BCL SEPTEMBER 2017

BUSINESS AND COMPANY LAW

SUGGESTED SOLUTION

QUESTION 1

(a) The doctrine of binding precedents is recognised as one of the sources of unwritten laws

in Malaysia.

Give a brief description of the above source of law.

(5 marks)

Answer:

(a) When a judge gives his decision on a case, he will give the legal reasons for his

decision. The legal reasons will bind the lower courts. Similarly, the judge will

interpret the relevant statutory provisions which are applicable in resolving the

dispute before him. The interpretation also forms part of the law.

When a judge in a subsequent case is presented with the facts which are materially

similar to a case which was decided by a higher court in the hierarchy, the judge

must follow the earlier decision. This is known as the doctrine of judicial precedent.

The decision of the Federal Court, bind the Court of Appeal, High Courts and the

subordinate courts.

The doctrine of binding judicial precedents applies only where the facts before the

judge are materially similar to the previous decision of a higher court.

In the event that there are conflicting decisions by the higher courts:

if there are conflicting decisions of the Federal Court , all courts must follow

the latest decision;

if there are conflicting decision of the Court of Appeal, the High Courts and

the subordinate courts may follow either decision.

(b) Under the law of contract in Malaysia, there are three types of consideration

recognised as valid consideration, namely, executory, executed and past

consideration.

Explain all three types of consideration with examples.

(9 marks)

Answer:

Three types of consideration:

Executory:

An executory consideration arises where the respective promises of the plaintiff and

the defendant remain to be performed at a future date.

BCL SEPTEMBER 2017

Example: A, a seller of wheat, undertakes to deliver 100 bags of wheat to B’s

premises next week. B agrees to pay for the 100 bags of wheat when they are

delivered.

Executed:

An executed consideration arises where A’s promise to B will be performed after B

has performed his promise to A.

Example: Lee offers RM50 to anyone who finds and returns his cat. Tan finds and

returns the cat to Lee. The consideration here is executed consideration because

Lee’s promise will only be performed after Tan has performed his part.

Past consideration:

Past consideration arises when the defendant’s promise to the plaintiff was made

after the performance of an act or omission that was requested by the defendant.

Example: Ling asked Bee to look after her cat, whilst she was on holiday. Ling did

not indicate that she would pay Bee for her services. When Ling returned from her

holiday, she promised to pay RM500 to Bee for looking after her cat. The

consideration here is past because Ling’s promise to pay was made after Bee had

performed her services.

(c) With reference to the Sales of Goods Act, 1957, define ‘specific goods’,

‘unascertained goods’ and ‘future goods’.

(6 marks)

Answer:

Specific goods:

Defined in section 2 as ‘goods identified and agreed upon at the time the contract of

sale is made’. Assume that Abu contracts to sell his MGB sports car, registration

number XYY 1234, to Atan for RM50,000. This is a sale of specific goods.

Unascertained goods:

There is no definition in the 1957 Act of this term. “unascertained goods” refers to

goods that exist at the time of sale but are not identified by the seller or buyer. if Tan

contracts to buy from Lim 500 bags of rice out of the 2000 bags now stored at Lim’s

warehouse, he is buying unascertained goods.

Future goods:

Future goods are defined in section 2 as “goods to be manufactured or produced or

acquired by the seller after the making of the contract of sale”. Chen enters into a

contract to buy a Zopal motor car from A1 Motors Bhd. A1 Motors Bhd will import the

car from Germany next month. Chen is buying future goods.

BCL SEPTEMBER 2017

QUESTION 2

(a) State briefly any three (3) of the conditions required, for an agency by ratification to

arise.

(5 marks)

Answer:

The contract entered into by the agent must not be a void or illegal contract;

At the time of the contract, the agent must expressly indicate that he acts as

agent for the principal. Keighley Maxted & Co v Durant (1901);

Ratification is not permissible unless the principal was in existence and had

the capacity to contract at the time the agent purported to act on his behalf;

At the time of ratification, the principal must have full knowledge of all the

material facts of the contract (section 151). Otherwise, the ratification is

invalid;

If the principal confirms the contract, he must confirm the whole contract.

Section 152 provides that the whole of the contract and not part thereof, can

be ratified;

According to section 153, an act which may have the effect of subjecting a

third party to damages, or terminating the third party’s rights or interest

cannot be ratified;

The act must be ratified within a reasonable time. What is a reasonable time

depends on the circumstances of the case. In the case of Grover & Grover v

Mathews (1910), the court held that a fire insurance policy cannot be ratified

after the insured event.

