Answers

6DMYSIX Paper 2.2MYS

Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) 1

December 2006 Answers

6DMYSAA Paper 2.2MYS

This question tests the candidates knowledge on three specific rules of statutory interpretation, viz, the ejusdem generis rule, the literal rule and the mischief rule. (a) The Ejusdem generis rule This is the rule by which where a general word follows a class of specific words, the general word is interpreted to refer to words of that class only. An example of the application of this rule can be seen in the case of Public Prosecutor v Pengurus Hong Trading & Co (1985) 1 MLJ 366, where the relevant part of the statute referred to a prohibition on tea containing any Prussian blue, or lead or any compounds of lead or other matter The question was as to the interpretation of other matter. The court applied the ejusdem generis rule and held that other matter referred to things of the same category as Prussian blue, lead or compounds of lead. The literal rule This is a rule by which a word or phrase is given its literal or ordinary grammatical meaning. According to this rule, if the words of the statute are in themselves precise and unambiguous they must be expounded in their natural and ordinary sense. This rule is very commonly used and sometimes appears to give a result contrary to the intention of parliament. The case Fisher v Bell (1961) 1 QB 394 is a good illustration of the application of this rule. In this case a shopkeeper was charged under the Restriction of Offensive Weapons Act 1959 for offering for sale certain weapons, including flick knives, by displaying these knives in a shop window. The court held, applying the literal rule, that the display was not an offer for sale but merely an invitation to treat. Thus, the shopkeeper was held not guilty. The courts in Malaysia have also adopted this rule. This may be illustrated by the case of Kon Fatt Kiew v PP (1935) MLJ 239 where the court held, applying the literal rule, that rubber includes scrap rubber. Mischief rule This is a rule that enables the court to interpret words or phrases which are unclear and ambiguous in the light of the statute as a whole. In such cases the courts will enquire into the mischief behind the statute. i.e. the court will look into the overall intention of the legislature as discovered from a reading of the statute as a whole. The matters that the court must consider were laid down in Heydons case (1584) 76 All ER 637 as follows: (a) (b) (c) (d) What was the common law before the making of the Act? What was the mischief and defect for which the common law did not provide? What remedy the Parliament has provided for? The true reason of the remedy.

(b)

(c)

This rule has been applied by the Malaysian courts in Lim Moh Joo v PP (1970) 2 MLJ 113. In this case the Criminal Procedure Code required the Public Prosecutor to deliver a copy of a report to the accused not less than ten clear days before the commencement of the trial. The issue was whether the same procedure applied when the prosecution was by a private person. The court held that it did, saying that this was a case where the court must modify the language of the law to meet what must have been the intention of the legislature.

6DMYSAB Paper 2.2MYS

This questions tests the candidates knowledge of those situations in which an agent may enforce or be bound by a contract made on behalf of his principal. Where an agent contracts in his capacity as agent for his principal, and he acts within the scope of his authority, he incurs no rights or liabilities under the contract. See: s.183 Contracts Act 1950. However, there are several exceptions to this: (a) Where the agent agrees to accept personal liability or contracts in such a way as to make himself personally liable. See: s.183 Contracts Act 1950. The case of Ching Yuen Tung v BEP Aketik [1978] 1 MLJ 211 serves as an illustration. In the case X, who had previous dealings with Y, was requested by Y to make a valuation report on a piece of land in Sandakan. At Ys request a copy of the report was sent by X to a New York company. When X claimed payment Y stated that they were merely acting as agent for the New York company. The Federal Court held that in the circumstances it was reasonable for X to expect payment from Y, who had represented that the terms of payment would be the same as in earlier dealings. In addition, s.183 provides that the agent is presumed to have agreed to accept personal liability in the following circumstances: (i) where the contract is made by an agent for the sale or purchase of goods for a merchant resident abroad; (ii) where the agent does not disclose the name of his principal; and (iii) where the principal, though disclosed, cannot be sued. (b) (c) (d) Where the agent executes a deed in his own name unless he has a power of attorney. Where the agent signs a negotiable instrument in his own name without making it clear that he is signing it only as an agent. See: Kavena Said Meydin v Komarappa Chitty (1909) 5 SSLR 70. Where a custom of a trade makes the agent liable.

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6DMYSAC Paper 2.2MYS

This question tests the candidates knowledge of the definition of a partnership and the rules which govern their rights and duties in relation to the partnership, in the absence of an agreement to the contrary. (a) By s.3(1) of the Partnership Act 1961, a partnership is, the relation that subsists between persons carrying on business in common with a view of profit. However, this does not include companies or co-operative societies. The interests of partners in the partnership property and their rights and duties in relation to the partnership, shall be determined, subject to any agreement, express or implied, between the partners, by the following rules: (i) (ii) All the partners are entitled to share equally in the capital and profits of the business, and must contribute equally towards the losses, whether of capital or otherwise, sustained by the firm; The firm must indemnify every partner in respect of payments made and personal liabilities incurred by him: (1) in the ordinary and proper conduct of the business of the firm; or (2) in or about anything necessarily done for the preservation of the business or the property of the firm; (iii) A partner making, for the purposes of the partnership, any actual payment or advance beyond the amount of payment which he has agreed to subscribe, is entitled to interest at the rate of 8% per annum from the date of the payment in advance. (iv) A partner is not entitled, before the ascertainment of profits, to interest on the capital subscribed by him; (v) Every partner may take part in the management of the partnership business;

(b)

(vi) No person shall be entitled to remuneration for acting in the partnership business; (vii) No person may be introduced as a partner without the consent of all existing partners; (viii) Any difference arising as to ordinary matters connected with the partnership business may be decided by the majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners; and (ix) The partnership books are to be kept at the place of business of the partnership (or the principal place if there are more places than one), and every partner may, when he thinks fit, have access to and inspect and copy any of them.

