OUM Business School

BBUS2103
Company Law

Copyright © Open University Malaysia (OUM)

 BBUS2103
COMPANY
LAW
Chitra Latha Ramalingam

Copyright © Open University Malaysia (OUM)

Project Directors: Prof Dato’ Dr Mansor Fadzil
Prof Dr Wardah Mohamad
Open University Malaysia

Module Writer: Chitra Latha Ramalingam

Moderators: Assoc Prof Dr Rozanah Abd. Rahman

Universiti Putra Malaysia

Tuan Fatma Tuan Sulaiman

Open University Malaysia

First Edition, November 2008

Copyright © Open University Malaysia (OUM), October 2010, BBUS2103
All rights reserved. No part of this work may be reproduced in any form or by any means
without the written permission of the President, Open University Malaysia (OUM).

Copyright © Open University Malaysia (OUM)

Table of Contents
Course Guide xi-xiii

Topic 1: Introduction to Company Law 1

1.1 Definition of a "Company" 2
1.1.1 Development of Modern Company Law 2
1.1.2 Company Law in Malaysia 5
1.1.3 The Companies Act 1965 5
1.1.4 Content of the Companies Act 6
1.2 Business Entities in Malaysia 7
1.3 Fundamental Distinctions between the Common Forms of 7
Organisation (Sole Trader, Partnership and Company)
1.3.1 Sole Proprietorship 7
1.3.2 Partnership 8
1.3.3 Why is Partnership Popular? 8
1.3.4 Comparison between Companies and Partnerships 10
1.4 Classification and the Changing Status of Companies 11
1.4.1 The Registered Company 11
1.4.2 Public and Private Companies 12
1.4.3 Limited and Unlimited Company 13
1.4.4 Changing the Status of a Company 15
1.4.5 Incorporating a Company and the Legal 16
Consequences
1.5 Effects of the Corporate Veil 19
1.6 Lifting the Veil of Incorporation 22
1.6.1 Common Law 22
1.7 The Agency Relationship 26
1.7.1 Types of Authority 29
1.7.2 Doctrine of Ostensible or Apparent Authority 32
1.8 Promoter and Pre-incorporation Contracts 35
1.8.1 Promoters 35
1.8.2 Remedies for Breach of Promoter's Duties 39
1.8.3 Remuneration of Promoter 41
1.8.4 Pre-incorporation Contract 42
1.8.5 The Liability of a Promoter 44
Summary 48
Key Terms 48

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Topic 2: The Memorandum of Association 49

2.1 The Characteristics and Content of the Memorandum of 50
Association
2.1.1 Compulsory Clauses 50
2.2 Corporate Capacity - The Ultra Vires Rule 51
2.2.1 The Development of the Ultra Vires Rule 55
2.2.2 The Confusion between Ultra Vires and an Abuse 57
of Powers
2.2.3 Statutory Reform of the Ultra Vires Rule 58
2.3 The Alteration of the Memorandum of Association 61
2.3.1 Powers of Alteration 61
2.3.2 Company Name 62
Summary 63
Key Terms 63

Topic 3: Articles of Association 64

3.1 The Characteristics of Article of Association 64
3.2 The Legal Effect of the Corporate Constitution 65
3.2.1 Obligation Enforceable between Members Inter Se 66
3.2.2 Obligations Enforceable by the Membership of a 67
Company
3.2.3 Obligations Not Enforceable by the Membership of 68
a Company (Unenforceable Rights)
3.2.4 Obligations Enforceable by the Company 71
3.3 Alteration of Articles 71
3.3.1 The Power to Alter a Company's Articles 71
3.3.2 Determining a Valid Alteration 72
3.4 Enforceable Obligations which are Outside the Scope of a 74
Company's Articles
3.4.1 Introduction 74
3.4.2 Director's Service Contracts 75
3.4.3 Remedies for Breach of an Independent Contract 77
Summary 80
Key Terms 80

Topic 4: Legal Incidents of Membership 81

4.1 Definition of Member and Restrictions on Membership 81
4.2 Distinction between a Member and Shareholder 83
4.2.1 Register of Members 83
4.2.2 Who Constitutes an Aggrieved Person? 86
4.2.3 Rectification on the Record of Depositors 86
4.2.4 Share Certificates 86
4.2.5 Liability of Company for Issuing Incorrect Share
Certificate 87

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4.2.6 Transfer of Shares 89

4.2.7 Liability of Members 93
4.2.8 Cessation of Membership 94
4.2.9 Substantial Shareholder 95
4.3 The Relationship between Members and the Board of
Directors 95
4.4 The Application of Section 181(1) Companies Act 1965
(Member's Remedy) 97
4.4.1 Who Can Apply? 98
4.4.2 Conduct where Remedy May be Sought 99
4.4.3 What is Meant by Disregard of Interests of the
Member's or Debenture Holders? 103
4.4.4 What is Meant by Unfairly Prejudicial or Unfairly
Discriminatory? 103
4.4.5 What Amounts to Legitimate Expectations? 104
4.4.6 Remedies Where There is Oppression 104
4.4.7 Relationship of Winding Up with the Oppression
Remedy 105
4.4.8 The Rule in Fross v Harbottle 108
4.4.9 Fraud on the Minority by Wrongdoers in Control 110
4.4.10 The Types of Shareholder Actions 115
Summary 116
Key Terms 116

Topic 5: Directors 117

5.1 Definition of Directors 117
5.1.1 Types of Directors 118
5.2 Appointment and Qualification of a Director 122
5.2.1 Appointment of Directors 122
5.3 Retirement, Resignation, Vacation and Removal of
Directors 123
5.3.1 Disqualification from Office 123
5.3.2 Vacation of Office 124
5.3.3 Removal of Directors 125
5.3.4 Resignation 126
5.3.5 Remuneration 126
5.3.6 Disclosure Obligations 127
5.4 Board of Directors 128
5.4.1 Composition of the Board of Directors 128
5.4.2 How does the Board of Directors Function? 128
5.5 Duties of Directors 129
5.5.1 Fiduciary Duties 130
5.5.2 Key Fiduciary Obligation 132
5.5.3 Business Judgment Rule 143

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5.6 Remedies for Breach 144

Summary 147

Topic 6: Meetings 148

6.1 What Constitutes a Meeting? 148
6.2 Types of Meetings 149
6.2.1 Statutory Meetings 150
6.2.2 Annual General Meeting (AGM) 151
6.2.3 Extraordinary General Meeting (EGM) 151
6.2.4 Class Meetings 152
6.3 Meeting Procedures 153
6.4 Power of the Courts to Order Meetings 155
6.5 Quorum, Chairman and Voting 157
6.5.1 Quorum 157
6.5.2 Chairman 158
6.5.3 Voting 159
6.6 Membership Rights in Meetings 160
6.7 Resolutions 161
6.8 Accounts 162
6.9 Penalty 163
Summary 164
Key Terms 164

Topic 7: Corporate Finance 1: Capital; Dividend and Share 166

7.1 Capital 166
7.1.1 Definition 167
7.1.2 Types of Capital 168
7.2 Dividends 170
7.2.1 Definition 170
7.2.2 Payment of Dividend 170
7.3 Shares 174
7.3.1 Definition and the Legal Characteristics of a Share 174
7.3.2 Types of Share 175
7.3.3 Classes of Shares 176
7.3.4 Issue and Allotment of Shares 180
7.3.5 Variation of Class Rights 181
Summary 183
Key Terms 183

Topic 8: Corporate Finance 2: Financal Assistance, Debenture, 184

Charges, Capital Maintenance and Reduction of Capital
8.1 Debenture and Charges 185
8.1.1 Fixed and Floating 188
8.1.2 Priority Rights 190

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8.2 Capital Maintenance and Reduction of Capital 192

8.2.1 Capital Maintenance 192
8.2.2 Why Would a Company Wish to Buy its Own
Shares? 197
8.2.3 Financial Assistance by the Company for the
Purchase of its Own Shares 197
Summary 200
Key Terms 200

Topic 9: Corporate Reconstructions, Mergers and Takeovers and 201

Arrangements
9.1 Reconstruction 202
9.2 Receivers and Administrative Receivers 203
9.2.1 Appointment by a Debenture Holder 204
9.2.2 Appointment by the Court 205
9.2.3 Duties of a Receiver 207
9.2.4 Liabilities of a Receiver 208
9.3 Administrative Orders and Voluntary Arrangements 208
9.3.1 Voluntary Arrangement 209
Summary 211
Key Terms 211

Topic 10: Liquidation 212

10.1 Voluntary Winding Up 213
10.1.1 Creditor's Voluntary Winding Up 214
10.2 Compulsory Winding Up 215
10.2.1 Grounds for Winding Up 217
10.2.2 The Duties and Functions of the Liquidator 220
Summary 225
Key Terms 225

Answers 226

Case Lists 238

References 245

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 TOPIK 2 KAEDAH DAN TEKNIK W 17

Copyright © Open University Malaysia (OUM)

COURSE GUIDE

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Copyright © Open University Malaysia (OUM)
 COURSE GUIDE  xi

COURSE GUIDE DESCRIPTION

You must read this Course Guide carefully from the beginning to the end. It tells
you briefly what the course is about and how you can work your way through
the course material. It also suggests the amount of time you are likely to spend in
order to complete the course successfully. Please keep on referring to Course
Guide as you go through the course material as it will help you to clarify
important study components or points that you might miss or overlook.

INTRODUCTION
BBUS2103 Company Law is one of the courses offered by Faculty of Business and
Management at Open University Malaysia (OUM). This course is worth 3 credit
hours and should be covered over 15 weeks.

COURSE AUDIENCE
This is a core course for students pursuing the degree in Bachelor of Business
Administration program. It is also basic major course for students pursuing
Bachelor of Accounting.

As an open and distance learner, you should be able to learn independently and
optimise the learning modes and environment available to you. Before you begin
this course, please confirm the course material, the course requirements and how
the course is conducted.

STUDY SCHEDULE
It is a standard OUM practice that learners accumulate 40 study hours for every
credit hour. As such, for a three-credit hour course, you are expected to spend
120 study hours. Table 1 gives an estimation of how the 120 study hours could be
accumulated.

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xii  COURSE GUIDE

Table 1: Estimation of Time Accumulation of Study Hours

STUDY
STUDY ACTIVITIES
HOURS
Briefly go through the course content and participate in initial
3
discussions
Study the module 60
Attend 3 to 5 tutorial sessions 10
Online participation 12
Revision 15
Assignment(s), Test(s) and Examination(s) 20
TOTAL STUDY HOURS ACCUMULATED 120

LEARNING OUTCOMES
By the end of this course, you should be able to:

1. Describe how the company law came into existence;

2. Discuss the information, classification and differences of companies and

relate how company differ from other forms of association;

3. Review the consequences of registration, the important of company

institution, how a person becomes a member and the effects of the
membership;

4. Assess the importance of meetings;

5. Analyse the power and duties of directors and other officers; and

6. Evaluate membersÊ rights and remedies, corporate finance, corporate

structure and corporate collapse.

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COURSE SYNOPSIS
This course is divided into 10 topics. The synopsis for each topic can be listed as
follows:

Topic 1 introduces the Company Law to learners. This will entail a discussion as
to the types of business organisation, the classification and the changing status of
a company.

Topic 2 will examine the Memorandum of Association in a registered company.

The development of ultra virus doctrine will also be discussed.

Topic 3 discusses the importance of Articles of Association, the legal effect and
how the Articles of Association may be altered.

Topic 4 discusses the effects of membership. In this topic also will examine the
law that governs a member, the transfer of membership as well as liability of
members.

Topic 5 explains the appointment and termination of directors also the duties of
directors at common law and under the Companies Act 1965.

Topic 6 will cover a discussion of the types of meetings and the procedure in a
meeting. It also touches on the requirement of notice, quorum, proxies, voting,
resolutions, accounts and penalty.

Topic 7 discusses the types of capital in company, the legal characteristics and
consequences association with share capital. An examination of the nature of
dividend payment will also be discussed.

Topic 8 will examine some of the common form of security granted by the
providers of debt finance such as debenture and charge. A relevant common law
principles and statutory provisions regarding the principle that share capital
must be maintained will also be discussed in this topic.

Topic 9 will start with the examination of reconstruction. It will then discuss how
are receivers and administrators are appointed and the nature or their respective
powers and duties.

Topic 10 discusses two types of procedures for winding up, voluntarily winding
up and compulsory winding up. Duties of liquidator will also be discussed.

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TEXT ARRANGEMENT GUIDE

Before you go through this module, it is important that you note the text
arrangement. Understanding the text arrangement should help you to organise
your study of this course to be more objective and more effective. Generally, the
text arrangement for each topic is as follows:

Learning Outcomes: This section refers to what you should achieve after you
have completely gone through a topic. As you go through each topic, you should
frequently refer to these learning outcomes. By doing this, you can continuously
gauge your progress of digesting the topic.

Self-Check: This component of the module is inserted at strategic locations

throughout the module. It is inserted after you have gone through one sub-
section or sometimes a few sub-sections. It usually comes in the form of a
question that may require you to stop your reading and start thinking. When you
come across this component, try to reflect on what you have already gone
through. When you attempt to answer the question prompted, you should be
able to gauge whether you have understood what you have read (clearly,
vaguely or worse you might find out that you had not comprehended or retained
the sub-section(s) that you had just gone through). Most of the time, the answers
to the questions can be found directly from the module itself.

Activity: Like Self-Check, activities are also placed at various locations or junctures
throughout the module. Compared to Self-Check, Activity can appear in various
forms such as questions, short case studies or it may even ask you to conduct an
observation or research. Activity may also ask your opinion and evaluation on a
given scenario. When you come across an Activity, you should try to widen what
you have gathered from the module and introduce it to real situations. You should
engage yourself in higher order thinking where you might be required to analyse,
synthesise and evaluate instead of just having to recall and define.

Summary: You can find this component at the end of each topic. This component
helps you to recap the whole topic. By going through the summary, you should
be able to gauge your knowledge retention level. Should you find points inside
the summary that you do not fully understand, it would be a good idea for you
to revisit the details from the module.

Key Terms: This component can be found at the end of each topic. You should go
through this component to remind yourself of important terms or jargons used
throughout the module. Should you find terms here that you are not able to
explain, you should look for the terms from the module.

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References: References is where a list of relevant and useful textbooks, journals,

articles, electronic contents or sources can be found. This list can appear in a few
locations such as in the Course Guide (at References section), at the end of every
topic or at the back of the module. You are encouraged to read and refer to the
suggested sources to elicit the additional information needed as well as to
enhance your overall understanding of the course.

PRIOR KNOWLEDGE
There is no prerequisite requirement for learners prior taking this subject.

ASSESSMENT METHOD
Please refer to myINSPIRE.

REFERENCES
Farrar J. H., & Hannigan J. M., (1998). Farrar's company law (4th ed.).
London: Butterworths.

Goode R. M. (2005). Principles of corporate insolvency law. London: Sweet &

Maxwell.

Gower. L. C. B. (2003). Principles of modern company law (13th ed.). Sweet &
Maxwell.

Morse, G. (2005). Charlesworth company law. Sweet & Maxwell.

Redmond, P. (1992). Companies and securities law: Commentary and materials,

(2nd ed.). Cavendish Publishing Limited.

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Copyright © Open University Malaysia (OUM)

T op i c 1 X Introduction
to Company
Law
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. List the types of business entities and its distinctions;
2. Identify the various forms of companies and the changing of status;
3. Discuss the doctrine of separate legal personality and lifting of the
veil of incorporation;
4. Describe the agency principles related to company law; and
5. Evaluate the duties of a promoter and the pre-incorporation
contracts.

X INTRODUCTION
The first topic of this module introduces you to Company Law. You will begin by
looking at the scope and development of Modern Company Law. It is important
to identify the main sources of company and the introduction to the Companies
Act 1965. The decision in dealing with the most appropriate form of business
association is most important. The area of discussion will be on types of business
entities and distinctions between the forms of organisations.

The registration of different types of companies and the changing of status is

allowed by the Companies Act. The legal characteristic of a company allows it to
undertake activities in its own right and to sue and be sued in its own name. The
separate legal personality characteristic and their implications will be discussed.

Although a company is regarded as a person, unfortunately unlike humans, it

cannot operate itself as it acts only through agents, either by expressed or
implied. The agency principles must be used whenever we wish to attribute
responsibility for a contract. The motive behind the formation of a company is
relevant. This is because of the way the law treats certain activities carried out in

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2 X TOPIC 1 INTRODUCTION TO COMPANY LAW

the company. The motive of the person/persons behind the formation of a

company is important.

1.1 DEFINITION OF A "COMPANY"

A company is:
Ć A "corporation" - an artificial person created by law.
Ć A human being is a "natural" person.
Ć A company is a "legal" person.
A company thus has legal rights and obligations in the same way that a natural
person does.

The function of a company in a legal sense is to hold property and carry on a

business or other activity, as an entity separate from the participants (investors,
managers) in that business or activity. Most corporations that are used to carry on
business in Malaysia are "companies," that is, corporations incorporated or
treated as being incorporated under the Companies Act 1965 (referred to as CA
1965 hereinafter).

ACTIVITY 1.1

What is the purpose of setting up a company and why is it so important to

set up a business?

1.1.1 Development of Modern Company Law

Company Law in Malaysia has evolved from the English principles of company
law. Most of its fundamental principles are of English origin. In order to
appreciate the fundamental principles governing Malaysian Company law, one
must understand how company law was first developed in the United Kingdom
and how these principles became the core principles of Modern Company Law.

The concept of registered company was born during the mid-nineteenth century
and as such, company law is a comparatively modern legal phenomenon.
Nevertheless, prior to the mid-nineteenth century, business associations existed
in such a form as to warrant them being properly described as ancestors of and
necessary catalysts to our present system of company law. Figure 1.1 illustrates
the development of modern Company Law.

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 TOPIC 1 INTRODUCTION TO COMPANY LAW W 3

Figure 1.1: Development of Modern Company Law

(a) The Chartered Company

Chartered joint stock companies were developed in the seventeenth
century, largely as a result of the expansion in the world shipping trade. A
joint stock company was an association of members whereby each member
contributed capital towards specific trade ventures.

The joint company was a sophisticated form of partnership concern, created by

royal charter. The charter often provided the association with monopolistic
rights in specific trades. The company was also deemed to have a separate legal
entity, although unless specifically provided for in the charter, the
memberships of such companies were devoid of any form of limited liability.

A member of a company would take shares in the company in proportion to

his initial contribution towards the companyÊs stock. The growth in joint stock
companies mirrored an expansion in the number of share dealings. In 1711,
South Sea Company was founded; the objective was to obtain a monopoly of
trade with the colonies in South America. The surge of confidence in the South
Sea shares resulted in a general that increased in share dealings and speculative
boom in the general value of share prices of other companies.

Unfortunately, many companies with dubious corporate objectives, many of

which had been formed by purchasing chatterers of long extinct companies,
thrived as a result of the general acceptance by naive investors that a
company share could do nothing but escalate in value.

A collapse in the markets was inevitable, fraudulently conceived companies

were prosecuted, members of the government who has been involved in the
share dealings fell from grace and Parliament, in an attempt to curb the
improper use of the corporate form, passed the so-called Bubble Act 1720.

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4 X TOPIC 1 INTRODUCTION TO COMPANY LAW

The objective was to prohibit the promotion and operation of Âdangerous and
mischievous undertakings and projects, wherein the undertakers and subscribers
have presumed to act as if they were corporate bodiesÊ. The south sea bubble
episode was the first speculative boom and crash in British history although it
was certainly not to be the last.

(b) Unincorporated Associations

The nineteenth century witnessed an increase in the number of companies
created by individual Acts of Parliament. Such companies were basically
large trading concerns; the expense of incorporating by this method was
extremely prohibitive of smaller business ventures.

The principal disadvantage of the unincorporated association was that the

members of these businesses did not have limited liability. In addition, the
legality of the right of members to transfer shares freely in the associations
remained undoubtedly questionable under the provisions of the Bubble Act,
an Act that was not repealed until 1825.

(c) The Joint Stock Companies Act 1844

The Joint Stock Companies Act 1844 gave birth to the first form of registered
company. This allowed a company to be incorporated by a registration
procedure as opposed to incorporation by royal charter or by an individual
Act of Parliament. This Act also created the Registrar of Companies with
whom particulars of registered companies had to be lodged. Despite the
creation of the registered company, the 1844 Act did not confer limited
liability on the membership of these companies.

(d) Limited Liability

The Limited Liability Act was passed in 1855. This Act allowed companies
with at least 25 members, each holding shares to the minimum value of £10
with at least one-fifth fully paid up on the share to incorporate with a
limited liability status. The 1855 Act was incorporated into the Joint Stock
Companies Act 1856.

This Act required a company to have and registered constitutional

documents (memorandum and articles of association). It removed the
restriction relating to the minimum amount of capital to be contributed by
members of a company and also reduced the minimum number of members
required for the purpose of incorporation from 25 to 7 members.

The companies legislation was consolidated into the Companies Act of 1862.
This act introduced companies limited by guaranteed and unlimited
companies. Since then, English Company law has consistently undergone a

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 TOPIC 1 INTRODUCTION TO COMPANY LAW W 5

series of review and consolidations that ultimately lead to the passing of the
English Companies Act 1948 and then Companies Act 1985. It has
continued to grow since the United Kingdom inception into the European
Union in 1972.

1.1.2 Company Law in Malaysia

Sources of Company Law in Malaysia consists of Legislation, Common Law, and
Self Regulation as explained in Table 1.1.

1.1.3 The Companies Act 1965

The Act came into force in April 15th 1965. The purpose of the Act was to
consolidate as well as amend the law pertaining to companies in Malaysia. In
view of the historical relationship with Australia and United Kingdom, the
judicial pronouncements on the interpretation of their respective companyÊs
legislation are highly persuasive in interpreting the equivalent Malaysian
provisions. The function of the Act can be seen as an enabling function and
regulatory function.

S5(1) of the Civil Law Ordinance 1956 provides that:

In all questions or issues which arise or have to be decided in the States of⁄with
respection to the law of partnerships, corporation, banks and banking⁄. The law
to be administered shall be the same as would be administered in England in the
like case at the date of the coming into force of this ordinance, if such question or
issue had arisen or had to be decided in England, unless in any case other
provision is or shall be made by any written law.
Source of company law are explained in Table 1.1
Table 1.1: Sources of Company Law

Sources Explanation
Legislation
CA 1965 and its accompanying regulations (Companies
Regulations 1966). In addition to this Act, the other legislation
includes the Securities Commission Act 1993, the Pengurusan
Danaharta National Berhad Act 1998, Securities Industry (Central
Depositories) Act 1991 and the Companies Commission of
Malaysia Act 2001. This module will be primarily concerned with
the CA 1965 (here in after referred to as the „The Act‰ and
sections referred to in this module refers to the Act unless stated
otherwise.

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Common Law The act is not a code and reference are made to the common
law for guidance. S131 (8) state that
„this section shall be in addition to and not in derogation of
the operation of any rule of law.‰
Such sections must be read in conjunction with case law,
which assists in the interpretation of the legislation.
Sell-Regulation Self-regulatory principles strictly speaking is not law but is
particularly relevant in the areas of company listing and
measures taken to enhance corporate governance.

In the cases of Re Low Nai Brothers & Co; and Syarikat Import and Export &
Perindustrian Timbering Sdn Bhd v Othman bin Taib, it was held by the High
Court that English and Australian law could be imported into Malaysian Law.
However, in the case of Tan Mooi Liang v Lim Soon Seng & Ors [1974] 2 MLJ 60, the
Federal Court declined to accept this practice.

Note: Federal Court dealt with the Law of Partnership while the High Court
dealt with specific provisions of the Act.

1.1.4 Content of the Companies Act

The Companies Act is an extremely long and complicated statute with over 374
sections and 12 parts and nine schedules. The parts are as illustrated in Figure 1.2.

Figure 1.2: Content of the Companies Act

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1.2 BUSINESS ENTITIES IN MALAYSIA

Any person who wishes to embark on any business venture in Malaysia must
register either under the Registration of Business Act 1956 or the CA 1965. The
Registrar of Companies and Registrar of Business administer both the Acts.
The types of business structures are as follows:
Ć Sole proprietorship
Ć Partnership
Ć Limited companies
Ć Unincorporated associations
Foreign investors could not register as the sole proprietors and partnership, and
therefore, any foreign investor coming to Malaysia must make use of a limited
company as his business vehicle.

1.3 FUNDAMENTAL DISTINCTIONS BETWEEN

THE COMMON FORMS OF
ORGANISATIONS (SOLE TRADER,
PARTNERSHIP AND COMPANY)
1.3.1 Sole Proprietorship

The advantage of this form of business is that there are fewer formalities in terms
of its formation and registration. The sole proprietor is the taxpayer and the
business' losses or profits can be offset against the proprietor's other income.
Surf the following website: [Link]

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8 X TOPIC 1 INTRODUCTION TO COMPANY LAW

1.3.2 Partnership

However, usually the terms of the agreement between partners are recorded in a
formal legal document referred to as a "partnership agreement". Unless otherwise
provided in the partnership agreement, whether specifically or impliedly the
Partnership Act 1961 will apply.

1.3.3 Why is Partnership Popular?

Advantages of the firm as a form of business enterprise.
(a) Partnership can be formed quickly and easily without any great legal
formalities (created by contract).
(b) Larger amounts of capital available than would be the case with the sole
proprietor.
(c) Each partner can have a say in management of business and can share
profits. (Note many inventors worried about losing control of business if it
becomes a company). Each partner may specialise in particular aspects of
the business according to his abilities and preferences.
(d) Burden of management can be shared.
(e) Discussion is possible and new ideas may develop as a result.
(f) Partnerships are often small - may be closer/more responsive to
clients/customers.

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 TOPIC 1 INTRODUCTION TO COMPANY LAW W 9

(g) Privacy. No disclosure of accounts etc to public.

(h) Partners bound to one another. Fiduciary duties to each other deal in
utmost good faith - no competition with the firm.
(i) Less costs/regulation compared to companies (e.g. no need for statutory
meetings).
(j) Partnerships can be dissolved easily - by mere consent (companies
elaborate procedure for dissolution and removal of co. name from the
Register).

This form of business is most common amongst:

(a) Professionals: Accountants, lawyers, doctors, dentists, architects, surveyors,
actuaries, patent agents, etc.
(b) Traders: Plumbers, joiners, electricians.
(c) Family business.
(d) Retail and road haulage.
(e) Pop Groups. For example, the famous band in UK, The Beatles was a
partnership worth millions. It came to an end when one of the partners,
Paul McCartney, went to the English High Court to ask for a dissolution of
the partnership (McCartney v Lennon, Harrison and Starkey) on March
1971. A receiver was appointed to handle the Beatle's assets until the court
granted the dissolution of "Beatles Co." in 1975.
(f) Agriculture (many family farms).

Disadvantages of Partnership.
(a) Relative lack of resources for expansion. No ability to offer floating charges.
(b) Differences of opinion among partners could threaten existence of the
business.
(c) The need for partners to consult one another on important matters creates
inflexibility. Adjustments to new situations may be less rapid (than say, sole
trader).
(d) Decisions of one partner are binding on all, and could lead to problems if it
is a poor decision.
(e) Unlimited ability for debts.
(f) Death or bankruptcy may mean end of the business unless there is a written
agreement to the contrary.

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Table 1.2: Definition of Unincorporated Joint Venture and Trust

An unincorporated joint venture is a contractual agreement between two or

Unincorporated more people that they will join together to conduct a particular venture. The
Joint Venture joint venture is not a separate legal entity and the assets and obligations of
the venture are those of the ventures personally.
Some business is conducted through private trust, often for tax purpose and
Trust the unit trust is a common mode of pooling investments with a separate
trustee and manager.

1.3.4 Comparison between Companies and

Partnership
Below are comparison between companies and partnership.
(a) A company can be created only by certain prescribed methods - most
commonly by registration under the CA 1965. A partnership is created by
the express or implied agreement of the parties, and requires no formalities,
though it is common to have a written agreement.
(b) A company incurs greater expenses at formation, throughout its life and on
dissolution, though these need not be excessive.
(c) A company is an artificial legal person distinct from its members.
(d) A company can have as little as one member and there is no upper limit on
membership. A partnership must have at least two members and has an
upper limit of 20 (with some exceptions).
(e) Shares in a company are normally transferable (must be so in a public
company). A partner cannot transfer his share of the partnership without
the consent of all the other partners.
(f) Members of a company are not entitled to take part in the management of
the company unless they are also directors of it. Every partner is entitled to
take part in the management of the partnership business unless the
partnership agreement provides otherwise.
(g) A member of a company who is not also a director is not regarded as an
agent of the company, and cannot bind the company by his actions. A
partner in a firm is an agent of the firm, which will be bound by his acts.
(h) The liability of a member of a company for the debts and obligations of the
company may be limited. A partner in an ordinary partnership can be made
liable without limit for the debts and obligations of the firm.
(i) The powers and duties of a company, and those who run it, are closely
regulated by the Companies Acts and by its own constitution as contained
in the Memorandum and Articles of Association. Partners have more
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freedom to alter the nature of their business by agreement and without

formality, and to make their own arrangements as to the manner in which
the firm will be run.
(j) A company must comply with formalities regarding the keeping of
registers and the auditing of accounts which do not apply to partnerships.
(k) The affairs of a company are subject to more publicity than those of a
partnership - e.g. companies must file accounts which are available for
public inspection.
(l) A company can create a security over its assets called a floating charge,
which permits it to raise funds without impeding its ability to deal with its
assets. A partnership cannot create a floating charge.
(m) If a company owes a debt to any of its shareholders they can claim payment
from its assets ratably with its other creditors. A partner who is owed
money by the partnership cannot claim payment in competition with other
creditors.
(n) A partnership (unless entered into for a fixed period) can be dissolved by
any partner, and is automatically dissolved by the death or bankruptcy of a
partner, unless the agreement provides otherwise. A company cannot
normally be wound up on the will of a single member, and the death,
bankruptcy or insanity of a member will not result in its being wound up.