(b) Jones is an entrepreneur who runs an investment consultancy firm. Recently, he

came up with an idea of making money by taking deposit from investors and

promising them lucrative returns. Jones did not have the requisite permit to conduct

this type of business activity. Jones then recruited Alan as one of his agents to help

him carry out the business. Their business activity ran smoothly. However, things

changed when Jones failed to pay investors their supposed profit and the investors

filed police reports. Jones and Alan were arrested and charged for “illegal deposit

taking” activities. Upon conviction, they were each fined RM100,000. Alan now wants

to recover the losses he suffered in his capacity as Jones’s agent.

Advise Alan whether he may be successful in his claims.

(6 marks)

BCL SEPTEMBER 2017

Answer:

Advising Alan:

This case involves the principles on agency. When Jones engages Alan to do

something, Jones is the principal and Alan is his agent. In the absence of an express

contract, the employer of an agent is bound to indemnify the agent against the

consequences of all lawful acts done by the agent in exercise of the authority

conferred upon him: Section 175, Contracts Act, 1950.

Alan is advised that he cannot recover the losses arising out of his conviction of the

offence, since the act which he was employed to do, is a criminal act (i.e. dealing

and promoting illegal deposit taking). By virtue of Section 177 of the Contracts Act,

1950: where one person employs another to do an act which is criminal, the

employer is not liable to the agent, either upon an express or an implied promise, to

indemnify him against the consequences of that act.

Section 176 of the Act however, does provide for situations where agents may be

indemnified against consequences of acts done in good faith, although it causes

injury to the rights of third persons. In this situation, had Alan not known that Jones

did not have the permit to take deposits, he may claim to have done the act in good

faith or out of innocence. This was not the case, however, since Alan was fully aware

of the state of things from the very beginning.

Therefore, Jones is not liable to indemnify Alan due to the fact that the act done by

Alan was unlawful. In this situation, Alan will have to bear the losses on his own.

(c) With reference to the Contracts Act, 1950, lay down the consequences of an agent

acting outside his actual authority, in relation to a third person’s rights against the

agent and the principal’s rights against the agent.

(5 marks)

Answer:

Consequences for acting outside actual authority:

(i) Third person’s right against the agent: Section 188 provides that a person

who held himself out as having authority when he did not have it, is liable for

damages to the third person for breach of warranty of authority if the principal

does not ratify the agent’s act and the third person was induced by the

agent’s representation to deal with him.

(ii) Principal’s rights against the agent: Section 164 provides that the agent is

bound to comply with the instructions given. if the agent acts otherwise, he is

liable to the principal for the loss suffered by the principal and if any profit

accrues, the agent must return it to the principal.

BCL SEPTEMBER 2017

QUESTION 3

(a) Define the following classification of partners:

(i) Active partner;

(ii) Dormant/sleeping partner;

(iii) Quasi partner.

(5 marks)

Answer:

(i) Active partner: a partner who actively participates in the management of the

partnership business;

(ii) Dormant/sleeping partner: a partner who takes no active part in the

management of the partnership business. He may have provided the capital

for the business but leaves the management of the partnership business to

the other partners;

(iii) Quasi partner: he is not a partner, but he may be liable for the debts of the

partnership as a result of a legal principle called “holding out”.

(b) With reference to the Partnership Act, 1961, explain the contractual debts and

obligations of a partner.

(8 marks)

Answer:

Section 11 provides that every partner is liable jointly with the other partners for all

contractual debts and obligations of the firm incurred while he is a partner. Joint

liability means all partners must be sued jointly in one action as there is only one

single cause of action against them. However, a plaintiff may choose to sue only one

or more of the partners in respect of the cause of action. The partner being sued

cannot put up the defence that under the partnership agreement, he is only liable to

a certain portion of the partnership’s debts. If the plaintiff elects to sue one or more of

the partners and not the other partners, he is deemed to have discharged the

partners who were not sued. In the event the plaintiff fails to recover the full amount

from the partners, who are sued, the plaintiff cannot subsequently sue the other

partners. Nevertheless the partners who were sued may claim contribution from the

other partners for the amount paid by him. His entitlement to the contribution is

governed by the partnership agreement.

(c) Kiera Wang & Partners is a firm of auditors duly appointed by Shellko Bhd. to

conduct an audit and due-diligence exercise on a particular company for purposes of

a business takeover. Based on Kiera Wang & Partners’ finding, Shellko Bhd.

proceeded with the takeover of the company. However, after taking over the

BCL SEPTEMBER 2017

company, Shellko Bhd. discovered that some of the reports provided by Kiera Wang

& Partners were inaccurate while some others were totally misleading. Shellko Bhd.

stated that, they would not have proceeded with the takeover had they been properly

informed. Shellko Bhd. now sues Kiera Wang & Partners for professional negligence.

