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United Business Institutes


Brussels, Belgium.
Executive Master of Business Administration

Module Code: MGT507


Module Name: Company Law
Student Name: Tham Wai Man
Student ID: UBI-102128
Student I/C: 740824-08-5523
Modular Facilitator: Dr Ian Mackechnie
Submission Date: 10th July 2010

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Commercial Applications of Company Law in Malaysia
Assignment Question:

1. Question 1 – Problems Set 2


Question 1 at page 11 of Problem Sets --------------------------- Page 3 to Page 7

2. Question 2 – Problems Set 2


Question 5 at page 11 of Problem Sets --------------------------- Page 8 to Page 11

3. Question 3 – Problems Set 6


Question 1 at page 19 of Problem Sets --------------------------- Page 12 to Page 17

4. Question 4 – Problems Set 6


Question 2 at page 19 of Problem Sets --------------------------- Page 18 to Page 23

5. Question 5 – Problems Set 7


Question 1 at page 21 of Problem Sets --------------------------- Page 24 to Page 27

6. Question 6 – Problems Set 7


Question 4 at page 22 of Problem Sets --------------------------- Page 28 to Page 34

7. Question 7 – Problems Set 8


Question 1 at page 25 of Problem Sets --------------------------- Page 35 to Page 38

8. Question 8 – Problems Set 8


Question 3 at page 25 of Problem Sets --------------------------- Page 39 to Page 44

9. Question 9 – Problems Set 11


Question 1 & 2 at page 31 of Problem Sets ---------------------- Page 45 to Page 51

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1. Question 1 at page 11 of Problem Sets.
Students should apply the discussion of the advantages and disadvantages of the corporate
form to the particular facts of the problems.

• What are the advantages for Mal & Lisa in conducting the Smallco Graphics business
through a company? What are the disadvantages?

1.1 Background
 A company is a type of corporation and as an artificial legal entities created by law
that have this attribute of a separate legal personality. According to s16(5) CA 1965,
upon incorporation, which is evidenced by the fact that there exists a certificate of
incorporation, the company by virtue of:

 Is capable forthwith of performing all the functions of an incorporated


company;

 Is capable of suing and being sued on its own name;

 Liability – a company is fully liable for its debts and obligations because
these are separate from the debts and obligations of its members

 Has perpetual succession and shall have a common seal; and

 Has power to acquire, hold and dispose of property

1.2 Advantage

A) Limited Liability:
A company is a separate legal entity & personality, its district from the legal personalities of
its owners or members. The company owns the assets and owes the liabilities and not the
shareholders. Under the Companies Act 1965, Mal and Lisa personal liability is limited to
the amount of investment in the Smallco Sdn Bhd. So, the advantage is for Mal and Lisa due
to them are not personally responsible for the debts and obligations of the company.
Shareholders are not liable for the company's debts beyond the amount of capital share that
they are invested and they are not required to contribute any further capital into the company

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except for remaining balance of the unpaid on their shares. The company as an artificial
legal entity is able to sue or be sued in criminal prosecution again the company using its own
name.

B) Perpetual Succession
The advantage of using the corporate form to carry on business is that a company’s existence
continues indefinitely until it is brought to an end through winding up and deregistration.
Perpetual succession allows for assets and obligation to be held in the company indefinitely,
reducing the cost and complexity involved in transferring those assets and obligations if the
identity of participants in the corporate charges. A company also has the distinguished
character of perpetual succession which mean that it never dies, its existence being
unaffected by such matters as the death or bankruptcy of its members. Unlimited life as
Smallco Sdn Bhd can continue of it business & no need to wind up even change in
ownership, or exit any owner from the company, or any transfer of ownership facilitated by
sale of stock either partly or wholly, or existence despite the deaths, insanity, bankruptcy of
it owners. Any think happen either Mal or Lisa on the features defining above, Smallco Sdn
Bhd still can operate as legal existence as separate from its owners, unless majority of its
shareholders decide to terminate it.

C) Large Commercial Enterprises


If form a business under a sole proprietorship is usually a small business and clearly
indicated that business is run by single individual without profit sharing. The profits of the
business go directly to the sole proprietor but with high risk, the capital is limited to his own
saving or personal loan from friends and family. However, with form an incorporate, allows
for association minimum of 2 or not more than 20 shareholders getting together to conduct
business with a distinctive goal of profit sharing. As companies continue grow, additional
capital may be required to fund their expansion, the source of capital is limited to the
contributions by their member. However, to a certain extent, company already has ability to
tap into the capital market particularly through the issuance of debentures as a means to
provide easier access to a wider pool of capital. In near future intend to larger the business
sizes, Mal and Lisa would enjoy the greater wider pool of funds from diversify number of
investors either from outsider or family members and could run their business under larger
corporation or commercial enterprises.

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D) Raise Capital
Formation a company can easily borrow funds from financial institute such as banks and
also easier to raise capital through sale of stocks and bonds. This can enable the company to
grow & expand the business widely & fast. The member in a company may transfer or sell
their share partly or wholly but the capacity of the company remains unchanged.

E) Separate Legal Entity


Since a company is a separate legal entity, Smallco Sdn Bhd need to pays taxes separate and
apart from its shareholders. Lisa only pays taxes on company profits paid to them as
Business Manager in the form of salaries, bonuses, and dividends. The company pays taxes,
at the corporate rate on any profits. Tax free benefits such as insurance, travel claim and
retirement plan deductions follow company income tax scheme. The company has capacity
to hold any properties, to own assets and to owe liabilities. Have a legal right to sue or be
sued in criminal prosecution again the company using its own name.

F) Transferability of Interests
A corollary of limited liability and perpetual succession is that the corporate form is
uniquely well suited to the free transferability of investors’ interest. However, these are less
relevant to small business operators, where it is unlikely large investors will be involved.
Under sec 14(3) of Company Act prohibits “outsize partnerships”. Generally, partnerships
with more than 20 partners are not permitted. Certainly, Mal and Lisa’s small business will
not have more than 20 partners and is not prevented by sec 14(3) of Company Act.

G) Company Charges
The companies have the ability to give a floating charge over their assets. They can create a
security interest over assets that are acquired, transformed and disposed of in the ordinary
course of the company’s business. The floating charge is a significant form of security in a
commercial context, where often a business’ main asset is its inventory.

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1.3 Disadvantage
A) Establishment and Administration Costs.
Some costs incur in registering the company, maintaining records, making the public filing
and disclosing information, in both professional fees such as accounting and audit costs,
legal fees and the cost of registry services. Mal and Lisa intend to form a company call
Smallco Sdn Bhd would have to incur some of its expenses in establishment, forming and
registering. Some professional cost such as accounting, audit, legal, and registration fee need
to pay to local authority before there are able to see any profits from the business proposal.
Comply with the requirement of the law, Smallco Sdn Bhd also required to keep proper
accounting records, appoint certified finance auditors to vet and reports the company
financial statement and submit all the financial records to the authorities. All this activities
incur some administration cost.

B) Director Duty
Since Mal and Lisa decided that each will own five ordinary shares in the company and
appointed as a directors of the company, they become subject to the Company Act duties and
obligations. The duties of directors are to act honestly and use reasonable diligence [sec
132(1) of the Company Act] and to ensure that the company does not trade while insolvent
[sec 304 of the Company Act]. If Mal and Lisa breach these duties, they can subjects to fines
and imprisonment. They need to consider carefully obtaining legal advice or intensive
researching about all the legal requirements before deciding to use a company.

C) Disclose Obligation.
It is more difficult for companies to maintain secrecy of the business, Mel and Lisa would
have to face it’s since their accounting details are open to public. As parts of the formation
of an incorporate company is required to disclose certain information such as profits and loss
annually to authorities and also to public.

D) Obligation to Corporate Governance

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Corporate Governance refers to "the processes & structure by which the business & affairs
of the company are directed and managed. Its goal is to enhance long term shareholder value
through improving corporate performance & accountability while taking into account the
interest of other shareholders”. To fulfill the law obligation, Smallco must appoint at least
one company secretary who must be a member of one of the prescribed bodies or a person
licensed by the Registrar. When Smallco business continues growth and intends to go for
public-listing in Bursa Malaysia, requiring carrying out their own internal audit functions.
Mal and Lisa as directors is obligation to safe keeping accounting records, preparing
financial statements in compliance with approved accounting standards and prepare financial
internal audits an integral part of corporate governance as it ensures protection of other
shareholders' interests.

1.4 Conclusion
To form an incorporate company has more advantages than disadvantages. The court case
which first established the essential distinction between a company and its members was
Solomon vs Solomon & Co. Ltd. [1897] AC22. The Company Law gives a principle that “a
company” is a separate legal entity from its members and the bigger advantage is the limited
liability towards the company in case of a wound up. This principle is also known as the veil
of incorporation. Cases which applied this principle include Lee vs Lee Air Farming Ltd
[1961] AC.12;[1960] 3 All ER420 and Macaura vs Nothern Assurance Co. [1925] AC 619
which held that sole owners of a company were separate persons and are distinct from the
company itself. The liability of the shareholders to meet the company debt is limited to a
pre-agreed amount of invested capital share and shareholders are protected their personal
assets from the business risks involved. Other advantages such as perpetual succession,
easily transferability of interests, ability to be larger corporation, ability to raise funds, enjoy
taxation benefits and legal standards rules for agent-principal relationships. On the perceived
disadvantages are the duties imposed by the law to disclose certain company profits & losses
information to public and substantial amount of establishment & administration cost are
involving during setup & registration an incorporate company.

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2. Question 2 – Problem Set 2:
Question 5 at page 11 of Problem Sets
Discuss the legal principle of limited liability.
Apply the principles to each fact and come to a conclusion.
State reasons for your conclusions.
• Main advantage to carrying on business through a company is that their personal assets
are protected by the legal principle of “Limited Liability”.

2.1 Background
When Mal and Lisa has decide to operate their business through a private company
called Smallco Sdn Bhd and each has appointed as a Director in the company and each own
five ordinary share in the company. Both understand the advantage of forming to carry on
business through a company is their personal assets are protected by the legal principle of
“limited liability”. After Smallco Sdn Bhd is registered, has executes a one year lease from
new premises for the business. Smallco has borrows RM30,000 from Largebank to fund
expansion of their business with personally guarantee from Mal and Lisa to repayment of the
loan and give the bank a charge over their house to secure their obligations under the
agreement. At the same time, Smallco agrees to purchase some computer from a supplier
called Comco with the term of purchase agreement one-third of the purchase price is payable
on delivery with the balance payable in equal monthly installment over the following two
years. Limited liability means that a member of a company limited by shares is usually not
required to contribute amounts from their personal wealth, beyond the subscription price of
their shares, to meet the debts of the company. The effect of limited liability is to transfer the
risk of corporate failure from the investors in the venture carried on by the company to its
creditors.