ACTIVITY 1.2

In your opinion, why is partnership much more practical and advantageous

than a sole proprietor? Provide your views on this.

1.4 CLASSIFICATIONS AND THE CHANGING

STATUS OF COMPANIES
The Companies Act allows for registration of various forms of companies. A
company may change its status because of its change of activities. This is also
permitted by the Companies Act.

1.4.1 The Registered Company

All public and private companies registered under the Companies Act from time
to time in force are registered companies. A registered company is a type of
corporation, that is, an association of persons, which has, in law, an existence,

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rights and duties separated from those of the persons who are from time to time
its members.

Thus, a corporation is an artificial legal person, which exists despite the demise of
its various members. Companies are classified according to the members' liability
and according to whether they are public or private.

1.4.2 Public and Private Companies

A public company is one, which fits the definition of public company given in the
CA 1965.

A public company and a private company may be differentiated as shown in

Table 1.3.

Table 1.3: Differences between Public Company and Private Company

Public Company Private Company

• Limited by shares or • Any company that is registered as, or converts to a
limited by guarantee and private company under S4 (1) of the Act.
having a share capital, • S22 (4)
being a company. States that a private company limited by shares must
• Public companies may be always include the words "Sendirian Berhad" of the
listed or unlisted. abbreviation "Sdn. Bhd" in its name.
• All companies listed on the • A private company is exempted if it has less than 20
Bursa Malaysia are public members and none of its members are themselves
companies. companies.
• Exempt private companies can keep their financial
information private.
• Must in its memorandum of association, restrict the
right to transfer its shares.
• Are not permitted to have more than 50
shareholders.
• Are not allowed to undertake certain fund-raising
activities that require the issue of a prospectus.

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Obligations imposed on public company are as shown in Table 1.4.

Table 1.4: Obligations as Imposed on Public Company

CA 1965 Provision
S69L Required to maintain a register of substantial shareholders
Required to lodge financial reports, regardless of the size of the
S169 (1)
company's operations.
S133 & S133A Restrictions on loans to directors or connected persons.

1.4.3 Limited and Unlimited Company

ACTIVITY 1.3

Do you know why limited companies are usually preferred over

partnership?

(a) Limited Companies

A company is a separate legal entity and its liability to pay its debts are
unlimited - it must pay all debts due. Where it does not have sufficient
assets to meet due debts, the company will go into liquidation, receivership
or administration. However, the liability of the members is usually limited,
either by shares or by guarantee.

(i) Limited by Shares

In this situation the liability of each member is limited to the amount,
if any, unpaid don his shares. Table 1.5 explains the provisions
governing members liability.

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Table 1.5: Provisions Governing Members Liability

Provision Explanation
S4(1) A company limited by shares is "a company formed on the principle of
having he liability of its members limited, by the memorandum of
association, to the amount (if any) unpaid on the shares respectively held
by them."
S18 • Requires these companies to state in their memorandum of
association, the amount of share capital and its division into
shares of fixed amount.
• It must also state that the liability of its member is limited. However,
in exceptional circumstances, the 'veil on incorporation' may be
lifted and members or company officers made liable for all or some of
the company's debt.
S214 Sets out the liability of members in a company limited by shares to
contribute to meet the company's debts on a winding up.

(ii) Limited by Guarantee

Here, the liability of members is limited to the guarantee amount which
they have respectively agreed to contribute to the assets of the company in
the event of its being wound-up: S4(1) of the Act. As long as the company is
a going concern, no contribution is required. However, it is possible to have
a company limited by guarantee and having a share capital.

(iii) Companies Limited by Both Shares and Guarantee

Where members are liable as shareholders and as guarantors. Although
there may be members who do not hold shares in a company limited both
by shares and guarantee, all member are liable to honor the guarantee.

Here, the members must pay for their shares in the normal way and will be
liable for the amount, if any, unpaid on the shares and for the guaranteed
amount. In practice, guarantee companies are private rather than public
companies and are used for charitable or non-trading concerns. Examples
include colleges and theater clubs.

(b) Unlimited Companies

A company may be registered as an unlimited company, in which case the
liability of its members is unlimited: S4(1) of the Act. Thus, the private
assets (e.g. house, car) of a shareholder could be used to satisfy debts
unpaid by the company.

Nevertheless, a few such companies do exist, the chief advantage being is

that an unlimited company does not have to file annual accounts with the

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Registrar - its financial affairs are private. It has some similarities to a

partnership and has the advantage of other characteristics of incorporation
such as the concept of legal personality.

ACTIVITY 1.4
Is a private company permitted to raise capital from the public and list
their shares on the stock exchange?

1.4.4 Changing the Status of a Company

A registered company may at some time during the course of its existence wish
or be obliged to change the status with which it was originally registered.

A rapidly expanding private company limited by shares may decide that the only
way in which its expansion can be achieved is to increase its share capital by
offering its securities to the general public to secure further capital top finance
growth.

Where a public company's issued share capital falls below the minimum
requirement of share capital permitted for a public company, the public company
must re-register itself as a private company.

ACTIVITY 1.5

Which would be the best form of business organisation? If you were

given an opportunity to set a business, which type of organisation
would you choose and why?

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1.4.5 Incorporating a Company and the Legal

Consequences

Liability on the part of the members to contribute to the assets of the company in
the event of its being wound up is as provided by the Companies Act.
(a) Separate Legal Personality/Entity
(i) A company is regarded as a distinct legal entity with a separate
existence from its membership and management team.
(ii) The corporate veil is „drawn‰ between the corporate entity and the
membership and management of a company so as to separate its
independent legal existence from that of its human constituents.
(iii) The principle of the veil of incorporation was tested and finally
established by the decision of the House of Lords in Salomon v
Salomon & Co (1897).
Refer to the following Salomon's case.

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Held:
High Court (HC)
The liquidator admitted the validity of Broderip's prior claim to be repaid from
the company's assets, i.e. as holder of a secured loan. Nevertheless, the liquidator
counter-claimed that the company (and therefore the company's unsecured
creditors) was entitled to be reimbursed by Salomon personally. The trial judge,
Vaughn Williams J., agreed with this contention. Whilst admitting that on its
registration a company was a legal entity distinct form its corporations, the
learned judge opinioned that A Salomon Ltd. (the company) was no more than an
agent of its principal, i.e. Mr. Salomon. As such, the principal was responsible for
the debts of its agent. The basis for the agency argument was that the company
was a mere alias of its founder and had not been formed in accordance with the
true spirit of the Companies Act 1862.

Vaughan Williams J., believed that the 1862 Companies Act, in its requirement for
„seven persons associated for a lawful purpose,‰ meant seven persons with a
bona fide intention of participating in a trading venture, and not as in the present
case, a company which was in reality akin to a one man business.

Court of Appeal (COA)

The decision of Vaughnan William's J was upheld, although, in the COA's opinion,
the correct analogy between the company and Mr. S was that of a trust relationship,
i.e. the company held its property on trust for its beneficiary, Mr. S, as such the
creditors of A Salomon Ltd. were entitled to a claim against Mr. S through the
company. As at first instance, the COA recognised that A Salomon Ltd., in
complying with the registration provisions of the Companies Act 1862, had been
validly incorporated as a separate legal entity. However, the court would not
recognise that the liability of A Salomon Ltd. should be divorced from that of its
founder, Mr. S, in so far as they agreed with Vaughn Williams J., that in relation to
the requirements of incorporation the correct interpretation of the Companies Act
1862 was that the seven persons who became members of the company should
participate in the venture rather than have a superficial interest in the company.

Notwithstanding the fact that the business had been profitable prior to its
incorporation, Linley J was of the opinion that the manner in which it had been
formed indicated that had been created for an illegitimate purpose, that it was
'advice to defraud creditors'. Indeed, in the Court of Appeal's opinion the
company's illegitimacy stemmed from the fact that it was in reality a one
company.

House of Lords (HOL)

In reversing the decision of the COA, rigorously denied the belief held by the
lower courts that a company could not be formed by one dominant character
together with six other persons divorced of a substantial interest in the business

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venture. According to the House, the Statutory language of the Companies Act
1862 (s 6) was clear. A company could be incorporated providing it had at least
seven members irrespective of whether or not all seven members made a
substantial contribution to the companyÊs affairs.

Although both the HC and the COA recognised that A Salomon Ltd., having
complied with the registration provisions of the Companies Act 1862, was a
corporate entity, they had not contemplated the fact that once incorporate the
company could not be considered as anything other than an independent entity,
totally separate and distinct from its founder, Mr. S. The HOL's interpretation of
the separate legal identity of as company was, in respect of A Salomon Ltd.,
absolute.

The HOL, in considering the agency and trust arguments of the lowers courts,
concluded that both were contradictory to the view that the company was a
separate legal entity. The finding of an agency or trust relationship would have
meant that Mr. S would have been personally liable for the company's debts.

SELF-CHECK 1.1
Study the case of Salomon v Salomon and list down the significant
and differences of the Judgments give by the Judges that presided in
the High Court, Court of Appeal and the House of Lords.

1.5 EFFECTS OF THE CORPORATE VEIL

The legal rights and duties of shareholders, in respect of their relationship with
the company and fellow shareholders are determined by the company's
constitution.

A company is a separate person in law from its members. This has several
important consequences. The consequences are as shown in Figure 1.3.

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Figure 1.3: Important consequences in forming a company

(a) Company is Liable for its Own Debts

The shareholders are not liable for the debts and liabilities of the company
and cannot be sued by the company's creditors. A shareholder can be a
debtor or creditor of the company and can sue or be sued by the company
as in Salomon v A Salomon & Co Ltd.

(b) Company's Liability

The fact that the company is a separate person from its shareholders makes
limited liability possible. It should be noted that the company's liability is
always unlimited. It is the members' liability that is limited and that liability
is to the company, not to the individual creditors.

(c) Company's Property

A company owns its own property and the shareholders have no direct
right to this or any share of it. Person who no longer wishes to be a member
is only entitled to whatever price he can get for his shares. A shareholder
has no legal interest in the company's property and cannot insure it against
theft, damage, etc.

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(d) Contractual Capacity

A company has full contractual capacity - and only the company can
enforce its contracts. Companies may also be liable in negligence.
Shareholders, on the other hand cannot be made liable for the negligence of
the company, unless he was also personally negligent.

(e) Crimes
A company can be convicted of a crime, regardless of whether its directors
are also convicted. However, exceptions to the limitations stated that a
company cannot be convicted of a crime which requires the physical act of
driving a vehicle.

There are particular problems with crimes which require mens rea ("a guilty
mind")
- most common law crimes require mens rea, while many statutory offences
involve strict criminal liability.

In order to convict companies of common law crimes, courts may regard the
mens rea of those individuals who control the company to be the mens rea of
the company.

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However, the courts have been very restrictive in their use of this approach:

Ć Crimes Against the Company

A company can be the victim of crime. It is theft to steal from a
company, even if those accused of the theft are also the company's
only shareholders as in the case R v Phippou (1989).

(f) Perpetual Succession

Separate personality means that the existence of a company does not
depend on the existence of its members. Membership may change or
members may die - the company continues in existence until wound up.

(g) Borrowing
A company can borrow money and grant a security for a debt. Only a
company can create a floating charge. Floating charge is a kind of security
for a loan. The charge "floats" because is does not attach to any particular
asset, but floats over the companyÊs assets as they exist from time to time.
Certain events cause the charge to "crystallise" and attach to whatever assets
the company has at the time.

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SELF-CHECK 1.2
What is the significance of a corporate veil and is it important in a
business point of view?

1.6 LIFTING THE VEIL OF INCORPORATION

Separate legal personality of company operates as a shield. The courts will not
normally look beyond the façade of the company to the shareholders who
comprise it. The screen separating the company from its individual shareholders
and directors is commonly referred to as "the veil of incorporation".

Sometimes the law is prepared to examine the reality which lies behind the
company façade - this is described as "lifting" or "piercing" the corporate veil.
This may occur at common law and under statute.

1.6.1 Common Law

Although the judiciary has universally accepted the principle of a company as a
separate legal entity divorced for the interest of its membership and
management, the corporate veil has, in exceptional instances, been dislodged by
the courts.

The case law examples generally penetrate deeper and in some instances have
had the effect of lifting the corporate veil in its entirety so as to completely
abandon the recognition of a company as a separate legal entity.

Although the court will, on occasions, disturb the corporate veil, it is nevertheless
difficult to classify the justifications which merit the exercise of this power. One
possible explanation for this difficulty may be found in the suggestion that a
court will seek to dislodge the corporate veil in the pursuit of the application of
equitable principles.

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In Malaysia, „doing justice‰ appears to be the sole criterion that motivates the
courts to exercise their inherent jurisdiction and this has been the case ever since
the decision of Hotel Jaya Puri Sdn. Bhd. v National Union Bar & Restaurant
Workers & Anor [1980]. The other cases that followed suit were;
(i) Aspartra Sdn Bhd & Ors v Bank Bumiputra Malaysia Bhd [1988]; and
(ii) Yap Sing Hock v Public Prosecutor [1992] 2 MLJ 714
These cases are merely a guide to the courts as to whether it ought to lift the
corporate veil or not. They do not determine the final outcome of case. In the
Malaysian context, the lifting of the corporate veil is done on a case-to-case basis.

However there are categories provided by writers in England and Australia. The
following are the categories:

(a) Company Identity Used to Evade Obligations (Fraud or Facade Cases)

The fraud or facade exception will occur where the underlying motive for the
incorporation of a company is to enable its membership to impugn an existing
binding obligation with a third party or instigate some other form of fraud.

In such a case the court may recognise the existence of the corporate entity
but may nevertheless dislodge the corporate veil to prevent those involved
in the façade or fraudulent act from escaping a liability which would have
otherwise been enforceable had the company not been incorporated.

In Salomon v Salomon Ltd. had the motive for the companyÊs incorporation
been a fraudulent one, the case would have had a different outcome. The
evidence in that case suggested that, although Mr. Salomon had overvalued
the price of his pre incorporated business, the overvaluation had not been of
a fraudulent character. Mr. Salomon had done everything possible to keep
A Salomon Ltd. afloat, including disposing of his debentures and using his
own personal funds to inject capital into the company.

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(b) Agency
Court may lift the veil on the basis that one company is merely carrying on
business as the agent of another - so that transactions entered into by the
subsidiary can be regarded as transactions of the holding company:

In the case of Aspatra Sdn Bhd v Bank Bumiputra Malaysia Bhd [1988] 1
MLJ 97, the Supreme Court held that it was proper to lift the veil to expose
the true owner of the company's assets in granting a Mareva injunction.

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(c) Group Entity

In the past, courts have been willing to lift the veil on the basis that a group
of companies was not a group of separate persons, but a single economic unit:

Later cases have doubted this principle as in the following case.

(i) Woolfson v Strathclyde Regional Council (1978); and
(ii) Adams v Cape Industries Ltd [1990]

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National Union of Hotel, Bar & Restaurant Workers v Hotel Malaya Sdn Bhd
[1987]
Held:
The court was not prepared to hold that the hotel company was the employer of
the workers of the restaurant company. The general manager was common both
to the hotel and restaurant companies. The hotel company only held 90.75% of
the paid up capital of the restaurant company.

(d) Justice and Equity

Courts have sometimes been prepared to pierce the corporate veil where
they feel this is in the interests of justice.

Note:
But see: Adams v Cape Industries Ltd

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Situations where the veil was not lifted are as briefly explained in Table 1.6.

Table 1.6: Cases Whereby Lift Was Not Lifted

Case Explanation
Sunrise Sdn Bhd v First Profile (M) Where there is no dispute as to the identity of the
Sdn Bhd & Anor [1996] controller of the company.
Lim Sung Huak & Ors v Sykt Where there is delay in bringing proceedings by those
Pemaju Tanah Tikam Batu Sdn. who seek to lift the corporate veil.
Bhd. [1993]
Development & Commercial Bank When a company has been duly incorporated and the
Bhd v Lam Chuan Co & Anor alleged wrongdoer is not even a shareholder or
[1989] director of that duly incorporated company.
JH Rayner ) Mincing Lane) Ltd & Where the subsidiary whose veil that is sought to be
Ors v Manila Sons (M) Sdn. Bhd. & lifted is not wholly owned by the holding company.
Anor [1987]
Yap Sing Hock & Anor v Public Where the company is a victim of fraud or wrongful
Prosecutor [1992] deprivation by the person who solely controls it.

(e) Legislations
Some statutory provisions have the effect of piercing the corporate veil to
make directors personally liable (Table 1.7). Presumption is in favour of
separate personality and courts will not normally infer that legislation is
intended to pierce the corporate veil.

Table 1.7: Statutory Provisions

CA 1965 Provisions
− If a company contravenes this provision then notwithstanding section 369 the
company is not guilty of the offence.
S67 (5)
− The officers will be criminally liable and the penalty is imprisonment for 5 years or
find of RM100, 000 or both.
Requires the directors of a holding company to prepare consolidated accounts
incorporating the financial position of the holding company and its subsidiaries. The
S169
act clearly recognises the function of a group related companies as a single commercial
entity.
Provides that an officer of the company who signs or is authorised to sign on the company's
behalf any bill of exchange, cheque or promissory notes where the companyÊs name is not
S121
properly or legibly written is guilty of an offence and is liable to the holder of the
instrument or order for the amount due (unless it is paid by the company).
Provides that an officer can be personally liable to creditors for debts incurred by the
S304
company.
Provides that if the number of member falls below two (except in the case of a wholly
owned subsidiary) and the company carries on business for more than six months , any
S36
member who is aware of this is personally liable for debts contracted after the period
and is also guilty of an offence.

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SELF-CHECK 1.3

Explain how the separate personality of the company facilitates

limited liability.

ACTIVITY 1.6
Give your opinion on the following questions:
1. Was „justice‰ done in the Macaura case?
2. Do shareholders own the company?
3. Explain how the separate personality of the company facilitates
limited liability.

EXERCISE 1.1

1. Why is Salomon v Salomon & Co an important case?

2. Is 'justice' the sole criterion for lifting the corporate veil in
Malaysia? Illustrates your answers with case example.
3. When will the court lift the corporate veil?

1.7 THE AGENCY RELATIONSHIP

An agency is a relationship where one person (the principal, here the company)
consents or is deemed to have consented that the other person (the agent eg.
director, employee, secretary) should act on its behalf so as to affect its relations
with third parties.

Whether an individual officer of a company is possessed of an authority to bind

the company in a contractual relationship with a third party will be dependent
upon the rules of agency.

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At common law, the acts of an agent could only bind the company if they were
within the objects of the company as stated in its constitution. Acts outside the
scope of the company's objects are ultra vires and were once not binding on the
company.

SELF-CHECK 1.4

If a transaction within the company's capacity but outside an agentÊs

authority is entered into, will it bind the company?

1.7.1 Types of Authority

Figure 1.4 indicate that there are two types of valid authority.

Figure 1.4: Valid authority

Where the Agent Acts within His/Her Actual Authority (express or implied) the
Company Is Bound by the Contract

"An 'actual' authority is a legal relationship between principal and agent created
by a consensual agreement to which they alone are parties. Its scope is to be
ascertained by applying ordinary principles of construction of contracts,

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including any proper implications from the express words used, the usageÊs of
the trade, or the course of business between the parties. To this agreement the
contractor is a stranger; he may be totally ignorant of the existence of any
authority on the part of the agent." Freeman and Lockyer v Buckhurst Park
Properties (Mangal) Ltd [1964] 2 QB 480 (Diplock LJ).

This principle was adopted by in the case of Chew Hock San & Ors v Connaught
Housing Development Sdn Bhd [1985].

The (actual) authority of the agent may be limited or entirely absent by virtue of:
• The object clause;
• Clauses in the Articles;
• GM resolution;
• Director's duties to the company; and
• A defective or no appointment.

(a) What Happens if the Agent Exceeds these Limitations? Is the Company
Nevertheless Liable?
Under ordinary agency rules, the principal is not bound by the transaction
if the 3rd party knew about the limitation on the agent's authority and
entered into the contract anyway. In such circumstances the 3rd party did
not act in good faith.

(b) What Amounts to Notice under Common Law?

Notice:
(i) Actually knew;

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(ii) Ought to have known: duty of enquiry where circumstances

suspicious; and
(iii) Could have known: constructive notice.

Also known as the indoor management rule.

"If⁄ the directors have powers and authority to bind the company, but
certain preliminaries are required to be gone through on the part of the
company before that power can be duly exercise, then the person
contracting with the directors is not bound to see that all these preliminaries
have been observed."

Fountaine v Carmarthen Railway Co (1868) LR 5Eq 316

„⁄ When there are persons conducting the affairs of the company in a
manner which appears to be perfectly consonant with the articles of
association, then those dealing with them, externally, are not be affected by
any irregularities which may take place in the internal management of the
company.‰

See also:
Mahony v East Holyford Mining Co (1875)

(c) If Agent Exceeds his/her Authority

(i) P/company can ratify contract by ordinary resolution (C/F traditional
Position re ultra vires)

(ii) Agent incurs liability vis-à-vis P and vis-à-vis third party

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Exceptions to TurquandÊs case rule:

The operation of the rule is subject to a number of exceptions namely:

(i) A third party with actual knowledge of the fact that a transaction is
outside the authority conferred by the companyÊs constitution cannot plead
the rule:
Howard Patent Ivory Manufacturing Co (1833) 38 Ch D 156; Pekan Nenas
Industries Sdn Bhd v Chang Ching Chuen & Ors [1998].

(ii) A third party cannot rely on the rule in circumstances where he is an

insider, ie an officer of the company:
Morris v Kansen [1946]
(iii) Where there are suspicious circumstances surrounding the authorisation of
a transaction and the third party should reasonable have been aware of
such circumstances, the third party will not be able to rely on the rule:
Underwood v Bank of Liverpool & Martins Ltd [1924]

(iv) The rule will not operate where the contractual authorisation was a forgery:
Ruben v Great Fingall consolidated [1906]

(v) Where the necessary authorisation for a transaction requires the passing of
a special resolution, a third party will be deemed to have notice of the
outcome of the resolution in so fact as this type of resolution requires public
registration:
Irvine v Union Bank of Australia (1877)

1.7.2 Doctrine of Ostensible or Apparent Authority

The question of ostensible authority always comes in when actual authority
(express or implied) was absent.

Freeman & Lockyer v Buckhurst Park Properties (Mangel) Ltd [1964]

"A principal is bound, not only by such acts of the agent as are within the scope
of the agentÊs actual authority, but by such act as are within the larger margin of
an apparent or ostensible authority derived from the representations, acts, or
default of the principal."

Lord Diplock set out four conditions to be fulfilled:

(i) That a representation that the agent had the authority to enter on behalf of
the company into a contract of the kind sought to be enforce was made to
the contractor;
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(ii) That such representation was made by a person or persons who had actual
authority to manage the business of the company either generally or in
respect of those matters to which the contract relates;

(iii) That he (the contractor) was induced by such representation to enter into
the contract, that is, that he in fact relied upon it; and

(iv) That under its memorandum or articles of association the company was not
deprived of the capacity either to enter into a contract of the kind sought to
be enforced or to delegate authority to enter into a contract of that kind to
the agent.

See also:
Crabtree-Vickers Pty Ltd v Australian Direct Mail Advertising & Addressing Co
Pty Ltd (1976)

(a) Representation - Holding Out

Thus, if in the case of a company the board of directors who have „actual
authority‰ under the memorandum and articles of association to manage
the company's business permit the agent to act in the management or
conduct of the company's business, they thereby represent to all persons
dealing with such agent that he has the authority to enter on behalf of the
corporation into contracts of the kind which an agent (authorised to do acts
of the kind which he is in fact permitted to do) usually enters into in the
ordinary course of business (Freeman case).

Usual authority: generally ostensible authority coincides with the usual

authority associated with the particular position.

Note: usual authority may also inform actual implied authority as in the
case of Hely-Hutchinson v Brayhead Ltd [1968] 1 QB 549,

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„Authority is implied when it is inferred from the conduct of the parties

and the circumstances of the case such as when the board of directors
appoint one of them their managing director. They thereby impliedly
authorise him to do all such things as fall within the usual scope of that
office.‰
(b) Representation by someone with actual authority
First Energy Ltd. v Hungarian International Bank Ltd [1993]

(c) Notice
But there is no liability on the basis of ostensible authority if the third party
on notice or put on inquiry as to extent of the person's authority.
See above: Rule on Turquand

AL Underwood Ltd v Bank of Liverpool [1924]

If the third party was on notice about the agent's limited authority and ignored it,
then the company is not bound by its agent's unauthorised action. This then
means that the third party looses out - depending on the facts:

(i) By being liable to the company for its action in reliance of the agent's
apparent authority (e.g. honouring cheques signed by the agent which third
party shouldn't have honoured,

Or perhaps more commonly,

(ii) By not being able to enforce the purported contract against the company
(see scenarios in Turquand, Freeman, Rolled Steel, Panorama - but be
careful in most of these cases third party was not on notice and thus could
enforce the contract).

ACTIVITY 1.7

When, if ever, are companies personally liable on contracts their

directors have entered into while acting as agents of the company?

EXERCISE 1.2

Explain the actual authority.

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1.8 PROMOTER AND PRE-INCORPORATION

CONTRACTS
When we are discussing about promoter and pre-incorporation contracts, two
questions arises are;
(i) Do those who form a company (called promoter) owe it or the other
shareholders any fiduciary duties such as the duty not to make personal
profits out of the promotion?; and

(ii) To what extent, if at all, is the promoter able to cause the company to enter
into contractual relationships prior to its existence?

These arrangements are usually referred to as pre-incorporation contracts.

1.8.1 Promoters
(a) The Promotion of a Company
(i) The term „promoter‰ is not defined in the Companies Act.

(ii) Case law indicates the necessity to show that the person concerned
contributed some essential element towards the incorporation of the
company.

Tengku Abdullah Ibni Sultan Abu Bakar & Ors v Mohd Laatiff bin
Shah Mohd & Ors and Other Appeals [1996] 2 MLJ 265, Gopal Sri Ram
JCA said:

„A promoter is one who starts off a venture- any venture- not solely
for himself, but for others, but of whom he may be one.‰

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(iii) Persons acting strictly in a professional capacity are not promoters, eg.
solicitors, valuers and accountants:

Bagnall v Calton (1877)

(iv) There are two types of promoters:
• Active promoter who undertakes the formation of a company by
carrying out the procedure necessary for incorporation; and
• Passive promoter who takes no active part in the incorporation of
a company and the raising of its share capital, but leaves this to
others on understanding that he or she is to profit from the
enterprise.

(b) The Promoter's Duties

The promoter owes a fiduciary duty to the company. And as a consequence
of this duty:
(i) The promoter must make full disclosure of any personal interest in the
promotion process; and accordingly; and
(ii) The promoter must disclose whether he obtained a profit as a result of
the promotion of the company concerned.

There are three basic fiduciary duties. These are owed to the company and
they are:

(i) A duty not to make a secret profit at the expense of the company. A
profit is not a secret if it is disclosed but the disclosure must be full
and frank.

The disclosure must be made to:

Ć An independent board of directors; or
Ć Existing and potential members as a whole (potential members
via the prospectus).

Note: „Independent‰ in this context would mean;

• Is a question of fact.
• Is satisfied where all the members of a private company are
aware of the facts and there is no intention to „go public‰.

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The above rule was too strict since an entirely independent board of
directors would be impossible in the case of most companies.

Fairview Schools Bhd v Indrani a/p Rajaratnam & Ors (no 2) [1998] Mahadev
Shakar JCA said:

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"Promoters have a legal duty not to make any secret profit out of the
promotion of the company without the company's consent and also to
disclose to the company any interest the promoters have in any
transaction proposed to be entered into by the company."

Disclosure to the same syndicate is not sufficient.

In such a case, information should be given in the prospectus.

(ii) Where the promotion has started the promoter must account to the
company for the benefit of any subsequent contract for the acquisition
of property which he or she intends to sell to the company, since this
belongs in equity to the company which can insist on taking it at cost.

Hichens v Congreve (1829)

Where the promoter acquired the property on his or her own account
before the commencement of the promotion it belongs to him or her in
law and equity and he or she can sell at a profit provided he discloses
the facts. If he or she does not make disclosure the contract is liable to
be rescinded.

Ladywell Mining Co v Brookes (1887)

(iii) A promoter must not exercise undue influence or fraud and in

particular must not hide his or her interest through a nominee.

Cavendish-Benetinck v Fenn (1887)

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1.8.2 Remedies for Breach of Promoter's Duties

Figure 1.5: Remedies for breach of promoter's duties

Figure 1.5 shows the remedies for breach of promoterÊs duties and discuss in
detailed below.

(a) Rescission
Equitable remedy is available to the company in respect of any contract
entered into as a result of non-disclosure or misrepresentation. It is
irrelevant that the promoters made no profit or had no dishonest motive in
respect of the contract.

The remedy must be exercised on normal contractual principles; the

company must not ratify the agreement and this remedy is not
available if the company is in liquidation.

The remedy may be unavailable to the company if any of the bars to

rescission apply:
(i) Affirmation
(ii) Lapse of time
(iii) Intervention of a third party right
(iv) Inability to make restitution in integrum
(v) The court's discretion under misrepresentation

Non disclosure of an interest in a contract by the promoter may

constitute fraud or misrepresentation.

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S17 Contracts Act 1950

- provides the definition for fraud.

(b) Accounting for the Undisclosed Profit

The primary remedy, if the profit is not disclosed, is rescission and a
financial remedy (if any) is usually a claim for damages, if there is the
basis for claiming damages at all.