Advise Kiera Wang & Partners, whether they owe a duty of care towards Shellko

Bhd.

(7 marks)

Answer:

The issue in this case is whether a duty of care is owed by the firm of auditors, Kiera

Wang & Partners to Shellko Bhd.

As a general rule, an external auditor of a company, in auditing the accounts under

the Companies Act, 1965, owes no duty of care to members of the public at large

who may rely on the audited accounts to lend money to the company or to buy

shares in the company.

An external auditor owes no duty of care to individual shareholders in the company

who have relied on the audited accounts to increase their shareholding in the

company.

In Caparo Industries PLC v Dickman & Ors., the respondent relying on the

accounts of a public company that was audited by the appellant, bought shares in

the company. It was later discovered that the audited accounts were inaccurate. As a

result of the reliance on the audited accounts, they suffered loss. An action was

brought alleging that the accounts of the company audited were inaccurate and

misleading and that the auditors were negligent in auditing the accounts.

HOL: The auditors did not owe a duty of care to the respondents. The purpose of the

audited accounts prepared by the auditors was to enable the shareholders as a body

to buy more shares in the company with a view to profit. The auditor’s statutory duty

in auditing the accounts was owed to the body of the shareholders as a whole and

not to individual shareholders or the public at large.

In the present situation, Shellko Bhd is alleging that they had appointed and relied on

the auditors to conduct the audit and due diligence process with the express

intention of acting upon the report. This fact is known by Kiera Wang & Partners and

that their negligence had caused Shellko Bhd. loss.

Therefore, based on the case of Re Kingston Cotton Mill (1896), it was held

that: It is a duty of the auditor to bring to bear on the work he has to perform that skill,

care and caution which a reasonably competent, careful and cautious auditor would

BCL SEPTEMBER 2017

use. What is reasonable skill, care and caution must depend on the particular

circumstances of each case.

In our situation, Shellko Bhd. did not only rely on the skill, care and

competence of Kiera Wang & Partners, but they also have a fiduciary relationship

with the auditors. Under the circumstances, there is no doubt that Kiera Wang &

Partners owes a professional duty of care towards Shellko Bhd. and should be liable

for the losses incurred.

QUESTION 4

a. This question on company law tests the candidates’ knowledge on the term, ‘the veil

of incorporation’ and the exceptions of principle in Salomon v Salomon where on

occasions the court will be prepared to lift the ‘veil of incorporation’ and ignore the

separate legal personality of the company.

(i) Upon incorporation and from the date in its certificate of incorporation, a

company acquires its own legal personality. The company is at law a different

person from its promoters, directors and shareholders. This was established

in Salomon v A Salomon & Co Ltd [1897].

The courts illustrate this separation as the “veil of incorporation‟. This “veil‟ is

said to be drawn over the company emphasising that it is a different person

from its promoters, directors and shareholders. The result is that a company

is treated, for most purposes, in the same way as a natural person so that, for

example, it can own property and sue and be sued.

(2 marks)

(ii) Students are required to state any four (4) of the circumstances under

common law or under the statute.

At common law:

i. Where the corporate form is used to avoid an existing legal duty or to

commit fraud. Jones v Lipman (1962), Gilford Motor Co Ltd v Horne

(1933) and Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd (1988).

ii. Where justice requires that the corporate veil be lifted. Aspatra Sdn

Bhd v Bank Bumiputra Malaysia Bhd, Tengku Abdullah Ibni Sultan

Abu Bakar v Mohd Latiff bin Shah Mohd (1996) and Tan Guan Eng v

Ng Kweng Hee (1992).

iii. Where the company is acting as the agent or partner of the controller.

Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd.

iv. Where the law shows an intention that the corporate veil be

disregarded. Daimler Co v Continental Tyre and Rubber Co (1916).

