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BUSINESS AND COMPANY LAW

(MIAQE)

ANSWER SCHEME

QUESTION 1

(a) Federal Court

This is the apex court in Malaysia.

Composition: (i) Chief justice of the Federal Court;

(ii) President of the Court of Appeal;

(iii) The two (2) Chief Justices of the High Courts; and

(iv) Eight other judges.

Jurisdiction: (i) To hear appeals from the Court of Appeal;

(ii) Exclusive original jurisdiction to decide on the validity of any law

made by Parliament or a State legislature, and to arbitrate on any

disputes between the Federal and State government.

Proceedings in the Federal Court are heard by a bench of three judges or a greater

odd number, as is determined by the Chief Justice of the Federal Court.

Court of Appeal

Composition: (i) President of the Court of Appeal;

(ii) 22 Court of Appeal judges.

Jurisdiction: To hear appeals from the decisions of the High Court.

Proceedings in the Court of Appeal are heard by a bench of three judges or a greater

odd number as is determined by the President.

(6 marks)

(b) Descriptive examples of ‘invitation to treat’:

(i) Goods on display – At common law, a display of goods in a shop is an invitation to

customers to make an offer to buy the goods. A customer who wants to buy the

goods may make an offer at the counter. When the shop accepts his offer, a contract

comes into existence.

Case: Pharmaceutical Society of Great Britain v Boots Cash Chemist.

(ii) Auction – An auction is held to attract bids. The auctioneer’s request fro bids is an

invitation to treat. The customer’s bid is an offer, and acceptance takes place at the

fall of the hammer by the auctioneer.

Case: M&J Frozen Food Sdn Bhd v Siland Sdn Bhd.

(iii) Supply of Information – Sometimes information is exchanged between the

supplier and a prospective customer. Whether there is offer, depends on the facts

and circumstances of the case.

Case: Harvey v Facey

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(iv) Advertisement or notices – Generally advertisements listing the price of goods or

for job applications are not job offers but invitation to treat. They are merely inviting

offers from potential customers or job applicants. However, there are circumstances

where an advertisement may amount to an offer (Carlill v Carbolic Smokeball Co.)

Case: Partridge v Crittenden, Coelho v The Public Services Commission.

(9 marks)

(c) Exceptions to the ‘nemo dat quod non habet’ rule:

(i) Estoppel: Section 27 – Estoppel will arise where the owner has by (1) his words

or (2) his conduct or (3) his negligence, made the buyer believe that the seller has

the owner’s authority to sell, when in fact the seller has no such authority.

(ii) Sale by a mercantile agent: Proviso Section 27 – This applies where a

mercantile agent in possession of the owner’s goods sells or pledges an owner’s

goods without the owner’s authority. A mercantile agent is a person who, in the

ordinary course of his business as such agent, has the authority to buy and sell

goods. At the time of sale, the mercantile agent must have possession of the goods,

or of a document of title to the goods, with the consent of the owner.

(iii) Sale by one of several joint owners: Section 28 – This applies where one of

several joints owners of goods sells the goods without the consent of the other joint

owners. For this section to operate, the requirements are that (1) the seller must be a

joint-owner in sole possession, (2) the sole possession must be with the permission

of the other joint-owners and (3) the buyer must act in good faith without notice that

the seller had no authority to sell.

(iv) Sale by a person in possession: Section 29 – This section applies where the

seller had obtained possession of the goods under a contract that is voidable (under

section 19 or 20 of the Contracts Act, 1950). If a seller in possession of goods

obtained under a voidable contract sells the goods before the innocent party to the

contract rescinds the contract, the buyer will acquire a good title, provided the buyer

buys in good faith without notice that the seller’s title is defective.

(v) Sale by a seller in possession: Section 30(1) – It applies in a situation where a

person, X, having sold the goods to another person, Y, continues in possession of

the goods that were sold or the documents of title related to the goods. If X, by

himself or through his mercantile agent, sells, pledges or makes any “other

disposition” of the goods to Z and delivers the goods to Z, Z will get a good title to the

goods provided that Z acts in good faith without notice of the previous sale to Y.