The possible advantages of using a company to carry out on a business are:

1) Limited liability

2) Perpetual succession

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3) Free transferability of interests

4) Company charges

5) Taxation.

In this case of Smallco Sdn Bhd as a registered company under limited liability, if six
months after agreements are entered, Smallco Sdn Bhd were unable to make payments to the
Landlord, Largebank and Comco, the following will occur:

2.2 Landlord
The landlord would not able to recover the amount owning under the lease from Mal and
Lisa personally. This is because their liability to contribute to pay company’s debts is limited
to the amount remaining unpaid on their shares. However, if Mal and Lisa had carried on the
business as a partnership, they would be personally liable to the debt as partners. From this
case, the lease contract agreement was entered between the leaser and company. The
landlord would not able to recover the amount owning under the lease from Mal and Lisa
personally. Mal and Lisa as Directors are not required to pay additional amounts from their
personal wealth, its limited from the subscription amount of their share to meet Smallco Sdn
Bhd debts. This principle is reflected in the court case of Abdul Aziz Bin Atan & 87 Ors. Vs
Ladang Rengo Malay Estate Sdn Bhd. [1985] 2 M.L.J. 165. “The company from the date of
incorporate has perpetual succession and the Companies Act provides that the liability on the
part of the shareholders to contribute to the assets of the company will be limited in the
manner provided by law and its memorandum and articles of associations. The whole point
of forming a limited company is that the shareholders can have in their hands the
management of the business without incurring the risk of being under unlimited liability of
the debts of the company.”

2.3 LargeBank
LargeBank would take legal action against Mal and Lisa under the guarantee agreement and
they would be personally liable to the loan. If they are not able to pay the loan, their house

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will be charged over by LargeBank. However, Mal and Lisa would personally liable for the
debts if they carried on the business as a partnership and entered into the loan agreement.

2.4 ComCo
Smallco agreed to purchase some computer from Comco. Under the terms of purchase
agreement, one-third of the purchased price is payable on delivery, with the balance payable
in equal monthly installment over the following two year. If in the event of Smallco fails to
do repayments after expire of six month of agreements. Comco unable to recover the balance
amount owning under the purchase agreement by Mal and Lisa personally because their
liability to contribute to meet company’s debts is limited to the amount subscripts on their
shares. If the Smallco Sdn Bhd assets have been exhausted, Comco would loss all the money
owed to them. However, if Mal and Lisa had carried on the business as a partnership, both of
them would be personally liable to the debts as partners and Comco have a right to get back
all the assets belonging from both as a debtors.

2.5 Conclusion
Under the Companies Act 1965 Section 16(5) defines that a company is the separate legal
entity, distinct from its shareholder, limited liability of it member, has perpetual succession,
may own land, may sue and be sued in its own names. Meanwhile, under the Partnership Act
1961 Section 3(1) defines that a partnership is the relation which subsists between persons
carrying on business in common with a view of profits. There are five legal differences
between a company and a partnership from the stand point of it structure, type of
registration, number of members, constitution and method of dissolution. When Mal and
Lisa carry on their business as a company, both is limited liability to the company debts.
Company liability is limited to the amount of capital has been invested and personal assets
will be secure from the risk when the company in case of wound up. In the case of company
on bank loan agreements requested personal guarantee from Mal and Lisa on the loan
repayment to give bank a charged over their house to secure their obligations. If Mal and
Lisa decide not to be a guarantor and using company’s valuable assets as parts of the
agreement agreeable deal within the banks, any happen the Smallco Sdn Bhd unable to
repayment will fall to the company liabilities. Difference from the business carry on as a
partnership, if their business fail to fulfill the obligations, the creditor can charge their

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personal assets to satisfy the amount of debts even sue the debtors until bankruptcy whether
they sign as a guarantor or not. Under the Partnership Act 1961, In Peninsular Malaysia a
partnership business must be registered under the Registration of Business Act 1956 & a
partnership is liable for the company debts and personal liability is unlimited. Section 11 of
the Partnership Act 1961 provides that every partner is liable jointly with the other partners
for all debts and obligations of the firm incurred while he is a partner. A partnership is not a
legal entity by itself. It merely comprises of two or more persons carrying on business with a
view of profits.

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3. Question 3 – Problem Set 6:
Question 1 at page 19 of Problem Sets.
Discuss the law on the various duty of care, skill and diligence.
Apply the legal principles to each facts and come to a conclusion.
State reasons for your conclusions.

3.1 Introduction
Company Act defines a director as a person appointed to the position of director or alternate
director. A Director has three broad categories of duties: -
• Statutory Duties under Companies Act 1965
• Common law Duties
• Fiduciary duties
• Common law Duties of Directors
A director of the company is given fully accountability as a role to undertake the
management of the business and affairs of the company, due to that under the Company Act
1965 a director has duties of care, skill and diligence and fall under common law of duties
and also statutory duties. Since the directors can act as and for the company, they have a
responsibility to ensure that the company does everything is obliged by law and that the
decisions they make are in the best interests of the company. The duty of directors to take
care a company can arise from a number of sources. These are:
• Duty to act with reasonable care, skill and diligence under Section 131(1A) of CA
1965;
• The business judgment rule will ensure accountability whilst providing directors with
sufficient protection to better manage companies under Section 131(1B) of CA 1965;
• The common law duty of care, skill and diligence ;
• The Contract of Employment - for executive directors and other executive officers.

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The common law duty of loyalty and good faith owns by directors can be divided into four
specific duties. They are:
• Duty to act in good faith in the best interests of the company;
• Duty to act for a proper purpose;
• Duty to retain discretion; and
• Duty to avoid conflict of interest.
Several courts case has held that there is no significant difference between the statutory duty
of care and the common law duty of care in terms of the standards to be applied. In another
word, a Director who breaches the statutory duty of care will also have breached the
common law on duty of care. Although the standard of care will not vary according to the
source of the duty of care, there is an important difference in relation to remedies. The
statutory duty of care is enforced by the registered of company (ROC) and any breach of
duty is carries with it’s a fine or imprisonment or both. Whereas under the common law, the
company have a right to sue the director for breach of duty and damage is caused by the
breach of that duties can demand for the compensation or remedies to the company. The
standard of duty of care can be divided into four categories: a) Care; b) Skill; c) Diligence;
and d) Delegation and reliance. The traditional approach to the duty of care, skill, diligence
and delegation of authority is explained in Re City Equitable Fire Insurance Co Ltd. Case.
The court laid down the following principles:

• A director need not exhibit, in the performance of his duties, a greater degree of skill
than may reasonably be expected from a person of his knowledge and experience.
• A director is not required to give continuous attention to the affairs of the company
and his duty arises intermittently while performing his functions at the board
meetings.
• A director is entitled to delegate his duties. In the absence of grounds of suspicion,
the director is justified in trusting the official (to whom his duties were delegated) to
perform such duties honestly.
However, in the AWA case (AWA Ltd vs. Daniels & Ors (formally practicing as Deloitte
Haskins & Sells - 1995), the New South Wales Court of Appeal proposed the following as
the minimum standard practice of duties of care, skill and diligence expected of all directors
as:
• Director must acquire a basic understanding of the business of the company and must
be familiar with the fundamentals of the company’s business;
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• Detailed inspection of day to day activities is not required but what is required is a
general monitoring of the company’s business affairs;
• Directors are under a continuing obligation to keep informed about the activities of
the company;
• Directors should maintain familiarity with the financial status of the company by a
regular review of financial statements.
3.3 Subco Case Study:
Question asked: Will the directors of Subco be held to have breached the statutory duty of
care, law of contract and the common law duty of care when they :

a) Appointed an executive that is a wine expert but with no experience in sales; and
b) Did not discover that the sales figures presented were false.

a) The Subco invested heavily in setting up a mail order wine distribution business and
should employ someone that is competent and reliable in same relevant industry and
experience in sales & marketing. The Subco Board of Director appointed of wine expert can
be justified only if there is a need for an expert to judge the quality of wine not for sales &
marketing. Based on AWA’s case it stated that “A director must acquire a basic
understanding of the business of the company and must be familiar with the fundamentals of
the company’s business”. In such, the Subco Directors might be held of breaching the duty
of care, skill and diligence. The company’s article of association allow for delegation of
authority. However, there is no evidence that the constitution of Subco limits the right of
directors to delegate any of their powers.

b) The financial statement for year 2001-2002 financial year show that Subco had again
made a significant loss. The Subco’s Directors did not discover that the sales figures
presented by the executive were false, are they considered breaching the duty of care? Since
the mail order wine distribution business is the heavy investment as the Directors of Subco,
they need to monitor the overall company’s business activities closely such as the total mail
order of wine, the revenues contributed by mail order and the inventory level of wine.
Besides wholly trusted looking on the sales figures presented by the executives, they shall
look into the monthly account statements above the revenues contributed by mail order
prepared by the finance department and inventory report prepared by the purchasing
department or the mail order report about the wine prepared by the sales department. They

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shall verify the report presented by the executive against the revenues and inventory report
prepared by the finance and purchasing department. According to the AWA’s case, it stated
that “Directors are need to continuing keep informed about the company business activities
and they should maintain familiarity with the financial status of the company by a regular
review of financial statements.” Therefore, the Directors of Subco might be held for
breaching the duty of care. Although the Directors of Subco may have power to delegate &
rely on others to run the business, but as directors should ultimately accountability for any
actions & decision of their delegates, unless the director has practices due diligence over the
delegate. Under Section 364 of CA 1965, It is an offence for an officer of a company to
knowingly authorize, direct or consent to any advertisement, circular or publication
containing a false statement of capital which is misleading or in which there is no mention of
the nature of the capital or in which the amount of paid-up capital or the amount of charge
on uncalled capital is not stated prominently. If found guilty the penalty may impose by the
court is sentence for imprisonment up to 10 years or fine up to RM50,000 or both.

