenths of the issued capital of the company may at any time serve the company with a requisition to enforce the transfer of any particular shares not held by the requisitionists. Pursuant to this article the majority shareholder served a requisition to buy out the minority shareholder s shares. The court held that the minority shareholder was bound to comply with the demand as it was part of what the defendant had bargained for. Thus Cindy and Din have to comply with the notice sent by Kazam. (ii) A company is permitted to alter its articles of association by special resolution pursuant to s.31(1) of the Companies Act However, the power to alter the articles is subject to the Companies Act and the conditions in the memorandum of Association. In addition, the courts have held that any alteration must be done bona fide for the benefit of the company as a whole. Essentially this means that the alteration must be for the benefit of the members generally, must not discriminate between members or groups of members and must not amount to a fraud on the minority. The cases of Brown v British Abrasive Wheel Co [1919] 1 Ch 290 and Greenhalgh v Arderne Cinemas [1951] Ch 286 serve to illustrate this. In Brown v British Abrasive Wheel Co the majority passed a resolution altering the articles to the effect that the minority could be compelled to sell their shares to the majority at a fair price. It was not shown that this was necessary for the benefit of the company. On the other hand such alteration would be unfair on the minority shareholder. Thus it was not valid as it was not done bona fide for the benefit of the company as a whole. In the present situation the alteration affects all members equally and it would be difficult to establish that the alteration was not bona fide for the benefit of the company. Thus the alteration is likely to be held valid. Even if the alteration is held to be valid, Cindy and Din cannot be compelled to increase their shareholding in the company. This is because of s.33(3) which states that no member of the company shall be bound by any alteration of the memorandum or articles of association made after he became a member which requires him to increase his shareholding in the company unless he has given his written consent. Cindy and Din may be advised accordingly. (b) The directors of Zam Zam 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 Section 139(1) requires every company to 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). Section 139A states that 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 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 and the Malaysian Bar. 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. 14

8 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: (i) he is an undischarged bankrupt; (ii) 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); (iii) he ceases to be a member of the body prescribed by the minister or (iv) he ceases to be a holder of a valid licence. Thus Khatijah may be appointed as company secretary if she fulfils the above requirements. The fact that she is the sister of one of the directors is not relevant. As for the main duties of a company secretary, they are largely administrative in nature. The duties are not fixed by law but are usually assigned to him either by the articles of association or his contract of employment. The duties may vary from company to company depending on the size and operations of the company. The main duties may be summarized as follows: (i) To carry out the functions of the chief administrative officer of the company; (ii) To maintain the different registers required by the Companies Act 1965 to be maintained by the company, e.g. Register of members, Register of substantial shareholders; Register of charges, etc; (iii) To prepare and lodge with the Registrar all returns required to be lodged under the Companies Act 1965; (iv) To organise and attend shareholders and directors meetings, including the preparation of the agendas, sending out of notices and the maintenance of minute books; (v) Safekeeping of the company seal and legal documents; and (vi) Authentication of documents. 10 This question tests the candidates ability to identify, analyze and apply the law on certain aspects of fiduciary and statutory duties of directors as well as the problems of minority shareholders in instituting an action on behalf of the company in the light of the rule in Foss v Harbottle (1843). Susie and Laily may be advised as follows: (a) The general rule is that dividends must be declared before it becomes payable. By art 98 of Table A of the Fourth Schedule, the company in general meeting may declare a dividend but such dividend cannot exceed the amount recommended by the directors. Thus effectively the directors have the right to decide whether dividends may be declared and if so the amount. Individual shareholders cannot demand that dividends be paid. A case in point is Burland v Earle (1902) AC 83, where a shareholder brought an action seeking to force the company to distribute accumulated profits as dividends. The court held that he could not do so and his action failed. Therefore, Susie and Laily have no right to demand that dividends be declared and paid. (b) The purchase of the luxury yacht may possibly be invalidated under s.132c of the Companies Act 1965 while the purchase of the bungalow may be invalidated under s.132e. By s.132c the directors cannot carry into effect any transaction for