(vi) Sale by buyer in possession: Section 30(2) – This applies where a person, X,

having bought or agreed to buy goods, obtains, with the consent of the seller,

possession of the goods or the documents of title to the goods. In such a case, if X,

by herself or through a mercantile agent, sells or pledges or makes other

“disposition” of the goods to Y and delivers the goods to Y, Y will get a good title to

original seller who sold the goods to X.

(5 marks)

(Total: 20 marks)

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QUESTION 2

(a) A significant feature of the agent-principal relationship is that,

a principal will be bound by the acts of his agent provided the agent acts

within the scope of the authority given to him by his principal; and

Where an agent has made a contract within the scope of the authority, the

making of the contract carries the same consequences as though the contract

had been entered into by the principal and the contract may be enforced by

and against the principal (section 179); and

The principal will be bound where an agent makes a misrepresentation or

commits fraud whilst acting in the course of his business for the principal

(section 191); and

In normal circumstances an agent cannot enforce contracts entered into by

him on behalf of his principal, nor is he personally bound by them (section

183).

(5 marks)

(b) The situation that Akra is in, is regarded as one where an agent has exceeded the

authority given to him.

According to section 149 of the Contracts Act, 1950, “where acts done by one person

on behalf of another but without his knowledge or authority, he may elect to ratify or

disown the acts. If he ratifies them, the same effects will follow as if they had been

performed by his authority”. This is recognised as an agency ‘by ratification’.

Agency by ratification may arise in two situations:

(i) a person duly appointed as agent by a principal exceeds his authority; or

(ii) a person is not appointed as an agent by a principal but acts as if he is so

appointed.

In Akra’s situation, he may fall under the first type of agency by ratification; agent

exceeding his authority. Akra’s act may be ratified by Povich his principal. If Povich

ratifies Akra’s act, then, the purchase shall be valid.

However, in order for an agency by ratification to arise, the following conditions must

be fulfilled:

(i) The contract entered into by the agent must not be void or illegal;

(ii) At the time of contract, the agent clearly indicates that he acts for his

principal;

iii) Ratification is only permissible if the principal is in existence and has the

capacity to contract at the time the agent purported to act for the principal;

(iv) The principal must have full knowledge of all material facts of the contract;

(v) The principal must confirm the whole contract and not a mere part thereof;

(vi) An act which may subject a third party to damages or terminating the third

party’s rights or interest cannot be ratified;

(vii) The act must be ratified within a reasonable time.

(10 marks)

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(c) Main duties of an agent to his principal:

(i) To obey the principal’s instruction;

(ii) In absence of instruction from the principal, or when none is given, the

agent may act according to custom;

(iii) Must exercise skill, care and diligence in carrying out his duties;

(iv) Must give proper account for all monies handled and must produce such

accounts when required by his principal;

(v) Must pay to the principal all sums received on behalf of the principal;

(vi) Must communicate with the principal;

(vii) Must avoid a conflict between his duties and his personal interests. He

must not make a secret profit;

(viii) Not to divulge to any third person any confidential information or

documents that were given to him by his principal;

(ix) Must not delegate his authority except under circumstances permitted by

the law.

(5 marks)

(Total: 20 marks)

QUESTION 3

(a) Liability of a retiring partner

Section 19(2) Partnership Act states that a partner who retires from the firm

does not thereby cease to be liable for partnership debts or obligations

incurred before his retirement.

Section 38(1): “where a person deals with a firm after a change in its

constitution, he is entitled to treat all apparent members of the old firm as still

being members of the firm, until he has notice of the change”.

For existing debts of the partnership. a retiring partner may, enter into an

agreement between himself, the new partnership firm and the creditors to the

effect that he shall no longer be liable for such debts.

To protect from liability in respect of future debts of the partnership, he may

place a notice of his retirement by way of advertisement in the Federal

Gazette, Sabah Gazette or Sarawak Gazette.