3.4 Jenny Johnson Case


Jenny Johnson as a Managing Director of Subco has make recommended to the board of
director to renegotiate the leases on the number of key supermarket sites to fix its rental
payments for a period of five years. However, market rents fell and make Subco lost money.
If Jenny Johnson made this recommendation to the board of Subco based on her own opinion
and the Subco directors did not seek for expert advice, the Subco directors might be
breached the duty of care. But under director’s duties, they are not liable for wrong judgment
whenever carrying out his duties and it is not expected that every time all the decisions made
must be right or profitable. Based on AWA’s case “A director must acquire a basic
understanding of the business of the company and must be familiar with the fundamentals of
the company’s business”, However, if the board of directors did obtain the expert advice
from expertise or from market survey about what might happen to the market rent over next
five years instead Jenny’s that 'expert' in property matter and the advice was used to make
such decision, then they will not be held to have breached the duty of care if the markets
rents decline and make Subco lost money. Under the Companies Act 1965 Section 132(1F)
has states that the director to delegate their power to others subject to reasonable supervision
by the board and Section 132(1C) to relay on information given by employees or
professional advisors or other directors or directors committees, provided such information
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is made in good faith and the director concerned has made proper inquiry on the accuracy of
such information before relying on it. In additional, the business judgment rule has also been
codified in Section 132(1B). The fundamental purpose of the business judgments rule is to
provide directors with a defense in the exercise of their duties. The immunity, however,
applies only to directors who have made a business judgment based on good faith or for a
proper purpose or who have acted on an informed basis without any conflict of interest and
the decision was made in the interest of the company. Similar court case on bad business
decision made by Mary verses The Lupin Foundation, 609 So.2d 184 (La. 1992), a non-
profit corporation sold its sole asset (a hospital) to a for-profit health care company for $17.5
million. A member of the non-profit board who objected to this sale sued his fellow board
members, alleging that the market value of the hospital was as much as $5 million above the
sale price, and that the sale below value was a breach of their fiduciary duty. This director
further alleged that the board never solicited other offers or made an attempt to value the
hospital. The court held that these allegations, if true, would constitute a violation of the
directors’ fiduciary duty.

3.5 Food Contamination Cases


A food contamination scare substantially affected sales by Big Bakers Sdn. Bhd. a wholly
owned subsidiary of Subco. Subco was not insured against the losses sustained. It would be
considered normal prudent business practice to taken out insurance of this kind. In this
situation, the CEO of the Big Bakers Sdn Bhd. shall be held the responsible of taken out the
insurance without notify the directors of Subco. Nevertheless, Subco main business is in
food and beverage, issues such as food contamination and food poisoning will have a great
impact on its sales, revenues as well as brand name. Knowing the impact and damages to the
company reputation if such incident happen, based on AWA’s case, it stated that: “Detailed
inspection of day to day activities is not required but what is required is a general
monitoring of the company’s business affairs and A director must acquire a basic
understanding of the business of the company and must be familiar with the fundamentals of
the company’s business”, the Subco directors might be breached the duty of care.

3.6 Conclusion

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Director of Subco could breach of duty of care, skill and diligence to appoint an executives
that not familiar to the marketing & sales to run the mail order wine distributors business. If
the director is continue monitoring the revenue, balance sheet accounting and financial
position closely with fair and true profits & loss statement would not breach their duties of
care due to every business could not have forecast of fall with close monitoring in place, any
profits loss or gain would not fall under directors liability. Similar case in Statewide
Tobacco Services Ltd v Morley (1990) 2 ACSR 405, a director was unaware of the company
financial position, having left such responsibility to the other director, who was her son. The
court held that a director in not entitled to claim ignorance of the company’s affairs and she
should have made the necessary inquiries.

For Jonny Johnson case is already provide information & actually acts in the best interest of
the company could not breach of her duty as a Managing Director of Subco when the market
rented fell substantially over the years.

For the food contamination case, Subco director could breach of duties due to not carry out
his director duties of care & diligence again the big loses such as food contamination which
will affect the reputation & revenue of the Big Bakers Sdn Bhd as a subsidiary companies of
Subco. The negligence of the common law on duty of care will usually result in the damages
of the company name and can lead to the company law sue to the directors for the
compensation or remedies.

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4. Question 4 – Problem Set 6:
Question 2 at page 19 of Problem Sets.
Discuss the law on duty of care, who owes the duties and to whom they are owned.
Discuss the remedies available.
Discuss the legal principle of insider trading and its application to the facts.

4.1 Background
Subco Bhd is one of the unlisted public subsidiary company of Listco Bhd (owns 73% of the
Subco ordinary shares) and operates a chain of supermarkets and specialty food & beverage
stores throughout Malaysia & Singapore. The Subco Board of Director has 5 members and
Jenny Johnson is acting as a managing director. Tommy Tang is also another Board of
Director & shareholders that own 10% of Subco Bhd share and there are other seven
members of Tang family shareholders hold cumulative of 17% of Subco Bhd shares.
Meanwhile, Frank Fearless is act as a managing director & CEO of Listco Bhd and also one
of the Board of Director of Subco Bhd. The Board of Director of Listco Bhd has eight
members and consists of two executive directors and six non-executives directors. The single
largest shareholders of Listco Bhd are Weldone Grain Bhd which is unlisted public company
owned by Richard Ross, with 239,775,639 ordinary shares, or 21% of the issued capital and
Listco Bhd is a public listed company. Through the current legal framework under the
Company Act 1965 in Section 132(1) has stated that “Director’s duties are fiduciary duties
of loyalty or duty to act with fidelity and trust to another”. In generally, directors owe
fiduciary duties to the company and its shareholders and not, for example, to stakeholders
such as creditors or minority shareholders (Percival v Wright [1902] 2 Ch 421; Southern
Cross Mine Mgt v Ensham Resources (2004) 22 ACLC 724). Therefore a company may
enforce fiduciary duties owed by a director. A reason for this is that otherwise, directors
would be liable and exposed to a multitude of actions (Brunninghausen v Glavanics (1999)
17 ACLC 1,247 at 1,254 per Handley JA). The most important fiduciary duty is the duty of
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loyalty. The concept is simple that the decision makers within the company should act in the
best interests of the company and not in their own interests. The easiest way to comply with
this duty is not to engage in transactions that involve a conflict of interest.

4.2 Directors' Statutory Duties under the Companies Act


Under Section 132(1) of the Companies Act 1965 have sets out the statutory duties of
directors. Firstly, directors in discharging their duties, have a statutory duty at all times to
act honestly and use reasonable diligence. Secondly, under Section 132(2) an officers and
agents of the company cannot make improper use of any information acquired by virtue of
their position to gain directly or indirectly, an advantage for himself or for any person, or to
cause detriment to the company. This is often referred to as a fiduciary duty. A director is an
officer of the company. The extensive application of this statutory fiduciary duty to anyone
who is deemed to be an officer or agent of the company has significant implications for the
corporate governance responsibilities of those persons. The statutory duties of a director,
officer or agent under Section 132 are in addition to, and not in derogation of, any other
written law or rule of law relating to the duty or liability of directors or officers of a
company. A director’s breach of this statutory duty can be a civil breach rendering the
director liable to the company for any profit made by him or for any damage suffered by the
company. The breach of fiduciary duties can also be charge under a criminal offence.

4.3 Directors' Fiduciary Duties under the Common Law


Directors under the common law of duties (Section 132(1)) may liable as fiduciary and act
bona fide in the interest of Company. A fiduciary is a person who is expected to act in the
interests of another persons or shareholders and cannot use their knowledge or position to
gain own benefits or personal interests. A directors position in the companies is a fiduciary,
must act honestly and good faith in the interest of the company or shareholders, duties to act
for a proper purpose, to retain discretion and consequences of breach of duties. A director is
regarded as a fiduciary both at common law and under the Company Act. A fiduciary
relationship arises when the company is entitled to expect that the directors will act in the
company’s interests to the exclusion of the director’s separate interests. Of all the duties of a
director, the fiduciary duty is conceptually the most demanding. It is an all encompassing
MGT507 Company Law Page 19 of 51
duty. A director’s duty is not merely to serve the company’s interests and also must avoid
placing himself in a position where he prefers his own interests, or the interests of a third
party, instead of or to the detriment of the company’s interests. This fiduciary duty is also a
statutory duty as the application of the fiduciary duty is very broad; this duty may be
recognized under the following rules under the common law:
a) A director has to act “bona fide” in the interests of the company and not for any
collateral purpose. In doing so, the director must make sure he does not in any way
benefit from the act of good faith or have any interest whatsoever in the act. Unlike a
trustee, a director can exercise his own interest so long as he has obtained the company’s
fully informed consent. This consent must be obtained through a full disclosure of all the
facts and of the director’s own interests in the transaction.
b) The rule of “no secret profit” is applied so strictly that even if there is no realistic
possibility of conflict between the interest of the company and the duty of the director, so
long as the director has made a profit which is sufficiently connected with his fiduciary
office, an account of the profit is required.

The similar court case on Section 132(1) for fiduciary duty of loyalty in Multi-Pak
Singapore Pte Ltd v Intraco Ltd [1994] 2 SLR 282, The word 'honestly' does not mean that a
director would only be in breach of duty if he had acted fraudulently. It means to act bona
fide in the interests of the company. In exercising their discretion, the directors should only
act to promote or advance the interest of the company.

4.3 Insider Trading


The statutory provisions governed under insider trading can be found in Part V, Division 1,
Subdivision 1 of Capital Market & Service Act 2007 (CMSA). Previously, insider trading is
governed by Part X, Division 1 of the Securities Industry Act 1983 (SIA). Insider trading
also defined & regulated by the Companies Act 1965 under Section 132A & Section 132B.
Under the Company Act has stated that “an officer, agent or employee of a company, or who
has price-sensitive information is prohibited from using price sensitive or specific
confidential information acquired by virtue of his/her position, to gain an advantage for him
or herself in relation to dealing in securities”. Under Malaysia Law of CMSA, if a person
commits insider trading, he/she may subjected to certain criminal and civil actions as follow:

MGT507 Company Law Page 20 of 51


a) Criminal sanction under the CMSA, Criminal prosecution may be instituted again the
insider and if convicted in insider trading, he may be punished with imprisonment of
a term not exceeding ten (10) years and to a fine not less than RM1 million. The
similar case involve insider trading in Malaysia is the case of PP v. Chua Seng Huat
[1999] 3 MLJ 305.
b) Civil suits by persons affected by insider trading under the act. The insider may face
a civil suit brought again him by a persons who suffer loss or damage by reason of,
or by relying on, the conduct of insider.
c) Civil suits instituted by Securities Commission under the CMSA.
d) Any civil actions brought against the insider by persons affected by insider trading
under any other law (Section 201(11) of the CMSA).