NOTE: The court distinguished the Erlanger case on the

ground that, in that case, the appellant purchased the property
in order to sell it to the company and so the mines were
purchased for the company.

Therefore if the company finds out that the promoter has made a secret
profit, it can:
(i) Rescind the contract where the property belonged to him before he
started acting as a promoter.
(ii) Affirm the contract and claim damages if the promoter was the agent
of the company.

(c) Damages
Promoters may be liable for damages for misrepresentation inducing a
contract and not for breach of fiduciary duty as such.

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Re Jubilee Cotton Mills (1902)

Held:
The promoter was held liable in damages for taking an allotment of shares
as consideration for the sale of his property which was over-valued.

(d) Other remedies:

(i) Promoter could be liable in damages for negligent mis-statement.
Hedley Byrne v Heller & Partners Ltd (1964); and
Mutual Life and Citizens' Assurance Co ltd v Evatt (1971)
(ii) If the company is in liquidation, the liquidator may recover secret
profits and damages from the promoter even if what is recovered is
used to pay off all the company's debts.

1.8.3 Remuneration of Promoter

(a) Traditional way - obtain reward in form of profit made on property sold to
the company or some other ancillary transaction, provided disclosure was
made.

(b) A valid contract providing for remuneration of the promoter cannot be

enforced since the company has no capacity to enter into contract because it
has not formed yet.

(c) The company cannot ratify a pre-incorporation contract made on its behalf
to enter into a new contract with the promoter because past consideration is
no consideration at all.

(d) A promoter cannot be remunerated because the articles stated that he is

entitled to a certain sum for his services since this does not create a binding
contract between the promoter and the company.

(e) Today, the promoter's function is usually carried out by city issuing houses
whose remuneration would be disclosed in the prospectus.

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Conclusion to Promoters Duties

Much of the case law which is relevant to the extent and enforcement of a
promoter's duties is rooted in the mid to late nineteenth century, at a time at
which it was quite a common practice for newly incorporated companies to offer
shares to the general public. The duties imposed on promoters were a means by
which investors would be protected from any fraudulent attempt on the part of a
promoter to obtain undeclared and unwarranted profits from the promotion of
what was often an unknown and untested business entity.

In todays world the vast majority of public issues take place as a result of
established private companies electing to become public companies. As such, the
likelihood of fraud is less probable. Nevertheless, the protection of the investing
public is still necessary, especially in situations where offers for company
securities contain untrue or misleading information.

1.8.4 Pre-incorporation Contract

Prior to incorporation, the promoter(s) of a company will usually be required to
enter into contractual agreements appertaining to the future needs of the pre-
incorporation company. However, until a company is incorporated it will not
exist as a separate legal entity and therefore cannot be bound by contracts made
in its name or on its behalf.

A company, even after its incorporation, cannot expressly, or by conduct,

retrospectively ratify or adopt a contract made in its name or on its behalf.

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Neither the company, nor the party with whom the promoter originally
contracted, is obliged to enter into a new contract following the companyÊs
incorporation. However, it should be noted following the Court of AppealÊs
decision:

Rover International Ltd. V Cannon Films Sales Ltd. (1988)

Held:
Where a contract is entered into for the benefit of a company which is not
incorporated as of the date of the contract, then monies mistakenly paid by the
company to a third party in the belief that the contract was valid may be
recovered as against the third party.

Note: In addition, the court may grant a quantum merit award to the company
for services provided during the period in which the company was under
the mistaken belief that the pre-incorporation contract was valid.

SELF-CHECK 1.5

What is a pre-incorporation contract?

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1.8.5 The Liability of a Promoter

The common law „solution".

(a) General Rule

A contract which purports to be made by or on behalf of a non existing
company cannot be enforced by or against the company, and ratification by
the company is not possible.

(b) Liability for pre-incorporation personally at common law depended on how

the contract was signed. Until quite recently English law was governed by
what seemed two inconsistent decisions.

If the promoter was to be held liable for contract entered into before the
company was formed and which the company did not take over by
entering into a fresh contact to the same effect, could the promoter also
enforce that contract? This was a question which arose in:

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(c) For a long time it was thought that these two decisions were to be
distinguished by the form of the signature of the contracting parties
purporting to act on behalf of the respective companies.

In fact, their difference was well analysed in the Australian case of Black v
Smallwood (1996).

In Kelner v Baxter, the parties intended the promoters to be bound (this

could be inferred from the fact that they knew that the company had not yet
been registered).

In Newborne's case, on the other hand, both parties thought that the
company was contracting.

Legislative position
The common law position proved to be unsatisfactory.

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This section alters the common law position and a company become bound by
and is entitled to the benefit of a pre-incorporation contract where:
(i) Such a contract purportedly has been entered into by the company itself; or
(ii) Such a contract has been entered into by any person on behalf of the
company; and the company is incorporated thereafter and it ratified the
contract.

The case of Black v Smallwood (1966) illustrates what is meant by the phrase „a
contract purporting to be entered into by a company.‰

The case of Ahmad bin Salleh & Ors v Rawang Hills Resort Sdn. Bhd. [1995]
illustrates the phrase „a contract purportedly entered into by any person on
behalf of a company.‰

S35(2) - Where the company does not ratify the pre-incorporation contract as
provided by S35(1), the person or persons who purported to act in the name of or

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on behalf of the company shall be personally bound by the contract unless there
is an express agreement to the contract .

This section is subject to agreement to the contrary (i.e. the promoter might
exclude his personal liability if and when the company fails to enter into a
contract on similar terms). It has now been clearly established (the case below)
that such agreement must be express.

In the English case of:

(d) It is suggested that in practice the only acceptable form of exclusion of

liability would be one which sought to exclude the promoter from liability
once the company had been incorporated (i.e. following the subsequent
novation of the pre incorporation contract).

Once the company is incorporated it may become liable not under the
original contract but by a „novation‰ of the contract, whereby the
promoter's liability ceases and an identical contract is entered into by the
company.

ACTIVITY 1.8

What is the nature of the relationship between a promoter and the

company?

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EXERCISE 1.3

1. What are the legal consequences that flow from the relationship
between a promoter and the company he/she is incorporating?

2. What are the duties of a promoter?

• During the twentieth century and into the new century the company structure
has become the vehicle through which most business is conducted.
• It is well accepted that modern business if often very large and complex.
• A company is a creation of the law; it becomes a legal entity in its own right,
separate from its members and controllers.
• A veil of incorporation is created which surround the company, providing a
protective shield between it and its members.
• Because the company is one of the preferred legal structures for carrying on a
business, the law has recognised the necessity of allowing companies to enter
into contract.
• Companies enter into a variety of contracts on a daily basis, but it would be
rare situation indeed for a third party to deal directly with the entire board of
directors.
• Instead, contracts are usually entered into by one or more of a range of
employees of a company, including directors who may be action on behalf of
the company or as it s agents.

Agency Promoter
Apparent authority Sole propriertorship
Limited companies Unincorporated association
Ostensible authority Veilot corporation
Partnership

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T op i c X The Memorandum
of Association
2
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the importance of a Memorandum of Association in a
registered company;
2. Discuss the development of the ultra vires doctrine; and
3. Identify the legislative reforms in place of the common law doctrine
of ultra vires.

X INTRODUCTION
The memorandum of a company is primarily concerned with the regulation and
outward appearance of the company in respect of its dealing with third parties.

Where a provision in a company's Memorandum of Association (hereinafter

referred to as MA) conflicts with one contained in the companyÊs articles, the
provision in the memorandum takes preference.
Welton v Saffery
Where a provision in a company's MA is unclear, reference may be made to the
company's articles in an attempt to clarify the ambiguity.
(a) Section 21 Company Act 1965 (hereinafter referred to as CA) ă a company
may not alter the conditions contained in its MA unless the purported
alteration is permitted by a provision of CA 1965.
(b) Section 16 (1) CA 1965 ă Every company must have a memorandum of
association before it can be registered.
(c) The legal effect of a memorandum of association is governed by Section
33(1) CA 1965. This act also applies to the articles of association (discussed
in detail in Topic 3) Section 33(1) CA 1965 provides that:

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"Subject to the provisions of the (Companies) Act the memorandum and the
articles when registered bind the company and its members to the same extent
as if they respectively had been signed and sealed by each member, and
contained covenants on the part of each member to observe all the provisions of
the memorandum and of the articles."

2.1 THE CHARACTERISTICS AND CONTENT OF

THE MEMORANDUM OF ASSOCIATION
Table 2.1 explains the provision governing the MA.

Table 2.1: Provisions Governing Memorandum of Association

CA 1965 Provisions

A company may not alter the conditions contained in its MA unless the
S21
purported alteration is permitted by a provision of CA 1965.

S16(1) Every company must have a memorandum of association before it can be

registered.

The legal effect of a memorandum of association is governed by this act.

S33(1)
(This act also applies to the articles of association)

SELF-CHECK 2.1

Can a company alter conditions in the Memorandum of Association?

2.1.1 Compulsory Clauses

Section 18 of CA 1965 provides that the MA of a company limited by shares must
contain certain obligatory clauses. he obligatory clauses must include the
following information (Table 2.2).

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Table 2.2: Provisions Governing Compulsory Clauses of a Memorandum of Association

CA 1955 Provision
S18(1)(a) Name of the company.

S18(1)(g) Situation of the company's registered office.

Object clause of the company.

S18(1)(b)

S18(1)(d) Liability of the company's membership is limited.

S18(1)(c) A company having a share capital, the MA must specify the amount of share
capital with which it proposes to be registered and the division of the share
capital into shares of a fixed amount.

S18(1)(h) An association clause.

To distinguish the differences between a Memorandum of Association and

Article of Association visit the websites stated below:
• [Link]
• [Link]

2.2 CORPORATE CAPACITY – THE ULTRA

VIRES RULE
Let us now discuss the development of the doctrine of ultra vires in relation to
registered companies.
Although the doctrine of ultra vires (referred to as UV hereinafter) was modified
in England by the Companies Act 1985 and in Malaysia by the Companies Act
1965, it is still necessary to trace the development of the doctrine in order to
understand the full implications of the reforms.
The determination of a company's capacity to enter into contractual obligations
was historically dominated by the ultra vires rule.
The rule states that a contractual transaction which goes beyond a company's
corporate capacity is a void transaction. If it is held to be void, not even the
unanimous consent of the company's shareholders could validate the transaction.
In the early 19th century, with the growth of statutory companies, the question
arose as to whether they were to be treated in the same position as chartered
corporations. After some fluctuation of opinion a view came to be accepted that
they had the powers of a natural person except in so far as these were cut down
by their legislation or their objects clause.

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The roots of the ultra vires rule emanated from those cases concerned with
statutory companies which were formed, for example to construct public utilities,
such as railways and canals.

Such companies were restricted in terms of the legitimate business activities

which they could pursue by the particular statute which granted them corporate
status. Any act by a statutory company which contravened a limitation placed
upon its capacity would be deemed ultra vires and void.
A case of point is (Eastern Counties Railway v Hawkes).
In 1855, as a result of the introduction of a limited liability status for joint stock
companies, the legislature considered it necessary to offer some means of
protection for corporate creditors to curb the potential danger of investing capital
in enterprises which, as a consequence of their limited liability status, offered
investors minimal protection against the risk of insolvency; i.e. the limited
liability status of companies precluded the personal resources of a company's
membership being to pay off corporate debts.

The legislature introduced provisions into the Companies Act 1856 whereby
companies were obliged to register object clauses; these clauses were included
within the company's MA. An object clause had to specify a company's intended
business purposes.

Accordingly, prior to entering into a credit agreement with a company, a creditor

could inspect the company's object clause to discover its business purposes; an
investigation which could obviously have influenced a creditor's decision to give
credit or loan funds.

In Ashbury Railway Carriage and Iron Co. v Riche, the House of Lords
restrictively construed the Companies Act 1862 to hold that any matter not
expressly or impliedly authorised by a company's objects clause would be one
which would be beyond the capacity of the company.

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Note: It should be noted that this point was of considerable significance at the
time as there was no possibility of altering an objects clause form 1856 until 1890.
The immediate policy behind the decision seems to be that incorporation is a
privilege only to be granted in respect of the objects specified.

In other words, the court adopted the legal privilege model of incorporation. This
is extremely unrealistic, as the company can choose its own objects. The
underlying policy is far from clear-cut. There seem to be elements of investor
protection, creditor protection and public interest. These interests are not
necessarily reconcilable and have motivated the courts to different decisions at
different times, as we shall see.

The strict interpretation of the 1862 Act in Ashbury was further strengthened by
the application of the eiusdem generis rule of construction ă The objects which
were ancillary to the companyÊs main object were not to be given their true literal
meaning but were construed in conjunction with the main object.

Therefore, in Ashbury, an object which permitted the company to act as 'general

contractors' could not be read as implying that the company could engage in a
business as finance agents; although arguably the term 'general contractors' could
have covered that activity.

Instead, the object which permitted the company to act as general contractors was
construed in relation to the company's main object, namely, the company's
principal business purpose which was mechanical engineering.

Thus, the company could only act as general contractors in connection with the
business of mechanical engineering.

By acting as finance agents the company had acted ultra vires; the transaction
was void.

The justification for the HOLs' strict interpretation of the CA 1862, and indeed the
rationale for the UV rule, was couched in terms of both shareholder and creditor
protection.

The UV rule protected shareholders by allowing them a right to seek an

injunction to restrain the company from entering into an UV transaction, or if a
company's main object (substratum) had failed, by allowing a shareholder to
petition to the court for a winding-up order.

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This principle was sometimes called the main objects rule. The company's only
permitted object was its first and all other stated objects were only permitted as
incidental to the main object. It did not matter in the (German Date Coffee) case
that the company acquired a Swedish patent instead.

Alternatively, where a company acted beyond its capacity, the members of the
company, by the passing of an ordinary resolution, could demand the return of
the subject matter of the avoided contract, or where that was not possible, sue the
part (the constructive trustee) with whom the contract had been made.

Unsecured creditors, unlike shareholders, had no rights appertaining to the

enforcement of the UV rule, although a secured creditor was given the right to
seek an injunction to restrain the company from entering in to a UV transaction.
A case of point is a Cross v Imperial Continental Gas Association).

SELF-CHECK 2.2

Can an ultra vires act be constituted and an abuse of power?

2.2.1 The Development of the Ultra Vires Rule

The UV rule was not conducive to commercial business in so far as a person
contracting with a company was deemed to have constructive notice of the
companyÊs object clause.

A person who dealt with a company could not therefore subsequently complain
if a transaction, to which he was a party, conflicted with a companyÊs object
clause and was avoided by the company.

In an attempt to rectify the restrictive nature of the UV rule, the judiciary was, in
subsequent cases, to weaken the strict approach taken by the House of Lords in

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Ashbury. Shortly after this case, the HOL realised that its ruling had been
somewhat draconian, and in the case of A-G v Great Eastern Railway Co, it
relaxed the rule by recognising implied powers which were reasonably incidental
to the carrying out of the express objects.

AG v The Great Eastern Railway Co Ltd (1880) 5 App Cas 473

Held: It was legitimate for a company to pursue a course of business which
could be reasonably connected to its stated objects or, for that matter, to employ a
power, for example the power to borrow money, for the purpose of its business,
regardless of the fact that the particular power was absent from the company's
object clause.

In 1904, one of the most significant decisions in connection with the weakening of
the impeachable nature of the ultra vires rule took place.

Re David Payne & Co Ltd (1904) 2 Ch 608

Held: A borrowing by the company which was intended for a purpose which
was not stated in the company's objects clause was nevertheless held valid
because the lender was unaware of this proposed purpose. Here the subjective
concept of knowledge was introduced into the ultra vires doctrine. COA, in
affirming the decision of Buckley J, inflicted what should have been a fatal blow
on the Ashbury interpretation of the rule.

Prior to Re David Payne, it was thought that where a company employed a

legitimate power use but for a purpose not within its stated objects, then the exercise
of the power would be ultra vires and void. In this case that view was rightly
discarded by restricting the question of whether a power use was ultra vires to the
issue of corporate capacity, i.e. was the power in question capable of being used to
pursue the corporate objects? Did the capacity to employ the power exist?

Therefore, where a company was legitimately able to exercise the power in

question, the power use would be intra vires even if ultimately the purpose for
using the power was for some activity outside the company's objects clause.

In the case below the HOLs, albeit reluctantly, struck another nail into the coffin
of the UV rule by refusing to invalidate an objects clause, the effect of which
eradicated the main object clause rule enunciated in the Ashbury case. Another
way of avoiding this rule was to have a widely drafted objects clause with a
clause at the end ă sometimes called the independent objects clause, which
expressly authorised the company to carry on any of the stated objects as its main
object. This device was approved by the HOL in the case below.

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The Cotman type clause became a regular feature of object clauses. Due to the
removal of the substratum rule (main objects rule) companies began to include a
multitude of business objects within their objects clauses to hopefully expand
their corporate capacity and preclude the possibility of transactions being
challenged on the basis of the ultra vires rule.

The power of a shareholder to petition for the winding-up of a company on the

basis that the company's main object had failed remained intact.

In the case below the scope of a company's objects clause was further widened by
the approval of a clause which authorised the company to carry on any business
whatsoever which, in the opinion of the directors, could be advantageously
carried out by the company in conjunction with, or ancillary to, any of the
ventures specified in the objects clause.

Note: This case is also notable because it apparently recognised that if this
contract had been UV then neither party, not just the company itself, was
bound by it.

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2.2.2 The Confusion between Ultra Vires and an

Abuse of Powers
In relation to corporate capacity a transaction whilst not ultra vires may
nevertheless have been entered into as a result of an abuse of directors' powers.
The legal consequences flowing from such a transaction were explained in the
case below, namely, a transaction within the capacity of a company would
nevertheless be voidable where the third party had actual notice that the
transaction had been used to pursue something which constituted an abuse of
directors' powers (the third party with actual notice would be liable as a
constructive trustee).
A case on point is Re David Payne.
The confusion between ultra vires transactions and those which had taken place
as a result of an abuse of directors' powers became commonplace.

Note: No relevance to the issue of capacity (UV) but were questions connected
with whether directors of the company had abused their power in
allowing a particular transaction to proceed. The ascertainment of
corporate capacity should not have been concerned with the state of mind
of the officers of the company. In this case the implied power was capable
of being used to pursue the objects of the company and as such should not
had been declared UV.

The above decision became widely accepted as authority for determining whether a
power by a company involved an abuse of capacity, thus rendering the power UV.

The case on point is:

• Re Jon Beauforte Ltd. (1953) Ch 131
• Re Ward M Roith Ltd.

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The Principles associated with the Re David Payne case were to remain clouded
in confusion until the decision of Pennycuick J:

Confirmation of the judge's decision was given in subsequent cases, namely

• Re Halt Garages (1982) 3 All ER 1016
• Re Horsley Weight (1982) Ch 442

Rolled Steel Products Ltd. v British Steel Corporation (1986) Ch 264

Held: The court killed off any suggesting that the doctrine of UV was
interwoven with issues relating to directors' powers. Accordingly, transactions
which involved a dispute over the exercise of directors' powers, a director's
authority to exercise delegated powers or a director's duty to exercise powers
bona fide and for a proper purpose, had no place in the determination of a
company's capacity to act.

2.2.3 Statutory Reform of the Ultra Vires Rule

(a) The Position in England
The first statutory intervention was made following the recommendations
of the Cohen Committee report in 1945. By the Companies Act 1948,
Parliament made it possible for companies to alter their objects clause by the
passing of a special resolution (today - S4 CA 1985).

Whilst this reform gave companies more flexibility and scope to alter
thedirection of their corporate purposes, it obviously did not protect third
parties in situations where a company entered into a new type of business
venture without having altered its objects clause.

In 1962, the Jenkins Committee proposed an even wider reform to the ultra
vires rule, by suggesting that the doctrine of constructive notice should be
abolished. However, the committee's recommendations were not heeded.

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The statutory reform of the ultra vires rule was to remain sidelined until, as
a result of the UK's entry into the EC, the UK legislature was press-ganged
into action by being required to reform the UV rule.
Article 9 of the EC First Company Law Directive was passed. This section
later became S35 CA 1985 and later amended by the Companies Act 1989.

(b) The Position in Malaysia

The ultra vires doctrine has been modified by S20(1) Companies Act 1965
which provides that "No act or purported act of a company⁄⁄⁄.and no
conveyance or transfer of property ⁄⁄⁄.to or by a company shall be
invalid by reason only of the fact that the company was without capacity or
power to do the act or to execute or take the conveyance or transfer."
See: Executive Aids Sdn. Bhd. v Kuala Lumpur Finance Bhd. [1992] 1 MLJ 89
The company's lack of capacity or power may be relied upon under the
provisions provided in Table 2.3.

Table 2.3: Provision Governing a Company Capacity of Power

CA 1965 Provision
S20(2)(a) In proceedings against the company by any member, holder of debentures
secured by floating charge or the trustee of those debentures to restrain the
doing of any act or acts or the conveyance or transfer of any property to or
by the company;
S20(2)(b) In proceedings by the company or by any member of the company against
the present or formed officers of the company; and
S20(2)(c) Any petition by the Minister to wind up the company.
S20(3) This section provides that if the act is yet to be performed the court has
powers to restrain the performance thereof and to order compensation for
loss sustained by either party.

The High Court in the case of Pamaron Holdings Sdn. Bhd. v Ganda Holdings
Bhd.[1988] 3 MLJ 346 held that members, debenture-holders (or their trustees)

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and the Minister are the only persons who are entitled to raise the issue of ultra
vires under s20. This clearly means that outsiders are excluded.

The third party who has entered into ultra vires transactions with a company is
not without any remedies. They may sue:
Ć The directors personally;
Ć Sue on the guarantee, if any: Garrad v James [1925] Ch 616
Ć Rely on equitable doctrine:Sinclair v Brougham [1914] AC 38; and
Ć Exercise the right of subrogation to the position of intra virus creditors
where ultra vires loans have been used to discharge intra vires loans:
Cunliffe, Brooks & Co v Blackbum and District Benefit Building Society
(1884) 9 App Cas 857.

SELF-CHECK 2.3
Based on your understanding on the doctrine of ultra virus, do you
think there is any difference (if there is any) between statutory reform
of the ultra virus in England and in Malaysia?

ACTIVITY 2.1

Can you identify why the doctrine of ultra virus was amended?

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2.3 THE ALTERATION OF THE

MEMORANDUM OF ASSOCIATION

2.3.1 Powers of Alteration

The powers available to a company to alter the compulsory clauses of its MA are
shown in Table 2.4.

Table 2.4: Provious Governing Alteration of the Memorandum of Association

Act Provision
S23(1) CA 1965 States that a company may alter its name by means of a special
resolution. (Name)
Nil Jurisdiction
S31 CA 1965 Permits the members of a company to alter the company's
objects clause by special resolution. (Object clause)
CA 1965 A company may change its status provided it acts in accordance
with the relevant provisions of the CA 1965. (Status)
Nil A company may alter its share capital in a number of ways.
(Share capital)

2.3.2 Company Name

It is an offence to carry on business under a name which uses these words or

abbreviations when not entitled to do so - the penalty is a fine.

Under S26 CA 1965, it is not possible to register a company name which includes
the words "public limited company", "limited", "unlimited" or their abbreviations
anywhere except at the end of the name. There are also other restrictions on the
use of names:

(i) Under S22 CA 1965, a company cannot be registered under a name which is
identical to a name already registered.
(ii) A company cannot be registered under a name which is regarded as
offensive or where the use of the name would constitute a criminal offence.

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(iii) Companies Act does not prevent the registration of a name very similar to
that of another company - but if the similarity is deceptive and likely to lead
to confusion, the established business may bring an action to restrain the
new company from using the name. This is called a "passing-off" action.

Court will take into account:

Ć Scope of pursuer's reputation
Ć Similarity of kind of business

Cameron Real Estate Pty Ltd v Cameron [1985] ACLC 83

Held: The Supreme Court of the Australian Capital Territory granted an injunction
to prevent the promoters of a company from proceeding with the registration of 'Don
and Mary Cameron Realty Pty Ltd'. There was a real likelihood that it could be
confused with 'Cameron Real Estate Pty Ltd', a registered company carrying on a
business in the same industry and in the same locality.

Drilex Systems Private Ltd v Registrar of Companies

Held: The Singapore Court of Appeal held that under the Singapore Companies
Act, mere similarity of names was not a sufficient reason for the Registrar to
refuse to register a corporate name: there must be something making the
similarity undesirable. In this case, although the court found the names similar
and likely to cause confusion, there was no likelihood of financial detriment by
way of loss of business as the two companies were in entirely different industries.

In the case of Tan Geok Neo Jessie v Minister for Finance & Anor [1991] 2 MLJ
301, the High Court of Singapore held that the test applicable for similarity of
names is an objective test.

SELF-CHECK 2.4

Why are the powers available to a company to alter the compulsory

clauses in the MA?

ACTIVITY 2.2

Based on your understanding on what you have learnt, explain why

was the ultra vires doctrine reformed?

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EXERCISE 2.1

1. Explain the content and effect of a company's memorandum.

2. What are the remedies afforded to a third party who has
entered into an ultra vires transaction with a company?

• Every registered company must have a Memorandum of Association.

Memorandum regulates the company's external affairs.
• The purpose of a memorandum is to enable persons who invest in or deal
with the company to ascertain what its names is, what type of classification is
the company, what its objects, are what share capital it is authorised to issue
and whether its liability is limited.
• Any act outside the objects clause is ultra vires and void and a company
could not be sued on any such act and probably could not enforce it.
• This severely restricted the capacity of a company to make contract.
• The ultra vires doctrine therefore proved to be both unduly restrictive on
shareholders and a trap for unwary third parties. This common law doctrine
was finally reformed in England by the Companies Act 1985 and in Malaysia
by the Companies Act 1965.

Abuse of power
Memorandum of assosiation
Ultra virus

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T op ic 3  Articles of
Association
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the importance of articles of association as one of the
constitutional framework of a company;
2. Discuss the legal effect of articles of association; and
3. Review how the articles of association may be altered.

 INTRODUCTION
A company's articles of association are primarily concerned with matters
concerning the internal affairs of the company.

A company's articles will normally contain clauses governing matters relating to

the regulations of general meetings, the appointment and regulations of the
powers of company directors, class rights attached to shares, shares capital and
dividends and accounts and the capitalisation of profits.

3.1 THE CHARACTERISTICS OF ARTICLES OF

ASSOCIATION
SELF-CHECK 3.1

You have learnt what is meant by Memorandum of Association in Topic 2.

Can you now recall the purpose of having a Memorandum of Association?

If a company does not register its own individual form of articles in compliance
with S29(1) and (2) CA 1965, the contents of the companyÊs articles will be
determined by reference to the model form of articles found in Table A of the
Companies of the Fourth ScheduleÊs30 (Table A articles).

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Where a company registers its own set of articles and matters not dealt with
therein is contained within the Table A articles, reference will be made to the
Table A articles to determine the matter which was omitted.

Visit this website below to find an example of an Article of Association:

 [Link]

3.2 THE LEGAL EFFECT OF THE CORPORATE

CONSTITUTION
Contractual Nature of S33

Section 33(1) CA 1965 provides that:

"Subject to the provisions of the (Companies) Act the memorandum and the
articles when registered bind the company and its members to the same extent as
if they respectively had been signed and sealed by each member, and contained
covenants on the part of each member to observe all the provisions of the
memorandum and of the articles."

Although the wording of this section stipulates that the articles and the
memorandum, when registered, bind the company and its members, and the
section only provides that the articles and memorandum are binding „to the same
extent as if they respectively had been signed and sealed by each member‰; i.e.
there is no mention of the fact that the company as a separate legal entity is
bound as if it had signed and sealed the articles and memorandum.

The effect of S33 of the CA 1965 is to create a binding obligation on the members
in their dealings with the company, between the members themselves and on the
company in its dealings with the members.

Those who are not members cannot enforce the provisions either against the
company or for themselves and a member cannot enforce the provisions for his
benefit in some other capacity that of member.

This means that the memorandum and articles operate as a contract binding on:
(a) The company and its members; and
(b) The members amongst themselves.

This section is important in determining:

(a) The manner in which the memorandum and articles of association are to be
interpreted;

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(b) The rights of the company and its members to require compliance with the
memorandum and articles of association; and
(c) The consequences of a failure, by some person who is bound by them, to
comply with the memorandum and articles of association.

3.2.1 Obligation Enforceable between Members Inter

Se
Although S33 the Act does not expressly impose an obligation on members in
their dealings with each other, it is treated as a contract between them, which is
enforceable under normal principles of contract law, without the need to pursue
the action through the company.

The principal justification for this view is that the company should not become
involved in what would essentially be a dispute between its members ă i.e. the
company should not be involved in unnecessary litigation.

This can be found in those cases which have enforced pre-emption rights between
members of a company, i.e. rights contained within the articles which provide
that if a member wished or is compelled to sell his shares he must first offer them
to existing members of the company.

Disputes between members of a company which involve obligations created

entirely outside the framework of the internal corporate relationship are not
enforceable in accordance with S33 in so far as such disputes would not be
concerned with the constitutional rights of the membership.

In the case of Beh Chuan v Paloh Medical Centre Sdn Bhd & Ors, it was held by the
High Court of Ipoh that to ensure that the terms of the shareholders' agreement shall
bind the shareholders inter se under the Companies Act 1965, it would be necessary
to incorporate them into the articles of association of the company.

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In Chung Khiaw Bank Ltd v Four Seas Communication Bank Ltd. Case,
Singapore Court of Appeal held that the articles of a company constituted a
contract only so far as they concerned the company and the members in their
capacity as members. The articles did not apply to business transactions
undertaken by the company in its capacity as trader, such as transactions of
lending money on security which could be undertaken with non-members.

3.2.2 Obligations Enforceable by the Membership of

a Company
Most of the controversy associated with the interpretation of S33 CA 1965,
concerns the extent by which obligations within a company's articles may be
enforced by members of the company against the company.