6DMYSAD Paper 2.2MYS

This question tests the candidates knowledge on the main elements of a valid contract. The main elements of a valid contract are (a) Proposal, (b) Acceptance, (c) Consideration, (d) Capacity and (e) Certainty. Each of these elements may be briefly explained as follows: (a) Proposal (offer) By s.2(a) of the Contracts Act 1950, a proposal is made, when one person signifies to another his willingness to do or abstain from doing anything, with a view to obtaining the assent of that other to such act or abstinence. Thus an offer/proposal can either be in the nature of a willingness on the part of one party to do something positive or in the nature of a willingness to refrain from doing something. An offer must, however, be distinguished from an invitation to treat. Although the Contracts Act does not contain any reference to this, English law is applicable. An invitation to treat is sometimes said to be an offer to receive an offer. While an offer can be accepted and become a contract, an invitation to treat cannot be accepted and become a binding agreement. Examples of invitation to treat are shop window displays with price tags, advertisements and auctioneers invitation for bids from prospective purchasers. A case in point is Pharmaceutical Society of Great Britain v Boots Cash Chemist Ltd (1953) 1 QB 401. Acceptance of the offer The second essential requirement is that the proposal or offer must be unconditionally accepted by the person to whom the proposal or offer was made. See: s.2(b) of the Contracts Act 1950. Acceptance therefore has obviously to be communicated to the offeror. The general rule is that an acceptance must be communicated to the offeror in some usual and reasonable manner. (However, this is subject to some exceptions). See also: s.7(b) Contracts Act 1950. When the proposal has been properly accepted an agreement is said to have come into existence. However, the agreement itself is not a binding contract unless the other elements are also present. (c) Consideration This is also an essential element for a valid contract. Consideration may be said to be the price paid by one party to the contract, to the other party, in return for that other partys promise. The price need not be in money. It could be in the form of a positive act of doing something, or even a forbearance, i.e. abstinence from doing something. Section 2(d) of the Contracts Act 1950 defines consideration as, when at the desire of the promisor, the promisee, or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or abstain from doing, something, such act or abstinence or promise is called a consideration of the promise. Agreements without consideration will be void. However there are exceptions to this. See: s.26 Contracts Act 1950.

(b)

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6DMYSAD Paper 2.2MYS

(d)

Intention to create legal relations Another pre-requisite for a valid contract is that the parties to the contract must have intended that the agreement be legally enforceable. The Malaysian Contracts Act 1950 does not contain provisions pertaining to this. The presumption therefore is that English Law on this point is applicable. Two rebuttable presumptions may be applied in relation to intention to create legal relations. (i) (ii) In business agreements, the presumption is that the parties did have such intention. In social or family agreements there is a presumption that there was no such intention.

When the intention to create legal relations is absent in the agreement, the agreement is void and will not be enforceable. (e) Capacity This is another essential element. Subject to exceptions the ordinary position is that only persons of full age and sound mind have the capacity to contract. This is reflected in s.11 of the Contracts Act 1950, by which, Every person is competent to contract who is of the age of majority according to the law to which he is subject, and who is of sound mind, and is not disqualified from contracting by any law to which he is subject. The age of majority is 18. Contracts made by minors are void in Malaysia. See: Mohori Bibee v Dhurmados Ghose (1903) I.L.R. 30 Cal 539; Tan Hee Juan v Teh Boon Keat (1934) MLJ 96. As for effect of contracts by persons of unsound mind the effect is uncertain as there has been no judicial decision in Malaysia on that point. English law indicates that such contracts are voidable at the option of the person of unsound mind if the fact of mental disorder was known to the other party see: Imperial Loan Co v Stone (1892) 1 QB 599. Note: Other elements include, certainty of subject matter and the need for free consent.

6DMYSAE Paper 2.2MYS

This question requires the candidates to show an understanding of the need for a contract to be entered into with the free consent of the parties. It tests in particular the meaning of undue influence and its effect on the validity of a contract. The law requires that a contract must be made with the free consent of the parties. Section 10(a) of the Contracts Act 1990 states, All agreements are contracts if they are made by the free consent of the parties competent to contract... Section 14 goes on to state the circumstances when consent is said to be free. By s.14(b) consent is said to be free when it is not caused by undue influence. Undue influence is defined in s.16(1) which states, a contract is said to be induced by undue influence where the relations subsisting between the parties are such that one of the parties is in a position to dominate the will of the other and uses that position to obtain an unfair advantage over the other. Section 16(2) further states that in particular, a person is deemed to be in a position to dominate the will of another: (a) (b) where he holds a real or apparent authority over the other, or where he stands in a fiduciary relation to the other, or where he makes a contract with a person whose mental capacity is temporarily or permanently affected by reason of age, illness or mental or bodily distress.

Examples of undue influence are provided in the illustrations to s.16. Illustration (a) states, A having advanced money to his son, B, during his minority, upon Bs coming of age obtains, by misuse of parental influence a bond from B for a greater amount than the sum due in respect of the advance. A employs undue influence. Illustration (b) provides the following example: A, man enfeebled by disease or age, is induced by Bs influence over him as his medical attendant, to agree to pay B an unreasonable sum for his professional services. B employs undue influence. Cases have established that the party alleging undue influence must show: (i) (ii) (iii) (iv) that the other party had the capacity to influence him. the influence was exercised its exercise was undue, and its exercise brought about the transaction.