4.4 Summary of Directors ought to note the following duties:


A) Fiduciary Duties:
• Duty to act in good faith in the best interests of the Company
• Duty to act for proper purposes
• Duty not to make secret profits
• Duty to avoid conflicts of interest
B) Common Law Duties:
• Duty of skill and care
• Duty of Mutual Trust and Confidence
C) Statutory Duties:
• Duties to creditors and employees
• Duty to disclose interests in contracts
• Duty to observe restrictions on, inter alia, loans to Directors and substantial
property transactions
• Health and Safety duties
• Procedural requirements
D) Contractual Duties (depending on the extent to which they are incorporated into the
service agreement):
• Confidentiality
• Non compete

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• Post termination restraints

4.5 Tommy Tang Cases


Tommy had telephones several members of family and without revealing what he has heard
the discussion between Frank Fearless and Gary Goff that the Listco board is considering
making an offer between 85 cents and RM1.20 per share to Tang family shareholders, offers
to buy their shares in Subco for 85 cents. Several elderly members of the company, who trust
him implicitly and rely on him for investment advice, accept his offer immediately. This
question is similar to the Brunninghausen v Glavanics. In these circumstances, an individual
elderly member is so reliant upon Tommy for information and advice. This can be reflected
in a relationship of trust and confidence between the Tommy and elderly members. In this
case, court is likely to hold that Tommy and elderly members were in a fiduciary
relationship and as a director; Tommy owes a duty to these individual elderly members. As a
director, Tommy is obligate to look after the interest of the members instead of putting his
interest above those of the members. A breach of this duty by Tommy mean that the court is
likely to make an order that Tommy shall return any profit made by him to the members if
he has sold their shares to Listco or returned all the shares to members is he has not yet sold
the shares.

4.6 Remedies Available


The family member shareholders can claim the losses or compensation again the directorship
from Tommy as an insider trading activities. The court could imposed an order to Tommy on
return of any profits made to the members if the share has been sold to Listco or returned all
the unsold shares to its family member shareholders.

4.7 Conclusion
Company Directors are in a position of trust within their companies. The knowledge and
power they acquire through their offices creates a potential framework for abuse, whereby
Directors act for personal gain. The media is filled time and again with scandals concerning
misappropriation of company funds, bribes and secret profits. It is well known that a

MGT507 Company Law Page 22 of 51


Director faces severe criminal penalties for such conduct. What is less well known, however,
is the vast array of duties and obligations placed on Directors by contracts and the law.
Breaching these duties and obligations can result in a Director being disqualified for a fixed
period at the discretion of the court and having to pay compensation, in addition to the
criminal sanctions already referred to. Fiduciary duties emanate from general common law
principles which have been developed by the courts over time, including those relating to
trust and unconscionable behavior. These duties are extremely general in nature since they
are based on the courts’ interpretation of what amounts to fair and reasonable behavior. The
standard duties imposed are: to act in good faith in the best interests of the company, to act
for proper purposes, not to make secret profits and to avoid conflicts of interest.

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5. Question 5 – Problem Set 7:
Question 1 at page 21 of Problem Sets.
This question focuses upon the duty to act in good faith in the interest of the company.
Discuss the duty and apply the legal principles to the facts.
Come to a conclusion and state reasons.

5.1 Introduction
Section 132 (1) of Company Act 1965 stated that “A directors of a company shall at all times
exercise his power of a proper purpose and in good faith in the best interest of the company”.
To avoid even the appearance of a conflict of interest, a director may want to treat as a
conflict any transaction between the company and (i) the director’s spouse, descendants, or
ascendants, (ii) any entity in which such a relative is a trustee, director, officer, employee,
consultant, or agent, or (iii) any entity in which such a relative has a financial interest.
If a conflict of interest is or may be present, the director must:
• Disclose to the board of directors or relevant committee of the board the material
facts as to his or her relationship or interest.
• Not participate in any board discussion or vote, unless the company’s board
determines that the director may participate in such discussion or vote.(Section
131A(1) of CA1965)
If the board determines that the director may participate, the director may still decide that a
conflict exists and that he/ she should not participate in any discussion or vote. If a director
follows these disclosure and recusal procedures, a party challenging a transaction on the
grounds of a conflict of interest/breach of fiduciary duty will face a heightened burden.
Similar court case on Sarawak Building Supplies Sdn Bhd v Director of Forest & Co [1991]
1 MLJ 211, the fact that interested directors were absent from the meeting which passed the

MGT507 Company Law Page 24 of 51


resolution on the subject matter. The court held that ‘the absence of certain directors from
the meeting did not mean that their absence gave the other directors the license to proceed
with the meeting and to pass the purported resolution. Their presence was necessary to
constitute proper quorum… if they had interest in any contract or arrangement, they shall not
vote. If they vote, their votes shall not be counted’

5.2 The case & application of the law:

Listco Bhd

Own 100% Share Own 73% Share

Food
Subco Sdn
Product Sdn
Subco leads RM$20Million to Bhd
Bhd
Food Product with interest
free.

Food Products Sdn Bhd & Subco Sdn Bhd is two of the subsidiary company of the Listco
Bhd. On account statement of 2002, the Listco group of companies have over 200 wholly-
owned subsidiaries and further 11 companies in which Listco has a controlling majority
interest but that are not wholly-owned subsidiaries include Subco, which is 73% owned by
Listco. Each of the individual subsidiaries companies has its own separate legal entity and
separate interests even through there are under corporate group of company. Each of the
individual companies directors much act in good faith and in the best interest of the
companies governs by the Company Act 1965. Under Section 132(1) also a general law
duty, even if director’s actions are in company’s best interests, may still be a breach of duty
if power not exercised for a proper purpose. Similarly in court case of Walker v Wimborne
that the high court held the directors must put their company’s interests before the group’s
interests. Even though the Subco Sdn Bhd is a subsidiary relationship to the Listco Bhd, the
directors of the Listco can’t act in the best interest of the Listco again Subco benefits. From
the case studies, Subco has recently sold its New Zealand bottle shop business for RM$20
million and lends RM$20 million in cash to Food Products Sdn Bhd with interest free and
also without obtaining any security from Food Product Sdn Bhd. However, looking into
Subco financial reports on 30 June 2006, Subco had net assets of RM198 million and
borrowings of RM60 million and the business has been operating at a loss for several years.
MGT507 Company Law Page 25 of 51
An intelligent, professional, honest & responsible directors of Subco Sdn Bhd would believe
that RM$20 million could be used to improve the current bad financial position in the
company than loan it out without interests. Meanwhile, there was no significant reason or
strong justification why the board of directors believe that the RM$20 million that Subco
lend to Food Products Sdn Bhd will benefits the company in present or near future.
Therefore, there is a breach of duty of the directors of Subco. Furthermore, the market each
ordinary share price of Listco’s at RM$4.45 may presume the financial position for the
company is relatively strong. So, it is the better position for Listco as a parent company to
lend money to Food Products Sdn Bhd with the substantial benefit to Listco is some of its
projects come to fruition that mention by the Frank Fearless (CEO of Litsco) instead of
Subco Sdn Bhd.

5.3 Would it be different if Listco owned all issued shares in Subco


There is NO difference instead of Listco owned all issued shares in Subco. The fact still
remain that each individual company such as Listco and Subco are a separate legal entity,
operate under separate management & each of the individual companies directors have a
duty to act in the best interest of the company. Due to that, the directors of Subco Sdn Bhd
are still considered breaching the fiduciary duty because they failed to consider act in good
faith & in the best interest of the company. Subco also has its own minority shareholders,
creditors, employees, customers and suppliers whose interests need to be taken into account
by the directors of Subco when making such decisions. If Food Products unable or fails to
repay back full amount of RM$20 million loan, the interests of Subco’s creditors are
jeopardized when lends it to Food Products Sdn Bhd with interest free and without obtaining
any security for the loan. Where looking at the benefits of majority shareholder would be
Listco and the benefits of minority shareholders of Tang family were not been taken care of.
The decision made by the Subco directors must not be involving in the conflict of interest
between director personal interest (interests of Listco as a parent company) and the company
interests (interests of Subco). Under Section 133A(1) stated that “a company (other than an
exempt private company) shall not make a loan to any person connected with a director of
the company or of its holding company and enter into any guarantee or provide any security
in connection with a loan made to such person by any other person”. In such circumstances,
the Food Product Sdn Bhd getting loan of RM$20 million from Subco can be prohibited
which is connected to the director of Subco to Food Product Sdn Bhd or of its holding
MGT507 Company Law Page 26 of 51
company under Listco. Under Section 133A(2) is exception a) Where the loan is made to a
subsidiary or holding company or a subsidiary of its holding company; b) To a company
whose ordinary business includes the lending of money or the giving guarantees in
connection with loans made by other persons. In this circumstance, loan to the Food Product
Sdn Bhd is prohibition from the law as:
1) Food Products Sdn Bhd is subsidiary company under Listco holding same as status as
Subco and not a subsidiary company relationships to Subco. Unless Food Production
Sdn Bhd is a subsidiary company under Subco.
2) Subco ordinary business not includes the lending of money (not license to provide
loan facilities) or giving guarantees in connection with loans to any person connected
to the director of the company, this may again contravenes with the Companies Act
Section 133A(2)(b) also breach of Bank Negara Act of unlicensed money lender.
Where a company contravenes Section 133A, any director who authorizes the making of any
loan or the entering into of any guarantee contrary to this section shall be guilty of an
offence against this Act can be fine for RM10, 000.

5.4 Conclusion
The duties of the directors need to act all the time honestly with the best interest of the
company. Subco directors always need to act in the best interest of its own company, and the
interest of its shareholders, members, employees, creditors and others need to be take care.
Although Subco is subsidiaries companies for Listco, the board of director cannot take
advantage again the company and minority shareholder benefits still need diligence and care.
Subco board of director should not and never breach their duties to act honestly in the best
interests of company and its employees, members, shareholders, creditors and others. The
decision made by the corporate group directors may affect other subsidiaries group company
but nevertheless if the decisions can deliver the best interest to the subsidiaries company in a
group than the directors was not in breach of his duty. When to judges this, the court will
apply the test to see there is any intelligent and honest person as a company directors.

MGT507 Company Law Page 27 of 51


6. Question 6 – Problem Set 7:
Question 4 at page 22 of Problem Sets.
Discuss the common law rule of directors taking corporate property information and
opportunities.
Discuss the statutory law on improper use of position and information.
Apply the principles discussed and come to a conclusion.
State reasons for conclusion.