The retiring partner will not be liable after the retirement towards new persons

who deals with the firm and who never knew him to be a partner of the firm.

(8 marks)

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(b) Statutory rules under section 26 (1), Partnership Act, 1961: State any five (5)

i) all partners are entitled to share equally in the capital and profits of the

business and must contribute equally towards the losses sustained by the

firm;

ii) the firm must indemnify every partner in respect of payments made and

personal liabilities incurred by him in the ordinary course of the partnership

business or in anything necessarily done for the preservation of the business

or property of the partnership;

iii) a partner making any actual payment or advance for the purpose of the

partnership which is beyond the amount of capital to which he has agreed to

subscribe, is entitled to interest at the rate of eight (8) per cent per annum

from the date of payment or advance;

iv) a partner is not entitled to interest on the capital subscribed by him before

the ascertainment of profits;

v) every partner may take part in the management of the partnership

business;

vi) a partner is not entitled to remuneration for acting in the partnership

business;

vii) a person may not be introduced as a partner without the consent of all

existing partners;

viii) any decisions to be made as to ordinary matters connected with the

partnership business may be decided by a majority of the partners, but no

change may be made in the nature of the partnership business without the

consent of all existing partners;

ix) the partnership books are to be kept at the place of business of the

partnership and every partner may have access to and inspect and copy any

of them.

(5 marks)

(c) Under the law, a professional person may attempt to exclude or reduce his

liability by inserting an exclusion clause into a transaction. To be effective, the

exclusion clause must be clear and unambiguous.

In Hedley Byrne v Heller and Partners, though the defendant bank was

found to have breached its duty of care to the plaintiff, it was held not liable as

it had effectively disclaimed its liability.

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Applying to the current situation, Kaur Rex & Associates was not exclusively

at fault, since the information provided during the audit was false. their audit

was therefore, done based on false information. Moreover, Kaur Rex &

Associates has made it clear in the clause they inserted in their audit report to

disclaim any liabilities to third parties.

The right of auditors to disclaim his liability was recognised in the case of

Royal Bank of Scotland PLC v Bannerman Johnstone Maclay. In relation

to this decision, the Malaysian Institute of Accountants in its Recommended

Practice Guide 6, has made the following recommendation to be included as

a disclaimer in audit reports:

“It is our responsibility to form an independent opinion, based on our audit, on the

financial statements and to report our opinion to you, as a body, in accordance with

section 174 of the Companies Act 1965 and for no other purpose. We do not assume

responsibility to any other person for the contents of this report.”

Therefore, Kaur Rex & Associates may use the above argument as a

disclaimer and defence against the claims of professional negligence with

regards the matter of Banzai Sdn Bhd.

(7 marks)

(Total: 20 marks)

S E T 1

SECTION B

ANSWERS

QUESTION 4

4(a)(i)(ii) (iii)This question contains 3 parts tests the candidates’ ability to identify, analyze and apply the law relating to liabilities of promoters and the effect of pre-incorporation contracts.

4(a)(i)

Pre-incorporation contract simply is a contract purpotedly entered into on behalf of a

company before its incorporation. It must be noted that beforeincorporation, a company has

no contractual capacity.

(1) Section 35(2) Companies Act 1965 – outsider may enforce the pre-incorporation

contract against the person who execute the contract on behalf of the non-existent

company and that person shall be personally liable if the company fail to ratify

the contract after its registration.

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(2) From the facts of the case it is silence as to whether or not the contract entered

into by Baba and Cocoabest Sdn Bhd had been ratified by Choloca Sdn Bhd. Hence

Baba should be held liable for the debt liabilty incurred therein.

(3) As for Magnafico Sdn Bhd, the contract entered between Magnafico Sdn Bhd and

Baba was ratified by Choloca Sdn Bhd on February 2017.

(4) Section 35(1) Companies Act 1965 – outsiders may enforce the pre-

incorporation contract against the company after it is registered, but only if the

company has ratified the contract after its registration.

(5) Applying the facts to the law provided, the company Choloca Sdn Bhd will be

held liable for the debts incurred therein.