Where undue influence is established, the agreement is voidable at the option of the party so influenced. The contract may be set aside either absolutely, or if the party entitled to rescind has received any benefit thereunder, upon such terms and conditions as to the court may seem just (s.20 Contracts Act.) For example, in the case of Datuk Jaginder Singh & Others v Tara Rajaratnam (1983) 2 MLJ 196, the appellants and the respondent were in a solicitor client relationship. The respondent had transferred her land to the appellants. She claimed that the transfer was induced by fraud and undue influence. The appellants failed to rebut the presumption of undue influence. The court set aside the transaction. (See also: Chait Singh v Budin Bin Abdullah (1918)1 FMSLR 348.)
6DMYSAF Paper 2.2MYS

This question tests the candidates knowledge of the definition of promoters, on their duties and the remedies available against them for breach of their duties. (a) Promoter of a company refers to the person who undertook the responsibility of setting up a company. Section 4 of the Companies Act 1965 defines a promoter in relation to a prospectus as a person who was a party to the preparation of a prospectus.

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6DMYSAF Paper 2.2MYS

This definition does not adequately explain the position of a promoter. The most frequently cited definition is that given by Cockburn CJ, in the case of Twyross v Grant (1877), where he defined a promoter as one who undertakes to form a company with reference to a given project and to set it going and who takes all the necessary steps to accomplish that purpose. (b) The promoter is in a fiduciary relationship with the company he promotes and as such he owes fiduciary duties towards it. This means that he is in a position of trust and must at all times act honestly and in good faith for the benefit of the company as a whole. In particular, a promoter owes a duty not to make a secret profit in connection with the promotion of the company. Where he does make any profit or acquire any other benefit from it, he owes a duty to make adequate disclosure to the company. The disclosure is required to be made either to an independent board of directors or to all the members of the company. In most cases, there will not be an independent board of directors as the promoter himself is likely to have nominated the directors and quite often he himself may be a director. The company has several remedies against the promoter in the event of breach of duty by him. (i) Rescission Where the company has entered into a contract with the promoter, the company is entitled to rescind the contract upon discovery of the breach by the promoter. An illustration of this is seen in the case of Erlanger v New Sombrero Phosphate Co (1878) 3 App Cas 1218. In this case Erlanger headed a syndicate which bought an island containing phosphate for 55,000. Later, Erlanger promoted a company and sold the property to it for 110,000. All the directors of that company were nominees of Erlanger and two of them were under his control. Later, the board of directors was replaced by a new board which brought an action to rescind the contract with Erlanger. The court held that there had been no adequate disclosure of the circumstances of the sale and the company was entitled to rescind the contract. It must be noted that rescission is an equitable remedy and the courts may not grant such a remedy if it is inequitable to do so. Thus the remedy of rescission may be lost, for example where there has been undue delay in initiating the action, where third parties have acquired rights bona fide and for value and where the parties cannot be restored to their original position. See: Lagunas Nitrate v Lagunas Syndicate (1899) 2 Ch 392. (ii) Recovery of the secret profit Sometimes the court will order the promoter to repay the company the profit made by him in breach of his duty. The case of Gluckstein v Barnes (1900) AC 240 may be used as an example. In this case the defendants bought debentures cheaply in a company at a time when the company was faring very badly. Later, they bought over the company for 140,000. The debentures were redeemed at full value and they made a good profit. Later still, they formed another company and sold the company to the new company at a profit of 40,000. This profit was disclosed in the prospectus but not the amount of profit they made on the redemption of the debentures. The court held that they were in breach of their duties as promoters and the company was entitled to recover the profit from them.

(iii) Damages for breach of fiduciary duties The court may also order that the promoter pay damages to the company for breach of his fiduciary duties See: Re Leeds and Hanley Theatres of Varieties Ltd (1902) Ch 809.
6DMYSAG Paper 2.2MYS

This question tests the candidates knowledge on the prohibition in the Companies Act 1965 on companies giving financial assistance for the purchase of their own shares and the exceptions to it. It has been a long established principle in company law that a company cannot purchase its own shares. This rule is found in the case of Trevor v Whitworth (1887). The purpose of the rule was to ensure that a companys share capital is properly maintained. Any purchase by a company of its own shares will certainly reduce the companys capital. The rule was later extended by statute to include the giving of financial assistance for the purchase of its own shares. The relevant statutory provision is s.67 of the Companies Act 1965. By s.67(1), a company cannot give, whether directly or indirectly, and whether by means of a loan, guarantee or the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company, or in any way purchase, deal in or lend money on its own shares. Thus, by the section, a company cannot purchase its own shares, cannot give a loan to any person to enable that person to purchase its shares, and also cannot give a guarantee or provide security in respect of a loan made by some other party to enable a person to purchase its shares. Many cases illustrate this prohibition, e.g. Selangor United Rubber Estate Ltd v Craddock (1968); Chung Khiaw Bank v Hotel Rasa Sayang (M) Sdn Bhd (1988); Kidurong Land Sdn Bhd v Lim Gaik Hua & others (1990). However, s.67(2) provides the following exceptions to the general prohibition: (a) (b) (c) where the lending of money is part of the ordinary business of a company, the company may lend money in the ordinary course of its business. The provision of money for the purchase of, or subscription for, fully paid shares in the company or its holding company, if the purchase or subscription is by trustees for the benefit of employees, including directors holding a salaried employment. The giving of financial assistance to employees (excluding directors) to enable them to purchase fully paid shares in the company or its holding company.

NB: Any financial assistance given in contravention of the section is recoverable: s.67(6). See also: Lori (M) Bhd v Arab Malaysian Finance Bhd [1999] 3 MLJ 81.