6.1 Introduction
Directors have a duty to avoid a conflict of interest. In particular:
a) the directors must retain their freedom of action and not fetter their discretion by
agreeing to vote as some other person may direct;
b) the directors owe a fiduciary duty to avoid a conflict of duty and personal interest;
c) The directors must not obtain any personal advantage from their position as directors
without the consent of the company for whatever gain or profit they have obtained.
A director may be appointed to represent the interest of, for instance, a shareholder of
debenture holder. If he finds himself in an acute conflict of interest he should resign.
Similarly court case in Regal (Hasting) ltd verses Gulliver [1967] 2 AC 134, a company
wanted to invest in 2 cinemas, but it had insufficient funds to do so. Some of its director then
took up the opportunity and together with the company, invested in the cinemas.
Subsequently, the 2 cinemas were sold, resulting in profit to the company and some of the
directors. The shareholder of the company changed and the new management brought an
action against the director to account for the profits made. Is has held by the court that the
individual director were liable.

6.1.1 Duty and personal interest

MGT507 Company Law Page 28 of 51


Directors must show undivided concern for the company’s interests. It is unnecessary to
show that the company has been prejudiced in any way by the conflict of interest. There
must always be a conflict of interest where a director has an interest, even indirect, in a
contract with his company. Yet such contracts have to be made, such as when a company
employs one of its directors in the management of the business. To regulate these situations
and provide a reasonable compromise statutory and other rules to permit directors to enter
into or be interested in contracts with their company subject to various conditions.

6.1.2 Personal advantage


Directors may not obtain personal advantages gained through their being directors unless the
company allows.
a) The directors were accountable to the company for their profit if they had obtained it
from an opportunity which came to them as directors.
b) It is immaterial that the company had lost nothing
c) The directors might have retained their profit if the company had agreed by
resolution passed in general meeting that they should do so.

6.2 Common law on taking corporate information & opportunities


Under common law, a director must not place themselves in a position where there is an
actual or substantial possibility of conflict between a personal interest and the director’s duty
to act in the interests of the company, unless the permission of the company is obtained. A
key case in this area in 2004 was Fassihi -v- Item Software (UK) Ltd in which the Court of
Appeal held that the director owed a duty to confess his own misconduct to the company. In
that case the director, Mr Fassihi, had set up a competing business and attempted to secure a
lucrative contract from an existing customer of the company. The Court decided that Mr.
Fassihi had acted in breach of his fiduciary duty to act in good faith by failing to disclose his
personal misconduct and conflict of interests. This meant that he had to account to the
company for the profit that he had made.

6.3 Statutory law of improper use of position & information

MGT507 Company Law Page 29 of 51


Under Section 131 of Companies Act 1965, the statutory duties of director is stated that
“every director of a company who is in any way, whether directly or indirectly, interested in
a contract or proposed contract with the company shall, as soon as practicable after the
relevant facts have come to his knowledge, declare the nature of his interest at a meeting of
the directors of the company.” In a Singapore case of Yeo Geok Seng v PP [2000] 1 SLR
195, Court held that under Section 156 Singapore Companies Act (Section 131 Malaysian
Companies Act) was not confined to situations where the directors had a personal interest
that conflicts with his duty but was wide enough to impose a duty of disclosure on a director
who holds directorship in another company. Under Section 132(2) Companies Act 1965 sets
out the duty not to misuse information or position “an officer or agent of a company or
officer of the Stock Exchange shall not make improper use of any information acquired by
virtue of his position as an officer or agent of the company or officer of the Stock Exchange
to gain directly or indirectly an advantage for himself or for any other person or to cause
detriment to the company”. Hence, it is applicable to directors. This provision can apply to
information which is not confidential as held in McNamara v Flavel (1988) 13 ACLR 619
but only so long as the information is of a kind which equity would protect by injunction for
breach of fiduciary duty. Section 132 is sometimes regarded as a misuse of information by
insiders. Insider trading is in effect a misuse of unpublished information of a company by
anyone in possession of such information which is not generally available. Under Section
132 (1) provides that a director shall at all times act honestly and use reasonable diligence in
the discharge of the duties of his office. Thus, the use of the company’s confidential trade
secrets, for example, by a director for his own personal gain, is a breach of his statutory duty
to act honestly. The consequences for breaching section 132(2) are two-fold:
a) the officer or agent is liable to the company for any profit made or for any damage
suffered by the company as result of the breach; and
b) the officer or agent is guilty of an offence punishable with imprisonment of 5 years
or a fine of RM30,000

6.4 Duty to avoid conflicts of interest


According to Section 132(2) of the Companies Act 1965 “a director, being an officer of a
company, or agent or officer of the Stock Exchange shall not commit a breach of using
information to make a personal profit by being dishonest and using information acquired by
him to gain directly or indirectly to his personal gain”. It is also a common law expectation
MGT507 Company Law Page 30 of 51
that a director should not have a conflict of interest with that of the company and should
disclose such interest to the board or to the company (Section 135 of CA 1965).
A) Some possible examples of situations which might fall within the act under conflict of
interest:
• If a director of Company A is a competitor in some respects of Company A.
• If a director of Company A is a major shareholder in Company A.
• If a director of Company A is a director of an investment bank which may have a
relationship with Company A or a competitor.
• If a director of Company A is also a director of Company A’s pension trust company.
• If a director of Company A owns property adjacent to Company A’s property, the
value of which could be affected by the activities of Company A.
• If, in each of the above situations, the director is a director of another company which
has the relevant relationship with Company A.

B) Some of the basic rule to avoid conflict of interest:


• Not using company property to make a profit for himself;
• Not using information and opportunities acquired in the course of the company’s
business for own profit;
• Not using position in the company to obtain a profit for himself (secret profit);
• Not conducting transactions between himself and the company without disclosing his
interest to the company;
• Not competing directly with the company in the same business.

6.5 The case & application of the law


Interco Bhd is an internet systems developer approaches the CEO of Listco Frank Fearless
with a proposal to establish a joint venture project to develop and implement internet grocery
sales in Malaysia. However, after detailed consideration the Listco board has rejects the
proposal because it would prefer to focus on its own internet grocery project. However, Gary
Goff the CFO of Listco thinks that proposal is a particular good one as Interco in more
advanced then Listco in relation to internet grocery sales. At the board meeting, Gary tells
the others directors that if they reject the Interco proposal then he intends to resign from his
current positions and work with Interco on the proposal. Gary intention is very pleased by

MGT507 Company Law Page 31 of 51


Frank Fearless and he had said to Gary during the board meeting “Go for it” and wishes
Gary the best of luck in his new venture. So, Gary does resign from his CFO positions with
Listco and joins a newly established subsidiary of Interco called On-Line Groceries Sdn.
Bhd. as a minority shareholder (investing RM2 million) and also becomes the CEO of On-
Line Groceries. On-Line Groceries is extremely profitable and within three years Gary’s
initial investment of RM2 million has increased in value of RM10 million. The directors of
Listco think that, in part, On-Line Groceries success is attributable to Gary’s experience
gained through his involvement in Listco Internet sales project. It also turns out that Gary
has made use of a number of industry contacts while at On-Line Groceries with whom he
first development relationships while working at Listco.

6.6 Can Listco recover the profits gain from Gary


Under the Section 131(5) of Companies Act (disclosure of interest in contracts, property,
offices, etc), every director of a company who holds any office or possesses any property
whereby whether directly or indirectly duties or interests might be created in conflict with
his duties or interests as director shall declare at a meeting of the directors of the company
the fact and the nature, character and extent of the conflict. The test was applied in Peso
Silver Mines Ltd (NPL) v Cropper [1966] 58 DLR (2d) 1 court case, the court held that
where the board has bona fide rejected an opportunity on the company’s behalf, a director is
allowed to take that opportunity for himself without the necessity of disclosure to the
company. However, in Regal Hastings Ltd. v Gulliver, Lord Wright expressed the view that
a director could only avail himself of an opportunity where it had been rejected by the board
on the company’s behalf, where he had specifically obtained the assent of the shareholders.
The fact of question is some similarity to Peso Silver Mines Ltd v Cropper case. Firstly,
Listco board has rejected the joint venture project proposal because for their own business
faith. Secondly, Listco CEO had granted the permission of “go ahead” message to Gary
during the board meeting and wishes him the best of luck in his new venture. Thirdly, Gary
had disclosure his intention in the board meeting to work with Interco on the proposal.
Therefore, Listco management had no obligation to recover the RM8 million profits gain
from Gary in relation to his own investment in On-Line Groceries. The argument may on the
similarity court cases as Canadian Aero Service Ltd v O’Malley (1973) that the Mr.
O’Malley (President) and Mr. Zarzycki (Executive Vice President) had invested
considerable time on a proposal for topographical mapping and aerial photographing of parts
MGT507 Company Law Page 32 of 51
for Government of Guyana (known as British Guiana until its independence on May 25,
1965) and they did not disclose their intention and interests in forming the new company to
obtain the contract. Therefore the court held they breached the duty even though they had
resigned from Canadian Aero. However, in Gary cases had already disclosed his intention
during the Listco board meeting if the proposal project had been rejected. Therefore, it may
conclude that the Gary has not breached his fiduciary duty and Listco had no basis to claim
the RM8 million profits gain from Gary. According to the Regal (Hasting) Ltd v Gulliver
case shall not apply to the fact of this question because there was no indication that the
directors of Listco taking a corporate opportunity on the basis that the company does not
have the financial resources to take up the opportunity. However, if Gary had concealed his
intention of joining Interco when he resigned from Listco, the fact will be some similarity to
court case of Canadian Aero Service Ltd v O’Malley (1973). In this circumstance, even
though Gary resigns from his position with the company does not mean can relief of the
company interests, with the intention is to take up corporate opportunity, Gary still under
fiduciary relationship with the company and would be in breach of his fiduciary duty for not
disclose his intention, purpose and interest to the company. Hence, Gary must not improper
use of confidential information & corporate opportunity to gain own interest during hold as
an officer position at Listco and as such intention is breach of fiduciary duty of directors. If
Listco intend to law sued Gary for not disclose the intention to joint Interco to grab Listco
corporate opportunities, Listco should be able to recover the profits of RM$8 million gain
from Gary and other consequences responsibility may face is imprisonment for not more
than 7 year or criminal fine up to RM$150,000 or both for contravening Section 131 of
Companies Act 1965.