the acquisition of an undertaking or property of a substantial value; or the disposal of a substantial portion of the company s undertaking or property, which would materially and adversely affect the performance or financial position of the company, unless the proposal or transaction has been approved by the company in general meeting. Any member may apply to the court to restrain the directors from entering into such a transaction. However, by s.132c (3) the transaction will still be considered valid in favour of any person who had given valuable consideration and did not have actual notice of the contravention. Applying the law to the present problem it may be concluded that the directors have contravened this section as they have not obtained the approval of the members in general meeting for the purchase of the yacht which cost a hefty RM3 million. In so far as the validity of the transaction is concerned it is not known whether Bintang Krooze Sdn Bhd had actual notice of the contravention. If they had then the transaction could be invalidated. With regard to the purchase of the bungalow, the directors may additionally be in breach of s.132e. By that section, a company may not enter into any arrangement or transaction with its director or person connected with such director to acquire from or dispose to such director or connected person any non-cash asset of the requisite value unless it is first approved by a resolution of the company general meeting. A non-cash asset will be of requisite value in any event where the value of the asset exceeds 250,000 ringgit. As the value of the bungalow clearly exceeds the above amount and the transaction was with a person connected with a director (Jenny being the sister of Benny), the directors should have obtained approval of the company in general meeting. As they failed to do so the transaction is voidable at the instance of the company. See s.132e(2). 15

9 (c) Susie and Laily do face certain obstacles in their quest to institute an action against the directors. The first hurdle is the rule that directors owe a duty only to the company and not individual shareholders. This was established in a case called Percival v Wright (1902), where a director purchased shares from a shareholder without disclosing that negotiations were taking place for the take over of the company by another company at a higher price for the shares than that paid by the director. The shareholder sought to rescind the sale on the ground that the directors should have disclosed the negotiations to him. The court held that the director did not owe such a duty to disclose the negotiation. His fiduciary duty was only towards the company. In addition, Susie and Laily would also face a hurdle in the light of the rule in Foss v Harbottle (1843). By this rule where a wrong is done to a company, only the company can sue to remedy the wrong. This is also known as the proper plaintiff rule. As the directors owe their duty to the company and only the company may sue to remedy the wrong, Susie and Laily will not be able to institute an action against the directors unless they can rely on any of the exceptions to the rule in Foss v Harbottle (1843), viz: (i) where the company has acted ultra vires. (ii) where a personal right has been infringed. (iii) where a special resolution is required and it has not been complied with. (iv) where there is a fraud on the minority. Where there is a fraud on the minority, a minority shareholder may be allowed to initiate legal proceedings on behalf of the company against the wrongdoers by a special procedure known as the derivative action. It is usually difficult to prove fraud on the minority. However, the case of Cook v Deeks (1916) 1 A.C serves as a good example. In this case there was a company with four equal shareholders. Three of them could not get along with the fourth. They diverted a contract due to the company to a company which they formed and later attempted to ratify their action relying on their majority votes. The court held that there had been expropriation of the company property at the expense of the minority and this amounted to a fraud on the minority. Applying this case to the present problem we may conclude that there is a fraud on the minority. Susie and Laily may therefore, be able to institute a derivative action to make the directors liable to the company for loss suffered by the company as a result of diverting the contract accruing to the company to ABCD Sdn Bhd. 11 This question tests the candidates knowledge on and ability to apply to the given problem, some aspects of the law relating to receivership. Mr Wong may be advised as follows: (a) By s.182 of the Companies Act 1965, the following persons are not qualified to be appointed and shall not act as receiver of the property of the company: (i) a corporation; (ii) an undischarged bankrupt; (iii) a mortgagee of any property of the company, an auditor of the company or an officer of the company or of any corporation which is a mortgagee of the property of the company; and (iv) any person who is not an approved liquidator or the Official Receiver. By s.182(2), a corporation may act as receiver if it is authorized to do so by any written law. (b) A receiver as such does not have any power to manage the business of the company. This is because a receiver s primary duty is merely to get in the assets subject to the charge and realise them for the benefit of the chargee. If it is necessary to run the business for some time in order to realize it as a going concern, a receiver and manager has to be appointed. Such an appointment may only be made when the charge in question is over the business or undertaking of the company. See: Whitley v Challis (1892) 1 Ch