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6DMYSAH Paper 2.2MYS

This question tests the candidates knowledge on the remedies available to an employee who has been unjustifiably dismissed. The following are the remedies available to an employee who has been unjustifiably dismissed: (i) Reinstatement and backpay This is the remedy that the Industrial Court is likely to award in normal cases of unfair or unjustified dismissal. Reinstatement basically means that the employee, who has been unjustifiably dismissed, is put back into the position he would have been in had he not been so dismissed. In the words of Tucker J. in Hodge v Ultra Electric Ltd (1943) 1 KB 462, reinstatement involves putting the specified person back, in law and in fact in the same position as he occupied in the undertaking before the employer terminated his employment. Again, in Western India Automobile Association Industrial (1949) LLJ 256 it was stated that reinstatement requires that the employee should be restored to his previous position so far as his capacity, status and emoluments are concerned. Upon reinstatement therefore, the employee will be entitled to receive backpay i.e. arrears of salary from the time of dismissal to the time of reinstatement. (ii) Compensation in lieu of reinstatement and backpay Sometimes it is not possible or advisable to order reinstatement. As was stated in the case of KFC Holdings Sdn Bhd v Lim Seng Yang (Award 348 of 1987), the relief of reinstatement may be refused in exceptional circumstances like the employer losing confidence in the workman, or the retention of the workman leading to an apprehension of breach of industrial peace. Reinstatement will also be impossible where the claimants have died after the proceedings in respect of which their claims had begun. In such exceptional circumstances the court is likely to order compensation in lieu of reinstatement. The compensation payable is normally at the rate of one months pay for each year of service subject to a maximum of 24 months. However it must be noted there is no hard and fast rule, and the court may take into account various factors such as the duty of the employee to mitigate loss by seeking alternative employment and the conduct of the employee contributing to the dismissal, before making an order for compensation in lieu of reinstatement. (iii) Re-engagement/Re-employment In some cases the employee is merely re-employed. This means that the employee is merely offered the chance to come back. No arrears are payable and he will lose his past service with the employer. This is illustrated in the case of Restu Motor Sdn Bhd v Nazaruddin bin Abdul Samad (Award 267 of 1985). In this case following conciliation efforts by the Industrial Relations Department, the company agreed to employ the claimant anew in the same post with the same salary. However, he was not given backpay and he also lost his past service.

6DMYSBA Paper 2.2MYS

This problem-based question on contract law contains three parts. Part (a) tests the candidates knowledge of the remedies for breach of contract and ability to apply it to the given fact situation. Parts (b) and (c) test the candidates ability to identify and apply the law on exclusion clauses and the law on frustration of contracts, respectively. (a) There are several remedies for breach of contract. These include damages, rescission and specific performance. Damages refers to the monetary compensation awarded to a plantiff for the loss suffered by him as a result of the defendants breach of contract. At common law, the amount of damages recoverable by the plantiff was laid down in the case of Hadley v Baxendale (1854) 9 Ex 341. Section 74 of the Contracts Act 1950 reflects this rule. Under the section, the party who suffers by the breach is entitled to receive from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach or which the parties knew, when they made the contract, to be likely to result from the breach of it. However, such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. This rule has been applied in numerous cases. See for example: Bee Chuan Rubber Factory Sdn Bhd v Loo Sam Mooi [1976] 2 MLJ 14. Rescission is a remedy, which entitles the party not in default to put an end to the contract where the other party has wrongfully refused to perform his part of the contract. This remedy is provided for in s.40 of the Contracts Act 1950. However, by virtue of s.65, the party rescinding the contract is bound to restore to the other party any benefit that he may have received. The party not in default (i.e. the party rescinding the contract) is entitled to claim damages from the party in default. Specific performance is a remedy that entitles the party not in default to demand that the contract be performed as promised by the other party. This remedy is provided for in the Specific Relief Act 1950. It is a discretionary remedy and not one that may be obtained as of right. Section 11(1) provides, among other things, that specific performance may be granted: 1. 2. when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done, and when the act agreed to be done is such that pecuniary compensation for its non-performance would not afford adequate relief.

Further, the section also provides for a rebuttable presumption that the breach of a contract to transfer immovable property cannot be adequately compensated in money whereas a breach of a contract to transfer movable property can. Applying the law as explained above to the given problem, Ali may be advised as follows:

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6DMYSBA Paper 2.2MYS

(i)

The most appropriate remedy for Bakar against him is specific performance. As the contract is for the sale and purchase of land, there is a presumption that damages would not afford adequate relief to Bakar. The case of Zaibun Sa binti Syed Ahmad v Loh Koon Moy & Anor [1982] 2 MLJ 92, is illustrative. In this case, the Privy Council, upholding the decision of the Federal Court in applying s.11 of the Specific Relief Act 1950, ordered specific performance of a contract for the sale of land. The most appropriate remedy for him against Bakar is damages. As the contract is for the sale of an ordinary motorcycle, he would be adequately compensated in monetary form. The quantum of damages, as explained above, would be the difference between the contract price and the current market price of a similar motorcycle as this would reflect the loss or damage naturally arising from the breach. See: Bee Chuan Rubber Factory Sdn Bhd v Loo Sam Mooi [1970] 2 MLJ 14.