One class of obligations for which there is no dispute as to a member's right of

enforcement are those obligations which may be regarded as pure membership or
insider rights.

Such rights are common to all the members of any given class of shares.

Examples of insider rights include:

(a) The right of a member to insist that once a company has declared a dividend,
the dividend should be paid in accordance with the terms of the articles.

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(b) The ability of a member to enforce a right to a share certificate:

Burdett v Standard Exploration

(c) The right of a member, once a company has paid its creditors, to a return of
capital on winding-up of a company:
Griffith v Paget

(d) On a valid transfer on shares, the right of a member to have his name
entered in the register of members:
Re British Sugar Refining Co.

(e) The entitlement of a member, holding voting shares in a company, to

exercise his vote at company meetings in anyway he wishes:
Pender v Lushington (1870) 6 Ch D 70

c.f

The outcome of a vote is detrimental to the interests of the company as whole; the
resolution to which the vote relates may be set aside.

A member's entitlement to enforce a right to vote may be lost where a resolution

to which the vote related was concerned with a matter of internal procedure as
opposed to a substantive issue affecting the constitutional rights of the
membership:
MacDougal v Gardiner

Note: This decision may be a dangerous precedent to follow in that it most

certainly distorts the protection of a basic membership right, i.e. the right to
vote (but note that the decision in MacDougal was followed in the Cotter v
National Union of Seamen (1929) 2 Ch 58 and an even more exceptional
example of the court's ability to refuse a member's entitlement to vote may
be found in the Standard Chartered Bank v Walker .

3.2.3 Obligations Not Enforceable by the Membership

of a Company (Unenforceable Rights)
Other obligations contained within the company's constitutional documents
which may be termed „outsider rights‰ are generally regarded as unenforceable.

Outsider rights are obligations which do not relate to the collective constitutional
rights of any given class of shareholder.

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An „outsider right‰ may be directly enforceable in a situation where the enforcement

of the right necessarily involves the enforcement of 'insider right', or directly
enforceable in a situation where the outsider right is supported by a separate contract.

The generally accepted view that an „outsider right‰ is not enforceable in

accordance with S33(1), owes much to the comments of Ashbury J in Hickman v
Kent and Romney Sheep Breeders Association Ltd.

A case on point is namely Browne v La Trinidad.

The indirect enforcement of „outsider rights‰:

(a) No privity of contract (S33) exists between a company and a non-member of
the company. Therefore, it is clear that an obligation contained within the
memorandum or articles which purportedly confer some form of right on a
non-member of the company will be unenforceable by the non-member.
(b) Where the 'outsider right' is held by a member of the company, the right,
whilst unenforceable in respect of the generally accepted judicial
interpretation of the S33, may in certain circumstances be held to be
indirectly enforceable.
(c) Where outsider rights have prima facie been enforced, the right in question
has usually been one associated with the management of the company, and
i.e. the right may belong to a corporate office such as a directorship. For
example in the case of:

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See also:
 Rayfield v Hands
 Re Harmer

Academic theories which have attempted to explain cases in which the

enforcement of an apparent outsider right has been allowed have resulted in two
different lines of thought. The two theories, namely Theory A and Theory B may
be identified in the following Table 3.1.

Table 3.1: Theory A and Theory B

Theory Explanation
A member of a company has the right to enforce any obligation contain
within the company's MA or AA, irrespective of whether the right is an
Theory A „insider‰ or „outsider‰ right. However, the member must sue qua member
and the enforcement of the obligation must constitute something more than
the enforcement of an irregularity.
A member of a company has the right to enforce any obligation contained
within the company's MA or AA, Nevertheless, where the member seeks to
enforce and 'outsider right' he can only do so where he sues qua member
Theory B and the right is essential to the proper functioning of the company or an
organ of the company; i.e. the right in question relates to the ability of a
company to function within the constitutional framework of its own
regulations and regulations imposed upon it by statue.

It is submitted that a common factor, in seeking to explain those cases in which

outsider rights have been apparently enforced, is one which is based on the
premise that the underlying nature of the so-called outsider right is an essential
constituent of a pure membership right.

Eley v Positive Government Security Life Insurance

c.f.
Quinn & Axten v Salmon

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3.2.4 Obligations Enforceable by the Company

Obligations contained within a company's articles which seek to regulate the
relationship between the company and its membership is enforceable by the
company.

A company may also rely on provisions in its article to deny the existence of an
internal contractual relationship.
Kerr v John Mottram Ltd.

3.3 ALTERATION OF ARTICLES

You have learnt the importance of both the Memorandum of Association and
companyÊs legislation. Think of the following question before proceeding to the
next topic. Can an article of association be altered without reference to the MA or
Companies legislation?

3.3.1 The Power of Alter a Company's Articles

By S31 CA 1965, a company may alter a term of its articles by the passing of a
special resolution, i.e. by a three-quarters majority vote.

S31(2): any alteration or addition to the articles is as valid as if originally

constrained in the articles.

A company may not alter its articles where the effect of the alteration would be
inconsistent with the terms of the company's memorandum or with a provision of
the Companies legislation.

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3.3.2 Determining a Valid Alteration

For a company's article to be validly altered, the alteration must comply with
certain judicial requirement which have been formulated to safeguard minority
interests. As such, an alteration of a company's articles must not be retrospective
in its effect. Case on point is Swaeby v Port Darwin Mining Co. (1889).

An alteration of a company's articles to be made bona fide for the benefit of the
company as a whole. This rule is necessary to prevent a majority of three-quarters
of the membership from adopting an article by which the majority could seek to
gain an advantage at the expense of the minority of the membership.

This rule does not curtail the basic principle that a shareholder should be able to
exercise his vote in the manner he so pleases; but it does enable the court to
challenge the outcome of a vote when the totality of the vote is considered to be
contrary to the benefit of the company as a whole.

Whether an alteration of a company's article is bona fide for the benefit of the
company, the courts have adopted a two part test as shown in Figure 3.1.

Figure 3.1: The two test to alter a company's article

Due to the general reluctance of the courts to interfere in the business decisions of
a company, the majority of the decided cases emphasise the importance and
predominance of the subjective element of the test over the objective part of the
test. A case on point is Shuttleworth Cox Bros & Co Ltd (1927).

While the effect of an alteration to a company's articles may cause some

disadvantage to minority interests, disadvantage alone is not sufficient to warrant
a declaration that the alteration was invalid.

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Tong Kok Chai v Ocean Front Pte Ltd & Anor [1988]

Held:
The judge granted an interlocutory injunction to prevent a proposed amendment to the
articles of association as it was not 'bona fide for the benefit of the company as a whole.

In applying the objective part of the test, the court must divorce itself from a
consideration of the personal motives which may have influenced a three-
quarters majority of the membership to accept the proposed alteration.

The court must weigh up the advantages and disadvantages of the alteration in
terms of its effect on the rights of those who claim to be prejudices by the
alteration. On the other hand, the court must consider the potential benefit which
the alteration may have been calculated to produce for the company as a whole.

c.f.
Clemens v Clemens (1976)

In cases where the courts have invalidated a proposed alteration of a company's

articles, the alteration has been set aside on the premises that its intended effect
was aimed at producing an inequality as between holders of shares of the same class.

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In RE Petrotech Logistics Pte. Ltd. [1982], it was held that tthe alteration of
articles was held invalid. This is because by altering the articles of association,
the company was trying to expropriate the member's shares.

In the case of Pang Ten Fatt & anor v Tawau Transport Co. Sdn. Bhd. & Ors
[1986], the judge said"S31 provides the manner and circumstances under which
articles of association can be amended but it cannot withdraw the rights and
privileges given by the company to anyone who is a shareholder."

See also
Peters' American Delicacy Co. Ltd. v heath [1939]

Australian position:

In the case of Gambotto v WCP Ltd. (1995), the Courts rejected the test laid down
in Allen's case. The court said that different test applied and this depends on
whether or not an alteration involved „an actual or effective expropriation of
shares or of valuable rights attaching to shares.‰ Where an alteration did not
involved an expropriation of shares the alteration will be valid unless it is either
beyond any purpose contemplated by the constitution or oppressive.

3.4 ENFORCEABLE OBLIGATIONS WHICH ARE

OUTSIDE THE SCOPE OF A COMPANY'S
ARTICLES
3.4.1 Introduction
Members or non-members of a company may enter into a separate enforceable
contractual agreement with the company, the terms of which would have been
unenforceable had the member or non-member sought to rely on the inclusion of

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such terms within the company's memorandum or articles i.e. where reliance had
been placed on S33(I) CA 1965.

A separate contractual agreement of this type allows terms otherwise regarded as

outsider rights to be enforced by the means of the separate contractual
agreement.

3.4.2 Directors' Service Contracts

For example, separate contractual agreement which, if it had been contained
within the company's articles, would ordinarily be viewed as giving rise to an
outsider is right, is a director's service contract.

The terms of a director's service contract are set out in an independent service
contract; the director concerned will be able to pursue an independent claim for
damages in a situation where the company breached the terms of the agreement.

Where a director's service contract is silent as to a specific matter. For example,

the length of the service contract, the term may be implied into the independent
service contract in a situation where the term was included within the company's
articles. (Read v Astoria Garage (Streatham) Ltd. (1952))

The appointment of a person to a directorship is not of itself evidence of an

independent contract between the director and company. (Newtherapeutics Ltd.
v Katz (1991))

Note: A person's appointment to a directorship, the newly appointed director

will be bound by the provisions of the company's articles even in a situation
where the director is a non-member of the company.

Anglo Austrian Printing & Publishing Union (1892)

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Where the articles of a company provide a specific procedure for the

determination of, e.g. director remuneration, a director who claims to rely on
such terms must establish that they were complied with in their entirety.

Where there is a separate service contract between a director and the company
and certain terms of the company's articles are impliedly incorporated into the
service contract, a valid alteration of the company's articles may have the effect of
altering the implied terms of the service contract i.e. the new terms of the articles
may be impliedly incorporated into the director's service contract.

A director's service contract expressly contains terms which are also included
within the company's articles, an alteration of the articles will not have the effect
of altering the terms contained within the director's service contract. Here the
terms of the service contract remain separate and severable from those contained
within the altered articles.

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3.4.3 Remedies for Breach of an Independent

Contract
Where the terms of an independent contract between a company and a third
party (a member or non-member) are contained within the company's articles, the
performance of such terms may be threatened by the company altering its
articles; i.e. if the articles are altered to deny the performance of the contractual
obligation.

While a company should not be able to escape the consequences of breaching a

contractual obligation, on the other hand it cannot be restrained from altering its
articles in accordance with the relevant provisions of the CA 1965.

Accordingly, although a third party may be entitled to claim damages for a

resulting breach of contract, it should not be possible for the third party to obtain
an injunction to prevent the breach occurring, i.e. to prevent the alteration of the
articles or to prevent a company from adhering to its altered articles was held in
the case of:
 Aunt v Symons & Co Ltd;
 Punt v Symons & Co Ltd. (1903); and
 British Murac Syndicate v Appleton Rubber Ltd. (1915).

Held:
An injunction was granted to prevent a proposed alteration of a company's
articles.

Note: In reaching this decision Sergeant J mistakenly construed the CoA's

decision in Baily v British Equitable Assurance Co (1904) as running
contrary to the principles enunciated in Punt v Symons.

Membership Agreements
(a) The shareholders of a company may lawfully bind themselves by way of an
independent membership agreement to act to vote in a specific way on
issues governed by the terms of the agreement.
Greenhalgh v Mallard (1943)
(b) The membership agreement purports to bind the entire existing
membership of the company.
(c) The agreement seeks to regulate the internal affairs of the company so that
those party to its terms must unanimously agree on matters covered by the
agreement.

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Breckland Group Holdings Ltd. v London & Suffolk Properties (1989)

Note: In this way, the concept of majority rule may be dispensed with
because if the agreement affects the totality of the membership each
member will have equal role in the company's decision-making
process.

(d) A shareholder agreement creates class rights; such rights are in addition to
class rights contained in the company's constitutional documents.

(e) The effectiveness of a membership agreement, in terms of its ability to

influence the outcome of a given vote, will normally be dependent on the
number of members bound by its terms.

(f) Problems relating to the validity of a membership agreement may arise in a

situation where the vast majority of a company's membership is bound by
an agreement, the terms of which conflict with a company's freedom to act
in accordance with one of its statutory powers.

E.g: The statutory power to alter the term of its article by the passing of a
special resolution. Where a provision in a company's articles conflicts
with the exercise of a statutory power, the provision will be invalid.

Re Peveril Gold Mines Ltd. (1898)

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(g) Can the same be said of a provision contained within a membership

agreement?

ACTIVITY 3.1
1. Why would a shareholder wish to use a shareholders'
agreement?

2. What is the purpose for having a memorandum and articles?

EXERCISE 3.1
To what extent, if at all does S33 Companies Act 1965 gives a member
enforceable contractual rights against a company? Does S31 of the Act
render any such rights illusory?

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 The constitution of a company is based on two important documents. The

articles of association govern the internal regulations.
 The legal effect of the articles is that there is a binding contract.
 This involves the rights and duties of the members in their dealings with each
other and with the company.
 However legislation provides that the articles may be altered and cases
suggest that it must be „bona fide for the benefit of the company.‰

Articles of association
Director service contract
Independent contract
Insider right
Outsiders rights

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 Topic X Legal Incidents
of Membership
4
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the importance of determining membership;
2. List the ways in which a person may become a member and
the relevant statutory provisions; and
3. Discuss the statutory application of S181 (1) Companies Act
1965.

X INTRODUCTION
This topic is concerned with the members of a company. The concept of a
company as an association of persons is a constant theme in company law.
Because fundamental rights and duties arise on becoming a member of the
company, it is important to determine whether a person has become a member.
This topic will examine the ways in which a person can become a member and
the persons who can become members.

4.1 DEFINITION OF MEMBER AND

RESTRICTIONS ON MEMBERSHIP
Who can be a member of a company?

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A company limited by shares usually has its shareholders as members. However,

company limited by guarantee does not have its shareholders as members. The
reason for this is because the company does not have a share capital.

It is important to know whether a person is a member of a company or not for

various reasons such as entitlement to vote, entitlement to dividends, liability for
class or the capacity to bring a statutory derivative actions or an action in
oppression.

A company may be a shareholder (member) of another company. However, there

are restrictions on a company holding and acquiring its own shares, and
acquiring control over its own shares.

A person under 18 years of an age (a minor) may be a member of a company.

This is subject to the rules of contract law. A minor's contract to take shares is
voidable by him before or within a reasonable time after he attains the age of 18.
If he/she avoids the contract then he /she cannot recover the money paid for the
shares unless there has been a total failure of consideration for which the money
was paid.

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4.2 DISTINCTION BETWEEN A MEMBER AND

SHAREHOLDER
A person may be a shareholder but does not necessarily mean he or she is a
member. A shareholder whose name does not appear in the register of members
is not a member and cannot exercise the rights of membership.
Ayer Molek Rubber Co Bhd & Ors v Insas Bhd & Anor

A person ceases to become a member if he/she dies, becomes bankrupt or is

incapable of administering his or her own affairs. The personal representative
may replace the person who has ceased to become a member.

4.2.1 Register of Members

Table 4.1 and 4.2 explains the provisions governing registration of members.

Table 4.1: Statute Governing Registration of Members

CA 1965 Provision
This section provides that all companies must keep a register of their
S158 (1)
members which contains certain prescribed information.

This section provides that the register must be kept at the company's
registered office and its principle place of business. Alternatively, the
S159 register may be kept at another office of the company, at the other
office if it is made up by another person. These must all be within
Malaysia.

This section provides that the register of members is prima facie

S158 (4)
evidence of any matters inserted in that register.

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The Australian case of Re Clifton Springs Hotel Ltd illustrates the importance of
inserting a person's name on the register for the purpose of determining his/her
liability or contribution towards the company.

Table 4.2: Provisions Governing Registrations of Members

CA 1965 Provisions
This section provides that if S158 is not complied, it is an offence by a
S158(7) company and any of its officers who are in default.
This section provides that the register may be inspected by members
S160(2
or any other person.
This section provides that if any person requests for a copy of extracts
S160(3)
of the register, the company must comply.
This section provides that a list of members must be included in a
S165(1)
company's annual return.
This section provides, inter alia, that persons whose names appear in
the record of depositors that is maintained by the central depository
S107B(1)
pursuant to S35 of the Securities Industry (Central Depositories) Act
1991 shall be deemed to be members.
This section provides that the company will not be obliged to enter
into the register of members as required and maintained by the
S107B(2)
company with respect of those depositors who names are found in the
record of depositors.
This section provides that unless the name of the depositor appears in
the record of depositors not less than three 'market' days (Any day
S107(3)
between Mondays and Fridays, which is not a market holiday of the
Bursa Malaysia or public holiday.
This section that before the general meeting of the company, he/she
shall not be regarded as a person who is entitled to attend, speak and
S107B(5) vote at any general meeting of the company. Although this section is
contrary to S148(1) which provides, inter alia, that every member has
a right to attend, speak and vote at any general meeting of the
company.

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The court have an inherent jurisdiction to rectify the register for section.

Allied Properties Sdn Bhd v Semua Holdings Sdn Bhd & Ors

The case of Central Securities (Holding) Bhd v Haron bin Mohamed Zaid is
significant to the application of S162.

The principles above were applied in cases such as inter alia Majujaya Holding
Sdn Bhd v Pens-Transteel Sdn Bhd.

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4.2.2 Who Constitutes an Aggrieved Person?

In the case of Allied Properties Sdn Bhd v Semua Holdings Sdn Bhd & Ors it was
held that the agents (the nominees) of the applicant who is the ultimate beneficial
owner of the shares to be registered is the person aggrieved by the refusal of the
first respondent to register the shares in either its name or that of its nominees.

In the case of Sing Eng (Pte Ltd v PIC Property Ltd) it was held that shares
cannot be registered in the name of nominees.

4.2.3 Rectification of the Record of Depositors

4.2.4 Share Certificates

A share certificate is prima facie evidence of the title of a member to the number
of shares specified: S100 (1). Share certificate enables the company to identify its
members. A company will generally require production of the certificate before
registering a transfer or transmission of shares.

Under S100(2), a share certificate must state:

• The name of the company and the authority under which it is constituted;
• The address of the registered office in Malaysia or the address of the branch
office if the certificate is issued at a branch office; and

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• The nominal value, the class of shares and the amount unpaid on the
shares.

In the case of Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kin Leng & Ors,
Jemuri SCJ of the Supreme Court indirectly considered the application of s 100. In
referring this section the judge commented that;

"Under S100(1) of the companies Act 1965 a certificate under the common or
official seal of the company specifying any shares held by any member of the
company shall be prima facie evidence of the title of the member to the
shares⁄.in the present case the company had succeeded in establishing that the
resolution was invalid and the seal of the company was affixed without
authority, in both cases in flagrant violation of arts 54 and art 55, respectively.
Section 100 does not apply in much the same way and for the same reasons
estoppel does not avail the respondents. What the company never did and what
is not attributed to the company does not in law bind the company."

Provision governing share certificates are shown in Table 4.3.

Table 4.3: Provision Governing Share Certificates

Act Provision
This provision requires a company to complete and have ready for
S107(1) delivery a share certificate, within two months of an allotment of
shares or within one month after a transfer of shares is lodged with the
company.
This provision further provides that non compliance of these is an
S107(2)
offence.
This provision provides that an applica tion may be made to the court
S107(3)
for an order compelling the company to issue a share certificate.
This provision also provides that a company need not issue a share
S107(1) certificate where it is entitled not to do so. And it will be so entitled if
it refuses to register a transfer.

4.2.5 Liability of Company for Issuing Incorrect Share

Certificate
A share certificate is not a contractual document but merely a certification by the
company of the information contained. The issue of a share certificate may give
rise to an estoppel against the company. The company cannot deny the truth of

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the certificate against a person who has relied on the certificate and in
consequence has changed his position. This is illustrated in the following case.

(a) Where a certificate states that a shareholder has fully paid shares when in
fact they are partly paid, the company is also estopped form denying that
they are fully paid. This means that the company is unable to make a call on
the shares.

Burkinshaw v Nicholls
(b) Estoppel operates against a company only where someone has change
position in reliance on the certificate. Someone who has knowledge of the
truth cannot rely on estoppel.
Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kim Leng & Ors
(c) There is no estoppel in favour of a person who procures the granting of a
certificate on a forged transfer or forged power of attorney even if he has
acted in good faith. The company may be able to claim indemnity from such
person.
(d) The company may be estopped from denying the title to shares of the
person to whom it has issued a share certificate.
Balkis Consolidated Co Ltd v Tomkinson
(e) The company may also be estopped from denying the amount stated to be
paid up on shares in which it was held that statements in the constitution,
which also appeared in share certificates as to the amount paid up on shares
could not be contradicted by the liquidator.
Bloomenthal v Ford [1897] A.C 156 cf Waterhouse v Jamieson
(f) The company may be made liable in damages to the person who has relied
on the statement in the share certificate.
Clavering, Son & Co v Goodwins, Jardine & Co Ltd

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(g) The company is not estopped where a certificate is a forgery.

Ruben v Great Fingall Consolidated

4.2.6 Transfer of Shares

The general rule is that shares are freely transferable which is an important
characteristic of a company over a partnership. Shares are transferable as
provided by the Table A Art 98.

There is a distinction between a transfer of shares and a transmission of shares. A

transfer is by the act of the member, while a transmission occurs by operation of
law on the death or the bankruptcy of a member. The directors' approval is not
necessary for the transmission of shares.

The result of a transfer is that the transferor ceases to be a member if the entire
shareholding is transferred and the transferee becomes a member of the company
after the name is entered in the register of members.

Restrictions on the transfer of shares are desirable where the identity of members
is important. Existing members may wish to restrict membership to persons
known to them or approved by them. Public companies allow a free transfer of
shares.

(a) Instrument of Transfer

In the case of Ayer Molek Rubber Co Bhd & Ors v Insas Bhd & Anor the
Court of Appeal held that the respondent should have brought to the
attention of the trail court that fact that a purported transfer of shares is not
possible when there is no delivery of a proper instrument of transfer of
shares to the company as required by the above section.

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Figure 4.1: Provision relating intrument of transfer under Table A

Based on Figure 4.1 it can be comcluded that the transferor remains the holder of
the shares and a member until the transfer is registered and the name of the
transferree is entered into the register of members. Table 4.4 shows the
provisions governing instrument of transfer.

Table 4.4: Provisions Governing Instrument of Transfer

CA
Provisions
1965

S104(1) This provision provides that the transferor to require the company to register
the transfer in the same manner as if the transferee had made the application.

This provision provides that an instrument of transfer is deemed to be

S106(4)
certificated if it bears the words 'certificate lodged' or words to that effect.

This provision provides that the certification constitutes a representation by

the company to any person acting on the faith of it that such documents as on
S106(1)
the face of them show prima facie title to the shares to the transferor named in
the instrument of transfer, have been produced to it.

(b) Restrictions of Transfer of Shares

Every shareholder has a right to transfer his shares to whom he likes, unless
the articles provide to the contrary. This was stated in the case of WestonÊs
case.

Recognises that a company may restrict the transfer of its shares and in the
vastm majority of companies, which are private companies; there must be a
restriction on transferability. Such restrictions usually fall within one of the
two categories: pre-emption clauses and refusal clauses.

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Discretion to Restrict the transfer of shares may be conferred to the

directors by the articles to refuse to register a transfer or give the existing
members right to take up the shares sough to be transferred, in proportion
to the shares alreadyheld by them. (Rayfield v Hand).

Any restriction contained in the articles must be clear and unambiguous.

The courts will construe the restriction narrowly even though expressly
provided by the articles. This was held in the cases of Greenhalgh v Mallard
and Arunachalam & Ors v Kwality Textiles (M) Sdn Bhd.

In the case of Greenhalgh v Mallard, it was held that the shareholders who
agreed to vote in a certain way were under no obligation to retain their
shares and there was no continuing obligation running with the shares.

In addition to containing pre-emption clauses, the articles of a private

company usually contain articles that directors may, in their absolute
discretion and without assigning any reason therefore, refuse to register
any transfer of any shares. If the share is transferred in breach of the pre-
emption clause then directors have no power to register the transfer- no
question of discretion arises.

While the directors have a discretionary power of refusal they must, as with
all their other fiduciary powers;
(i) Act within the terms of the power and
(ii) Act bona fide in what they consider to be the interests of the company
and not for a collateral purpose.

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Kesar Singh v Sepang Omnibus Co Ltd., & Allied Properties Sdn. Bhd. v
Semua Holdings Sdn Bhd & Ors

Where the power is unrestricted the Courts, in considering whether the directors
have so acted bona fide for the benefit of the company use the presumption that
the directors have been acting in good faith and the onus of proving the contrary
is therefore on those challenging the decisions.
Re Smith & Fawcett Ltd

The case of David Hey v New Kok Ann Realty Sdn Bhd states that the time frame
specified in S105 is not a mandatory requirement but merely a directory one and
need not be complied with strictly where a good reason can be advanced for its
non-compliance.

It is extremely difficult to challenge a refusal if the articles do not require the

directors to disclose the grounds or reason for a refusal to register a transfer as
seen in the case of Arunachalam & Ors v Kwality Textiles (M) Sdn Bhd.

If the articles empower the directors to decline to register transfers on certain

grounds e.g. on the ground that the transferor is indebted to the company, or
interrogated on the ground on which they have refused registration, although
not as to the reasons for their refusal, unless the articles provide that they shall
not be bound to specify the ground for their refusal, in which case they cannot be
interrogated at all.
Berry and Stewart v Tottenham Hotspur Football Club Co Ltd.

Where the articles of a company empower it to refuse to register a transfer of

shares in particular circumstances, the courts will strictly examine the articles in
order to determine whether the refusal was authorized. Where directors give
reason for refusal to register the transfer the court may consider whether the
reason give are sufficient.
Lim Ow Goik & Anor v Sungei Merah Bus Co Ltd.

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Articles that require the directors to pass a resolution refusing to register a

transfer, the transferee is entitled to registration unless the directors actually
resolve as a board to reject registration.
Moodie v W & J Shepherd Ltd.

The insertion of Div A, which is a new division of CA 1965, has resulted in the
enactment of S107A, B, C, D, E and F.

With the rules (Securities Industry Central Depository) of the central depository.
This is not withstanding SS103 and 104.

The central depository system is managed and established by the Malaysian

Central Depository Sdn Bhd. This is a subsidiary of Bursa Malaysia.

SISDA provides the legal framework and safeguards for users and participant of
CDS. Scripless trading environment has been created due to the immobilization
of physical transfer of scrip or shares certificated for the Bursa Malaysia. The
effect of this is that it reduces the risk of share certificate fraud.

4.2.7 Liability of Members

Although members are contractually bound under S33(1), the members are not
bound by an alteration made after they became members, where the alteration
requires them to take more shares or increase their liability to the company
unless otherwise they agree in writing: S33(3). Table 4.5 list the provision
governing lialibility of members.

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Table 4.5: Provisions Governing Liability of Members

CA 1965 Provisions
This provision provides that the liabilities of members in a
S214(1)(d) company limited by shares are limited to the amount, unpaid
amount of shares.
This provision provides that members are liable to pay calls as
S33(2)
if they were debt due under a deed, where the company has
issued partly paid shares.
This provision empowers the directors to make [Link]
Table A, Art 13 are forfeited if a member holding partly paid shares does not
pay when a call is made.
This provision provides on a winding up of a company, every
present and past member is liable to contribute to the
S214 property of the company to an amount sufficient for payment
of debts, costs of winding up and adjustment of rights as
between its contributories.
This provision however, provides that a past member who
S214(1)(a) has ceased to be a member for more than one year prior to the
commencement of winding up is not liable to contribute.
This provision provides that a past member is not liable to
S214(1)(b) contribute in respect of any debts or liabilities incurred after
he or she ceases to be a member.
This provision provides that a post member is liable to
S214(1)(c) contribute where it appears to the court that the existing
members are unable to satisfy the companyÊs debts.
This provision provides that in event of a company winding
up, the liability of a member of a company limited by
S214(1)(e)
guarantee is limited to the amount guaranteed by the member
to the property of the company.
This provision provides that the liability of the contributories
is dependant upon the nature of the debt at the time of their
S215
liability commenced but payable from the time calls are made
enforcing the liability.

4.2.8 Cessation of Membership

Where shares are transferred or the transfer is duly registered and the transferor
ceases to be a member. This is also applicable when the member dies.

A person also ceases to be a member in the following circumstances

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• Forfeiture on non payment of calls.

• Surrender of shares.
• The company's power of lien.

4.2.9 Substantial Shareholder

Note: S69B (a) provides that a company whose shares are listed for quotation on
the official list of the stock exchange.
S69B (2)(b) provides that the company is a public company.

This enables directors and shareholders to ascertain the identity of holders of

large numbers of shares and the extent of their shareholdings.

Under Div 3A of Part IV of the Act, voting share interest are required to be
disclosed.

S6A(2) - S6A(10) lays down the relevant provisions outlining what constitutes
'interests' within the substantial shareholder provision.

4.3 THE RELATIONSHIP BETWEEN MEMBERS

AND THE BOARD OF DIRECTORS
The division of responsibility in decision making between the company's
members; and its directors is distinguishing feature of a company.

The nature of the division depends on the articles of association. The

responsibility for making decisions will be shared between the board of directors
and the members once a company is registered. The decisions made in the
course of managing a company is divided into three categories listed in Table 4.6.

Decision making power in a company is divided between the board of directors

on the one hand and the members in general meeting on the other. Directors

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have the power to manage the business of the company, whilst the members are
entitled to vote only on limited matters expressly reserved to them by the articles
or the Companies Act.