The director of Listco think that, in part, On-Line Groceries success is attributable to Gary
experience gained through his involving in Listco internet sales project and also turn out that
Gary has made use of a number of industry contacts while at On-Line Groceries with whom
he first developed relationships while working at Listco. In such circumstance, if the
evidence is truth that Gary has improper use of his position in Listco and made use of
company confidential information to gain opportunities for his own benefits in On-line
Groceries business could breach of his duty. If Listco take this case to the court & found
Gary is guilty on misuse of Listco company information will be breach of fiduciary duty,
Listco could try to recover some profits from RM8 million gains from Gary. Guilty of an
offence against Section 132 of Companies Act, Gary could face the possible imprisonment
MGT507 Company Law Page 33 of 51
not more than 5 year and fine up to RM$30,000. However, if there was no fact stated that
Gary has made use of a number of industry contacts while at On-Line Groceries, Gary would
not be held breach of duty to act in the interests of the company.

6.6 Conclusion
The law on conflict of interest has been strictly imposed in the Company Act 1965. In-order
to avoid unnecessary conflict of interest between directors personal interest and company
interest, every director of a company who is in any way, whether directly or indirectly,
interested in a contract or proposed contract with the company shall, as soon as practicable
after the relevant facts have come to his knowledge, declare the nature of his interest at a
meeting of the directors of the company. A duty to avoid possible conflict of interest and to
disclose the intention of interest for the business opportunity which may offers to the
directors in current line of company business or the company has considered & rejected the
corporate opportunities at a general meeting with shareholder shall obtain the permission
from the company for grapping those opportunity. Every director of a company who holds
any office or possesses any property whereby whether directly or indirectly duties or
interests might be created in conflict with his duties or interests as director shall declare at a
meeting of the directors of the company the fact and the nature character and extent of the
conflict. In Gary case that he had informed and disclose the intention to take up the corporate
opportunity if the proposal rejected by the board of Listco in the board meeting and Frank
Fearless as a CEO of Listco has given permission to “go for it” wishes the best in new
venture for the resignation of Gary. Gary decide resign from his position with Listco and
joint Interco with personal investment of RM$2 million as a minority shareholder, also
become CEO of newly establish On-Line Groceries company and take up the opportunity. In
such circumstance, Gary would not breach of his duties and Listco cannot recover the RM$8
million profits gain from Gary in relation to his investment in On-Line Groceries business.

MGT507 Company Law Page 34 of 51


7. Question 7 – Problem Set 8:
Question 1 at page 25 of Problem Sets.
Discuss the various actions that can be taken against Phil Peters and the possible outcome of
those action.
State reasons for conclusion.

7.1 Background
Subco Bhd has acquired Tang Supermarket Bhd and owns all the issued shares in 1996.
Prior to 1996, Phil Peters is the Finance Director of the Tang Supermarket Bhd. Jenny
Johnson the MD of Subco Bhd, has recently discovered that, in 1994, when Phil Peters as a
Finance Director of Tang Supermarket was lend money to a company without sufficient
security. Finally, the company did not repay the loan eventually. Based on the fact of
Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371, the courts held O’Malley
and Zarzycki breaching his duty as director even though he argued that he had resigned from
the Canadian Aero and therefore not subject to any duties. Due to this, Phil Peters can be
sued for breach of duty even he is no longer the Finance Director of Tang Supermarket. He
cannot avoid his duty and responsibility done on 1994 before the company acquired by
Subco and resigning from his position as director from Tang Supermarket.

7.2 Action can be taken by ROC


Register of Company under SSM (Companies Commissions Malaysia) has a very wide legal
power to take action again the directors who breach their statutory duties and common law
of duties. SSM can impose the power under section 371A of the CA 1965, “the Registrar has
discretionary power to impose compound and the rate imposed is based on a case to case
basis” and also bring court proceedings and ask the court to impose a penalty or
imprisonment or both. Apply to court to order the officer or former officer to do the act
which the officer is required or directed to do may compel compliance under section 362(2).
MGT507 Company Law Page 35 of 51
Under Section 132(1) of CA 1965 stated that the duty to act with reasonable care, skill and
diligence is a statutory duty and also a common law duties of directors. If it is alleged that
Phil Peter has breached this statutory duty under Section 132(1) also breach of common law
duties. Under Section 132(3), the director commits a criminal offence, the ROC can seek a
legal order against Phil Peter for a fine up to RM$30,000 and imprisonment up to 5 years or
both. In addition, this may ground for disqualified order under Section 130 of CA 1965, if a
person is convicted of certain types of offences; they are lead to automatically disqualify
from managing companies for a specified period of time such as:
• of any offence in connection with the promotion formation or management of a
company;
• of any offence involving fraud or dishonesty punishable on conviction with
imprisonment for three months or more; or
• of any offence under section 132 (breach of statutory duty to act honestly and use
reasonable diligence in the affairs of the company), 132A (dealings by officers in
securities) or 303 (liability where proper accounts not kept),
And that person, within a period of 5 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
will be imprisonment for 5 years or RM$100,000 or both.

7.3 Action can be taken by Tang Supermarket


Due to the loan was not repaid, Tang Supermarket can take legal action again Phil Peter to
account for the profits he made or to compensate for any damage suffered by the company as
a result for the breach of statutory duties under Section 132(3)(a). This allows courts to order
Phil Peter to compensate the losses suffered by Tang Supermarket. The care and diligence is
also a common law duty. It is stated in the company’s civil remedies if the director has
breached their common law duty of care and diligence and the company has suffered the
loss, the company can apply to the court for the equitable remedy of compensation. Under
statutory duties Section 132D & Section 132E stated that if an officer contravenes certain
provision, company can apply to court for a compensation order. However, it’s important to
note that even though proved that Phil Peter breach of both the statutory duty in Section

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132(1) to act with reasonable care and diligence and common law duty of care and diligence,
Tang Supermarket does not receive double compensation again Phil Peter. The Court will
order Phil Peter to pay one amount of compensation to Tang Supermarket for the loss it
suffered from the loan was not repaid and consequences Phil Peter may face including fine
for RM$30,000 or imprisonment up to 5 years or both. Due to pass financial reports not
indicate the loan not repaid from debtors & Phil Peter may report the false and misleading
statement to the boards, this may fall under Section 364 of CA 1965 stated that it is an
offence for an officer of a company to knowingly authorize, direct or consent to any
advertisement, circular or publication containing a false statement of capital which is
misleading or in which there is no mention of the nature of the capital or in which the
amount of paid-up capital or the amount of charge on uncalled capital is not stated
prominently. If found guilty, can sentences for imprisonment for 10 years; or fine RM
50,000 or both.

7.4 Actions can be taken by Subco Bhd.


Subco cannot take a legal action against Phil Peter even though the issued shares of Tang
Supermarket owned by Subco. However, Under Sections 181A to 181E of the Companies
Act 1965 allows a complainant to apply for leave of the Court to bring an action on behalf of
the company and under Section 362(2) stated that any member may apply to court to order
the officer to do the act which the officer is required or directed to do. In this circumstance,
members of Tang Supermarket can bring derivation action against Phil Peter. The essence of
a derivative action is an action brought by a shareholder based on a cause of action that the
company has, rather than a cause of action belonging to the shareholder. The common law
allows a minority shareholder to bring this action on behalf of the company in situations
where the company does not take action because the wrongdoer controls the company and is
able to prevent the company from taking any action. In this case, the cause of action belongs
to Tang Supermarkets because he was former Finance Director of Tang Supermarket and
own fiduciary duties to Tang Supermarkets instead of Subco. If the derivation action is
successful, the court will order Phil Peter to pay compensation to Tang Supermarket not to
the individual members or shareholders.

7.5 Conclusions
MGT507 Company Law Page 37 of 51
As a director, Phil Peter needs to act all the time honestly with the best interest of the
company even thought already resign from the post in the company, she still hold an
accountability from lent money to a company on an inadequate security. Phil Peter has
responsibility to disclose this obligation & stated in the financial reports to the potential
buyer before the company been acquire & get back the loan from lender before hand over
the company to new buyers. Phil Peter should not put themselves in the risk or dangerous of
a breach of duty which will result in compensation or imprisonments or both and even been
automatically disqualify for a specified period of time set by the Court either involving
direct or indirect or taking parts in the management of any company in Malaysia. Phil Peters
can be sued for breach of duty even he is no longer the Finance Director of Tang
Supermarket. He cannot avoid his duty and responsibility done on 1994 before the company
acquired by Subco and resigning from his position as director from Tang Supermarket.

MGT507 Company Law Page 38 of 51


8. Question 8 – Problem Set 8:
Question 3 at page 25 of Problem Sets.
Discuss the remedy of oppression.
Discuss whether Rufus is able to wind up Sub for oppression and state your reasons.
Discuss the remedies available to Rufus if he is successful.

8.1 Background
Rufus Tang is one of the minority shareholders and own only 5% of Subco share. As a
minority shareholder, Rufus Tang has become frustrated with what he sees as the
mismanagement of Subco. He thinks the incompetence and laziness of Subco directors has
substantially reduced the value of his share in Subco in recent years. He also believes that
transactions within the Subco group have been undertaken without sufficient regard to the
separate interests of Subco. The Subco directors all receive generous directors’ fees and
other benefits such as free overseas travel and unrestricted use of Subco fleet of chauffeur
driven cars. He sees the Subco board as an “old boy’s club” designed to reward loyalty to
Listco and discourage critical evaluation of management. Rufus Tang wants to threaten the
Subco board with an action under Section 181 of Companies Act 1965, but has been advised
that the oppression remedy is really a remedy for small privately owned company.
According to Companies Act, there is no section to stop any members to bring oppression
action again to the company and its directors who unfairly treated it members or shareholder
and oppression remedy can applies to all type of companies register in Malaysia include
public, private companies, big or small. Due to that, as a minority shareholders, Rufus Tang
have own right to applied oppression remedy action again the board of Subco when he thinks
that the action of board of Subco has an oppressive effect and the action of the company &
actions by the directors which may harmful and oppressive, unfair discrimination or unfairly
prejudicial against its members and failure of directors to act in the best interest of the
company.