(ii)

(b)

The issue in this case is whether the exclusion clause in the contract between Minyak Sdn Bhd and Ah Chong is valid. As a general rule, the courts will not interfere with the terms that parties to a contract have agreed upon. This is illustrated in the case of Playing Cards (M) Sdn Bhd v China Navigation Co Ltd (1980) 2 MLJ 182. In this case the appellants had ordered paper board from a company overseas. The goods which were to be loaded onto the respondents ship, which were to arrive on 25 December 1973, were in fact loaded onto another ship which only arrived on 13 June 1974. The appellant sued for breach of contract. In defence the respondent sought to rely on an exclusion clause which exempted the carrier from liability for any loss or damage arising or resulting from delayed or early arrival The court held that the clause was valid. Thus, the respondents were not liable. See also: Chartered Bank of India, Australia and China v British India Steam Navigation Co Ltd (1906) AC 369. However, if the terms of the exclusion clause are ambiguous or capable of more than one meaning, the courts will intervene, applying a rule of construction known as the contra proferentem rule to interpret the exemption clause. By this rule the courts will construe the clause against the party asserting it. A good example is the case of Wallis Son & Wells v Pratt & Haynes (1911) AC. 394. In this case there was a contract for the sale of seeds described as common English Sanfoin. An exclusion clause in the contract stated that the seller gave, no warranty express or implied as to the growth, description, or any other matters. The seeds supplied were of a much inferior variety. The supplier sought to rely on the exemption clause to avoid liability. The court held that the term describing the seeds was a condition of the contract. The exclusion clause related only to warranties and not to conditions. Hence the supplier could not rely on the exclusion clause. It is clear from the given facts that Ah Chong has been supplied a much lower grade of oil than that contracted for. Further, the exclusion clause only refers to a warranty as in the case stated above. Thus, the contra proferentem rule may be applied and the supplier will not be able to rely on the exclusion clause. Ah Chong is therefore likely to be successful in an action for breach of contract against Minyak Sdn Bhd.

(c)

This question concerns the issue of frustration of contracts. Al Tooney may be successful in suing Joe to recover the payment of RM2,000 if he could show that the contract has been discharged by impossibility of performance (i.e that frustration has occurred). Frustration has been said to occur, whenever the law recognises without the default of either party, a contractual obligation has become incapable of being performed because circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. See: Davis Contractors Ltd v Fareham UDC [1956]. Section 57(2) of the Contracts Act states that a contract to do an act which after the contract is made becomes impossible, or by reason of some event, which a promisor could not prevent, unlawful, becomes void when the act becomes impossible or unlawful. Case law has established that destruction of the subject matter of the contract results in frustration of the contract. The contract is then said to be discharged by impossibility of performance. The case of Taylor v Caldwell (1863) serves as an example. In this case, a music hall hired by the defendant to the plaintiff for a series of concerts was accidentally burnt down before the date of the concert. The court held that there was frustration and the contract was therefore void. By s.66 of the Contracts Act 1950, when an agreement becomes void, any person, who has received any advantage or benefit under it, is bound to restore it or make compensation for it to the person from whom he received it. Further, by s.15 (2) of the Civil Law Act 1956, money due but not paid before frustration ceases to be payable. Any money actually paid must be restored. Section 57 of the Contracts Act also provides for restitution when a contract becomes impossible to be performed. Applying the law to the present case, Al Tooney may be advised that he is likely to be successful in his claim against Joe as the contract has become frustrated upon the destruction of the theatre by fire after being struck by lightning.

6DMYSBB Paper 2.2MYS

10 This problem-based question on company law contains two parts. Part (a) tests the candidates knowledge and application of the law relating to ultra vires transactions, while part (b) tests them on their knowledge and application of two situations in which the veil of incorporation may be lifted (a) The issue that arises in this question is whether the decision of the directors to expand the scope of the companys business to include the manufacture of soft toys and the intended purchase of a factory for this purpose can be considered to be ultra vires the company (i.e. outside the scope of the objects clause). If so, a further issue is the validity of such ultra vires transactions in Malaysia.

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6DMYSBB Paper 2.2MYS

At common law, a company may only carry out those activities which were within the scope of the objects clause of the company. Any activity which was beyond the scope of the objects clause was said to be ultra vires and void. This is referred to as the ultra vires doctrine. See: Ashbury Rly Co Ltd v Riche; A.G v Gr Eastern Rly; Re Jon Beauforte. However, the doctrine often caused hardship upon third parties who dealt with the company without realising that the transaction concerned was ultra vires the company. Several methods of drafting of the objects clause were used in an attempt to avoid the operation of the ultra vires doctrine. One such method, (which is relevant to the present problem) was the use of a subjectively phrased objects clause, usually referred to as a Bellhouses clause following its successful application in the case of Bell Houses Ltd v City Wall Properties Ltd (1966) 2 QB 656. In this case, Bell Houses Ltd was carrying on business as housing developers. One of it objects clauses stated that it could, carry on any other trade or business which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or as ancillary to any of the above businesses or the general business of the company. Bell Houses Ltd agreed to introduce City Wall Properties Ltd to a financier for a commission. After the introduction and the successful obtaining of a loan, City Wall refused to pay the agreed commission on the ground that Bell Houses Ltd had acted ultra vires. The court held that it was not ultra vires because of the above mentioned clause. As a similar clause exists in the present situation, Nono may be advised that the manufacture of soft toys and the intended purchase of a factory for such purpose would be within the objects clause of the company and would not be ultra vires. Even presuming that such activity is ultra vires the company, the transaction would nevertheless not be void in Malaysia because s.20(1) of the Companies Act 1965 essentially validates completed ultra vires transactions. However, by s.20(2), the lack of capacity or power may be relied upon in three situations: (1) in proceedings against the company to restrain it from acting ultra vires. Such proceedings must be brought by a member or debenture holder secured by a floating charge. (2) In proceedings against the present or former officers of the company. Such proceedings may be brought by the company or any member. (3) In a petition by the minister to wind up the company. Applying the above law Nono may be advised that (i) (ii) The manufacture of soft toys would not be ultra vires because of the Bell Houses clause discussed above. Presuming that the manufacture of soft toys and the intended purchase of the factory is ultra vires the company, an injunction may be obtained by Nono restraining the company from implementing their decisions, as permitted under s.20(2) (a).