4(a)(ii)

(1) Under Common law position, prior to its registration, a company as a legal entity

does not exist. At this stage, neither the company can enter into contracts nor can it

appoint any person to enter contract on its behalf.

(2) Therefore, at common law, a company is not bound to any contract made prior to its

incorporation – Newborne v Sensolid (Great Britain) Ltd. At common law, a

company is also not capable to ratify any pre-incorporation contract – Kelner v

Baxter

(3) The common law position discussed above have been modified by Section 35(1)

Companies Act 1965 where outsiders may enforce the pre- incorporation contract

against the company after it is registered, but only if the company has ratified the

contract after its registration.

(4) Section 35(2) Companies Act 1965 This provision indirectly ensures that the

promoter shall cause the company to ratify the contract. If not, he will be personally

liable unless there is an express agreement to the contrary.

4(a)(iii)

The Act is silent on how ratification of pre-incorporation contract should be made. However,

in Ahmad Bin Salleh v Rawang Hills Resort Sdn Bhd, it is suggested that a board

resolution that has the effect confirming that the company has adopted the pre-incorporation

contract will suffice.

4(b) This question test the candidates’ understanding on how an auditor may be removed persuance to the Companies Act 1965

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(1) Section 172(4) An auditor may be removed by ordinary resolution. Special notice must be given of such a resolution ie 28 days before the meeting.

(2) Section172(5) A copy of the notice must be sent to the auditor and to the Registrar and the auditor shall have the right to make representation in writing (reasonable length). A copy of representation must be sent to all members prior to the general meeting.

(3) Section172(6) If it is too late to send a copy of the representation to all member, auditor has a right to be heard at the meeting or request his written representation be read out at the meeting.

(4) Section172(8) Where an auditor is removed, notice of removal must be lodged with the Registrar

4(c) This question tests the candidates’ knowledge on reduction of capital under the Companies Act 1965.

(1) A company may reduce its capital in accordance with s.64. By this section a company may reduce its capital if there is authority in its articles and the company passes a special resolution to do so.

(2) The court must confirm the reduction. If these conditions are met the company can reduce its capital in any way, but s.64(1) specifically states that the company may do so in the following ways:

(3) by extinguishing or reducing the liability on any of its shares in respect of share capital not paid up;

(4) by cancelling any paid up share capital which is lost or unrepresented by available assets;

(5) by paying off any paid up share capital which is in excess of the needs of the company.

QUESTION 5

5(a)(i)(ii)(iii) This problem question on company law, which contains 3 parts, tests the candidates’ knowledge and application skills in relation to directors’ duties

5(a)(i)

(1) It is quite clear that the directors have breached their fiduciary duties towards the company. Directors are fiduciaries in relation to the company and as such they must at all times act honestly and in good faith for the benefit of the company. The main categories are :

(2) Duty to act in the best interest of the company. This means that a director must, in making a decision for the company, consider whether it would be for the benefit of the company. If the decision is primarily for his own or a third party’s benefit, he would be in breach of this fiduciary duty. See: Re W & M Roith Ltd (1967).

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(3) Duty to act for a proper purpose. This means that a director must exercise the powers bestowed upon him for the right purpose. The best example of a breach of this duty can be found in cases such as Hogg v Cramphorn (1967) and Howard Smith v Ampol Petroleum Ltd (1974), where the directors exercised the power to issue shares for the purpose of forestalling a takeover bid. The court held that the primary purpose of the power to issue shares is to increase the share capital of the company in the event the company is in need of such funds. To utilise that power to frustrate a possible takeover of the company was considered a breach of the fiduciary duty to act for a proper purpose

(4) The duty to avoid conflict of duty and personal interest This duty requires the director not to use his position as a director to make a personal profit for himself or for another. Thus he cannot make secret profits nor usurp corporate opportunities. See: Regal (Hastings) Ltd v Gulliver; IDC v Cooley.