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8.2 Remedy of Oppression
The oppression remedy is stated in Section 181 of the CA1965. This section covers a very
broad range of conduct which is ‘oppressive’, in disregard of interests, unfair discrimination
or unfairly prejudicial. The House of Lords in Scottish Co-operative Wholesale Society Ltd v
Meyer described oppressive conduct as conduct that is ‘burdensome, harsh and wrongful’. In
Elder v Elder and Watson Ltd oppressive conduct involves a ‘visible departure from the
standards of fair dealing’ and in Re Jermnyn Street Turkish Baths Ltd the English Court of
Appeal added that oppression involved ‘some overbearing act or attitude on the part of the
oppressor’. Lord Wilberforce in Re Kong Thai Sawmill (Miri) Sdn Bhd said that there must
be a visible departure from the standards of fair dealing and a violation of the conditions of
fair play which a shareholder is entitled to expect before a case of oppression can be made.
Due to that, oppresses remedies available for Rufus Tang to establish oppression under
statuary law of Companies Act 1965 such as Section 181(1) (a) allows the court to provide a
remedy to a member where the court finds that:
a) The affairs of the company are being conducted; or
b) The power of the directors are being exercised either;
c) In an oppressive manner to one of the members including the petitioner; or
d) In disregard of the member or the members’ interests.
And also under Section 181(1) (b) allows the court to provide a remedy to a member where
the court finds that:
a) An actual or proposed act by or on behalf of the company; or
b) A resolution or a proposed resolution, of members, debenture holders or a class of
members of the company; is either
c) Unfairly discriminatory to a member or members, shareholder or debenture holders
including the petitioner; or
d) Prejudicial to a member or members, shareholder or debenture holders including the
petitioner.

8.3 Applies of Oppression Remedy


The oppression remedy applies to all types of companies including public and private
companies, companies limited by guarantee and companies limited by share. However the

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remedy is generally used in relation to small companies which have few members because
of:
a) Member in these companies may have more at risk that just the capital they have
invested. They may be frequently involved in the management of the company and a
dispute among members may result in majority members terminating the
employment of a minority member, thereby depriving the member remuneration.
b) Oppressed members in small companies might not be able to sell their share easily. A
minority member in a public company which has a liquid market for its shares may
ready sell their shares. However, this is not for private company because these
companies generally have a restriction on the rights of members to sell their shares.

8.4 Examples of Oppressive


Some examples of oppressive, disregard of members’ interests and unfairly prejudicial or
unfairly discriminatory conduct include in the following court cases:
a) Hannes v MJH Pty Ltd - Issuing shares in circumstances where the main purpose is
to reduce a member’s ownership interest in the company;
b) Re Gee Hoe Chan Trading Co Pte Ltd - diversion of profits where directors paid
themselves directors’ fees and salaries but not declaring dividends ;
c) Jenkins v Enterprise Gold Mines Ltd - course of conduct designed by them to further
their own interests to the detriment of the company or the minority shareholders ;
d) Re Bright Pine Mills Pty Ltd - diversion of corporate assets or opportunity;
e) Low Peng Boon v Low Janie - No dividend or inadequate dividend given , the
Singapore Court of Appeal stated that the non-payment of dividend coupled with the
misappropriation of company funds could amount to oppression under the Singapore
Companies Act equivalent of Section 181.

8.5 The case & application of the law


According to the question, the allegations made by Rufus Tang about the board of Subco can
it be form the basis of an oppression action as mention below?
a) The incompetence and laziness of Subco’s directors has declined the value of his share in
recent years?

MGT507 Company Law Page 41 of 51


According to the above mentioned allegation, there was no court case to prove this has
been successfully established as the ground for oppression action. The concerns among
the shareholders about the disability of directors do not lead to an oppression action. It is
expected these matters would be resolved internally rather than being the ground of an
oppressive action. Mere mismanagement or mere negligence does not give rise to
oppressive conduct. However, the allegation of incompetence and laziness of Subco
directors may form other part of a claim. Rufus Tang may bring legal action against
Subco’s directors for breach of the statutory duty to act with reasonable care and
diligence under Section 132(1) and under common law duty of care and diligence.
Mismanagement of Subco directors is breach of duty of care, skill and diligence.
Mismanagement also may constitute burdensome, harmful and loss to the company & its
members interests and thus deprive its members of the dividend (if there is no profits
gain). Rufus Tang can apply the statute of Section 7B to the court for authorization to
inspect Subco company any books, minute books, register or document required by or
under this Act to be kept by the company for getting more evident on mismanagement
and Court can authorize either the members or their representative to carry out the
investigation and the authorize representative must be acting in a good faith and for a
proper purpose. If found guilty under Section 132, the directors of Subco can be fine up
to RM30,000 or imprisonment for 5 years or both.

b) The transactions within the Subco group have been undertaken without sufficient regard
to the separate interests of Subco?
This fact could form the basis of an oppression action. The transactions within the Subco
group have been undertaken without sufficient regard to the separate interests of Subco
can constitute a breach of fiduciary duty by the Subco directors. However, evidence of
inadequate transactions have been found such as the Subco directors breached their duty
to act in the best interest of company by lending RM20 millions to a wholly-owned
subsidiary of Listco with interest free and without obtaining any security for the loan is
again the interest of Subco company. Although Listco is parent companies of Subco, the
board of Subco cannot take advantage again Subco interests by diversify the Subco
money to Listco own-subsidiary companies. Subco board of director should not and
never breach their duties to act honestly in the best interests of company and its
employees, members, shareholders, creditors and others. Base of this fact, Rufus Tang

MGT507 Company Law Page 42 of 51


can take oppression action under Section 181 of CA1965 again the board of Subco and
its directors.

c) The Subco director’s all receive generous director’s fees and other benefits such as free
oversees travel and unrestricted use of Subco’s fleet of chauffeur driven cars?
According to the above mentioned allegation can be the basis for oppression. The board
of Subco not acts in the best interest of the minority shareholders, it members and not act
in the good faith for the company as a whole. The generous action taken by the Subco
directors is harmful, disregard of members’ interests and unfairly prejudicial or unfairly
discriminatory and misappropriation of company funds may lead to refused to pay
dividends or inadequate dividend given to its members or unjustifiable failure to pay
dividends. The benefits such as free oversees travel & unrestricted use of Subco’s fleet of
chauffeur driven cars is course of conduct designed by Subco directors to further their
own interests to the detriment of the company or the minority shareholders. Also
diversion of profits where Subco directors paid themselves generous directors’ fees and
salaries may not declare dividends and neglect of the duty of care, skill and diligence.
Base of this fact, Rufus Tang can take oppression action under Section 181 of CA1965
again the board of Subco and its directors.

d) The Subco board as an “old boy’s club” designed to reward loyalty to Listco and
discourage critical evaluation of management?
The above mentioned allegation can’t form the basis for oppression. The Subco board
has special designed to reward loyalty to Listco is breach of best interest of company as a
separate entity. Although Subco is subsidiary companies of Listco, the board of Subco
cannot take advantage again Subco interests by diversify the interest to Listco. The
disability & incapability of directors to manage the company do not lead themselves to
an oppression action. The directors’ failure to act in the best interest of company do held
as long there was an evidence to prove that the directors purposely designed the reward
loyalty program for the sole benefit of Listco instead of its own company Subco. Rufus
Tang may bring legal action against Subco’s directors for breach of duty to act in good
faith with the best interest of the company and proper purpose under Section 132(1) and
under common law duty of care and diligence. If found guilty under Section 132, the
directors of Subco can be fine up to RM30,000 or imprisonment for 5 years or both.

MGT507 Company Law Page 43 of 51


8.6 Remedies available for Rufus Tang
If Rufus Tang able to establish the oppression action under Section 181 of the Company Act
allows the court to choose a broad range of the remedies, such as directing or prohibiting any
act or cancelling or vary any transaction or resolution, or for the purchase of the share of a
minority shareholders by other members or company. Looking into scenario of Rufus Tang
has own only 5% of Subco share as a minority shareholders, the court could order the Subco
company or majority shareholder or other directors to purchase all the shares belong to him
at a reasonably price which the court determines is fair for both party.

8.7 Conclusion
The duty of directors is to ensure that the oppression remedy must not exist in their
companies. A director has to act bona fide in the best interests of the company and not for
any collateral purpose. In doing so, the director must make sure he does not in any way
benefit from the act of good faith or have any interest whatsoever in the act and make sure
all the action taken do not lead to oppression action such as disregard of members’ interests
and unfairly prejudicial or unfairly discriminatory conduct. The interest of minority
shareholders or members need to take care of their affairs carefully, ensure exercised fairly
treatment to all and to avoid unnecessary oppression action taken by minority shareholders
or members or even debenture holders. Shareholders have the right to ensure that a company
is properly run. This right is enforced via the derivative action. In fact any person whose
interests have been, are or would be affected by the conduct or likely conduct of another
person in contravention of the Companies Act can apply for an injunction. Similarly that
same aggrieved person may apply for an injunction to require a person to do an act or thing
that he is required to do by the Act. Due to that, directors of Subco must all the times act
fairly and does not heart or harmful or burdensome conduct to their minority shareholders
interests. Any visible departure from the standards of fair dealing and a violation of the
conditions of fair play which a shareholder is entitled to expect before a case of oppression
can be made. If the oppression evidence is truth, Rufus Tang can applied legal action under
Section 181 of CA1965 again the board of Subco & its directors.

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9. Question 9 – Problem Set 11:
Question 1 & 2 at page 31 of Problem Sets.
Discuss the law relating to corporate authority.
The question asks whether sales concept can enforce the agreement against Subco.

9.1 Introduction
While attending a marketing conference, Barry Boon meet Wanda West, the CEO of a direct
marketing company called Sales Concepts Sdn Bhd. Wanda tells Barry that Sales Concepts
is about to conclude an agreement to license a direct marketing system to Foodies Berhad, a
competitor of Subco. Barry believes that the system would be suitable for Subco but knows
that he will have to move quickly. He offers Wanda RM3 million for the license. Wanda
produces a licensing agreement and Barry signs the document “for and on behalf of Subco”.
Wanda says she will arrange for the agreement to be executed under seal by Sales Concepts
and sent over to Subco in a few days. The following week, Jenny Johnson receives the
agreement. She is not as enthusiastic about the direct marketing system as Barry is. In her
opinion Subco is not bound by the agreement and is not required to pay the amount owing
under it. Can Sales Concepts enforce the licensing agreement again Subco?

9.2 How do companies entering contract


The Companies Act confers a legal entity on a company and the capacity to enter into
contract. A company can enter into the contracts either directly or through an agent. A
company can enter into the contract directly through the following methods:
1) By using the its common seal if the contract that would be required to be made under
seal and shall be executed by directors and the secretary or another director or by

MGT507 Company Law Page 45 of 51


some other person appointed by the directors for that purpose. There are three way
possible to use common seal provided under Companies Act:
• By using common seal, if so required, if made between private persons - Under
Section 35(4)(a)
• By having document signed by certain company officers if so required – Under
Section 35(4)(b)
• Being made by persons acting under the company’s authority, expressed or
implied – Under Section 35(4) (c).
2) Without common seal and shall be executed by two directors or any manner
determined by the directors from time to time.