BCL SEPTEMBER 2017

Under the statute:

i. Section 36 Companies Act 1965 – If the number of members of a

company falls below two (except in the case of a wholly owned

subsidiary) and the company carries on business for more than six

months, any member who is aware of this is personally liable for the

debts incurred after the first six months.

ii. Section 121 Companies Act 1965 – Where an officer signs on the

company’s behalf any bill of exchange, cheque, promissory note etc,

and the company’s name is not properly or legibly written, he will be

personally liable to the holder of the bill etc, or order for the amount

due (unless it is paid by the company).

iii. Section 304(1) Companies Act 1965 – 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.

iv. Section 303(3) and 304(2) – In regards to insolvent and fraudulent

trading, these sections provide that an officer who knowingly contracts

a debt with no reasonable or probable ground of expectation that the

company would be able to pay the debt is guilty of an offence.

v. Section 169 and the Ninth Schedule of the Companies Act 1965 – By

these provisions the directors of a holding company are required to

produce group accounts in which the assets, liabilities, profits and

losses of the group as a whole are reflected. In this respect, the

Companies Act does not regard each company in the group as a

separate legal identity but recognises the reality that a group of

related companies function as a single commercial entity.

vi. Section 140 of the Income Tax Act 1967 – The Director General of

Inland Revenue may ignore any transaction or disposition, which has

the effect of avoiding or evading tax.

(8 marks)

b. This question on company law tests the candidates’ knowledge on permitted buy-

backs or purchase by a company of its own shares.

At common law there was an absolute prohibition for a company to purchase its own

shares. This was established in the case of Trevor v Whitworth (1887). Section 67 of

the Companies Act also prohibited such purchases. The purpose of the rule is to

ensure that a company’s capital is maintained, i.e. remains intact and does not get

wasted away. However, following the economic recession in 1997, amendments

were made to the Companies Act allowing for companies to purchase their own

shares subject to certain conditions.

BCL SEPTEMBER 2017

According to section 67(A) a company may purchase its own shares subject to the

following conditions:

1. It must be a public company with a share capital

2. The article of association of the company must permit such a purchase

3. The company must be solvent at the date of the purchase and must not

become insolvent as a result of the purchase.

4. The purchase must be made through the stock exchange on which the

shares are quoted and must be in accordance with the relevant rules of the

stock exchange.

5. The purchase must be made in good faith and in the interest of the company.

Hence, in the case of Fosferes Bhd, if the purchase of its own shares that is to

prevent potential take-over of the company is in the interest of the company then

according to s 67(A), it is allowed to do so.

(5 marks)

c. This question on company law tests the candidates’ knowledge on the appointment

and duties of a company secretary which are as follows:

(i) Appointment procedure:-

1. 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 a Malaysia.

2. Section 139(1A) – the first secretary is required to be named in the

MOA and AOA. Subsequent secretary are appointed by directors – s

139(3).

3. Section 139(A) – a person may be qualified to act as a secretary of a

company only if he (a) licensed by the ROC for that purpose or (b) is a

member of professional body prescribed by the Minister.

4. Section 139B states that a license 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.

(ii) Duties:

1. Carry the functions of the chief administrative officer

2. Maintain different register’s required by the companies Act e.g.

register of members, substantial shareholders, charges

3. Prepare and lodge with the Registrar all returns required

4. Organise and attend shareholders and directors’ meeting, preparation

of agendas, notices.

5. Safeguard company’s seal and legal documents

6. Authentication of documents.

(5 marks)

BCL SEPTEMBER 2017

QUESTION 5

a. This question on company law tests the candidates’ knowledge on power exercised

by the directors with regards to register the transfer of shares.

(i) Where discretion is given to the directors, the power must be exercised bona

fide in the interest of the company - Re Smith & Fawewtt Ltd (1942). Where

directors give reasons for refusal to register, the court may investigate the

sufficiency of the reasons - Lim Ow Goik v. Sungai Merah Bas Co. Ltd

(1969). Dani may challenge the decision of the directors if their power of

discretion is not properly exercised.

(3 marks)

(ii) The directors may decline to register any transfer of shares if the

requirements of the articles are not complied with. Under Art. 22 Table A of

the 4th Schedule, the directors may decline to register if any shares are not

being fully paid up or shares on which the company has a lien.

(2 marks)

b. This question on company law tests the candidates’ knowledge on the security of

loan.

A floating charge, although useful, is peculiarly vulnerable as a security. The main

problem lies in the fact that the charge implicitly authorizes the chargor to deal with

the property charged and even dispose of it in the normal course of business. Thus,

assets may be taken out of a class of charged assets without being replaced. Where

there is a retention of title clause, the assets charged may be mixed with other

assets and so cease to be subject to the charge. Creating charges over property is

one of the incidents of a company's normal business. This being so, a floating

charge is only becomes a fixed charge when the company default the terms of the

charge and the chargee takes step to enforce the charge.