(iii) The advice in (ii) above would differ if the company has already purchased the factory. It would then be too late to obtain an injunction, and pursuant to s.20(1) mentioned above, the validity of the transaction cannot be challenged on grounds of ultra vires. (iv) In the event an injunction cannot be obtained as in (iii) above, Nono or the company may bring proceedings against the directors of the company to compensate the company for loss arising from the ultra vires transaction. See: s.20(2) (b) of the Companies Act 1965. (b) The general principle established in the case of Salomon v Salomon & Co Ltd (1897) is that a company is a separate legal person distinct from its members. As a result, the company is liable for its own debts and liabilities and not the members, officers or others. However there are several exceptions to this rule. The liquidator of Tirai Sdn Bhd may be advised as follows: (i) By s.36 of the Companies Act 1965, if the number of members of the company falls to one and the company carries on business with only one member for a period longer than six months, that remaining member will become personally liable for all the debts incurred by the company after those six months. However, he will only be liable if he was aware that the company was carrying on business with only one member. In the given problem Badrul had sold his shares to Asri and Asri continued to manage the company by himself. It is clear that he was aware that the company was carrying on business with only one member. Thus he can be held personally liable for all the debts incurred by the company from July 2006 onwards (i.e. six months from the time Badrul left the company). (ii) Section 121(2) states, inter alia, that, where an officer of a company has signed on behalf of the company, any bill of exchange, promissory note or other negotiable instrument, and the name of the company is not properly stated therein, he can be made personally liable to the holder of that instrument for the amount stated therein, unless it is paid by the company. In the given problem Berle, the office manager, was responsible for the issue of the cheque. The name of the company was not properly stated on it. The company will not be able to pay as it is insolvent. Therefore, Berle may be made personally liable to pay Juval the amount stated on the cheque. See: Atkins & Co v Wardle (1889) 5 T.L.R 73

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6DMYSBC Paper 2.2MYS

11 This question, which contains five parts, tests the candidates knowledge and application of the law and procedure of meetings and resolutions. Part (a) relates to notice of meetings, part (b) concerns appointment of proxies, parts (c) and (d) relate to voting and procedure at meetings and part (e) concerns resolutions. (All sections mentioned refer to the Companies Act 1965.) (a) The board of directors may be advised that members have a right to be given notice of every general meeting. This is stipulated in Art 111(a) of Table A of the Fourth Schedule of the Companies Act 1965 (which has been adopted by the company). Such notice may be sent by the company by post. In such a case service of the notice is deemed to have been effected by properly addressing, prepaying and posting the letter containing the notice and to have been effected on the day after the date of its posting. However, Rubiah has not received the notice though the company has in fact posted the notice to all the shareholders. So the question arises whether due to this, she could invalidate the proceedings at the meeting. Section 145(5) of the Companies Act states that the accidental omission to give notice of a meeting to or the non-receipt of notice of a meeting by any member shall not invalidate proceedings at a meeting. Thus, the board of directors may be advised that the meeting was properly held and Rubiah cannot invalidate its proceedings. (b) The issue that arises here is whether a non-member may be appointed as a proxy. Section 149(1) provides that a member who is entitled to attend and vote at a meeting is entitled to appoint another person or persons as his proxy to attend and vote on his behalf. The section further stipulates that unless the articles provide otherwise, a member shall not be entitled to appoint a non-member as his proxy unless that person is an advocate, an approved company auditor or a person approved by the Registrar in a particular case. As the company has adopted Table A as its articles of association, Article 59 would apply. This article stipulates that a proxy may be but need not be a member of the company. Therefore Kang Foo may be advised that his appointment as a proxy is valid. (c) The question here is whether Arvind as chairman of the company has the right to preside at the meeting even though he was ten minutes late. Section 147(1)(b) provides that so far as the articles do not make other provision in that behalf any member elected by the members present at a meeting may be chairman thereof. However, Table A does make other provision. As the company has adopted Table A, article 49 thereof will apply. By that article the chairman, if any, of the board of directors shall preside as chairman at every general meeting of the company or if there is no such chairman or if he is not present within 15 minutes after the time appointed for the holding of the meeting or is unwilling to act, the members present shall elect one of their number to be chairman of the meeting. As Arvind was only ten minutes late, he still has the right to preside as chairman of the meeting. (i) Section 149(i) provides that proxies are not entitled to vote except on a poll, unless the articles provide otherwise. Article 54 provides that on a show of hands every person present who is a member or representative of a member shall have one vote and on a poll every member present in person or by proxy or by attorney or other duly authorised representative shall have one vote for each share he holds. The representative referred to in the article does not refer to a proxy but to a representative appointed by a corporation, who is a member of a company under s.147(3). Thus, Kang Foo may not vote on a show of hands. If Kang Foo has a right to demand a poll, he may do so before or after a declaration of the result of a show of hands. This is provided for in article 51. However, a right of a proxy to demand a poll in the first place has to be determined. Article 51(c) provides that a poll may be demanded by any member or members present in person or by proxy and representing not less than 1/10 of the total voting rights of all the members having the right to vote at the meeting. As Kang Foo is the proxy of Janu who holds only 5% of the shares of the company he does not have a right to demand a poll at all.

(d)

(ii)

(e)

By s.28, a company may alter its objects clause by passing a special resolution. Section 152 provides that a resolution shall be a special resolution when it has been passed by a majority of not less than three fourths (75%) of such members as being entitled so to do vote in person or where proxies are allowed by proxy at a general meeting of which not less than 21 days notice specifying the intention to propose the resolution as a special resolution has been duly given. As the resolution was approved only by a 70% majority, it does not amount to a special resolution. Hence the chairman may be advised that the company cannot validly proceed with the alteration of the objects clause.