A company can make a contract through an agent by two type of authority: 1) Actual
authority; and 2) Apparent authority. The actual authority can arise in two ways: a) From the
company’s articles of association; or b) By the board of directors delegating its power &
some of their own actual authority. There are several generic types of authorities; authority
may be express, implied, or apparent. “Express authority” is that which is found within the
plain meaning of a written grant of authority. “Implied authority” is that which is necessary
or appropriate for exercising express authority and therefore be inferred from the express
authority. “Apparent authority” is not actual authority at all. Company should avoid this
apparent of authority and should not rely on apparent authority as a basis for acting, because
the company may be held liable, under the doctrine of “estoppels” for resulting harm to the
persons rely to their detriment on an appearance of authority. The implied actual authority
can arise by implication from things the principal says and does include:
i. Appointing someone to a certain position; and
ii. Otherwise acting to give the person authority, including through “acquiescence”.

9.3 Agency authority of company officers


Officers are agents of the company. They can have:
• Express authority - authority derived from company statutes, articles of
incorporation, by laws, and resolutions of the board of directors.
• Implied authority - authority implied from the position of the company officers and
the facts and circumstances of the situation.

MGT507 Company Law Page 46 of 51


• Apparent authority - authority arising when a third person is reasonably led to believe
that an officer has authority to act when in fact the officer does not have express
authority.
However, when a company is the principal, the implied actual authority can flow from a
person being appointed as a company officer or principal agreed that the agent can act on the
principal’s behalf. Examples of the implied authority for different company officer:
1) Implied authority of CEO - When a person is appointed as CEO of a large company,
the mere appointment to that position gives the person quite a wide amount of
implied actual authority to bind the company (fiduciary obligation to the company) in
contracts.
2) Implied authority of a director, acting alone - While the board of directors can pass
resolutions that binding on the company, individual directors do not have implied
actual authority to bind the company in contracts.
3) Implied authority of other officers - This refers to senior executives who may be on
the board of directors or may be “below board level”. The requirements to establish
apparent authority in relation to companies was applied in Woodland Development
Sdn. Bhd. v Chartered Bank and PJTV Denson (M) Sdn. Bhd. In that case, the
apparent authority was held based on the following:
• The agent had the authority to enter on behalf of the company into a contract of
kind sought to be enforce, was made to contractor;
• The agent was made by a person or persons who had “actual” authority to
manage the business of the company;
• The contractor was induced by such representation to enter into the contract, that
he in fact replied upon it; and
• That under its memorandum or articles of association the company was not
deprived of the capacity either to enter into the contract of the kind sought to be
enforced or to delegate authority to enter into a contract of that kind to the agent.

9.4 Defective contracts


A defective contract made through an agent or purported agent of a company can be
enforced either:

MGT507 Company Law Page 47 of 51


• The person making the contract on behalf of the company has no express actual
authority at all; or
• The person making the contract on behalf of the company has express actual
authority that is too narrow to be able to make this contract.
• For example the CEO’s service contract gives him the authority (express actual
authority) to enter into the contracts worth up to 10 million on behalf of the
company, but the CEO enters into contract worth 12 million. In this situation, an
outsider may be assisted by:
• Common law rules that enable them to enforce the contract, despite the defects; or
• Provision of the Company Act that enable them to enforce the contract, despite the
defect.

9.5 Indoor Management Rule


The indoor management rule assists outsiders to show that a company has given authority,
whether implied actual authority or apparent authority. Under the rule, the outsider can
assume that (for example):
• There have been no procedural defects in the appointment of directors;
• A meeting of board of directors has been properly called and held; and
• Any board (or general meeting) approval required under the company’s articles of
association or the Company Act has been obtained.

9.6 The agreement has been signed by Barry Boon


In the case of Sales Concepts Sdn Bhd whether can enforce the licensing agreement against
Subco due to Barry Boon signed act on behalf of company? Obviously, Barry Boon has
signed the agreement document stated “for and on behalf of Subco”. Therefore, Barry was
purporting to act as an agent of the Subco Company. Since Barry acted as an agent of the
company, Sales Concept will only able to enforce the contract within the scope of Barry’s
actual or apparent authority. In term of Subco management structure, the board of director
has five members. Barry Boon is one of the directors of Subco. There was no written or
orally fact stated that Barry Boon had been given any express actual authority by the Subco
MD or by the board of Subco directors. As a independent non-executive director, Barry

MGT507 Company Law Page 48 of 51


acted alone without given implied actual authority to bind the company in contracts with
Sales Concepts Sdn Bhd. In order to hold the apparent authority, either one of the four
requirements mentioned shall be met such as: (i) a “holding out” (or representation), (ii) by
someone with actual authority, (iii) reliance, or (iv) company not deprived of capacity to
enter into contract under the memorandum or articles. Since Barry Boon has signed the
agreement “for and on behalf of Subco”, apparently requirement of apparent authority is not
satisfied and void (invalid). Under the memorandum and articles of association has provides
a method for executing a document without the common seal. Subco shell adopted of Table
A on Article 77 has stated that all cheques, promissory notes, drafts, bills of exchange, and
other negotiable instruments, and all receipts for money paid to the company, shall be
signed, drawn, accepted, endorsed, or otherwise executed, as the case may be, by (i) any two
directors or (ii) in such other manner as the directors from time to time determine. Due to
that, Barry Boon shall be personally liable for the amount of agreement signed as an
independent director acted alone unless the amount is agreeable paid by Subco. Similarly
court case in Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing
Co Pty Ltd., (1975) 133 CLR 72, this Court followed and applied Freeman & Lockyer v
Buckhurst Park Properties (Mangal) Ltd, as to the general principles concerning the
apparent or ostensible authority of an officer of a company dealing with a third party. Where
an officer is held out by a company as having authority, and the third party relies on that
apparent authority, and there is nothing in the company's constitution to the contrary, the
company is bound by its representation of authority. Due to that, Subco registration of
memorandum and article of association has more than one director, by acted as individual
director, Barry has no implied actual authority to commit on behalf of Subco Company to
contracts with outsiders. Where the transaction and the use of the common seal are not
authorized by the company, the company is not bound by the contract. The contracting party
can request to be furnished with a certified copy of a directors' resolution of the contracting
company which should show (i) the company authorizing the transaction; (ii) the company
authorizing the use of the common seal of the persons delegated to affix the common seal.

9.7 Any different If the agreement has been signed by Jenny Johnson (MD of Subco)
and Head of Subco Marketing Department?
There was no fact to show that the Subco’s board has given the implied actual authority to
Jenny Johnson as a MD of Subco and the Head of Subco’s Marketing Department to sign the
MGT507 Company Law Page 49 of 51
contract ‘on behalf of Subco’ with Sales Concepts Sdn Bhd. If Jenny Johnson signs the
contracts agreement with Sales Concepts Sdn Bhd, Subco may bind by the licensing
agreement. Similarly to the court case of Entwells Pty Ltd v National and General Insurance
Co Ltd (1991) 6 WAR 68 stated that if a Managing Director did not have actual authority, a
company may still have been liable because of his or her apparent authority. In the case of
Hely-Hutchinson v Brayhead Ltd [1968], the court have said that the appointment of MD
involve a grant of implied actual authority to “do all such things as fall within the usual
scope of that office”. So, the appointment of the Jenny Johnson as a MD of Subco will
involve a grant of implied actual authority as well. The usual scope of a MD's powers
depends on what is customary or usual for a MD in a similar company carrying on a similar
business. In general, the courts have said that:
i. A MD's functions include dealing with everyday matters, supervising the daily
running of the company, supervising the other managers and generally being in charge
of the company's business

ii. A MD may engage others to provide services for the company and authorize agents to
make contracts on the company's behalf of the kind that the MD could make;

iii. A MD of a trading company has no usual authority to enter into a transaction that is
not considered to be an ordinary trading transaction;

iv. A MD can guarantee loans made to the company's subsidiary, indemnify persons who
have given such guarantees and give guarantees of payment of debts owed by other
persons;

v. As the usual authority of a MD is to carry on the company's business in the ordinary


way, a MD does not have an implied authority to sell the company's undertaking or to
sell the company's main business.

Based on point (v), the agreement that Jenny Johnson signed cannot be characterized as an
ordinary trading transaction. However, considering the strong financial and size of Subco
that the net assets of RM198 million and loan of RM60 million, the Court would hold that
Subco MD’s have sufficient implied actual authority to enter the RM3 million agreement on
behalf of the company. However, if the Head of Subco’s Marketing Department had signed
the agreement, it could argue that this fell within the implied actual authority of that
executive officer. The Head of Subco’s Marketing Department just has apparent authority.
Looking into the agreement that worth RM3 million, the court may say that the amount is
too large and no implied actual authority of a senior executive below MD level.

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9.8 Conclusion
Wanda West as a CEO of Sales Concepts Sdn Bhd may unable to enforce the licensing
agreement against Subco by only signed by Barry Boon acted as an individual director
acting alone “for and on behalf of the Subco”. The misrepresented as Subco implied or
express actual authority personnel may liable for Barry Boon to bound by the agreement she
made. However, Jonny Johnson as a MD of Subco has a right not to recognize or accept or
agreed to the contract agreement signed by Berry Bong. Due to that, Subco would not
require to repay the amount bound by the contract agreements. But if a contract agreement is
signed by Jonny Johnson as MD of Subco. Wanda West may able to enforce the licensing
agreement against Subco. Even thought MD of Subco did not have actual authority but
Subco may still have been liable because of his apparent authority. The argued is, when
Jonny Johnson appointed as a MD by the board of Subco, together with the appointment
some delegation of duties and power of authority is being carried out as well to bind the
company in agreement with outsiders. Therefore, the contract agreement are executed by
Jonny Johnson would be enforceable and bound by the law. However, if the Head of Subco’s
Marketing Department had been enter into company contract agreement with outsiders. The
contract agreement may be invalid due to apparent actual authority, unless there is a
representation by the board of Subco or by MD of Subco that carry the implied actual
authority with the power to bind the contract with Sales Concepts Sdn Bhd. Under CA1965
Table A on Article 96 has mention that the directors shall provide for the safe custody of the
seal, which shall only be used by the authority of the directors or of a committee of the
directors authorized by the directors in that behalf, and every instrument to which the seal is
affixed shall be signed by a director and shall be countersigned by the secretary or by a
second director or by some other person appointed by the directors for the purpose. There
for, if the Head of Marketing Department with Jonny Johnson as a MD of Subco together
signed & acknowledged the contract agreement with Sales Concepts Sdn Bhd will be bind
under Subco & Wanda West able to enforce the licensing agreement against Subco.

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