10 (c) (d) (e) The primary duty of the receiver is to get in the property charged and ultimately disposed of for the purpose of discharging the secured debt. The duties of the receiver/manager under the Companies Act 1965 may be summarized as follows: (i) By s.188 (I) (a), when a receiver or manager of the property of the company is appointed he must forthwith send notice of his appointment to the company. (ii) By s.187(i), upon the appointment of a receiver/manager every business document of the company must contain a statement immediately following the name of the corporation that such appointment has been made. (iii) By s.188 (I) (b) the company is required to send to the receiver a statement of the affairs of the company. Upon receipt of the statement the receiver must lodge a copy with the Registrar together with any comments he considers necessary. A copy of such comments, if any, must be sent to the trustees for debenture holders, if any. (iv) Section 190 requires that the receiver/manager must prepare accounts of the receipts and payments and an estimate of the total value of the property in respect of which he was appointed receiver/manager. Such accounts and estimates must be submitted to the Registrar every six months during the course of the receivership and within one month after the receiver/manager ceases to act. (v) The receiver/manager in distributing the proceeds of the realisation of the assets subject to the charge must observe the order of priority as stipulated in s.191. Inter alia, it requires that where a receiver/manager is appointed over property secured by a floating charge and the company is not in liquidation, he has the duty to pay certain preferential debts out of those assets in priority to the debenture holders secured by that floating charge. The Companies Act 1965 provides that a receiver who is unsure of any matter arising in connection with the performance of his duties, may apply to the Court for directions. By s.191(1) where a receiver is appointed on behalf of the holders of any debentures of a company secured by a floating charge or possession is taken by or on behalf of debenture holders of any property comprised in or subject to a floating charge, then if the company is not at the time in the course of being wound up, debts which in every winding up are preferential debts and are due by way of wages, salary, vacation leave etc shall be paid out of any assets coming to the hands of the receiver in priority to claims of the debenture holders. By s.292 wages or salary of employees will constitute a preferential debt subject to a maximum of one thousand five hundred ringgit per employee or four months wages, whichever is less. Thus, the employees will have priority over Gudd Bank Bhd to this extent. 12 This question which contains four parts, tests the candidates ability to identify, analyze and apply to the given problem, several aspects of contract law. Part (a) is on sufficiency of consideration, part (b) touches the issue of statute-barred debts, part (c) is on the distinction between offer and an invitation to treat, and part (d) concerns coercion, as a vitiating factor in a contract. (a) This question touches the issue of sufficiency of consideration. 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 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, Muthu agreed to give his calculator worth RM500 to Alice in return for Alice s story book worth only RM10. He now refuses to give the calculator to Alice on the ground that the consideration is inadequate. As discussed above, consideration needs only to be sufficient. The fact that Alice s book is worth only RM10 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 Muthu s consent was not freely given. Therefore it can be concluded that there is a binding contract between Muthu and Alice. Alice may therefore successfully sue him for breach of contract. 17

11 (b) (c) (d) This question concerns the issue of consideration and statute-barred debts. One of the elements of a contract is consideration, which may be said to be the price paid by one party to a contract to obtain a reciprocal promise by the other. In the absence of consideration, the contract is void. In the present problem, Termizi lent RM10,000 to Jumboo in Jumboo promised to repay it within one month but has not done so to-date. Termizi wishes to sue Jumboo to recover the amount. Termizi may be advised that he will not be successful in such action against Jumboo as the debt is now statute-barred. By the Limitation Act 1953, actions to enforce debts must be commenced within six years from the date it became due. It is now seven years since the debt became due. Hence Termizi will fail in any action to recover the debt. The answer will certainly differ if Jumboo has subsequently made a fresh promise to repay the debt. This is because of s.26(c) of the Contracts Act 1950, which provides an exception to the rule that contracts without consideration are void by providing that a statute-barred debt may be enforced subject to the following conditions being satisfied: (i) The debtor must have made a fresh promise to pay in whole or in part a statute-barred debt and (ii) The promise must