6DMYSBD Paper 2.2MYS

12 This problem based question on company law contains two parts. Part (a) tests the candidates knowledge and application of the law relating to directors duties. Part (b) tests the candidates knowledge and ability to apply the law concerning one aspect of restriction on transfer of shares. (a) This part of the question concerns breach of directors duties. Directors are persons who are in a fiduciary position in relation to the company. Inter alia, the fiduciary duties are: (i) to act bona fide for the benefit of the company as a whole. (ii) to act for a proper purpose. (iii) to avoid conflict of duty and personal interest.

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6DMYSBD Paper 2.2MYS

In relation to the issue of shares, the directors may be considered to be in breach of their duty to act bona fide for the benefit of the company as a whole as well as in breach of their duty to act for a proper purpose. They will be in breach of their duty to act bona fide for the benefit of the company where they have acted in their own interests instead of the company. A case that illustrates this is Re W & M. Roith Ltd (1967). In this case a director had entered into a service agreement with his company under which his widow was to receive a pension for life. The court found that no thought had been given as to whether this arrangement was for the benefit of the company and as the sole object was to benefit the widow, the transaction was not binding. Even if the directors had acted in what they considered was in the best interests of the company they would still be in breach of their fiduciary duty if they had not acted for a proper purpose. This is well illustrated in the case of Hogg v Cramphorn (1964) CH 254 where directors in an endeavour to forestall a take-over bid, issued shares with special voting rights to trustees of a scheme for the benefit of employees. The court held that this was an improper use of the power to issue shares. To reduce this improper exercise of power it is today statutorily provided in s.132D (subject to exceptions which do not apply to the present problem) that directors may not exercise their power to issue shares unless they obtain the approval of the company in the general meeting. Applying this law to this part of the given problem we could conclude that the directors purpose in issuing shares was to strengthen their overall voting strength in the company. Hence they have breached both their duty to act for a proper purpose as well as the duty to act bona fide in the interests of the company. The company may sue them for breach of fiduciary duty. Further, as they have not obtained the required approval from the general meeting for the issue of shares as required by s.132D, they are also in breach of the section. Section 132D (6) further provides that any issue of shares made by a company in contravention of this section shall be void and consideration given for the shares is recoverable. In addition, by 132D (2), any director who knowingly contravenes or authorises the contravention of the section is liable to compensate the company and the person to whom the shares were issued for the loss or damage sustained as a result of the contravention. In relation to the contract made in March 2006 with Jojo & Co, the directors, Olive and Priya are also in breach of their fiduciary duty to the company. One well established principle at common law is that directors must not put themselves in a position of conflict between their duties to the company and their personal interest. Such conflict may arise where the directors are interested in a contract with the company or where they make use of their position as directors to obtain a profit or advantage for themselves. At common law where a company has entered into a contract in which a director is interested the contract is voidable at the option of the company. This is illustrated in the case of Aberdeen Rly Co v Blaikie Bros (1854) 1 Macq 461. Here the railway company ordered a quantity of chairs from the firm of Blaikie Bros. It was later discovered that one of the directors of the company was a partner in Blaikie Bros. The court held that the company was entitled to avoid the contract. Applying this principle, Aman Shah Sdn Bhd will be entitled to avoid the contract with Jojo & Co as Olive and Priya are partners of that firm. Further, by s.131 of the Companies Act 1965, every director of a company, who is in any way 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. Contravention of the section results in a penalty of imprisonment for seven years or fine of RM150,000 or both. As Olive and Priya have failed to comply with this section they will be liable as mentioned. In relation to the third matter all the directors are in breach of the fiduciary duty to avoid conflict of duty and personal interest by usurping for themselves a corporate opportunity. The facts given are rather similar to the case of Cook v Deeks (1916) AC 554. In that case there were four shareholders who were also directors. Three of them negotiated a contract on behalf of the company but later diverted the contract to another company formed by them. When the fourth director (Cook) protested, resolutions were passed by the three of them as shareholders approving the transaction. The Privy Council held that the three directors had breached the duty to avoid conflict of duty and personal interest. The purported ratification was not valid as it constituted a fraud on the minority. The company was entitled to get back the benefit of the contract. Applying this law to the problem it may be concluded that Aman Shah Sdn Bhd could successfully sue Olive, Priya, Raju and Sam for breach of fiduciary duty and have the benefit of the contract returned to the company. (b) This part concerns the validity of the exercise by the directors of their discretion under the articles of association to refuse to register a transfer of shares. Section 15(1) provides, inter alia, that a private company is one which by its memorandum or articles restricts the right to transfer its shares. It is common for companies to restrict the right to transfer its shares by a provision in the articles which gives its directors a discretion to refuse to register a transfer of shares. However, such a discretion must be exercised bona fide in the interests of the company. In Allied Properties Sdn Bhd v Semua Holdings Sdn Bhd & others (1988) 3 MLJ 185, the court found that some of the directors had pledged their shares to the applicant in consideration of a loan given by him to the company. When the applicant applied to have those shares transferred to his nominees, the directors refused to allow the transfer. The court held that the directors had exercised their discretion in their own interest and not bona fide in the interests of the company and the court ordered the shares to be registered in the name of the applicants nominees. See also: Lim Ow Gaik v Sungei Merah Bus Co Ltd (1969) 2 MLJ 101. Often it is very difficult to challenge the exercise of the discretion by the directors. For example, in Kesar singh v Sepang Omnibus Co Ltd (1964) MLJ 122, the directors were given by the articles of association an absolute and uncontrolled discretion to refuse to register a transfer of shares. The court held that once the directors have

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6DMYSBD Paper 2.2MYS

stated on oath that they have exercised their discretion in the interests of the company, it must be assumed that they have so exercised their discretion unless the contrary is established by the applicant. See also: Re Smith and Fawcett Ltd (1942) Ch.304. Hence, in the given problem Karim may be advised that such an article is valid and he may challenge the validity of the exercise of the discretion by the directors only if he could show that the directors have not exercised it bona fide in the interests of the company. As the directors have not offered any reason for their refusal, it would be difficult for Karim to challenge the decision of the directors.