The organic theory of the company is when the company acts through the board
of directors with respect to some matter, and through the members in general
meeting with respect to others.

Table 4.6: Categories of Decision Making in the Course of Managing Company

Category Explanation
Enterprise This category of decision relates to the company's business
decisions or operation.
Capital decisions This category of decision involves decisions on the sources,
amount and composition of company's capital.
This category of decision is a decision made by participants
in companies. This relates to the way the company is
Constitutional
constituted and to the internal arrangement that provide
decisions
for its administration and govern the relationship between
its participants.

The relationship between the board and the general meeting is not hierarchical.
The power to bind a company is divided between the board and the general
meeting, and they are supreme within the areas allocated to them unless the
constitution provides otherwise.

Members have the option of removing the director or directors form office and
where they have power to appoint new director to replace them if the members

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disagree with a decision made by the board on a matter that the board has power
to decide: S144 and S145.

Members may alternatively alter the company's articles of association to restrict

the directorsÊ powers to act without first obtaining the members consent: S31

However the members cannot use their power to requisition or call a meeting of
members to pass a resolution relating to a matter that is within the power of the
board, even where the resolution is expressed to represent a non binding
opinion.
NRMA Ltd v Parker

ACTIVITY 4.1

1. What options are available to members who disagree with

decisions of the board?
2. What kinds of decisions do companies make?

4.4 THE APLLICATION OF SECTION 181(1)

COMPANIES ACT 1965 (MEMBER'S
REMEDY)
One of the consequences of the separate legal personality doctrine is that a
company can sue and be sued. The company as a legal entity therefore can
enforce its legal rights and can be sued for breach of its legal duties. It is not
generally open to individual shareholder to initiate an action on the company's
behalf. The decision must be left to the appropriate organ of the company
(normally the board of directors).

Practical difficulties arise where the alleged wrongdoers are themselves members
of the board and are in a position to prevent action being taken by the company
to obtain redress for their wrongdoing.

The rule in Foss v Harbottle translates the doctrine of separate legal personality,
the statutory contract and the principles of majority rule into a rule of procedure
governing locus standi (i.e. who has the right to sue). However The Law
Commissions Report criticised this rules as 'complicated and unwieldy'

A more effective procedure to enable members to obtain remedies in

circumstances where the controller of a company acts oppressively or unfairly
towards them is provided by the Companies Act.

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Is either:

Unfairly discriminatory to a member or members, shareholders or debenture

holders including the petitioner or prejudicial to a member or members,
shareholders or debentures holder including the petitioner.

4.4.1 Who Can Apply?

An action under S181 can be brought by:
(a) A member of the company, even if the oppression action relates to an act or
proposed act that is against the member in a capacity other than as a
member as long as the oppressive conduct also affects him in his capacity as
a member or another member in their capacity as a member.
(b) A debenture holder of a company

At the time the legal action is brought by the person bringing the action, he or
she must be a member. A person who was oppressed as a member and then sold
all of his shares has no redress under this section.

In the case of Owen Sim Liang Khui v Pisau Jaya Sdn Bhd & Anor, by way of
obiter, the Federal Court of Malaysia decided that under this section, a petitioner
must be able to demonstrate that his name appears on the register of members at
the date of the presentation. However the court gave an example where a person
whose name is not on the register of members may rely on the section. This
situation is one where a shareholder is treated by the company or the board as a
member, prior to the application, though the shareholder's name is not yet
inserted into the register of members. The doctrine of estoppel will be applied
here.

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4.4.2 Conduct Where Remedy May be Sought

A person to whom a share in the company has been transmitted by will or by
operation of law is also a member of the company once the person's name is
included in the company's register of members.

In most cases members seeking a remedy under this section will be a shareholder
in a small, tightly held company who is unable to continue a workable
relationship with other shareholders

Oppressive Conduct of Affairs

The court may make an order under section 181 if:
• 181(a) the conduct of a companyÊs affairs;
• 181(b) an actual or proposed act or omission by or on behalf of a
company; or
• 181(c) a resolution, or a proposed resolution, of members or a class of
members of a company;

is either:
• Contrary to the interest of the members of a whole; or
• Oppressive to, unfairly prejudicial to, or unfairly discriminatory against, a
member or members whether in that capacity or in any other capacity.

The legislation does not provide the meaning of what amounts to „the conduct of
a company's affairs.‰ To get an understanding of what kinds of conduct has been
considered to be oppressive, unfairly prejudicial or unfairly discriminatory;
guidance will be sought from case laws.

In the Australian case of Morgan v 45 Flyers Avenue Pty Ltd., Young J expressed
the view that a court should look at the four grounds:

"As a composite whole and the individual elements mentioned in the section
should be considered merely as different aspects of the essential criterion namely
commercial unfairness."

In the case of Re Norvabron Pty Ltd the Supreme Court of Queensland

adopted a wider interpretation of „affairs of the company.‰

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This section, however, does not apply to omissions or proposed omission. In

Sanford v Sanford Courier Service Pty Ltd. it was held that feathering of their
own nests by the directors was oppressive. This includes also, where the
omission or proposed omission is a refusal by the directors to register a transfer
of shares. This action will be regarded as oppressive or unfairly prejudicial or
unfairly discriminatory towards a member.

The following are examples of case laws of conduct that has been held to be
oppressive, unfairly prejudicial or unfairly discriminatory.

(a) Grabbing Corporate Opportunity

The remedy for this conduct is based on the English legislation. In the Case
of Scottish Co-Operation Wholesale Society v Meyer, the majority
shareholders set up an alternative business to do what their company did.
This was done to the exclusion of the minority shareholders. Lord
Simmonds defined the term oppressive conduct to mean „burdensome,
harsh or wrongful.‰

In the case of Re Jermyn Street Turkish Baths Ltd., oppressive conduct

was described as "some overbearing act or an attitude on the part of the
oppressor.

An oppressive conduct may have a cumulative effect as seen in the case of

Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd., where

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through the neglect and indifference over a period of time, the directors of
the company allowed the assets of the company to deteriorate to such an
extent that they were almost forfeited to the authorities.

In the case of Eric Lau Man Hing v Eramara Jaya Sdn. Bhd. & Ors it was
held that the majority shareholders by withdrawing substantial funds from
the company and depositing the same in the fixed deposit accounts in their
individual or joint names had acted oppressively.

In the case of Kumagai Gumi Co Ltd. v Zenecon Kumagai Sdn. Bhd. & Ors
it was held that diverting the company's business opportunities to related
companies would also amount to oppression.

In the case of Low Peng Boon v Low Janie it was held that the controllers
using company fund to pay for their personal interest amounted to an
oppressive conduct.

However, the case of Re Kong Thai Sawmill (Miri) Sdn. Bhd. it was held
that the shareholder ă directors were not impugned for causing the
company to purchase and outfit a motor yacht for their personal use. The
Privy Council did not consider the extravagance on the part of the
shareholders directors as amounting to oppression of the minority
shareholders.

(b) Failure by Directors to Act in the Company's Interest S181 is concerned

with the effect of oppression on the oppressed, not with the intention of the
oppressor.

Also see: Jaya Medical Consultants Sdn Bhd v Island & Peninsule Bhd
& Ors.

(c) Diversion of profits

Courts need to look at the expectation of shareholders in small tightly held
companies. It is an expectation that shareholders will participate
management and derive an income from doing so, and then if the majority

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exclude the minority form doing so, i.e. pay themselves directors fees to the
exclusion of the minority and payment of dividends are not made, then this
would be oppressive.

In the case of Re Gee Hoe Chan Trading co Pte Lt it was held that the
directors by paying themselves directors fees and salaries but not declaring
dividends had acted inequitable and this was held to constitute a basis for
an allegation of unfair prejudice.

(d) Shares issued for improper purposes

(e) Non payment of dividend or inadequate dividend given

In the case of Burland v Earle it was held that a shareholder cannot compel
a company to declare dividends. The failure to recommended or effect the
declaration of a dividends doe not by itself amount to unfair conduct
impeachable under S181.

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In the case of Low Peng Boon v Low Janie it was held that non payment
of dividend coupled with the misappropriation of company funds could
amount to oppression under the Singapore equivalent of S181.

In the case of Eric Lau Man Hing v Eramara Jaya Sdn. Bhd. & Ors it was
held that the non payment of dividends together with a failure to keep proper
records amount to oppressive conduct to disregards of the interest of the
minority shareholder by the majority.

In the case of Re Roberts v Walter Developments Pty Ltd. it was held that a
failure to pay dividends may be oppressive in view of the history of the
company, its financial needs and the reasonable expectation of the members.

4.4.3 What is Meant by Disregard of Interests of the

Members or Debenture Holders?
In the case of Re Kong Thai Sawmill (Miri) Sdn. Bhd., the word disregards was
construed to have a far wider meaning than the word „oppression‰ though there
may be significant overlap between the two.

Lord Wilberforce explained the operation of S181

"It is only when majority rule passes over into rule oppressive of the minority, or
in disregards of their interests, that the section can be invoked; 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⁄⁄⁄"

4.4.4 What is Meant by Unfairly Prejudicial or

Unfairly Discriminatory?
In the case of Eric Lau Man Hing v Eramara Jaya Sdn. Bhd. & Ors the judge
stated that the grievances of the minority shareholders should be looked at in
totality to decide if it amounted to oppressive discriminatory and prejudicial
conduct by the majority shareholders.

In the case of Wayde v New South Wales Rugby League Ltd. it was held that in
order to determine what constitutes unfairness, the objective standard will be
applied.

The court of appeal in Low Peng Boon v Low Janie and Jaya Medical Consultants
Sdn. Bhd. v Island & Peninsula Bhd. & Ors have upheld the objective standard.
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4.4.5 What Amounts to Legitimate Expectations?

Where the majority's assertion of power and dominion in accordance with the
company's constitution conflict with the legitimate expectations of the minority
members, the conduct of the majority could be challenged as oppressive and
unfair under S181.

In the case of Jaya Medical Consultant Sdn. Bhd. v Island & Peninsula Bhd. &
Ors the judge was of the opinion that the concept of unfair discrimination or
prejudice that enables the court to take into consideration not only the rights of
the members under the companyÊs constitution but also their legitimate
expectations arising from agreements and understanding of the members among
themselves.

However this case must be contrasted with the case of Tuan Hj Ishak bin Ismail
& Ors v Leong Hup Holdings Bhd. where it was held that it was for the
petitioner (the minority shareholders) to satisfy the court that his expectations
were legitimate.

4.4.6 Remedies Where There is Oppression

Section 181(2) allows the court to make any order that it considers appropriate
where there has been oppression:

(a) An order directing or prohibiting any act or canceling or varying any

transaction or resolution. This order may include an order that the
company commences or defends specific legal proceedings, or authorise a
member of the company to institute or defend specific legal proceedings in
the name and on behalf of the company.

The court can order the company to sue the directors to recover
compensation or it can allow the minority member who has brought the
oppression action to bring legal proceedings against the directors on behalf
of the company.

In the case of Re Spargos Mining NL the court orders the removal of

several directors of the company and appointed other people as directors.
The court also ordered the new board to investigate a number of
transactions the company had made in the past for the purpose of deciding
whether there should be further legal actions.

(b) An order for the purchase of the shares of a member by other members or
by the company.

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This remedy is most commonly used by the courts. It allows an oppressed

minority member to sell the shares at a price which the court determines is
fair. The court can order the company or other member to buy the shares
of the oppressed minority members.

In the case of Guan Seng Co Sdn. Bhd. v Tan Hok Chan the applicant
could not prove the elements of oppression as the court held that the
directors of the company merely had a „disregard‰ of the shareholdersÊ
interests in any event it agreed to the sale of the shares to the company and
had to determine the issued of valuation of the said shares.

In the case of Tullio v Maoro, the court held that the value at which the
shares ought to be repurchase must be fair and reasonable within the
particular circumstances of each case.

(c) If the company is ordered to purchase its shares, then the court may order a
reduction of capital accordingly.

(d) An order to have the company wound up. The court will not make an order
for the winding up of a company if it is of the opinion that a winding up
would unfairly prejudice the members who are suffering as a result of the
oppressive or unjust conduct: S181(2)(e).

4.4.7 Relationship of Winding Up with the

Oppression Remedy
A minority member who brings an action to wind up the company may also
bring an oppression action under S181.
The reasons are:
(a) Where a member brings an action that the company should be wound up
on the ground that:
• It is just and equitable to do so; or
• The directors have acted in a manner that is unfair or unjust to the
members;
The court is often influenced by the existence of an alternative remedy
before making an order to wind up the company under S218(1)(f) or
218(1)(i)

(b) The courts are reluctant to wind up a company which is solvent and which
has a future.

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The Just and Equitable Ground

The courts may wound up companies based on the reasons illustrated in
Figure 4.2.

Figure 4.2: Reasons of winding up a company

(a) Break Down of Mutual Trust

In the case of Re Tivoli Freeholds Ltd. it was held that it was appropriate to
wind up the company as N (the partner) had acted contrary to the common
understanding on which the company was established and there was no
longer any mutual trust and confidence.

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(b) Fraud or misconduct

(c) Deadlock
There must be evidence that the deadlock is clear and fully presented. The
application will be dismissed otherwise.
Re Davis Investment (East ham) Ltd.

In the case of Ng Eng Hiam v Ng Kee Wei & Ors it was held that an order
will not be granted where there exists a reasonable opportunity of
reconciliation and cooperation between the parties involved in the
deadlock.

(d) Failure of substratum

If a company undertakes business which is entirely outside what was the
general intention and common understanding of the members when they
became members then this could be a ground to wind up the company.

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Cotman v Brougham (this case has been discussed in Topic 2)

4.4.8 The Rule in Foss v Harbottle

The general rule in company law is that the wishes of the majority will prevail.

When a wrong is done to a company, it is for the company to decide what action
to take. The courts will not usually hear an action brought by a member or
members of the company.

(a) Reasons for the Rule

Reasons for appling foss v Harbottle Rule are explained in table 4.7.

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Table 4.7: Reasons for Applying Foss v Harbottle Rule

Principle Explanation
The Proper Plaintiff The company is the proper plaintiff (pursuer) in any action to
Principle right a wrong against it.
The courts will not interfere with the internal management of a
The Internal
company. It is for the company to decide whether it is being
Management Principle
properly managed.
A member cannot sue to rectify a mere informality where the
Irregularity Principle act would be within the company's powers if done properly
and the wishes of the majority are clear.

(b) Problems with the Rule

The majority of shares often belong to directors. The majority are in the best
position to prejudice the company - then decide that the company will not
bring an action against them. There is thus a need for minority protection ă
enforcement of minority rights falls into three main categories.

(c) Exceptions to the Rule in Foss v Harbottle

(i) Preliminary Points
A number of matters must be established first:
• The company is entitled to the remedy - shareholder cannot
have a wider right to bring an action than the company itself
would have had.
• It is not possible to petition under CA S181 or S218 CA 1965
(these will usually be easier).
• The action falls within one of the recognised exceptions to the
Rule in Foss v Harbottle.
• It is not possible to obtain authority to bring an action in the
company's name (i.e. must show the company has decided not
to sue).

EXERCISE 4.1
The rule in Foss v Harbottle greatly strengthens the position of the
majority, indeed, if there were no exceptions to it the minority would
be completely in their hands (L.C.B Gower). Discuss the rule in Foss
v Harbottle and its exceptions.

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(ii) The Recognised Exceptions

In reality, only the first of these is a true exception to Foss - the others are
cases where the Rule has no application.

4.4.9 Fraud on the Minority by Wrongdoers in

Control
"Control" = voting control (50% + 1 vote) - but some suggestion that de facto control
is enough.

Fraud on minority has been elucidated by Gopal Sri Ram JCA of the Court of
Appeal in the case of Abdul Rahim bin Aki v Krubong Industrial Park ( Melaka)
Sdn. Bhd.

"Although the real meaning of the phrase is unclear in the sense that one is
unable as yet to determine its boundaries with any precision, an examination of
the authorities leaves us to include that the following propositions may be taken
as settled and beyond question:
(a) The expression „fraud on minority‰ is a term of art and has nothing
whatsoever to do with actual fraud or deception at common law;
(b) Lack of probity comes within the ambit of the expression. But it is not necessary
to prove dishonesty before a minority shareholder may claim relief under the
doctrine; and

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(c) It is sufficient to show that those wielding majority control, used their
powers for an oblique or collateral motive or purpose and not for the true
purpose for which the power was entrusted to them.‰

Note: The assertion of „fraud on minority‰ is now included in S181

Fraud on minority may be committed where the majority:

• Expropriates the company's property
• Ratifies directors' breach of duties:

In the case of Winthrop Investments Ltd v Winns Ltd., which is similar to

the above case with the only difference being that the directors in the
Australian case sought approval from the general meeting before they
actually issued the shares and the courts held that whilst it is capable of
ratifying prospectively a breach of directors' duties, this action constituted a
fraud on the minority if is shown that the majority in ratifying failed in its
duty to act bona fide for the benefit of the company as whole.

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In the case of In Residue Treatment & Trading Co Ltd. v Southern

Resources Ltd., the Supreme Court of South Australia held that an
allotment of shares is made for an improper purpose, it may not be capable
of ratification by the general meeting.

Ć Expropriation of company property

Brown v British Abrasive Wheel

Facts:
The company required further capital. The majority, who represented 98%
of the shareholders were willing to provide the capital but only if they were
able to acquire the remaining 2% of the shares. The articles were altered to
allow holders of 90% of the shares to compulsarily purchase the shares of
the remaining shareholders.

Held:
The alteration was held to be invalid - it was not for the benefit of the
company as presently constituted, though it would have been valid if it had
been contained in the original articles.

C.f.

In the case of Wong Kim Fatt v Leong & Co Sdn. Bhd. & Anor the Court
held that unless otherwise agreed between the parties and expressly
provided by the articles of association, it is unlikely that an investor who
subscribes or purchase shares in a company expects to have his shares
compulsorily acquired at the initiative of the majority.

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Note: However, CA 1965 and the Malaysian Code on Takeovers and Mergers
1998 allow the shares of the minority to be expropriated in certain
circumstances, if proper compensation is paid. S180 allow the holders of
90% shares to compulsorily acquire the remaining 10% under a scheme of
arrangement.

"Fraud" = unconscionable use of majority power resulting in loss to or

discrimination against the minority. Negligence is not enough to amount to
fraud, but „self-serving‰ negligence might be.

Oppression of the minority will be regarded as fraud:

Also conduct which is an abuse of majority powers:

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(a) Invasion of Personal Rights

Invasion of the shareholder's personal rights is not really an exception to
the rule in Foss v Harbottle - because the shareholder would be the proper
person to bring the action:

The cases below has been discussed in Topic 3.

Wood v Odessa Waterworks Co

Salmon v Quinn & Axtens Ltd.

(b) Illegal or Ultra Vires Acts

Any shareholder is entitle to bring an action to restrain the company from
doing something which is outside the company's objects.

(c) Material Procedural Irregularities

General rule that the courts will not interfere with the internal management
of a company when an action is brought by a shareholder does not apply if
the act done by the company was one which required a special majority
which was not obtained. If this exception did not exist, the company would
be able to act in breach of its own constitution.
Edwards v Halliwell ( discussed above)

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4.4.10 The Types of Shareholder Actions

The rule in Foss v Harbottle (1843) is not an absolute bar to the individual
shareholders bringing an action in respect of an alleged wrong. There are a
number of so called exceptions to the rule discussed as follows.

(a) Personal Action

It is evident form the judgment of Mellish LJ in Mac Dougall v Gardiner
(1875) that where a right of a shareholder has been infringed by the majority
he can sue.

Here the injury or wrong in question is not suffered by the company as such
but by the shareholder and therefore the anxiety arising underlying Foss v
Harbottle does not arise.
It should be noted that where the wrong results in a loss to the company
and the only loss alleged to have been suffered by the shareholder is
reflected in the loss sustained by the company' the courts will not permit a
person action: Stein v Blake (1998).

(b) Representative Action

Where a representative action is brought, the claimant is suing on behalf of
himself and other members who have the same right which it is alleged has
been abused or infringed. In such case an individual may bring an action in
a representative form.

(c) Derivative Actions

Where a shareholder initiates an action in order to enforce the company's
rights this is called a derivative action. This action is brought by the
shareholder on behalf of all the company's shareholders other than the
wrongdoers who are in control and who are preventing the company itself
from suing.

In this action, because the wrongdoers who are in control are preventing the
company from suing, the company is obviously not the claimant. In fact it is
joined as a defendant together with the actual wrongdoers so that the
company will be bound by the judgment and receives any money recovered
in the action.
Spokes v Grosvenor Hotel and West End Railway Terminus Co.

ACTIVITY 4.2

What are the types of actions that are available to an aggrieved

shareholder?

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ACTIVITY 4.3
Assess the significance of the rule in Foss v Harbottle in company law.
To what extent will the law provide protection for minority
shareholders aggrieved by the conduct of the majority?

EXERCISE 4.2

Explain the restrictions of transfer of shares.

• The legal remedies available to member can only be imposed by a court. In

determining whether to make such orders, the court has to balance the
interests of the majority and minority members of the company.
• Not every decisions or action taken by a company that reduces the value of
the minority' investment will be treated as improper conduct by the majority.
• Courts take into account of the effect of the disputed decision or action on the
majority members.
• The majority have a larger investment in the company to protect than
minority members.
• There may be circumstances (as discussed above) where the court will
determine that it is legitimate and reasonable for the majority to take certain
actions for the benefit of the company, at the expense of the minority
members.

Fraud and minority Shareholder

Shape certificate Substancial shareholder

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 Topic X Directors
5
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the meaning of a director;
2. Describe the duties of directors at common law and under the
Companies Act 1965; and
3. Apply relevant legislation and case law to determine the
required behaviour for directors in given fact situations.

X INTRODUCTION
Although a company is a legal entity in its own right, it must of course have
human agents to carry out its functions. While the company act as a whole
through a general meeting, this is generally not practical so that the power of
management of a company is almost always vested in the board of the directors.
Directors, by virtue of their position in the company, owe it certain duties. It
should be noted, though, that the courts do not seek to evaluate the business
judgment made by the management of the company, rather they are concerned
with the duty of the directors and others to properly perform their function in
relation to the company. These duties, established at common law, have been
adopted and in some cases extended in the Companies Act.

5.1 DEFINITION OF DIRECTOR

There are numerous expressions used in relation to directors, some emanate from
the Companies Act itself. Others are used in commerce or reports of cases, but
do not appear in the legislation. The statutory definition that you need to
understand is set out.

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Unless otherwise stated, a person may be regarded as a director even though not
validly appointed if they are:
(a) Shadow directors; or
(b) Act as an alternate or substitute directors.

5.1.1 Types of Directors

A company is required to comply with S141 which requires that companies to
keep register of directors, manager and secretaries.

In the case of Re Hydrodam (Corby) Ltd. Millett J, defining a de facto director,

stressed the necessity of the person in question being 'held out' as a director by
the company. He went on to state:

"To establish that a person was a de facto director of a company it is necessary to

plead and prove that he undertook functions in relation to the company which
could properly be discharge only by a director. It is not sufficient to show that he
was concerned in the management of the company's affairs or undertook tasks in
relation to its business which can properly be performed by a manager below
board level."

In the case of Mistmorn Pty Ltd v Yasseen, the courts held that even though
Yasseen was not formally appointed as a director of a family company, it was
clear from his involvement in its business activities that he was the driving force
behind it and not a merely a consultant.

(a) Shadow Directors

Sometimes a shareholder may deliberately try to avoid the legal duties
borne by directors by exercising influence over the board but without being
formally appointed as a director.

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As the term suggest, they are distinguishable from de facto and de jure
directors by virtue of the fact they seek to evade the duties and liabilityÊs of
directors by remaining in the back ground instructing and directing the
actions of the board members while taking care to avoid directorial
appointment, whether on a de jureor de facto basis.

S4(2) expressly excludes from its definition those who provide professional
advice. However, it has been held that if the conduct of an adviser is such
that it goes beyond the normal scope of this professional capacity and is
tantamount to effectively controlling the company's affairs, he will be held
to be a shadow director.

In the case of Re Tasbian Ltd. an accountant who controlled the company's

banking so as to decide which of the company's creditors should be paid
and in which order was held to be a shadow director.

The judge concluded that a pattern of behaviour must be shown 'in which
the board did not exercise any discretion or judgment of its own but acted in
accordance with the directions of others. With respect to the fourth
requirement, a course of conduct must be shown on the part of the board in
acting on the instructions of a shadow director.

In the case of Yap Sing Hock & Anor v Public Prosecutor the court was of
the opinion that the plaintiff had to prove beyond reasonable doubt whether
or not the appellant were infact directors of the said company. S 4(1) is
limited to the purpose of the act and could not be relied on to prove this.

In the case of Standard Chartered Bank of Australia v Antico (1995) 13

ACLC 1381, it was held that a holding company may be „shadow‰ directors

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of a subsidiary if the directors of the subsidiary company follow the

instruction and directions of the directors of the holding company.

S4(1) further defines officers as directors, secretaries, employees and

receivers and managers and liquidators under voluntary winding up.

(b) Alternate Directors

The office of director is personal in character and so a director cannot
appoint a delegate to act in his place should he be prevented from attending
board meetings unless the company's articles of the constitution permit this.
Table A Art 82 provide that director may appointed any other director or
any other person approved by the board to be his alternate.

An alternate director is entitles to receive notice of all meeting of the board

and its committees of which the appointed director is a member and to
attend and vote at all such meeting from which the appointing director is
absent.

Subject to anything in the articles to the contrary, an alternate director is not

deemed to be the agent of the director appointing him, but is deemed for all
purposes to be a director and shall alone be responsible for his own act and
default.

(c) Executive and Non Executive Directors

Company law recognised the division between the two types of directors.
Executive directors are generally full time officers of the company who carry
out the management of the company's business. The articles typically give
extensive management power to them and they will usually have separate
service contract with the company.

Non executive directors are normally appointed to the boards of larger

companies to act as monitors of the executive management. They are
typically part time appointment. The importance of the role of the noon
executive in a company is that they perform a monitoring role over their
executive brethren, ensuring that they act strictly in the interests of the
company. They are also referred to as „independent director.‰

(d) Managing Director

The case of Shirlaw v Southern Foundries (1926) Ltd., Green MR described
the office of the managing director:

"A managing director is, as I have said, a director to who, the board, being
empowered to do so by the articles of association, delegates its power of
managements or some of them, and this delegation is usually, if not

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invariably made subject to the overriding authority of the board.

Management here means manager of the company's business, or part of it,
as the case may be. There is no delegation of the remaining powers of the
boards. Such important matters as (to take a few examples) the financial
policy of the company, the dividends to be declared and the issue of new
shares are all reserved to the board."

The functions of a managing directors are that of a director and officer of the
company that of an employee with special authority to exercise any or all of
an employee with special authority to exercise any or all of the boardÊs
management powers. A managing director is also the executive director.

(e) Chairman of Directors

Table 5.1 shows the provisions governing the duties of chairman of
directors.

Table 5.1: Provisions Governing Duties of Chairman of Directors

Act Provisions
A chairman of directors is merely the director appointed to chair and
Table A art 85
exercise procedural control over directors meeting
S156 Sign the minutes

The duties of the chairman above was stated in the case of AWA Ltd. v Daniels.

SELF-CHECK 5.1

Explain the difference between a de facto director and a shadow

director.

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ACTIVITY 5.1

Are non executive directors important to a company? If so, why?

5.2 APPOINTMENT AND QUALIFICATION OF

DIRECTOR

5.2.1 Appointment of Directors

Provisions governing duties of appointment of directors are listed in Table 5.2.

Table 5.2: Provisions Governing Duties of Appointment of Directors

CA 1965 Provision
This provision provides that every company must have at least 2
S122
directors.
This provision provides that the first directors appointed must be
S122 (2) named in the either of the articles.
This provision provides that the directors retire from office at the 1st
Table A art 63 Annual General Meeting.

In the case of Solaiappan & Ors v Lim Yoke Fan & Ors, the court held that where
a resolution was passed at a meeting without notice to the old directors, the
dismissal of the old directors with new directors is ineffective and void.

S123 (1)
− provides that a person holding the position of a director must consent in
writing. Non compliance of this section will result in the said directors
being regarded as de facto directors.

Table A Art 66
− provides that subsequent appointment of directors will be done in the
general meeting.

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Generally the appointment of director in a public company is by General

Meeting. Each director is appointed by a separate resolution unless there is a
unanimous agreement that the directors may be appointed by a single resolution.

In the case of Goh Kim Hai Edward v Pacific Can Investment Holding Ltd, the
judge held that the company was entitled to dismiss the appointee if the
appointment was obtained by means of a conspiracy between the appointee and
another directors to further the interest of the appointee.

A director may hold a minimum number of shares in the company as required by

the articles of a company. This is called director's share qualification. The reason
behind this is two fold. Firstly, it is an added incentive to ensure that the
directors will ensure the company is financially successful and secondly, the
shareholders will appreciate that the directors are willing to risk their own
money as well as that of the members. The share qualification should not be
nominal.

5.3 RETIREMENT, RESIGNATION, VACATION

AND REMOVAL OF DIRECTORS
How can a director be vacated from office? It can be done either through
retirement, resignation, vaction and removal of directors. Its brief explaination
will be discussed as follows.

5.3.1 Disqualification from Office

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The court may prohibit a person from being a director or from otherwise being
involved in managing a company if they are directors of insolvent companies or
have breached the KLSE Listing Rules (S130A CA1965 and S100(1)(kk) SIA
respectively).

A person needs the court's permission to be a director after he or she has been
convicted of certain offence or if he or she (in personal capacity) has been unable
to pay his or her debts and is an undischarged bankrupt or as entered into an
arrangement or composition with creditors (S125(1) and Table A Art 72
respectively).

The company is still bound by the acts of a person disqualified form the office of
director (S127).