(4 marks)

c. This question on company law tests the candidates’ knowledge on distribution of

dividends in both public and private companies:

1. The general rule is that a member of a company may not get any money from

the company except in the form of dividends. Dividend may not be paid

unless there are profits available for that purpose – s 365 (1).

2. Profits need only be available at the time that the dividends are declared.

There is no necessity that there are available profits when the dividend is

actually paid as long as there were available profits when the dividend was

declared – Marra Development Ltd v BW Rofe Pty Ltd (1977)

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3. Dividends may be paid otherwise than in cash e.g. shares. The share

premium account may be used to pay up such shares – s 60(3)(6). In such a

case there is no necessity that profits be available.

4. Shareholders cannot compel a company to declare dividends – Burland v

Earl (1902). Howe and when dividends are to be paid is a matter left to the

articles of a company.

5. Once a dividend has been declared it is a debt owed by the company to the

members. The declaration cannot be revoked or cancelled nor can the

dividend be reduced – Marra Development Ltd. If the dividend is not paid

when due a member may sue for it.

6. If dividend is paid when there is no profit available every director or manager

of the company who wilfully paid or permitted the payment of the dividend is

guilty of an offence. If it is discovered that a dividend has been declared

illegally, the board may apply to court to have the declaration set aside.

7. A director may be made liable to replace the money paid out – Re Exchange

Banking (1882).

(5 marks)

d. This question on company law tests the candidates’ knowledge on the transactions

between a company and its directors which requires the approval of the members of

the company.

The transactions between a company and its directors which requires the approval of

the members of the company or which are prohibited by the Companies Act 1965

include:

1. compensation made to directors for loss of office under section 137;

2. substantial property transaction exceeding RM250,000.00 under section

132E ;

3. loans made to directors or persons connected to the directors under sections

133 and 133A;

4. tax-free remuneration under section 136; and

5. acquisition of assets from companies in which directors have a substantial

interest under section 132G.

(6 marks)

QUESTION 6

a. This question on company law tests the candidates’ knowledge on the topic of

Meetings of a company.

(i) Darlene may be advised that, as a general rule, there must be at least two

members personally present to constitute a meeting (s 147(1)(a)). Even if it is

provided that the members present shall constitute a quorum, there is no

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meeting if only one member is present. See Re Salvage Engineers (1962).

Hence, since Jenny is representing herself and as proxy for Darlene, based

on the case of Re Salvage Engineers, it can be argued that there had been

no proper meeting of the company. It is necessary for at least two members

to be present throughout the meeting.

(4 marks)

(ii) A member shall not be entitled to appoint a person who is not a member as

his proxy unless that person is an advocate, an approved company auditor or

a person approved by the Registrar in a particular case (Section 149 (1)(b)

Companies Act 2016)

(2 marks)

b. This question on company law tests the candidates’ knowledge on the topic of

winding up of the company.

Priority of Payments

The secured creditors will have priority to payments using the assets secured. The

unsecured creditors shall be paid in priority based on the provisions of s.292 of

Companies Act, 1965

1. Cost and expenses of winding up.

2. Wages/salaries/allowances/reimbursements under any contract of

employment not excluding RM1500 within a period of 4 months before the

commencement of winding up.

3. Workers compensation before commencement of winding up.

4. Remuneration in respect of vacation leave.

5. Contributions to employees superannuation, fund, retirement fund etc.

6. All federal tax assessed before winding up commenced.

(6 marks)

c. This question on company law tests the candidates’ knowledge on the topic of

fraudulent behaviour.

(i) Bursa Malaysia Securities Berhad (“Bursa Malaysia”) defines insider trading

as the purchase or sale of a company’s securities effected by or on behalf of

a person with knowledge of relevant but non-public material information

regarding that company. The insider is in a position to make massive gains

by selling or buying securities before information that might affect the price of

the company’s securities (price-sensitive information) is made public.

(2 marks)

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(ii) From this definition, it can be understood that to constitute insider trading,

there are three (3) elements that need to be fulfilled as follows:

1. The trading is effected by an ‘insider’. The insider concept relates to

the corporate setting, the word ‘insider’ being one which conveniently

describes those who are likely ‘to be in the know’ about significant

corporate matters. An insider normally is the one who is connected

with the management of company. The insider concept however is

also extended to others who forge a relationship with an insider or his

company (e.g. by virtue of his employment, office or profession and

those who have been tipped off by the insider)

2. The trading is effected pursuant to knowledge of relevant but non-

public material information regarding that company.

3. The effect of that information is that when it is made available to the

public, it will affect the price of the company’s securities.

(6 marks)