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6DMYSMS Paper 2.2MYS

Part 2 Examination Paper 2.2(MYS) Corporate and Business Law (Malaysia) 1 (a) 03

December 2006 Marking Scheme

An accurate answer correctly explaining the ejusdem generis rule will fall into the upper part of this band while an inaccurate one will fall into the lower part. An accurate answer explaining the literal rule of interpretation will fall into the upper part of this band while an inaccurate one will fall into the lower part. Good to excellent answer explaining the mischief rule in relation to statutory interpretation. Incomplete or inaccurate answer.

(b)

03

(c)

24 01

710 56 04

An excellent answer, explaining accurately the exceptions to the general rule that agents cannot enforce or be bound by contracts made on behalf of the principal. Reasonable answer, sufficiently explaining what is required. Incomplete or inaccurate answer.

(a)

02

An accurate answer correctly defining a partnership will fall into the upper part of this band while an inaccurate one will fall into the lower part. Good to excellent answer stating five or six rules governing the rights and duties of partners in the absence of an agreement to the contrary. Average answer, accurately mentioning three to four of those rules. Weak answer indicating little or no knowledge of what the question requires.

(b)

68 35 02

810 57 04

An excellent answer accurately explaining the elements of a contract. Good to average answer identifying and explaining the main elements of a contract. Incomplete or inaccurate answer.

NB: Candidates may be awarded some bonus marks if they mentioned other elements such as certainty of subject matter and the need for free consent.

810 57 04

Excellent answer, clearly explaining the nature and effect of undue influence as a vitiating factor in a contract. Good to average answer, sufficiently explaining what is undue influence and its effect on a contract. Incomplete or inaccurate answer.

(a)

02

An accurate answer defining the term, promoter in relation to a company will fall into the upper part of this band while an incomplete or inaccurate one will fall into the lower part. Excellent answer, explaining the duties of a promoter in relation to a company as well as the remedies for breach of such duties. Average answer, explaining some of the duties of a promoter in relation to a company and some of the remedies. Incomplete or inaccurate answer.

(b)

68 45 03

810 57 04

An excellent answer, clearly explaining the prohibition under s.67 of the Companies Act 1965 in relation to the giving, by companies, of financial assistance for the purchase of its shares and the exceptions to it. Good to average answer sufficiently explaining the prohibition and some of the exceptions to it. Incomplete or inaccurate answer.

810 57 04

Excellent answer accurately and fully explaining the remedies for an employee who has been unjustifiably dismissed. Good to average answer. Incomplete or inaccurate answer.

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6DMYSMS Paper 2.2MYS

(a)

810 57 04

Excellent answer accurately identifying and discussing the various remedies for breach of contract, especially damages and specific performance, with sound advice to Ali. Good to average answer, identifying and discussing at least briefly, the remedies of damages and specific performance Incomplete or inaccurate answer. Good to excellent answer accurately identifying and discussing the issue of exclusion clauses in relation to contract law with correct application and accurate advice to Ah Chong. Incomplete or inaccurate answer. Good to excellent answer, accurately identifying and discussing the issue of frustration of contracts with correct application of the law and accurate advice to Al Tooney. Incomplete or inaccurate answer.

(b)

35 02

(c)

35 02

10 (a)

(i)

04 An accurate answer properly explaining what is ultra vires and whether in the given problem the manufacture of toys would be ultra vires the company will fall into the upper part of this band while an incomplete or inaccurate one will fall into the lower part. 04 An accurate answer will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part.

(ii)

(iii) 03 An accurate answer will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part. (iv) 03 An accurate answer will fall into the upper part of this band while an inaccurate or incomplete one will fall into the lower part. (b) (i) (ii) 03 An accurate answer correctly identifying the issue of lifting the veil of incorporation, with reference to s.36 of the Companies Act will fall into the upper part of this band while an inaccurate one will fall into the lower part. 03 An accurate answer correctly identifying the issue of lifting the veil of incorporation, with reference to s.121 of the Companies Act will fall into the upper part of this band while an inaccurate one will fall into the lower part.

11 (a)

24 01

Good to excellent answer, accurately discussing the validity of the meeting, with proper advice to Rubiah. Incomplete or inaccurate answer. An accurate answer explaining the validity of appointment of a proxy, with proper advice to Kang Foo, will fall into the upper part of this band while an inaccurate one will fall into the lower part. An accurate answer explaining and advising whether Arvind will be entitled to preside as chairman of the meeting, though he was ten minutes late, will fall into the upper part of this band while an inaccurate one will fall into the lower part. An accurate answer explaining both the issues, i.e, whether Kang Foo may vote on a show of hands and whether he may subsequently demand a poll. Average answer. Incomplete or inaccurate answer. Average to excellent answer, clearly identifying the issue of the need for a special resolution for the alteration of the objects clause with correct advice to the chairman. Incomplete or inaccurate answer.

(b)

03

(c)

03

(d)

56 34 02

(e)

24 01

12 (a)

1215 711 06

Excellent answer clearly identifying the various breaches of duties by the directors and proper discussion and application of the law. Good to average answer identifying and explaining some of the breaches of duties by the directors. Incomplete or inaccurate answer. Good to excellent answer identifying the issue of restriction on transfer of shares and discussing the need for directors to exercise their discretion to refuse to register a transfer of shares, bona fide for the benefit of the company with appropriate advice to Karim. Incomplete or inaccurate answer.

(b)

35

02

22