A director who is convicted of insider trading will be disqualified as a director,

even though the legislation does not require the prosecution to prove fraud or
dishonesty. It is sufficient if the offence involved dishonesty.
Public Prosecutor v Allan Ng Poh Meng

5.3.2 Vacation of Office

Table 5.3: Provision Governing Vacation of Office

Act Provision
A director is vacated from office if he has not obtained the share
124(1) qualification within two months of appointed or has ceased to hold the
share qualifications.
S124(4) The director may be reappointed after obtaining the qualification.

Table 5.3 shows the provisions governing vacation of office by a director. If the
director attains the age of 70 years, this is applicable to a public company or subsidiary
of a public company. His office will be vacated at the end next annual general meeting:

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S129(2). A director may be reappointed but the appointment must be renewed at

every annual general meeting. And a special resolution must be passed.

The articles provide for the appointment of a director for a specified period of
time, the appointment cease at the expiration of that time and the position
becomes vacant.

5.3.3 Removal of Directors

A director may only be removed in a general meeting of shareholders if the
articles empowers to do so (Table 5.4).
Table 5.4: Provisions Governing Removal of Directors

CA 1965 Provision
This section provides that the company to remove any director
Table A Art 69 before the expiration of the term of office by ordinary resolution.
However, the articles may be altered by a special resolution.
This section provides that a director may be removed before the
expiration of his or her period in office, in a general meeting by
S128 ordinary resolution. This is allowed even if it is contrary to the
articles or separate agreement between the director and the company
: Tuan Ishak bin Ismail & Ors v Leong Hup Holding & other appeal

In the case of Solaiappan v Lim Yoke Fan, the Federal court held that the power
to remove directors under S128 (empowers shareholders of public company
some control over the composition of the board of directors. Directors who
oppose the majority will be prevented from remaining in office) coăexisted with
any power contained in the articles. The power to remove directors which is
exercised under this section is only valid if special notice is given.

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The case of Wong Kin Fatt v Leong & Co. Bhd. held that a public company may
have only one director so long as the director take steps to appoint another or
others within the grace period allowed by the Act.

5.3.4 Resignation
A director may also resign his office. The articles of association normally requires
notice in writing to the board, the effect of which is that the director is deemed to
have vacated his office. The articles of association may also include a provision
that the office of a director will be vacated if he is requested in writing to resign
by all his co-directors. Such power must be exercised in the best interests of the
company.
Lee v Chou Wen Hsien

5.3.5 Remuneration
Directors are in a fiduciary relationship with the company as a consequence they
are not entitled to any remuneration from the company unless it is specially
provided for in the companyÊs internal rules. The internal rules normally provide
members with the power to fix the remuneration of directors.

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The remuneration of executive directors may be significant because they are also
full time employees. However, non executive directors do not typically received
enormous salaries. The finance committee recommends that the remuneration of
executive directors should be recommended by the non executive directors.

Excessive remuneration may constitute oppressive or unfair conduct under S181

or breach of director's duties.

5.3.6 Disclosure Obligations

Directors' remuneration must be disclosed in the financial statements before the
annual general meeting of all company. This does not apply to private
companies. This is intended to provide some protection for creditors and
members from potential abuses by directors of the control they have over the
management of a company's affairs.

However, there are exceptions to the prohibition.

In the case of Che Wan Development Sdn. Bhd. v Cooperative Central Bank Bhd.,
it was held that a charge transaction entered into in contravention of S133 was
illegal and therefore void and unenforceable.
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In the case of Harta Empat Sdn. Bhd. v Koperasi Rakyat Bhd., the Court of
Appeal held that the case of Cooperative Central Bank Ltd. v Feyen
Developments Sdn. Bhd. (where guarantee or security was deemed valid) was an
obiter dicta and not binding. However this was rejected by the Federal Court and
cited the reasons of policy precluded it from departing from its recent decision in
the Feyen case.

However, in the case of Grinstead v Britannia Brands (Holdings) Pte Ltd. it was
held that an entitlement to be paid remuneration for two years after the
termination of the contract was part and parcel of the remuneration package and
not compensation for loss of office. Especially so, if the service contract itself
makes provision for payment upon severance of the contract.

ACTIVITY 5.2
A major deterrent operating against companies seeking to remove a
director from his office is the amount of compensation which may be
payable. Does the Companies Act effectively control such payments? Is
there any reform needed?

5.4 BOARD OF DIRECTORS

Information on Malaysian boards is scarce and not as extensive as that in other
jurisdiction.

5.4.1 Composition of the Board of Directors

All Malaysian (90%) publicly listed boards typically have two or more
independent non executive directors of which half (49%) has two non executive
directors and nearly a quarter (23%) have three independent non executive
directors.

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About 60% of the respondents separated the role of chairman of the board and
the chief executive officer. Out of this, 62% of the chairmanships were assumed
by non executive directors and only 38% by independent non executive directors.
9% of executive directors assumed the dual role of managing director and /or
chief executive director.

Almost all (97%) of the companies have substantial shareholders as members of

the board, out of which over a third (39%) are involved in the management of the
companies.

5.4.2 How Does the Board of Directors Function?

The number of full board meetings ranges from one to more than five meeting
per year. Most companies hold four meetings per year while some hold three or
less full board meetings per year. Only a minority of the companies hold one
board meeting per year.

The board is ultimately responsible for the establishment of proper internal

control within the company. The board is also responsible for the prevention and
detection of fraud. This is part of their fiduciary duties for protecting the assets of
the company.

The board must ensure that audit committees or internal audit functions are in
place. Almost half of the companies in Malaysia conduct three or more audit
committee meetings a year whilst less than half have two meetings per year and
the minorities' one meeting per year.

The board also establishes the remuneration committee. But this is done very
rarely.

The board is in charge of codes of conduct and business ethics policy. This is
adapted form the Bursa Malaysia Listing Requirement, SC Policies and
Guidelines on Issue' offer of Securities, the Companies Act and the Code of ethics
for directors issued by the ROC.

The board is also responsible for establishing formal policies for the release of
price sensitive information. Some companies however entrust this task to the
company secretary.

The communication with the media and shareholders is usually handled by a

specific spokesperson. Generally this is the chairman, managing director, chief
executive officer and/or the corporate affairs or communications department.

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EXERCISE 5.1

Discuss whether a director of a company can be removed before the

expiration of the term of his office.

5.5 DUTIES OF DIRECTORS

Table 5.5 lists the provision governing duties of directors.

Table 5.5: Provision Governing Duties of Directors

CA1965 Provision
The duties of director established at common law, have been
S132
adopted and in some cases extended in the companies act.
The duties specified in the companies act operate in addition to the
S132(5)
common law duties instead of them.

5.5.1 Fiduciary Duties

The term fiduciary does not have a precise definition. Fiduciary is a term that
may cover a wide range of situations where a person is expected to act, not in
their own self interest but having regards to another's interest.
Re Coombe

Director's fiduciary duties are owed only to the company, not to the individual
shareholders.

However, directors may owe fiduciary duties to individual shareholder in special

circumstances.

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The Australian case of Glavanics v Brunninghausen applied the factors noted by

the judge and held that a director may owe a fiduciary duty where there are only
two shareholder and the director is one of them.

The onus is on the shareholder alleging that a director owes him or her a
fiduciary duty to establish that special or exceptional circumstances exist.
However, the director and officers owe a duty to take account of the interests of
creditors where the company is insolvent or going insolvent.

The case of New Kok Ann Realty v Development & Commercial Bank Ltd New
Hebrides (in liquidation), the judge referred to the above case and stated:
"The Australian case shows that even where companies, such as the plaintiff and
the defendant, are members of a so-called 'group' each company was a separate
and independent legal entity and the directors, in discharging their duty to the

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company must take account of the interest of its shareholder and its creditors
who may be prejudiced by the movement of funds between companies in the
event that the companies become insolvent or are wound up as in this case."
In Parke v Daily New Ltd., it was held that no duty was owned to the general
public not the company's employee.

It has long been settled that directors are views as agents of the company and as
such are subject to the full rigour of the fiduciary duties which equity has
developed to ensure strict compliance with the overriding principle that
fiduciaries must not benefit from their position of trust.

One consequence of this fiduciary relationship has been the judicial juxtaposition
of the terms fiduciary and trustee when referring to the agent status of company
directors.

In the case of Re City Equitable Fire Industries Co, the court stated that the
fiduciary relation ship between a director and his or her company is not the same
as between a trustee and beneficiary.

Directors are not therefore trustees rather their fiduciary relationships arise from
their appointment and empowerment by the general meeting.

Given the wealth of case law which spans almost 300 years it is less than
straightforward to distil what the specific duties are without avoiding points of
overlap between them.

The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin
Syed Mohamed & Anor, per Ian Chin J
"A fiduciary is someone who has undertaken to act for or on behalf of another in a
particular matter in circumstances which give rise to a relationship of trust and
confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty.
The principal is entitled to the single minded loyalty of his fiduciary... This core
liability has several facts. A fiduciary must act in good faith; he must not make for
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his own benefit or the benefit of a third person without the informed consent of his
principal This is not intended to be an exhaustive list, but it is sufficient to indicate
the nature of fiduciary obligations.. They are the defining characteristics of the
fiduciary⁄..he is not subject to fiduciary obligations because he is fiduciary; it is
because he is subject to them that he is a fiduciary."

5.5.2 Key Fiduciary Obligation

Broadly speaking the key fiduciary obligations of the directors are:

(a) To Act Bona fide in the Interest of the Company
(b) To Exercise Their Power under the Company's Constitution for Proper
Purpose

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Because directors are fiduciaries they can only exercise powers given to them
for the purpose for which those powers were given and for no other purpose,
and the exercise of a power for an improper purpose can be challenged even if
the directors' good faith is not in question.

This duty to act for a proper purpose commonly arises in the context of a
challenge to an issue of shares. The power to issue shares is ordinarily conferred
upon the directors for the purpose of raising capital for the company. In the case
of Jimat bin Awang v Lai Wee Ngen the judged observed:

„The statutory regime is put into place primarily to protect the interest of
shareholder so that directors cannot act to their detriment with their knowledge
and prior consent."

In the Case of Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kin Leng, the
Supreme Court refused to validate shares that had been issued with a proper
directorÊs resolution. The court held that this was not a case of a mere procedural
irregularity, but a case where the purposed resolution was invalid and ineffectual
because it failed to comply with the articles of the company.

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Where directors issue shares for control purposes and not for capital raising
purposes it makes no difference if they can show that their intentions are good.
Whitehouse v Carlton Hotel

Sometimes what would be an improper purpose is „incidentally‰ achieved by a

share issue - this will not affect the validity of the issue: HarloweÊs Nominees Pty
Ltd v Woodside (Lake Entrance) Oil Co NL. In this case the court accepted that
the share issue was to secure financial stability of the company by ensuring funds
could be raised if necessary by making a call.

The decision to issue new shares will rarely be motivated by one single purpose.
Issues will often be made for a combination of reasons, some proper, some not.

In this situation of mixed purposes the old 1939 case of Mills v Mills required a
determination of what was the substantial purpose. Later the High Court in
White House v Carlton Hotel rejected this test and replaced it with the "but for"
test. In other words would the company have gone ahead and still issued the
shares without the improper purpose? If the answer is yes, it would have issued
the shares without the improper purpose then the issue is proper. If the answer is
no, the company would have issued the shares once the improper purpose is
taken away, then the issue is improper.

In the case of Kokotovick Construction v Wallington the court believed there

were two purposes, one to raise capital, the other to manipulate voting power.
However the court also believed that without the improper purpose the share
issue would not have been made purely for raising capital, therefore the issue
was invalidated.

Akin to the question of issue of shares is the question of transfer of shares. Table
A Art 22 states that directors may refuse to register a transfer of shares which
are not fully paid up or over which the company has lien.

S15 requires the constitution of the company to restrict the transfer of its shares.
This is achieved by giving directors power.

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(c) To Avoid Conflict of Interest and not to Profit from their Position
A director cannot vote on any matter in which he has a personal interest,
and a director with any interest in a proposed contract must disclose this to
the board Neptune (Vehicle Washing Equipment) Ltd.

In the case of Neptune (Vehicle Washing Equipment) Ltd., it was held that
a sole director could be in breach of S317 by failing to declare his
interest in a contract at a meeting. The declaration should have been made
and recorded in the minutes of the meeting.

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A director has a duty not to make a personal profit out of his connection with the
company. This rule applies even if no loss is suffered by the company. However,
if he does he must account for the profit to the company. In the case of
Queensland Mines ltd v Hudson, the court held that the Managing Director could
take up an opportunity which the company could not although there was no consent
by the shareholders. However there was disclosure to the board of
directors.

The Canadian case of Peso Silver Mines v Cropper the Court held that the
director could take up the opportunity which the company in good faith rejected.
It must be noted however, that the court was influenced by the fact that the
opportunity was given to the Managing Director privately, not as a director of
the company.

In the Malaysian case of The Board of Trustees of the Sabah Foundation & Ors v
Datuk Syed Kechik bin Syed Mohamed & Anor , the judge found that there was a
clear breach of fiduciary duties. The judge here applied three test to determine
whether a director could be held liable for breach of fiduciary duty by obtaining
personal profits which in equity belong to the company.

"⁄.In coming to that conclusion I have⁄put the matter through various tests
which evolved from the three rules governing a trustee, viz: (1) the no profit rule;
(2) the no conflict rule and (3) the misuse of trust knowledge rule⁄."

It is conflict of interest if a director receives a bribe or secret commission to

procure that the company acts in a particular way.

In the case of Simmah Tiber Industries Sdn Bhd v David Low See Keat & Ors
The High Court held that the first defendant had clearly breached his statutory
and fiduciary duties as a director of the plaintiff company by obtaining secret
profits for himself.

In the Case of Mahesan v Malaysian Government OfficersÊ Co-operative Housing

Society when the case went on appeal to the Privy Council, the court agreed that

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he breached his duty to the Society. Lord Diplock held that there are alternative
remedies against a briber. The plaintiff may recover the amount of the bribe as
money had and received or may recover as damages for tort, the amount of loss
actually incurred. The plaintiff cannot recover both.

In the case of Personal Automation Mart Pte Ltd v Tan Swee Sang it was held
that the defendant had breached her duty to the company by setting up a
competing company, while still employed by the company. This was clearly a
breach of fiduciary duty. This is applicable even when the directors had resigned.
The judge held that the strict fiduciary principle that a director must not obtain
for herself or himself a benefit or business advantage that properly belonged to
the company.

S131(1)
- requires a director who is directly or indirectly interested in a contract with
his company to declare promptly the nature of that interest at a meeting of
directors.

The shareholders can vote to permit the director to keep the profit - unless there
is a fraud on the minority:

In the case of Mui Sdn Bhd v Hong Leong Bank Bhd , the courts held that any
arrangement or transaction includes entering into six tenancies which had a
common purpose.

(d) Misuse of Corporate Funds

The directors who misappropriate company funds have no defense. They
cannot assert that since there was no intention to case wrongful loss to
company or that they did not consider the company to be another person
and therefore there was no misappropriation. Table 5.6 shows the
provisions governing misuse corporate funds.

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Table 5.6: Provisions Governing Misure of Corporate Funds

Act Provision
This section provides that the offfice of a director becomes vacant if a
Table A Art
director is directly or indirectly interested in any contract with the
72(h) company and fails to declare the nature of the interest.
This section prohibits directors from voting in respect of any contract
Table A Art 81
with the company in which they have an interest.
This section prohibits any arrangement or transaction involving the
S132E transfer of non cash assets without the prior approval of the company
in the general meeting.

In the case of Tan Sri Tan Hian Tsin v PP and Chong Lee Swee v PP it was held
that misusing company funds for a directors own benefit constituted a criminal
breach of trust.

(e) Misuse of Confidential Information

In the case of Electro Cad Australian Pty Ltd & Ors v Metagi RCS Sdn Bhd
& Ors, the judge stated what amounts to confidential information.

„Confidential information is generally information which is the object of an

obligation of confidence and is used to cover all information of a
confidential nature. This includes trade secrets, literary and artistic secrets,
personal services and public and government secrets.‰

The judge further relied on the Law of Intellectual Property by Stanifortes

Ric Keatson to determine whether a given body of information is
confidential.

They are:
Ć The extent to which the information is known to outside his (owners
business).
Ć The extend of measures taken by him to guard the secrecy of the
information.
Ć The extent to which it is known by employees and others involved in
the business.
Ć The value of information to him and his competitors.
Ć The amount of effect or money expended by him in developing the
information.

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Ć The ease or difficulty with which the information could be properly

acquired or duplicated by others ( i.e. by their independent
endeavors).

However, the section does not specifically require the information to be

secret or
confidential.

(f) Competing with the Company

The case of Personal Automation Mart Pte Ltd v Tan Swee Sang suggests
that directors who were former employees of a company may not set up
similar enterprises to that of their former companies if they exploit corporate
opportunity and confidential information obtained by virtue of their position.

(g) Honesty and Diligence

S132(1) imposes a broad duty on directors at all times to act honestly and
exercise reasonable diligence in the exercise of their power and the

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discharge of the duties of their office. This is based on a question of fact.

Yeng Hing Enterprise Sdn. Bhd. v Datuk Dr Ong Poh Kah

In the case of Industrial Concrete Products Bhd v Concrete Engineering

Products Bhd, James Foong of the High Court opined:

„Regarding the extend of the meaning of „honesty‰, the case of Multi Pak
Singapore Pte Ltd (In Receivership) v Intraco Ltd & Ors explains that this
does not mean that the directors had acted fraudulently, it means that he
must act bona fide in the interests of the company and that in exercising his
discretion, the director should act only to promote and advance the interest
of the company.‰

In the case of PP v G Choudhury, the court held that knowledge that the
company was facing a financial crisis was specific confidential information
within the meaning of the act.

The consequences of breaching S132 are that it imposes criminal liability

Imprisonment up to 5 years or fine of RM30,000: S132(3).

(h) Common Law Duty of Care and Skill

Relates to directorÊs competence in managing the company. Traditionally,
the duty has been minimal - director is judged according to his own
knowledge and experience:

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However, a radical shift in the law occurred in more recent cases. These recent
cases suggest a move to a tougher standard - the level of skill reasonably to be
expected from a person undertaking the same duties.

In the case of Re DÊJan of London Ltd., It was held that Mr. D'Jan was held prima
facie liable to the company for loss caused when the companyÊs insurers refused
to pay on a fire policy. He had signed an incorrectly completed proposal form
without having read it.

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The Australian case of Daniels v Anderson also reflects the changed community
attitudes and expectations. In this case it was held that a director is bound to take
reasonable care in the performance of her office. The requirement of „reasonable care‰
suggest that there is an objective standard of care which all director are expected to
meet regardless of the experience of the directors or the size of the company involved.
However, the standard would not be viewed as a wholly objective one.

Directors are expected to posses certain basic skills in relation to the financial
statement and financial affairs of their company. In the Australian case of
Commonwealth Bank v Friedrich. Tadgell J commented:

"In particular, the stage has been reached where a director is expected to be
capable of understanding his company's affairs to the extent of actually reaching
a reasonable informed opinion of its financial capacity⁄.I think it follows that he
is required by law to be capable of keeping abreast of the company's affairs and
sufficiently abreast of them to act appropriately if there are reasonable ground to
expect that the company will not be able to pay all its debts in due course and he
has reasonable cause to expect it.‰

The element of diligence required directors to take reasonable steps to place

themselves in a position to monitor and guide the manage of the company. In
the case of Daniels v Anderson. Diligence by a director includes:
Ć Attendance at all board meetings unless exceptional circumstances, such as
gf illness, prevent attendance;
Ć A basic understanding of the business of the company; and
Ć A continuing obligation to keep informed about and monitors the financial
and general affairs of the company.

5.5.3 Business Judgment Rule

This rule protects directors from personal liability for breaches of the statutory
and general law duties of care, skill and diligence if they satisfy the requirement
set out below. The merits of their business judgment or decisions which satisfy
these requirements will not be reviewable by the courts.
Requirements:
Ć Make the judgment in good faith for a proper purpose;
Ć Do not have a material personal interest in the subject matter of the judgment;
Ć Inform themselves about the subject matter of the judgment to the extent
they reasonably believe to be appropriate; and
Ć Rationally believe that the judgment is in the best interest of the
corporation.

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The directors or officerÊs belief that the judgment is in the best interest of the
corporation is a rational one unless the belief is one that no reasonable person in
their would position would hold.

ACTIVITY 5.3
1. If a director, acting through his company (a) deliberately or (b)
negligently causes the members to suffer loss, to what extent do the
members have a right of recompense from the director personally?

2. Struktur Sdn. Bhd. is engaged in the business of providing services,

including architectural and project management, to industrial
concerns. Wan was appointed as managing director of Struktur Sdn.
Bhd. Shortly after WanÊs appointment, Struktur Sdn. Bhd. attempted
to unsuccessfully to obtain work from the Gas Timor Board. The
board did not place the work with Struktur Sdn. Bhd. but indicated
to Wan that they would be prepared to engage him personally. Wan
failed to notify Struktur Sdn. Bhd. of his negotiations with the
Board. Subsequently, Wan induced Struktur Sdn. Bhd. to agree to
release him from his employment with the company. Wan was
engaged by the Board to execute work of a substantially similar
nature to which Struktur Sdn. Bhd. had tried to secure for itself.
Struktur Sdn. Bhd. now seeks to recover all profits due to Wan
under his contract with the Gas Timor Board. Discuss.

5.6 REMEDIES FOR BREACH

There are five identifiable remedies available to the company.

(a) First, if a company has suffered a loss, then compensation may be sought
either through compensation in equity or on the basis of any tortious
liability for damages for negligence or deceit. The general rule with respect
to damages applied so that they operate to put the company back in the
position it would have been if the breach had not occurred. All directors
who committed the breach are jointly and severally liable.
Newcare Sdn Bhd v Sri Alam Sdn Bhd

Mahesan v Malaysian Government OfficersÊ Co-operative Housing Society

Held:
The Privy Council on appeal from Malaysia, held that the director of the
society who received a bribe to enable the society to purchase land at an
overvalue had breach his fiduciary duty to the society. The society could
elect to revoke the amount of the bribe or sue for damages. As the loss to

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the society was greater than the amount of the bribe, the director was
ordered to pay damage to the society.

(b) Second, account of profit is a common remedy for breach of fiduciary duty
when a company has suffered no loss but a director has enriched himself or
herself at the companyÊs expense
Regal Hastings Ltd v Gulliver

Board of Trustees of Sabah Foundation & Ors v Datuk Syed Kechik bin
Syed Mohamed & Anor
Held:
The appropriate remedy was for the director to disgorge the profit, which
constituted the value of the improvement of the land.

(c) Third, because of the position of directors as fiduciaries, the principles of

equity allow the courts to trace property that may have been misapplied
from the company. The company may therefore recover property from
directors and any third parties who are not innocent purchasers.
Cook v Deeks

Simmah Timber Industries Sdn Bhd v David Low See Keat & Ors
Held:
The company could recover assets which have come into the hands of third
parties as a result of breach of fiduciary duty by a director.

Barnes v Addy
Held:
A third party can be made liable as a constructive trustee in two situations
(i) Where a third party received trust property as a consequence or a
breach of trust or duty; and
(ii) Where a third party assists a trustee or fiduciary, such as a director to
misapply trust funds.

(d) Fourth, if the director breaches their duty in entering into a contract on
behalf of the company, then it may be rescinded in certain circumstances.
Kinsella v Russell Kinsela Pty Ltd

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Note: Rights to rescission are easily lost if, for example the complete
restoration of property to both parties is not longer possible.

(e) Finally fifth, if there is a service contract between a director and a company,
a breach of duty will amount to a breach of the contract of employment and
entitled the company to dismiss the director.
Thomas Marshall (Exporters) Ltd v Guinle

If the company is insolvent or nearing insolvency then „ interest of the

company‰ includes the interests of the creditors. The directors must avoid
action contrary to their interests: Walker v Winborne

The court found the company was insolvent at the time the lease was
entered into, the interest of the company were those of its creditors.
Although the members of the company had voted to approve the granting
of the lease, because the company was insolvent, the interests of the
company were not those of its members but were those of its creditors:
Kinsela v Russel Kinsela Pty Ltd.

The creditorÊs interest has also been upheld in the decision the company to
declare dividends
Hilton International Ltd v Hilton

However while creditors have some limited statutory rights against

directors of breach, creditors have no right to sue for breach of their general
law duties: Sycotex v Baseler. Directors do not owe an independent duty to
creditors which is enforceable by creditors :Spies v R.

SELF-CHECK 5.2
State your views on these question. (1) Can a creditor sue a director of
a company for breach of duty to act bona fide in the interest of the
company? Explain why or why not. (2) When does a director breach
his duty?

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EXERCISE 5.2
What are the duties of director? Are there remedies available to the
company if the director has breached his duties?

• The directorsÊ duties are one of several mechanisms that play a role in
corporate governance.
• The main function of directorsÊ duties is to ensure the loyalty of directors to
their company.
• If the law becomes too onerous, the people who are most well-informed
about their responsibilities may become reluctant to take on the role of a
director for fear of personal liability.
• Experience also suggests that the imposition of more rigorous legal duties
will not necessarily be more effective in protecting shareholders from the
harms and will not automatically result in the reduction of the number of
corporate failures.
• A related problem is that it is difficult to have clearly defined directorsÊ duties
because of the diverse nature of company - what may be expected of a non
executive director of a large, public, listed company can be irrelevant or
inappropriate for a sole director of a small family business.
• Director of different sized companies may also have different levels of skill
and experience.

Alternate directors Remuneration

Fiduciary Shadow directors
Managing directors

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 Topic X Meetings
6
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the company law requirement with respect to
meetings;
2. Explain the requirements for notices, quorum, resolutions and
procedure;
3. Examine and discuss the doctrine of unanimous consent; and
4. Apply legislation and case law in given fact situations
concerning meetings.

X INTRODUCTION
Traditionally, a company was regarded at law as an association of persons. As a
result the meetings of members provided its ultimate method of decision
making. In companies there are two groups who hold meetings. Directors hold
board meetings and members meet in general or class meetings. This topic looks
at the types of meetings and the purpose of meetings, the way in which they are
convened and their procedures.

6.1 WHAT CONSTITUTES A MEETING?

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In the case of Sharpe v Dawes, Mellish LJ said at 29:

„According to the ordinary use of the English language, a meeting could no more
be constituted by one person than a meeting could have been constituted if no
shareholders at all had attended. No business could be done at such meeting.‰

Although to have a „meeting‰ at common law it was necessary to have the

persons attend in that one place, the Companies Act now allows for a meeting of
members to be held at more than one venue. This is permitted where technology
allows a reasonable opportunity for the members as a whole to participate. This
is likely to at least required members at each venue to be able to hear each other
and for the chair of the meeting to hear and be heard. It would also require some
means of being able to count votes at all venues.

6.2 TYPES OF MEETING

Precedents are used in areas other than the legal system. Decision making bodies
of all kinds may be faced with problems involving conflicting principles on
which a determination must be made.

In reaching a solution they will take into account previous decisions in relation to
similar problems and they will be aware of the example they are setting for the future.

There are four types of meetings (Figure 6.1).

Figure 6.1: Types of meetings

The meetings of members of a company may be classified into annual general

meetings and extraordinary general meetings.

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SELF-CHECK 6.1

What are the four types of members meeting?

6.2.1 Statutory Meetings

The following Table explains the statutes governing statutory meeting.

Table 6.1: Statute Governing Statutory Meetings

CA 1965 Provision
This section provides that a statutory meting must be held within a period of not
S142(1) less than one month and not more than 3 months after the date on which a
public limited company with a share capital is entitled to commence business.
This section provides that a copy of a statutory report must be sent by the
S142(2)
directors to every member at least 7 days before the statutory meeting.
This section provides that at least 7 days before the statutory meeting a copy of
S142(5)
the statutory report and auditors report must be lodged with the Registrar.
This section provides that the report must be certified by 2 directors and contain
certain information as listed below:
The total number of shares allotted, the consideration for the allotted shares and
the amount paid up as partly paid shares.
The total amount of cash received in respect of allotted shares. The auditors
must examine and report on this: S142(4).
S142(3) An abstract of receipts and payments up to 7 days before the date of the report.
This must include an account and estimate of preliminary expenses and the
balance remaining in hand.
'The names and addresses of directors, trustees of debenture holders auditors,
the managers and secretaries.
Particulars of any contract proposed to be modified with the approval of the
meetings, together with particulars of the modifications.
This section provides that a list of members and the number of shares held by
S142(6)
them must be available during the meeting for inspection.
This section provides that in order for a resolution of the meeting to be passed,
S142(7)
notice in accordance with the articles must be given.
This section provides that it is an offence by any defaulting officer and every
S142(10) director who failed to take reasonable steps to secure compliance with the above
provisions.
This section provides the company may be compulsorily wound up if it fails to
S218(1)(b)
hold the statutory meeting and lodge the statutory report.

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6.2.2 Annual General Meeting (AGM)

By S143, the general rules is that every company must hold an AGM specified as
such in the notice calling it, every year, with an interval of not more than 15
months between one AGM of the company and the next.

A limited expectation is that as long as a company holds its first AGM within 18
months of incorporation it need not hold it in the year of incorporation or
sometimes in the following year. This is provided by S143(1).

The directors must hold the AGM. It is an office if the by accompany or by any
defaulting officer, if a default is made in holding the AGM.

The object of the AGM is to enable the members to meet together and confront
the directors at least once a year.

The usual business at an AGM is as follows:

Ć Declaration of dividend: Table A Art 98.
Ć The consideration of the account.
Ć Balance sheet.
Ć The report of the director.
Ć The report of the auditors.
Ć The election of the directors in place of those retiring.
Ć The appointment and removal of directors: Table A Art 69.
Ć The fixing of remuneration of the auditors: S172(1).
Nowadays however, some of the above may be considered at other meetings.

