MGT507 Company Law Assignment

NetAcademy

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

MGT507 Company Law Page 1 of 51

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 2Question 5 at page 11 of Problem Sets --------------------------- Page 8 to Page 11

3. Question 3 – Problems Set 6Question 1 at page 19 of Problem Sets --------------------------- Page 12 to Page 17






9. Question 9 – Problems Set 11 Question 1 & 2 at page 31 of Problem Sets ---------------------- Page 45 to Page 51


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

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.


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.


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

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.


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

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

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

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.



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.

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;

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

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


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

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


the company’s business”, the Subco directors might be breached the duty of care.

3.6 Conclusion

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.




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

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

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:

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

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

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.




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

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:

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.

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


Subco leads RM$20Million to Food

Product with interest free.

Own 73% ShareOwn 100% Share

Listco Bhd

Food Product Sdn

Bhd

Subco Sdn Bhd

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

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.




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

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

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

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

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

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

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.




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).

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

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

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.




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.

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

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?

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

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.

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.



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

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.

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:

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

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

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.

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.


Documents

MGT507 Company Law Assignment