be made in writing and signed by the person to be charged or his lawfully authorised agent. In the given problem Jumboo had given a written reply to Termizi promising to repay the loan. Presuming that the written reply had been signed by Jumboo, the above conditions would be satisfied and Termizi would be able to enforce the debt. In order for a valid agreement to arise there must be a proposal (offer) and an acceptance of that offer. A proposal (offer) is said to be made when one person signifies to another his willingness to do or abstain from doing anything, with a view of obtaining the assent of that other to the act or abstinence: s.2(a) Contracts Act An offer must be distinguished from an invitation to treat. While an offer may be accepted giving rise to an agreement, an invitation to treat is only an offer to receive an offer, i.e. it is an invitation to others to make an offer. Examples of invitations to treat are advertisements and displays in shop windows. A case in point is Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd (1953) 1 QB 401. In this case the defendants were charged with selling certain poisons in contravention of the Pharmacy and Poisons Act The question was whether a sale had occurred when a customer in a self-service shop selected certain items which he desired to purchase and placed them in a wire basket. The court held that the display in the shop only amounted to an invitation to treat. A proposal to purchase was made when the customer selected the items he wanted to purchase. A sale would occur only when the cashier accepted the customer s money. In Janet s case it can be concluded that there is no binding agreement for the purchase of the evening gown at the price of RM100. The display in the shop was only an invitation to treat. When Janet selected the item and brought it to the cashier s counter to pay she was in law making a proposal to purchase the gown which the shop assistant was free not to accept. Janet may be advised accordingly. The issue in this situation is whether Siti can recover the amount of RM1,000 from her neighbour on the ground that her consent to pay that sum was induced by coercion. As stated in (a) above, a contract must be entered into with the free consent of the parties. The consent would not be free if it was caused, inter alia, by coercion. Such contracts are voidable under s.16. Coercion is defined in s.15 of the Contracts Act. It states, Coercion is the committing or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement. In Chin Nam Bee Development Sdn Bhd v Tai Kim Choo & 4 Ors (1988) 2 MLJ 117, the respondents had entered into sale and purchase of homes to be constructed by the appellants at the price of RM29,500. Subsequently, the respondents were required by the appellants to pay an additional four thousand ringgit (RM4,000) failing which the appellants threatened to cancel the bookings for the houses. The court held that the agreement to pay the additional sum was caused by coercion within the meaning of section 15. As Siti had paid the sum of RM1,000 on the threat of detention and harm to her property (the pet cat), it can be concluded that her agreement to pay the sum was caused by the coercion of the neighbour. Therefore the contract is voidable at her option and she will be able to recover the said sum. 18

12 Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) December 2003 Marking Scheme Very good answer clearly explaining the principle in Salomon s case and any six instances of lifting the veil of incorporation. 5 6 Reasonable answer explaining the Salomon principle and stating some instances of lifting the veil of incorporation. 0 4 Incomplete or inaccurate answer. 2 (a) 0 3 An accurate answer explaining what is an issue of shares at a discount and the purpose of the rule in Ooregum s case will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part. (b) 4 7 Very good answer explaining the extent to which shares may be issued at a discount under s.59 of the Companies Act Incomplete or inaccurate answer An excellent answer describing accurately the structure of the Malaysian court system together with a sound explanation of the advantages of having a hierarchy of courts. 5 6 Fair answer describing the structure of the Malaysian court system with a reasonable explanation of the advantages of having a hierarchy of courts. 0 4 Incomplete or inaccurate answer. 4 (a) 0 2 An accurate answer defining a proposal (offer) will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part. (b) 6 8 An excellent answer explaining the ways in which a proposal may be revoked, with reference to the Contracts Act 1950 and relevant cases. 4 5 Average answer with a reasonable explanation of how a proposal may be revoked. 0 3 Incomplete or inaccurate answer Excellent answer explaining the terms, conditions, warranties and intermediate terms in the law of contract. The better answers will cite relevant cases and examples. 5 6 Average answer reasonably explaining the three terms. 0 4 Incomplete or inaccurate answer. 6 (a) 3 4 Excellent answer clearly defining the term, wages with reference to the Employment Act Poor to average answer. (b) 5 6 Excellent answer stating accurately the situations in which an employer may make advances on wages in favour of employees under the Employment Act Average answer stating some of the more important instances in which an employer may make advances on wages of employees. 0 2 Incomplete or inaccurate answer. 19