6.2.3 Extraordinary General Meeting (EGM)

Any general meeting of a company, other than an AGM is an EGM.

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Further by S144, despite anything in the articles, the directors are bound to
convene an EGM on the requisition of the holders of not less than one tenth of
the paid up capital of the company carrying the right of voting at general
meetings or if the company has no share capital, of members representing not
less than one tenth of the total voting rights.

The right of the members given here must also be exercised bona fide and for the
purpose for which the power is conferred.
Humes Ltd v Unity APA Ltd

The directors may refuse to act on proposed resolutions that involved

interference with a power conferred by the articles on the directors.
National Road & Motorists Association v Parker (1986) 4 ACLC 609.

Provisions governing annual general meeting are shown in Table 6.2.

Table 6.2: Provisions Governing Annual General Meeting

Act Provision
This section provides that if directors do not, within 21 days of the
deposit of the requisition at the registered office of the company,
proceed to convene the meeting fixed from a date within 28 days of its
S144(3)
being summoned, the persons making the requisitions or the holders of
more than half their voting rights, may convene it themselves, as long
as it is held within 3 months after such reports.
This section provides that subject to the articles, two or more members
S144(5) holding at least 5 percent of the issued share capital may convene a
meeting of the company.
This section provides that the notice must be in writing of at least 14
S145(2) & (4) days notice must be given to all members having the right to attend and
vote at meeting.
This section provides that if a meeting is convened to pass a special
S152(1) resolution, then at 21 days notice in writing must be given and the
notice must specify the intention to propose a special resolution.

6.2.4 Class Meetings

A class meeting is held when it is necessary for a class of shareholders to decide
matter which affect their particular class of share. Meetings of a particular class
of shareholder are regulated in accordance with the terms of a companyÊs
articles. The procedure for conducting class meetings, on the whole, is
comparable to the procedure which governs general meetings. The standard

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quorum required at class meetings is two people holding or representing by

proxy at least one third in nominal value of the issued share capital of the class in
question.

6.3 MEETING PROCEDURES

The exception to this is where shorter period of notice may be allowed for an
AGM if all members agree beforehand, or for any other meeting, 95% of
members agree. No shorter period is allowed, however, if a resolution to remove
or replace a director or to remove an auditor is to be decided: S172 (4) and S128
respectively.

In deciding what information to include in a notice, the directors must give

sufficient information to enable the shareholders to decide whether the need to
attend.

Ryan v Edna May Junction Gold mining Co NL,

Held:
That the notice should give a „fair and reasonable‰ indication of that which is
proposed to be done at the meeting. The recipient in that case was said to be a
businessman.

The determination of the fair and reasonable standard is now more likely to be
made from the point of view of a shareholder who may not be versed in the skills
of business
Devereaux Holdings Pty Ltd v Pelsart Resources NL

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The common law rule where notice as required by the articles is not given the
proceedings of the meeting, including any resolutions purported to be passed,
are void has been modified under S355. This section provides that no
proceedings under the Act shall be invalidated by any defect, irregularity or
deficiency of notice or time unless the court is of the opinion that substantial
injustice has been done or may be caused thereby which cannot be remedied by
an order of court.

David Lau Tai Bek v Lau Ek Ching Sdn. Bhd.

Held:
The court has extensive powers under S355(3) to make such orders as it thinks fit,
including ancillary orders, to rectify or modify the consequences of any
irregularity.

Musselwhite v CH Musselwhite & Sons Ltd.

Held:
The section equivalent to the Malaysian S145(2) does not apply where the
omission was deliberate, even though based on a mistaken belief that the
member was not entitled to attend.

Chequepoint Securties Ltd. v Claremont petroleum NL

Facts:
The purpose of the meeting was to seek approval for agreement with another
company. A report was prepared for that other company showing it was
beneficial and the directors of Claremont included this in the notice.

Held:
To be misleading to the Claremont shareholders.
If the directors have personal interest in the matter before the meeting, this
should be brought out in the notice.
Kaye v Croydon Tramway Company

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If a matter has not been covered in the notice, it may not be dealt with at the
meeting.
Espstathis v Greek Orthodox Community of St George

Notice of the meeting should be served in the manner required specified in the
act or any other method allowed by the constitution of the company. The notice
may be served by sending it to the fax machine or electronic address of the
member if they have been provided. A defect in the notice given will not
invalidate a meeting.

ACTIVITY 6.1

State your views on these question. (i) „General Meetings of

Shareholders are an expensive waste of time‰. Do you agree and why?
(ii) Who must be given the notice of meeting? (iii) What must be
included in the notice of meeting?

6.4 POWER OF THE COURTS TO ORDER

MEETINGS
Under S150, both directors and members have the power to make application to
the court to order a meeting. In addition the court may order a meeting of
members if it is impractical to a meeting in any other way. The term impractical
in S150 does not require impossibility:

Re El Sombrero Ltd.
Wynn-Parry J stated:
„one must examine the circumstances of the particular case and answer the
question whether, as a practical matter; the desired meeting of the company can
be (convened).‰

Leong Ah Hong v Hup Seng Co Ltd.

Held:
High Court held that after considering the case of Re El Sombrero, that before the
court will convene a general meeting it must be satisfied that it is impracticable
to call a meeting of the company in any manner in which the meeting of that
company may be called or to conduct the meeting of the company in the manner
prescribed by the articles or the act.

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Foo Tong Eng v Po Fun Suan,

Held:
The Court will convene a general meeting when the effect of non attendance is to
paralyse the company and expose it to penalties for non compliance with the law.

Tay Say Geok v Tay Ek Seng Co Sdn Bhd,

Held:
The courtÊs power to convene a meeting did not extend to concerning directors
meetings.

The power has been used for example:

(a) Where a company has failed to appointed directors.
Re Totex & Adon Pty Ltd. (1980) 4 ACLR 769
Held:
To be „impracticable‰ to call a meeting because one of the two shareholders
entitled to vote at a meeting refused to cooperate in calling a meeting. It as
ordered that the meeting be called and that the presence of one member
holding AÊ class shares would constitute a quorum.

(b) Where there is a lack of shareholder to make a quorum owing to the

articles:
Re Edinburgh WorkmanÊs Houses Improvement co Ltd. ; and

(c) Where the companyÊs operation are deadlocked:

Re Canadian Javelin Ltd.

SELF-CHECK 6.1

What are the circumstances where the directors have been given
power to order a meeting?

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6.5 QUORUM, CHAIRMAN AND VOTING

6.5.1 Quorum

The quorum must be an effective quorum i.e. it must consist of members

qualified to take part in and decide upon questions before meeting and where
articles required a quorum of members to be „present‰ (without addition as
„personally or by proxy‰). That word means „present in person.‰

M Harris Ltd petitioners

Held:
A member represented by an attorney was held not to be present.

Whether a meeting is valid is a matter of construction of the articles where a

person is present at the commencement of the meeting but leave before the
business is transacted, leaving the meeting in less than the required quorum.

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Tan Guan Fong v BN Low Holdings Sdn. Bhd. & Ors and others actions
Held:
The High Court judge construed the relevant articles to mean that a quorum was
required only at the time when the meeting proceeded to business. Given that
there was a quorum present when the meeting proceeded to business, in the
circumstance of the case, the continued meeting with the presence of only the old
of valid proxy was valid.

If a quorum is not present within half an hour of the time appointed for the
meeting, the meeting will be adjourned. In the next week at the same time and
place or to such time and place the directors may determine and if at the
adjourned meeting a quorum is not present with half an hour, the members shall
form a quorum. It is thought that a single member can constitute a quorum at an
adjourned meeting.

6.5.2 Chairman
Unless the articles otherwise provide, the members present at a meeting may
elect any member as a chairman. However the articles usually provide who is to
be a chairman.

The chairman must exercise „procedural control‰ in order to be said to chair a

meeting. This includes such things as:
Ć Nominating who is to speak;
Ć Dealing with the order of business;

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Ć Putting question; declaring resolutions carried or not; asking for general

business; and
Ć Declaring the meeting closed.

The chairman has no casting votes unless otherwise provided for by the articles.

6.5.3 Voting
The right to vote is generally determined by the provisions in the company
constitution. Normally voting is by show of hands unless a poll is demanded.
Table 6.3 shows the provisions governing right to vote.

Table 6.3: ProvisionGoverning Right to Vote

CA 1965 Provision
This section provides that Subject to specific rights or
restrictions attaching to any class of shares each member of the
Table A Art 54
company, having a share capital has one vote when voting by
show of hands and one vote per share if a poll is taken.
This section provides that members have the right to demand a
poll at a general meeting on any question or matter other than
S146(1) the election of the chairman of the meeting or the adjournment
of the meeting. Any provision in the articles excluding this
right is void.
This section provides the chairman and certain categories of
Table A Art 51 members may demand a poll where a resolution has to be
defeated by a show of hands.
This section provides unless otherwise the articles provide, a
S149(1) (a) proxy is entitled to vote only on a poll. A proxy is person
authorized to vote on behalf of the appointed member.

ACTIVITY 6.2
What are the procedural requirement governing the conduct of
meetings? State your opinions.

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6.6 MEMBERSHIPS RIGHTS IN MEETING

Members have a right to vote at a general meeting of the company, unless the
companyÊs constitution denies that right (Pender v Lushington). A memberÊs
right to vote is unusually provided for in the companyÊs articles of association.

An ordinary shareholder enjoys full voting rights unless otherwise provided for
by Table A Art 57. In this situation, the member cannot vote unless all calls or
other sums payable by the member in respect of membersÊ shares have been
paid.

Where a company has issued more than one class of shares the companyÊs
constitution or the terms of the issued of the share may provide for the difference
classes to have different voting rights.

Only members are entitled to vote at a meeting of the company (except of course,
where a non member does so in his or her capacity as a proxy or representative
of a member) it seems likely that a company cannot confer the right to vote on
people who are not members.

A person becomes a member by being named in the company constitution as the

subscribers to the company shares by being a shareholder and having been
included in the register of members or being included in the Central Depository
Systems register of depositors.

ACTIVITY 6.2
Imagine the following scenario. Being a member of the company,
your right to vote has been deprived. Based on what you have read
and learnt, explain on your rights and say in a meeting.

EXERCISE 6.1

Discuss on the types of meetings that are held in a company.

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6.7 RESOLUTIONS

An ordinary resolution is a resolution passed by a simple majority of the votes of

the members entitled to vote (Bushell v Faith).

A shareholders agreement may however prevent a member voting in particular

way on a particular resolution (Russel v Northern Bank Development
Corporation Ltd.) and voting in person or where allowed by proxy at a meeting
of which notice has been duly given.

An extraordinary resolution or also known as special resolution is a resolution

passed by at least three fourth majority of [votes of] the members entitled to vote
and voting in person or where allow by the proxy at a general meeting of which
notice specifying the intention to propose the resolution has been duly given.

The court has evolved the doctrine that if all the member assents to a transaction
within the capacity of the company the company is bound.

In the case of Parker & Cooper v Reading, there was no actual meeting but the
member individually and a different time informally ratified a debenture granted
by the directors which although within the capacity of the company was beyond
the powers of the director because two directors had been invalidly appointed.

The case was applied in Re Duomatic Ltd. where it as held that where it can be
shown that all shareholders have right to attend and vote a general meeting of
the company assent to some matter which a general meeting of accompany
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could carry into effect that assent is as binding as a resolution in a general

meeting.

ACTIVITY 6.3

Based on what you have learnt, discuss with your classmates on

what you understand on resolutions.

6.8 ACCOUNTS
Under the Companies Act all companies are required to keep certain records
which includes financial records, minutes of directors and members meetings
and resolution and register of the holders of various securities. Table 6.4 shows
the provisions governing accounts.

Table 6.4: Provisions Governing Accounts

CA 1965 Provision
This section defined accounting records as to include invoices,
receipts, order for payment in money, bills of exchange, cheques,
S4(1) promissory notes, vouchers and other document of prime entry and
any documents which are necessary to explain the methods and
calculations by which accounts are made up.
This section provides that every company and the director and
manager must make entries in accounting and other records within
S167(1A)
sixty days of the completion of the transaction to which they relate.

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This section provides that the company is also under an obligation to

S167(2)
keep records for at a least seven years.
This section provides that appropriate translations must be kept if the
S360(3) records are not in Bahasa Malaysia or in English.
This section provides that the company may keep account by making
S358 A
entries in bound books or in electric form.

ACTIVITY 6.4

Why are all companies required to keep accounts? State your

opinions.

6.9 PENALTY

This section goes further and allows "any interested person" to apply to the court
for an order validating irregularities generally not just procedural irregularities.

The court may exercise its discretion where „any omission, defect, error or
irregularity (including the absence of a quorum at any meeting of a company or

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of the director) has occurred in the management or administration of a

company⁄.‰

ACTIVITY 6.5
Suppose a resolution is passed at a general meeting without a quorum
being present. If a member disagreed with the resolution, what could
he or she do about it?

EXERCISE 6.2
Discuss the members' entitlement to vote, and the rules governing
exercise of membersÊ voting rights at company meetings.

• Day to day management of a company is in the hands of the directors, not the
shareholders - but the shareholders retain some important powers - many
decisions require a resolution of the shareholders and cannot be decided by
the directors alone.
• It is clear that most companies must hold an AGM. Authority to call for a
meeting normally rests with the directors.
• If person without authority issues notice of a meeting the notice is void.
• Table A provides that notice must be given to all shareholders, directors and
auditors.

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• Failure to notify someone entitled to notice will invalidate the meeting unless
the failure was purely accidental: A meeting held without a quorum cannot
validly transact any business.

Accounts Penalty
Annual general meeting (AGM) Quarum
Chairman Resolutions
Class meeting Statutory meeting
Extraordinary general meeting (EGM)

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 T op i c  Corporate
Finance 1:
7 Dividend and
Share
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain what is meant by capital and share capital;
2. Discuss what is meant by dividend;
3. Identify the provisions governing dividend payments;
4. Evaluate what is meant by a class of shares;
5. Describe the rights of preference shareholders; and
6. Review how class rights can be varied.

 INTRODUCTION
This topic deals with company finance. These are the sources and natures of
funding provided to the companies by investors and creditors and used by the
company in the course of carrying on its activities. This topic begins with the
discussion of capital and shares. It then discusses the other main source of
company finance which is dividend.

7.1 CAPITAL
ACTIVITY 7.1

Do you know the sources of a company's finance?

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„There is probably no concept in economic which are quite so ambiguous and

confusing as capital. According to the context word may mean wealth, a factor
or means of production, the value of those means of production, the net worth of
business enterprise, the present value of a future sequence of receipts, money, the
money value of assets, and possibly other things as well. Capital is thus thought
of in physical terms, in value term and in money terms, an ambiguity which has
sometimes been carried over into law.„ FarrarÊs on Company Law.

7.1.1 Definition

The term capital does not only cover share capital provided by the proprietors
and the loan capital provided by creditors.

Share capital represents a right in the company and loan capital represents a
right against the company.

Judicial decisions distinguish the various meanings of capital in the Canadian

case of St Michael Uranium Mines Ltd v Rayrock Mines Ltd (1958). By way of
obiter dicta he opined:

„I think⁄⁄.it is right to say that there is confusion commonly existing regarding

the meaning of the term capital in corporation financing. To the economist it
usually signifies tangible instruments of production, that is, physical assets used
in the creation of other goods or of services. The average man frequently thinks
of „money‰ as „capital‰ and uses the terms synonymously, and bankers often use
the word capital, in the sense of net worth. However, in business parlance the
term ordinarily means the investment in an enterprise, which from the legal
point of view, may be thought of as being represented by money or by moneyÊs
worth consisting of property and valuable tangible assets the corpus of the
corporate business⁄⁄And capital and share capital are not the same‰.
Re Ontario Express and Transportation Co (1894)

7.1.2 Types of Capital

A company requires finance for its commercial activities. Thus, the main sources
of finance for companies are shown in Figure 7.1.

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Figure 7.1: Main sources of finance for a company

Lord Watson opined:

„Capital is the asset of a company that it employs to conduct its trading

activities‰ Trevor v Whitworth (1887)

(a) Share Capital or Contributed Capital.

The term share capital may be used in the following contexts and there are
six different aspects to this (Table 7.1).

Table 7.1: Six Different Terms of Share Capital

· Authorized Share Capital is total value of shares the company is

allowed to allot - also known as nominal or registered capital.
- S18(1) CA 1965 makes it compulsory for companies to have a
capital clause in the memorandum stating the amount of capital the
company proposes to register and its division into fixed amount.

SHARE - S62 (1) (a) further allows the authorized capital of a company to be
CAPITAL increased by the amendment of its articles.
·
Allotted Share Capital is the value of shares the company has actually
allotted to members.
· Paid-up Share Capital is the amount that members have paid on
their shares, excluding any premium.

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· Called-up Share Capital is the paid-up capital + any amount

members have been called on to pay.
· Uncalled Capital is the amount owing on partly paid shares which
members have not yet been called on to pay.
Reserve Capital is uncalled capital the company has resolved not to
call unless the company is wound up.

(b) Issued Share Capital

The issued share capital of a company is the fund to which creditors of the
company can look for payment of their debts.

Two fundamental legal principles relating to share capital is that share

capital must be raised and share capital must be maintained.

The Common Law developed the principles that share capital must be
raised and maintained in order to accommodate and adjust the respective
interests of a company, its members and its creditors.

Under Companies Act, only companies limited by shares may issue share
capital.

(c) Loan Capital (Debt Capital or Equity Capital)

Loan capital is the amount of money borrowed by a company. Persons who
lend money to a company may be issued with debentures to show that they
have lent money and are entitled to interest on their loans. Unlike
shareholders, debenture holders are not members of the company and they
have no right to vote at general meetings. Creditors may take a charge over
the companyÊs property by way of security for repayment of their debt.

ACTIVITY 7.2
Applying your understanding and ideas, explain the context in which
the term share capital can be used.

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7.2 DIVIDENS

7.2.1 Definition

However, there are some circumstances that the companyÊs constitution may
exclude that power.

7.2.2 Payment of Dividen

The dividend must be declared before it can become payable. In the case of Kang
Chong Yeow; exp Mivan Far East Sdn Bhd, the High Court reaffirmed that a
dividend must be first declared before it becomes a debt by the company to the
shareholder.

This clearly indicates that the courts are reluctant to interfere with the directorsÊ
discretion as men of business.

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The traditional view of the courts is that dividend policy is a matter for the
appropriate organ of the company- either the company in general meeting or the
directors.

However the amount payable must not exceed the amount that has been
recommended by the directors.
Scott v Scott [1943]

In the case of Re SQ Wong Holding (Pte) Ltd [1987], the High Court of Singapore
held that the directors have discretion whether or not to recommend a dividend,
even on the preference shares.

In deciding whether to recommend the payment of a dividend, the directors

must act in the best interest of the company.

Shareholders are not entitled to a dividend as of right once the company has
earned profit, unless this is specifically stated in the companyÊs internal rules.
Burland v Earle

In the case of Sanford v Sanford Courier Service pty Ltd (1986), it was decided
that persistent refusal to pay dividends may be considered oppressive and
unfair.

In the Case of Cheiw Sze Sun & Anor v Cast Iron Products Sdn Bhd & Ors [1994],
the judge in that case held that the complaint by the petitioner that no proper
accounts were being kept and no dividends had been paid amounted to the affair
of the company being conducted and the powers of the other respondents being
exercised, in manner oppressive to and in disregard of the interests of the
petitioners which constituted sufficient grounds to grant the orders under S181
CA 1965.

Company articles may draw a distinction between the declaration of final and interim
dividend. Dividends payments may be staggered during the course of the year:

(a) Final dividend represents the debt owed by the company to the shareholder.
This type of dividend is one paid at the end of a companyÊs financial year,
out of profits disclosed by the companyÊs annual financial report.

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(b) Interim dividend depends by its nature, on estimates and opinions of the
companyÊs ultimate profitability for the year. This type of dividend is one
paid in the period between the annual presentations of the financial reports
to th companyÊs general meeting.

The method of payment is usually in cash; however other forms may also be
acceptable such as shares, the grant of options or the transfer of assets. Bonus
shares can be used as an alternative to cash dividends. The amount the dividend
goes to pay for the extra (bonus) shares which the company issues to the
shareholders. Therefore, this means that no money leaves the company. In the
financial reports, the profit and loss account is decreased, and the share capital
account is increased by the amount of the distribution.

A company's constitution may provide for the share capital to be divided into
classes of shares, of which each class may have different dividend rights.

Dividend is usually entitled to a fixed annual dividend in priority to any

dividend payable to ordinaries. Right to dividend is presumed to be cumulative
(i.e. arrears of dividend unpaid in previous years are added up and must be paid
before any dividend can be paid to ordinary shareholders) but it could be made
non-cumulative although this would be unusual and unattractive to preference
shareholders who look for a lower degree of risk.

A dividend is usually payable to a shareholder in proportion to the nominal

value of the shares held in the company, but it should be noted in accordance
with Companies Act, that the constitution may place restriction on the payment
of dividend. Dividends may not be paid out of capital. This would amount to
return of capital to members in a way not authorized in the Companies Act.

The Companies Act does not define "profits" or "capital." The courts have also
been reluctant to define theses terms, except for a statement by Fletcher Moulton
LJ in Re Spanish Prospecting Company Ltd. [1911] which was considered in:

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A company can only make a distribution of its profits if the amount of its nets
assets is not less than the aggregate of its called-up share capital plus
undistributed reserves, and further the distribution must not reduce the amount
of those assets to less than the aggregate.

If the directors of a company decide not to declare a dividend or to declare a

reduced dividend, the company may retain its profits in the business; indeed
most companies retain at least a proportion of their profits to inject back into
future business projects. The directors may create reserves and such reserves
may be capitalized and used for the purpose of allocating bonus shares.

Where a dividend is declared in contravention of S64 and the procedural rules

set out in the Companies (Reduction of Capital) Rules 1972 the director may be
liable under S64(10).

Any member who was awarded or had reasonable ground for believe that there
had been a contravention of the procedural rules, will be liable to repay the
dividend payment to the company.
Precision Dippings Ltd. v Precision Dippings Marketing Ltd. [1986]

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ACTIVITY 7.3
Applying your basic understanding on what you have just read and
learnt about dividend, explain the distinction between a final dividend
and interim dividend.

7.3 SHARES

7.3.1 Definition and the Legal Characteristics of a

Share

The memorandum states the nominal value for each share - members must
contribute at least this amount.

The said property attracts rights and benefits provided by the principles of
property law. They also attract rights and benefits under a companyÊs internal
rules, companies act and the general law. The legal rights of a particular type of
share (class rights) may vary from those of other types of shares issued by the
company.

In the case of Bradbury v English Sewing Cotton Co. Ltd. [1923], the House of
Lords examined the nature of shares and said that a share is a fractional part of
the share capital. Shares are also the individual property of all the members but
all the members together do not own the share capital. The share capital belongs
to the company (separate legal personality). All shares are individual property
but what they represent, i.e. share capital remains the property of the company.

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The legal rights attached to shares may be seen as comprising elements in Figure 7.2.

Figure 7.2: Legal rights attached to share

7.3.2 Types of Share

ACTIVITY 7.4
„Shares confers a bundle of rights.‰ Do you agree with this
statement?

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A company may issue different types of shares, referred to in the Companies Act
as „classes of shares.‰ Shares may differs as to the terms on which they are issued
and the rights and restrictions attaching to them.

The bulk of the company shares are known as ordinary shares. Apart from
ordinary shares, companies can also issue preference shares. These will be
discussed in detail under the heading of classes of shares below.

7.3.3 Classes of Share

(a) Typical Rights of Shareholders

MemberÊs rights are detailed in the Articles, but the following are typical:
• Right to control company through voting at meetings.
• Right to participate in distribution of profits.
• Right to participate in surplus assets in a winding up.

(b) Preference Shares

Therefore, this simply means:

• Give preferential right to a dividend of fixed amount or fixed
percentage per share.
• This dividend is paid before anything is paid to ordinary
shareholders.
• Right to dividend is normally cumulative.

Cumulative dividends are dividends which accumulate if the company

does not pay the full dividend in any year.

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The preference shareholders are then entitled to have the deficiency made up in
a later year before any dividend is paid to ordinary shareholders.

Preference shares usually give a preferential right to repayment of capital on a

winding up.

Preference shareholders normally have restrictions placed on their power to vote

at general meetings.

However, the standard rights are one vote per share (preference or ordinary).

An issue of preference shares must comply with the requirement of this section.
A company can issue preference shares only if the rights attached to the
preference shares with respect to the following matters are set out in the
companyÊs constitution (Figure 7.3).

Figure 7.3: Requirements to issue preference shares

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A company that contravenes S66 by issuing preference shares whose rights are
not set out in the companiesÊ constitution, the company or shareholders can
apply to the court for an order validating or confirming the terms of preference
share issue. Courts refer to the following presumptions:

Dividends- preference shares are presumed to carry a right to cumulative

dividends unless the terms of preference share issue state otherwise.
Webb v Earle (1875).

Preference shares may be interested as carrying a right to further dividends in

the same year where they are called participating preference shares in the
company documents.

If a share is merely given preference as to the payment of a dividend, it is

presumed as to payment of a dividend, it is presumed that there is no automatic
right to participate in the profits available for distribution after the preferential
dividend has been paid- in other words, for a preference share to have been
created as a participating preference shares, the companyÊs constitution must
specify that the preference share was so created:

Will v United Lankart Plantations Co Ltd [1914] AC 11l.

Whether a specific right exists as to the return of capital or the ability to
participate in surplus assets is a question which will be determined by a
construction of the company's constitution, or terms of the share issued. Where
no such provision is made within the regulation for the distribution of capital or
surplus assets, all share holder of all classes will participate equally
Birch v Cropper (1889) where Lord Macnaughten, stated:

„very person who becomes a member of a company limited by shares of

equal amount becomes entitled to a proportionate part in the capital of the
company, and, unless it be otherwise provided by the regulations of the
company is entitled as a necessary consequence, to the same proportionate
part in all the property of the company, including its uncalled capital.‰

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In the cases of Re Isle of Thanet Electricity Supply Co. Ltd. [1950] and Dimbula
Valley (Ceylon) Tea Co. Ltd. v Laurie [1961] would appear to confirm the view
that unless specifically provided for the companyÊs constitution, the rights of
shareholders on the liquidation of the company cannot be calculated according to
rights which were applicable to them prior to the companyÊs liquidation.

Redeemable preference shares are preference shares that are issued on the terms
that they are liable to be redeemed.

(c) Ordinary Shares

Where a company's shares are issued without being divided into different
classes, the shares will be ordinary (equity) shares. If a company issues
shares which have specific class rights, any remaining shares to which the
specific rights are not attached will be construed as ordinary shares. This
share is the only type of share to carry votes at general meeting of the
companyÊs shareholding body.

It is allowed for a company, if authorized by this constitution, to issue

different types of ordinary shares. It may be created as non voting shares,
shares with limited voting rights or shares with enhanced voting rights. The
last type can be seen in the case of Bushell v Faith [1970]

Dividend depends on company profits and there is no automatic right to a

dividend.

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7.3.4 Issue and Allotment of Shares

A company can either issue shares privately to certain people, or it may invite
the public to subscribe for shares. Issuing is the process by which members
take shares in the company.

A share is allotted when someone acquires an unconditional right to be entered

in the register of members. Table 7.2 explains the allotment of shares.

Table 7.2: Allotment of Shares

Allotment Contracts

- Usual rules of contract apply. There must be an offer met by an

acceptance. A prospectus is not an offer to sell shares; it is an
invitation to treat.

- It is possible to have a conditional contract which gives an

option to demand the allotment of shares at a later date. This
option can be traded like shares.
ALLOTMENT OF
SHARES Authorisation of Allotment

- Directors cannot allot shares without authority given by the

existing shareholders or the articles.

- The authority must state the maximum number of shares to be

allotted. It is a criminal offence to allot shares without proper
authorisation, but the allotment remains valid.

The application of this Australian equivalent section can be seen in the case of Re
The Swan Brewery Co. Ltd. (No. 2) 1976. This case was later applied in the case
of Kelapa Sawit ( Telok Anson) Sdn. Bhd. v Yeoh Kim Leng & Ors [1991] where
the Supreme Court the shares could be validated under S63 and the court stated
that there was no valid directorÊs circular resolution as required by the
companyÊs memorandum and articles. Moreover, the affixing of the seal by the

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secretary on the share certificate was not in accordance with the provision of the
memorandum and articles. In this circumstance there were no valid grounds to
validate the shares under S63.

Pre-emption Rights
Existing shareholders must be offered the opportunity to buy any new issue of
shares before they are offered elsewhere. Shareholder must be given 21 days to
decide whether to buy. Private companies can avoid pre-emption rights.

7.3.5 Variation of Class Rights

What is variation of class rights? A company may vary the rights of a particular
class of shares or member directly or indirectly. A transaction that involves a
variation of class rights if varies or cancels the legal rights attaching to shares or
membership.

Class rights are where particular rights are annexed to certain shares. A class can
probably be defined as "those persons whose rights are not so dissimilar as to
make it impossible for them to consult together with a view to their common
interest" per Bowen LJ CA in the case of Sovereign Life Assurance Co. v Dodd
[1892].

In determining whether a variation of class rights has taken place the courts have
drawn a distinction between the rights of a class of shareholders and the
enjoyment of those rights. Therefore, to establish a variation of class rights, the
rights of class of shareholders must be fundamentally and specifically altered.
Where a company act merely to affect the rights of a class of shareholders
without expressly altering such rights, that particular corporate act will not be
construed as a variation but merely as affording a change in the enjoyment of
those rights. This is seen in the case of Greenhalgh v Arderne Cinemas Ltd.
[1946].