(5) In the given problem the facts indicate that the directors had misspending the company’s funds on matters which were not beneficial to the company. The purchase of the luxury boat which is not in the best interest of the company.

5(a)(ii)

(1) With regard to the purchase of the piece of land from Jack for RM2.5 million, when its true market value was only RM1.5 million, it is clear that the Jason has breached his fiduciary duty to act honestly and in the best interest of the company.

(2) He has taken a gift of RM500,000. This amounts to a secret profit. Hence theymay also be considered to be in breach of their duty not to make secret profits. See also: Mahesan v Malaysian Government Officers Cooperative Housing Society (1978)

5(a)(iii)

(1) As the company is a separate legal entity and the directors have breached their fiduciary duties to the company, only the company may sue the directors to remedy the wrong. This is the essence of the rule in Foss v Harbottle. One aspect of the rule is the ‘proper plaintiff’ rule. This rule states that where a wrong is done to a company only the company may sue to remedy it.

(2) However, there are several exceptions to the rule in Foss v Harbottle. The most important one is where the wrongdoers are in control of the company and their acts amount to a fraud on the minority. There would be a fraud on the minority where the wrongdoers have breached their fiduciary duties and in particular have expropriated company property for themselves. See: Cook v Deeks (1916).

(3) Where the minority can show that there is a fraud on the minority, they may be allowed to institute an action on behalf of the company through a procedure known as a derivative action.

(4) On the facts of the case, it is likely that Ramy and Lily will be able to institute a derivative action on behalf of the company to make Jason and Sharon liable to the company for the loss resulting from the breach of their fiduciary duty to the company.

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5(b) This questions test candidates on the main differences between a non-exempt private limited company and an exempt private limited company

The main differences between a non-exempt private limited company and an exempt private limited company are as follows:

(1) The maximum number of members of a non-exempt private limited company is 50 whereas for an exempt private company, the limit is 20. See: ss.4 and 15 of the Companies Act 1965.

(2) In the case of the exempt private limited company, the membership must consistonly of individuals and not corporations. Further, corporations cannot have any direct or indirect beneficial interest in it. This restriction does not apply to non-exempt private limited companies. See: ss.4 and 15 of the Companies Act 1965.

(3) There is also a difference in relation to filing of accounts with the Companies Commission. A non-exempt private limited company must include an audited copy of its last balance sheet and profit and loss account with its annual return. An exempt private limited company is not required to do so, though it must include an auditor’s certificate in accordance with s.165A. This does not mean that an exempt private company does not have to prepare the balance sheet and profit and loss account. It is only exempted from filing them with the Companies Commission of Malaysia.

(4) The exempt private limited company also enjoys a difference in relation to loans to directors and loans to persons connected with directors. Subject to certain exceptions, s.133 generally prohibits a company from giving loans to its directors while s.133A prohibits loans to persons connected with directors. Both of these sections do not apply to exempt private companies. Exempt private companies are therefore free to give loans to their directors and persons connected with them.

5(c) This questions test candidates on rights attached to preference shares

(1) Right to a fixed preferential dividend. This right to a preferential dividend is in priority to the ordinary shareholders.

(2) Right to cumulative dividends.This refers to the right to receive arrears of dividends in respect of those years where no dividend is declared.

(3) Right to participate in surplus profits.This refers to the right of the preference shareholder to enjoy a higher dividend in those years where the company has made higher profits and is able to give a higher dividend to its ordinary shareholders.

(4) Right to participate in surplus assets in a winding up. This refers to the right of preference shareholders to share in the surplus assets of the company when the company is wound up.

(5) Priority to repayment of capital.This refers to the right of the preference shareholders to be repaid their capital ahead of the ordinary shareholders in a winding up of the company.

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QUESTION 6

Question 6 (a) (i) (ii) (iii)(iv)

In this question candidates are tested on the extent to which the ultra vires doctrine applicable to companies operates in Malaysia and the remedies available to the company and its members if the directors of a company embark on activities outside its objects clause.

6(a)(i)

(1) The effect of s.20(1) is that no act or purported act of a company and no conveyance or transfer of property (whether movable or immovable) to or from the company shall be invalid by reason only of the fact that the company was without capacity or power to do the act or to execute or take the conveyance or transfer.

(2) As a result of s.20(1), the company and the other contracting party to the transaction are bound to an act, conveyance or transfer even though it falls outside the objects clause in the memorandum. In short neither party to a transaction may raise ultra vires to escape that party’s legal obligation or obligations under the transaction (Public Bank v Metro Const. Sdn Bhd (1991).

(3) Thus, in the given problem the Milea may be advised that both Winwin Bhd and Raifalake Bhd are bound by the sale and purchase of the resort. No member of the company can invalidate the purchase of the resort as the purchase has been completed.

6(a)(ii)

(1) Under s.20(2)(a) where a company is engaged in, or is about to engage in, an activity which is outside its objects as stated in the memorandum, any member of the company or, where the company has issued debentures secured by a floating charge, by the holder of any of the debentures or by the trustee for the holders of such debentures, to apply to court for an injunction to restrain ‘the doing’ of such activity.

(2) The use of the words ‘the doing’ in s.20(2)(a) indicates that the power to restrain only applies if the alleged ultra vires activity has not been completed. In the case of the acquisition of the resort from Raifalake Bhd, the transaction has been completed and the directors may be advised that Milea will not be able to restrain or invalidate the transaction.

(3) Milea will be able to restrain by injunction the proposed contract with Ubahsuai Sdn Bhd to renovate the resort under s.20(2)(a). This is because the ultra vires activity remains executory as the contract will only be signed in another three weeks’ time.

6(a)(iii)

(1) The attention of the directors must also be drawn to s.20(2)(b). By this provision the company’s lack of capacity or power may be asserted in any proceedings for

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damages by the company or by any member of the company against the present or former officers of the company.

(2) Thus, in the case of the purchase of the resort either Winwin Bhd or Milea may sue the directors for any damage suffered by the company arising from the purchase.

6(a)(iv)

(1) At common law where a company’s act or transaction is outside the object clause in its memorandum of association, the company is said to act ultra vires. An ultra vires act or transaction is void under common law. Neither the company nor the other contracting party can enforce it.

(2) Further, members cannot validate an ultra vires act or transaction by passing a resolution, even though the resolution was passed unanimously: Ashbury Railway Co Ltd v Riche (1875).

6(b)

This question test the candidates’ understanding of the liquidator’s duties. The duties of the liquidator under the Company Act include:

(1) Taking into his custody or control all the property and things in action to which the company is or appears to be entitled (sec 233);

(2) Conducting an impartial investigation of the company’s affairs;

(3) Collecting and administrating the company’s assets;

(4) Keeping proper books, entries and minutes of proceedings at meetings and other matters as may be prescribed during the winding up;

(5) Lodging various notices and reports with the SSM, such as half yearly accounts, notice of appointment as liquidator; A report to the court whether there are any breaches of the Companies Act ; and A statement of the financial position in the winding up at six monthly intervals.

6(c) This question tests the candidates’ knowledge of the meaning of corporate governance.

(1) Corporate governance includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.

(2) In Malaysia, The High Level Finance Committee on Corporate Governance defined corporate governance as ‘the process and structure used to direct and manage the business and affairs of the company towards enhancing business prosperity and corporate accountability with the ultimate objective of realising long term shareholder value, whilst taking into account the interests of other stakeholders”.

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6(d) This question tests the candidates’ knowledge on certain basic aspects of winding up of companies.

By s.254(1) Companies Act 1965, a company may be wound up voluntarily:

(1) when the period, if any, fixed for the duration of the company by the memorandum or articles expires, or

(2) the event, if any, occurs, on the occurrence of which the memorandum or articles provide that the company is to be dissolved,

and the company in general meeting has passed a resolution requiring the company to be wound up voluntarily; or

(3) if the company so resolves by special resolution.

(Candidates are required to state only TWO situations in which a company may be wound up voluntarily.)

END OF SOLUTION