In the case of Re Saltdean Estate Co. Ltd. [1968] it was held that the return of
capital to preference shareholders thereby ending their right to participate in the
company could not be regarded as a variation of the preference holdersÊ class
rights. However, it is to be observed that in this case, the preference shareholders
right to a return of capital was expressed to be on the winding up of the company
and not upon a reduction of capital.

The statutory provisions that protect the rights of shareholders as set out in the
articles. In the case of Pender v Lushington it was held that where the majority
members disregards a right attaching to a class of shares the class shareholder
may enforce his or her rights under the articles.

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Table 7.3: Statutory Provisions That Protects the Rights of Shareholders

CA 1965 Provision
A special resolution is necessary to alter the articles.(The alteration of
articles at a general meeting must be bona fide for the benefit of the
S31
company as a whole and the majority does not commit a ground on
minority).
Members may seek a remedy under this section for alteration of
S181 article which is not bona fide for the benefit of the company.
The holders of three quarters of the issued shares of a class of shares,
to consent in writing to or pass a special resolution at a separate
Table A Art 4 meetings of holders of the shares of the class approving a variation of
their rights.
Where a variation or modification of rights classes exist in the
company's constitution, and class rights have been varied in
accordance with that modification of rights class, the holders of not
less than ten percent of the issued shares of the class whose rights
S65 have been varied or abrogated can within one month after the
variation or abrogation, apply to the court to set aside the variation
or abrogation. (The court will make an order if it is satisfied that the
variation has unfairly prejudiced the members of that class).
Deems an allotment of preference shares ranking equally with
existing preference shares to be variation of rights of the holders of
S65 (2) existing preference shares. Unless otherwise at the time the existing
preference shares were allotted, the constitution authorized a later
issued of equal rank.

With the statutory protection members in the affected class will not be at a risk of
the company undertaking a variation of their rights for non legitimate purpose.
Non legitimate purposes may be to eliminate a person from being a member of
the company by canceling all of the right attaching to them meres shares, to
benefit some members at the expense of others by increasing the rights attaching
to some shares but not others or to prejudice some members by decreasing the
rights attaching to their shares only.

ACTIVITY 7.5
What are ordinary shares and preference shares? Are there any
restrictions on rights that can be attached to shares? State your
opinion.

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EXERCISE 7.1
What are the rights of a preference shareholders and ordinary
shareholders?

• In general terms, the capital of a company is made up of equity and debt.

The ratio of debt to equity is called gearing.
• Equity is the amount available to members of the company after all liabilities
have been paid.
• A company limited by shares obtains equity by the issued of shares in return
for contribution of capital from the members. A company has the power to
issue its own shares.
• Debt is capital obtained by borrowing money private (bank) or publicly
(debentures).
• A class of shares is a category of shares which have particular rights and
benefits that are different to the rights and benefits attaching to other shares.
• To date on which an authorised variation or cancellation of class rights takes
effect depends on whether or not the variation was unanimously agreed to by
members of the affected class.

Allotment of shares Ordinary shares

Capital Preferences shares
Dividens Shares

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 T op i c X Corporate Finance
2: Financial
8 Assistance,
Debenture,
Charges,
Capital
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Explain the nature of a debenture as well as debenture stock
fixed and floating charges.
2. Apply relevant common law principles and statutory provisions
to given fact situations regarding the principle that share capital
must be maintained;
3. Examine the prohibition on a company providing financial
assistance for the acquisition of its own shares and the main
exceptions to this rule.

X INTRODUCTION
Another important method by which companies increase their capital is through
debt financing. Debt finance or Loan capital are the terms used to describe the
procedure of borrowing money from lenders outside the company such as bank.
The lender, in this situation, do not become members of the company but remain
outside the company structure.

This topic will examine some of the more common forms of security granted by
the providers of debt finance such as debenture and charges.

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CHARGES, CAPITAL

This topic will also examine a number of rules derived from the principle that
share capital must be maintained and the methods of reduction of capital.

Finally it will also examine the prohibition on a company providing financial

assistance for the acquisition on its own shares.

ACTIVITY 8.1
Imagine yourself in this situation. You are planning to set up a
construction firm. Of course, you need capital. How can you manage
to raise enough money to build up your company?

8.1 DEBENTURE AND CHARGES

Companies quite often raise money through borrowing. This is by undertaking
ordinary unsecured loans, by issuing bills of exchange of promissory notes, by
granting a charge on the property of the company or by the issue of debentures.
As previously stated, this money borrowed is known as loan capital.

A company being a debtor differs from other debtors. A company is given the
power by Company Law to issue debentures (Figures 8.1).

Figure 8.1: Differences of a debtor from another debtor

Banks and private lenders are a significant source in providing capital of a

company. The loan provided may be secured or unsecured. A secured loan is
one which the company gives special rights over its property to the creditor. The
creditor is then able to revoke the amount owned if the company defaults in
payments. The security will be in the form of a charge over the company
property or capital. This gives the creditor the right to apply the secured property
towards payment of amount owing to it.

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In the commercial sense, a debenture is a series of bonds, which evidences the

fact that the company is liable to pay an amount specified, with interest, and is
generally secured on a charge over the property.

A debenture holder is entitled to obtain payment of the interest sums due to him.
Whether they are principal or interest, the prescribed rate of interest which is
stipulated in the debenture must be paid to the debenture holder irrespective of
whether or not the debtor company is in profit.

Debenture can be issued to the public for the purpose of raising capital. Issued
by the corporation upon or subject to the terms and conditions contained in trust
deed referred to or identified in the certificate is deemed to be a document
evidencing the indebtedness of that corporation in respect of the deposit or loan.

The Securities Commission Act 1993 (SCA) has an identical definition of

debenture with the Companies Act. However it further sets out categories of
instrument which are not classified as debentures.

A public company can raise loan finance from the investing public by way of
debentures. The usual method is for a company to offer to the public a set of
debentures known as debenture stock.

The holders of the debentures become creditors of the company for a particular
sum of money, being part of the total sum owing in respect of the debenture
stock. A debenture holder will usually be in a much better position than a
shareholder, as in a winding up it will have priority over creditors for the
repayment of its debt. A company must keep a register of debenture holder,

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which must contain such detail as the name and address of debenture holder and
the amount of debenture held by them.

A public company proposing to issue debentures generally must adhere to

requirements as listed in the following Table 8.1.

Table 8.1: Requirement to Issue Debenture by a Public Company

Comply with the Bursa Malaysia Listing Requirements

Enter into a trust deed which contains the contents specified by

the SCA
REQUIREMENTS
TO ISSUE A
Appoint an eligible trustee: person who are eligible to be
DEBENTURE BY A
appointed as trustees are identified in the SCA:
PUBLIC COMPANY
Comply with the other requirements of the SCA and this
included the duty to call a meeting of debenture holders under
S86

As the individual debenture holders may not be in a position to protect their

interest.

ACTIVITY 8.1
Based on your understanding on what you have just learnt on
debenture and charges, state your own opinion as to why do
companies issue debentures?

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CHARGES, CAPITAL

8.1.1 Fixed and Floating Charges

A charge in the general sense describes a security given by a company over some
or all of its assets in favour of a creditor.

Lord Atkins in the case of National Provincial and Union Bank of England v
Charnley [1924] defined a charge as:

„⁄⁄..in a transaction for value both parties evince an intention that property,
existing or future, shall be made available as a security for the payment of a debt,
and that the creditor shall have at present right to have it made available, there is
a charge even date, and though the creditor gets no legal right of property, either
absolute or special, or any legal right to possession, but only get a right to have
the security made available by an order of the court. If those conditions exist, I
think there is a charge.‰

(a) Fixed Charge

It is not necessary for the property to be owned by the borrowing company
or even to be in existence when the charge is given:

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CHARGES, CAPITAL

Holroyd v Marshall (1862)

The consent of the lender must be obtained first, if the company wants to dispose
of the property:
Siebe Gorman & Co. Ltd. v Barclays Bank Ltd. [1979]

Property which is subject to a fixed charge and which is sold on to a third party
without the chargee's consent will remain subject to the charge unless the third
party is a bona fide purchaser without notice, of the existence of the charge.
However, providing the charge is registered, the third party will be deemed to
have notice of its existence.

The creation of a fixed charge on the book of debts of a company was affirmed in
the case of United Malaysian Banking Corporation Bhd. v Aluminex (M) Sdn.
Bhd. by the Supreme Court.

In order to create a fixed charge over a corporate asset, the asset in question must
be identifiable, although it need not be in existence at the time the charge was
created. The property to which a fixed charge may attach can be a future
property. The holder of fixed charge has rights which are to be found within the
document creating the charge.

Fixed charge confers an immediate security over the charge property.

(b) Floating Charge

In the case of Illingworth v Houldsworth [1904] Lord Macnaghten drew a

distinction between a fixed charge and floating charge.

„A specific charge, I think, is one that without more fastens on ascertained

and definite property or property capable of being ascertained and defined;
a floating charge, on the other hand, is ambulatory and shifting in its nature,
hovering over and so to speak floating with the property which it is intended
to affect until some event occurs or some act is done which causes it to settle
and fasten on the subject of the charge within its reach and grasp‰.

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Only a company may grant a floating charge. In the case of Re Yorkshire

Woolcombers Association Limited [1903] 2 Ch 284, Romer LK stated the
following to be the characteristics of a floating charge:

(a) It is a charge on a class of assets of a company present and future;

(b) That class is one which, in the ordinary course of business of the
company, would be changing from time to time; and
(c) It is contemplated that, until some future step is taken by or on behalf
of those interested in the charge, the company may carry on its
business in the ordinary way as far the particular class of assets
affected by the charge is concerned.
In the case of Re Lin Securities (Pte) [1988] it was held that a fixed charge
created over the companyÊs entire assets and undertaking is treated as
floating charge as only a floating charge will allow these secure assets to be
used by the company in its ordinary course of business during the term of
the charge.

The benefit of floating charge is that it allows the company to give security
over property such as raw materials, stock in trade and inventory that are
constantly floating into and out of its ownership in the course of carrying its
businesses. The lender has a valid security over this shifting fund of assets
but has no right to interfere in the conduct of the business as long as the
company does not breach any term of the charge and only deals with the
charges assets in the ordinary course of its business.

If the company defaults under the charge, the charge is said to „crystallise‰.
When crystallization occurs the charge becomes a fixed charge over the
specified asset then held by the borrowing company. Crystallisation will
also occur upon appointment of a receiver or of a liquidator or when the
company ceases to carry on business.

If a floating charge crystallises upon the happening of a defined event, the

assets become subject to fixed charge and can be dealt with by the lender.
The lenderÊs remedies include appointment of a receiver, suing under the
contract or proving in the winding up.

8.1.2 Priority Rights

Where a receiver or liquidator of a company is responsible for selling corporate
assets to discharge the debts of a company, the realisation of such assets may be
insufficient to discharge the amount loaned by individual creditors.

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CHARGES, CAPITAL

SELF-CHECK 8.1
Are you aware of the issues that must be considered to determine
the priority of charge?

Where a receiver or liquidator of a company is responsible for selling corporate

assets to discharge the debts of a company, the realization of such assets may be
insufficient to discharge the amount loaned by individual creditors.

Where there are two charge holders, the question of who has priority will
inevitably arise.

Registration of a charge protects the chargeeÊs priority over later, registrable

charges. A charge that is registered earlier than another charge will have priority
over it, even if the second mentioned charge was created before it.

The Companies Act does not determine priority between charges and other
interest or claims which are not registrable under the Companies Act. Priorities
between these interest and claims are governed by the common law principle.

The following issues as in the following Figure 8.2 must considered to determine
the priority of charge.

Figure 8.2: Factors to be considered in determining the priority of charge

Based on registration, the priority among registrable charges are as stated in the
following Table 8.2.

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Table 8.2: Registrable Charges Upon Registration

• A registered charge has priority over a later registered charge,

even if the later registered charge was created earlier;
• A registered charge has priority over a charge that was
created earlier and is registrable but has not been registered;

Upon registration, • A registered charge has priority over a charge created later
the registrable and which is registrable but not registered;
charges are as • A registered charge has priority over an unregistered charge
follows. unless the unregistered charge was create first and the holder
of the registered charge had actual notice or constructive
notice at the time of the creation of the registered chare of
the existence of the unregistered charge; and
• Unregistered charge has priority in accordance with their
time in creation.

A fixed charge will rank above a floating charge. A floating charge has no
priority over a legal charge. Unless it was created earlier and it has a clause
prohibiting the creation of subsequent charges without the holder of the floating
chargeÊs consent and the legal charge having knowledge of it: United Overseas
Bank LTD v Forward Overseas Credit [1998]

ACTIVITY 8.2
Based on your understanding on what you have just read and learnt
on fixed and floating charge, state your opinion on the distinctions
between a fixed charge and a floating charge.

8.2 CAPITAL MAINTENANCE AND

REDUCTION OF CAPITAL

8.2.1 Capital Maintenance

The doctrine of capital maintenance requires companies limited by shares to
maintain their issued share capital in order to protect the interests of the
company's creditors and shareholders. Therefore members are entitled to a
dividend out of profits. A company cannot return capital to the members.

In the case of Trevor v Whitworth it was stated that creditors and shareholders
are „entitled to assume that no part of the capital which has been paid into the

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coffers of the company has been subsequently paid out, except in the legitimate
course of its business.‰

CA 1965 sets out some legal methods by which the capital of a company can be
returned to the members.

(a) Reduction of Capital

The court will only confirm the reduction if it is satisfied that the company's
creditors have been paid or have consented to the reduction. The test that
the court will use is the fair and reasonable test.

The reason why a company may wish to reduce its capital is because the
companyÊs net assets have fallen below the value of the share capital.
Generally, the reduction of capital will not be detrimental to the
shareholders. The objective of reducing its capital is to enable the company
to resume paying dividends or to pay dividends at a higher rate.

A company may be able to reduce its share capital in a number of ways

which includes:

(i) Reducing liability on the shares that are partly paid.

Re Doloswella Rubber & Tea Estates Ltd. [1917]

(ii) Canceling paid-up share capital that has been lost to available assets:
Re Rhodesian Manufacturing Co. Ltd. [1927]

(iii) Pay off or return any of the paid up capital that is in excess of its needs
to its shareholders
Re Fowlers Vacola Manufacturing Co Ltd [1966]

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In regards to a buy back, the member has the option of refusing to sell,
while in a reduction of capital, the members' shares can be cancelled against
their will; While a reduction of capital may not necessarily involve a
payment to members when the shares are cancelled.

A company may wish to undertake a reduction of capital to return capital

to members that is no longer required by the company, to cancel uncalled
capital that is no longer required or to cancel capital no longer represented
by available assets.

If the proposed reduction does not meet the requirement of S64, the creditor
may approach the court for an injunction under S64(2).

(b) Redeemable Shares

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The shares give a temporary membership of the company - the nominal

value (and sometimes a premium) is paid to the shareholder at the end of
the period.

When shares are redeemed, they must be cancelled by the company. The
company must make up its capital by issuing new shares or transferring
funds from the profit and loss account to the capital redemption reserve
account.

Any premium payable on redemption must be paid out of profits.

Private companies can pay for redemption completely out of capital by a

special resolution and a declaration from the directors that the assets will
exceed liabilities after the payment is made.

(c) Company Purchasing its Own Shares (Share buy back)

The prohibition of a company purchasing its own shares was first
expressed in the case of Trevor v Whitworth.

Generally this is prohibited by S67, but this section itself allows a company
to buy its own shares in the circumstances provided by the Act and S67A
allows such purchase if authority is given in the companyÊs articles.

The exceptions under S67 are as stated in the following Table 8.3.

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Table 8.3: Exceptions Under S67

CA 1965 Provision
S67(2) Where the exceptions set out in (this section applies).
S61 Where a company redeems its redeemable preference share.
Where the court makes an order for he company to purchase shares of the
S181(2)(c )
applicant.
Where a public listed company purchases its own shares through the Bursa
S67A
Malaysia.

A share buy back is any transaction by which a company buys back its own
sharesfrom existing shareholders. This transaction involves an agreement
between the company and the selling shareholders to transfer shares to the
company in return for consideration provided by the company. A share
buy back can only take place with the consent of the shareholders whose
shares are being bought back while a capital reduction can take place
without requiring the consent of the shareholders whose capital is being
returned, provided that it complies with the set of requirementapply to
capital reductions.

Under S67A a public listed company may apply to purchase its shares
through stock exchange. The conditions are:

(i) The company must ensure that the company is solvent at the date of
the purchase and will not be come insolvent;
(ii) The company must ensure that the purchase of shares by the
company is done bona fide and in the interests of the company;
(iii) The company is permitted to apply its share premium account to pay
for the shares that it has purchase. The shares purchase may either be
cancelled or retained as treasury shares;
(iv) The purchase is made through Bursa Malaysia, i.e. it must be
purchased in the open market; and

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(v) The shares cancelled cannot be deemed to be a reduction of share

capital and the special procedures prescribe for reduction of capital by
S64 will not apply.

8.2.2 Why Would a Company Wish to Buy Its Own

Shares?
Ć Lack of acquisition opportunities and lack of investment opportunities
within the company.
Ć Balance sheet strength - equity capital more expensive than debt capital
(because of „equity risk premium‰).
Ć It thinks the market is undervaluing its shares.

However, this prohibition is subjected to certain exceptions which is expressly

provided for by S67(1).

8.2.3 Financial Assistance by the Company for the

Purchase of Its Own Shares

Examples derived from case laws would include a company lending money to a
person to be used to acquire shares in the company or its holding company, a
company guaranteeing a loan by a third party to a person who will use the loan
funds to acquire shares in the company, a company making a gift to a person,
which is used to acquire shares and reducing the liability of a person in
connection with the acquisition of the companyÊs shares.

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Cases such as Cheah Theam Swee & Anor v Overseas Union Bank Ltd. & Ors
[1989] and Utama Wardley & Anor v Leggan Laut Development Sdn. Bhd. &
Anor [1991] all indicate the courts reluctance to define financial assistance. For by
doing so, it might result in the risk of having to exclude transaction that ought to
be included. Courts however, have attempted to provide a general guidance as to
what may be regarded as financial assistance.

Datuk Tan Leng Teck v Sarjana Sdn. Bhd. & Ors [1997], Augustine Paul CJ said:

„The words 'or otherwise' are very wide and mean „in any other way‰. In this
regard I refer to EH Dey Pty Ltd. ( In Liquidation) v Dey [1966] ⁄.The essence of
the question whether a company has contravened s 67(1) is whether it has
diminished its financial resources, including future resources, in connection with
the sale and purchase of its shares and the matter is not to be determined by
considering only what is done by the parties to the transaction⁄the giving of
finance assistance means making a provision in money or moneyÊs worth to
which a shareholder was not already entitled in his capacity as a shareholder (see
Rossfield Group of Operators Pty Ltd. v Austral Group Ltd. [1981].

You have only to look at such cases as Steen v. Law [1963] 1 3 All ER 770, [19641]
and Selangor United Rubber Estates Ltd v. Cradock (No.3) [1968], [1968] to see
the devices which they use. Circular cheques come in very handy. So do puppet
companies. The transactions are extremely complicated, but the end result is
clear. You look to the company's money and see what has become of it. You look
to the company's shares and see into whose hands they have got. You will then
soon see if the company's money has been used to finance the purchase.‰

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Lord Justice Buckley said:

„The reasoning assumes, as I understand it, that if the transaction under

consideration is genuinely regarded by the parties as a sound commercial
transaction negotiated at arm's length and capable of justification on purely
commercial grounds, it cannot offend against S54. This is, I think, a broader
proposition than the proposition which the judge treated as having been
accepted by counsel for Belmont.‰

A subsidiary company cannot give loan, give security or guarantee or any form
of financial assistance to a person who acquires shares in its holding company.

Financial Assistance is permitted in certain circumstances as laid out follows:

• The company lends money in the course of its ordinary business.
• If the financial assistance is in accordance with any scheme for the benefit of
employee of the company or its subsidiary.
• It is to employees (other than directors of the company) of its subsidiary to
enable them to purchase shares in the company or its holding company.

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ACTIVITY 8.3

State the procedural requirement of a share buy back and to what

extent does the law permits a company to reduce its capital?

EXERCISE 8.1
1. What is the rule prohibiting financial assistance?
2. When is financial assistance permitted?
3. What is the prohibition on a company acquiring its own shares?
4. Why is the rule of a company acquiring its own shares undesirable?

• A company's net asset must be maintained in conjunction with the companyÊs

notional liability.
• A company's share capital represents a measure by which assets values
should correspond.
• A company if permitted by the terms of its articles, may alter the conditions
of its memorandum to effect an alteration in share capital.
• A company may wish to reduce its share capital for a number of legitimate
reasons as discussed above.
• Share buy back by a company and financial assistance given to a third party
for the purchase of a company's shares are prohibited but not without
legitimate exceptions laid out in the legislation and case laws.

Capital maintenance Fixed charges

Charges Floating charges
Debentures

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 Topic X Corporate
Reconstructions,
9 Mergers and
Takeovers
and Arrangements

LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify the options available when a company is in financial
difficulty;
2. Explain the effect, powers and liabilities of a receiver;
3. Describe the administrative orders and voluntary arrangements;
and
4. Apply legislation and case law in situations of external
administration.

X INTRODUCTION
This topic deals with the external administration of a company. When a company
is in financial difficulties, there are several ways to deal with it. It can be dealt
with under the appointment of receivers, a creditorÊs scheme of arrangement,
voluntary arrangement/administration and liquidation (discussed in Topic 10).

This topic will first start with the examination of reconstruction. It will then
discuss how are receivers and administrators are appointed and the nature of
their respective powers and duties. Finally the discussion on administrative
orders and voluntary arrangement.

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9.1 RECONSTRUCTION

The procedures to be followed in all types of schemes are found in S176 and 177.

Schemes of arrangement are used in company reconstruction and can be used in

situations of insolvency. In the reconstruction scenario, arrangements are made
with the members, not creditors (although creditors are given consideration
where the scheme involves a reduction of capital).

Takeover has been defined as the acquisition by one company (the bidder) of
sufficient shares in another company (the target) to give the purchaser control of
that other company. One of the ways a business can expand is by takeover.

However, generally the misconception of takeover is that it is related to

aggressive and predatory management. There have been debates and is still on
going whether takeovers and mergers are beneficial or harmful to the overall
economy.

The regulation takeover bids are governed by the Companies Act 1965 and law
of contract.

Merger is the unification of two companies and it may be described as a

recommended takeover. Reconstructions occur when the business is transferred
to a new company in the course of liquidation.

Part VII of the Companies Act allows a numbers of schemes which may be
implemented. One of these schemes is known as reconstruction.

Application can be made by a member, creditor or liquidator for the court to

order the appropriate meetings. Different meetings will be organised for any
groups which have different interests.

All meetings must approve the scheme by a majority in number and 75% in
value. The scheme is then submitted to the court for final consent. The court will
not approve it unless there is genuine compromise:

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The order approving the scheme is sent to the Registrar of Companies and is then
binding on all members and creditors.

ACTIVITY 9.1
When will the court approve a scheme of arrangement and why did
the court in the NFU case did not approve the scheme?

9.2 RECEIVERS AND ADMINISTRATIVE

RECEIVERS
A receiver is appointed when the company enters into receivership. The receiver
is appointed in respect of some or all of its property. The sections that apply
when a company is in receivership is SS182-192 of Part VIII of the Act. The
application of these sections are not exclusive, general law will be applied in
certain circumstances.

The term „receiver‰ and „receiver and manager‰ are distinguished in the act and
the general law.

The case of Re Manchester & Milford Railway Co (1880) explains the distinction:

„A receiver is a term which was well known in the Court of Chancery, as

meaning a person who receives rents or other income, paying ascertained
outgoings, but who does not, if I may say so, manage the property in the sense of
buying or selling or anything of that kind. We were most familiar with the
distinction in the case of a partnership. If a receiver was appointed of partnership
assets, the trade stopped immediately. He collected all debts, sold the stock in

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trade and other assets, and then under the order of the court the debts of the
concern were liquidated and the balance divided.

If it was desired to continue the trade at all it was necessary to appoint a manager
or a receiver and manager as it was generally called. He could buy and sell and
carry on the trade. So that there was a well-drawn distinction between the two.
The receiver merely took the income and paid necessary outgoings and the
manager carried on the trade or business.‰

In the case of Re Victoria Steamboats Ltd. [1897] the distinction was explained
and a receiver is a person authorised to get in and realize the secured assets with
no powers to run the business and a receiver manager is expressly empowered as
the agent of the company which granted the debenture, with the objective of
realizing the assets as a going concern.

A receiver or a receiver manager can be appointed either by the debenture holder

(secured creditor) or by the court.

9.2.1 Appointment by a Debenture Holder

In the case of Re B Johnson & Co (Builders) Ltd [1955], Jenkins LJ explained the
role and function of a receiver and a receiver manager appointed by a debenture
holder.

A receiver and manager for the debenture-holders is a person appointed by the

debenture-holders to whom the company has given powers of management
pursuant to the contract of loan constituted by the debenture and as a condition
of obtaining the loan, to enable him to preserve and realize the assets comprised
in the security for the benefit of the debenture holders‰.

A debenture holder may appoint a receiver and manager in the following

circumstances (Figure 9.1).

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Figure 9.1: Circumstances in which the debenture holder may appoint a

receiver and manager

Appointment of the receiver and manager is over the property secured by

debenture. If there is a defect in the debenture, then the appointment will be
ineffective.

9.2.2 Appointment by the Court

In the case of Re London Press Hinge Co. (1905), Lord Haldane stated that a
receiver/manager may be appointed if the court considers it to be necessary or
desirable to do for the purpose of protecting the interests of any person to whom
the company or person may be liable or in the event that the security is in
jeopardy.

In the case of Matang Holdings Bhd. & Ors v Dato San Choon & Ors [1985], the
judge held that for a receiver to be appointed, the plaintiff must present a prima
facie case that the property is in jeopardy or that the plaintiffs will be in a worse
situation if the appointment of a receiver is delayed.

There is no specific provision in the act that allows for a person to obtain a
declaration that a receiver/manager has been validly appointed by the court.

However, the person must be of sufficient standing. In the case of Lim Tai Ming
& Sons Credit Sdn. Bhd. v Lim Tuck Thien [2001], it was held that a director who
was removed did not have the locus standi to seek the appointment of a receiver
and manager.

Lord Haldane in the case of Parsons v Sovereign Bank of Canada [1913] clarified
the position of the court in the appointment of receiver/manager to be:

„the agent neither of debenture holders who credit he cannot pledge, nor the
company which cannot control him. He is an officer put in to discharge certain
duties prescribed by the order appointing him...‰

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In the case of Wallace Kevin James v Merrill Lynch International Bank Ltd. [1998]
it was stated that the person seeking the remedy of a court appointed
receivership must show that the interests of the persons to whom the company is
or may become liable require protection and that a lesser remedy would be
inadequate.

In the case of Tan Ah Teck v Coffral (Malaysia) Sdn. Bhd. [1992], Justice Wan
Yahya stated that:

„a debenture holder's receiver is only empowered to act and to do all thing

which he is authorized according to the debenture and the covering trust deed
which provide for his appointment.‰

The receiver's powers may be laid out in the debenture under which they are
appointed. The following are the powers to:
Ć Take possession of or dispose of property.
Ć Borrow money and grant security over property.
Ć Appoint professionally qualified person to assist.
Ć Employ or dismiss employees.
Ć Bring or defend legal actions on behalf of company.
Ć Carry on companyÊs business.
Ć Call up uncalled capital.
The receiver displaces the directors, but they are not dismissed.
Cocoa Processors Sdn. Bhd. v United Malayan Banking Corp Bhd. & Ors [1988].

Third parties dealing with the receiver in good faith are entitled to assume he is
acting within his powers.

The receiver is not personally liable on contracts entered into by the company
prior to it being placed in receivership unless he or she adopts them as his or her
own.

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In the case of Re Great Cobar Ltd. [1915] it was held that a receiver and manager
is not obliged to go on with contracts that have no effect on the goodwill of the
company.

9.2.3 Duties of a Receiver

There are number of specific duties that the receiver and manager must carry
out, stemming from both legislation and the common law.

The overall duty of the receiver and manager may however, be described as a
duty in relation to the property charge ă gathering the assets, managing them,
and realizing those assets as necessary to pay the secured creditors but not so as
to ignore the interest of other creditors of the company.

However, certain debts have priority and will have to be paid ahead of the claims
of the debenture holders. S191 relates to payments of certain debts out of assets,
subject to floating charge, in priority to other claims where the company is not in
liquidation.

A receiver owes a duty to act in good faith. This has been clearly illustrated in the
case of:

A receiver also owes a duty of care to obtain the best market price for the sale of
the charged properties
Malaysian Industrial Development Finance v Eureka Alloy Sdn. Bhd. [1989]

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9.2.4 Liabilities of a Receiver

However, S183 (1) does not extend to all debts incurred in the course of a
receivership. It only applies to debts for services rendered, goods purchased, or
property hired, leased used or occupied. In addition a receiver is normally given
an indemnity in the mortgage documents, form the assets under his or her
control, for expenses properly incurred in the course of the receivership. This
allows the receiver to withhold funds to be paid to the secured creditor.
A receiver may also be liable for tort.
Botibol v Botibol (1947)

A receiver may take possession of only part of a company property but if he

takes possession of the whole or substantially the whole of the company's
property and was appointed by the holders of a charge which, as created was a
floating charge, he is known as an administrative receiver.

Most receivers will be administrative receivers since the major creditors

appointing them will take extensive fixed and floating charges as a security.

ACTIVITY 9.2
How did the court in Re Manchester distinguish between a receiver
and a receiver manager? State your opinion.

9.3 ADMINISTRATIVE ORDERS AND

VOLUNTARY ARRANGEMENTS
An administrative order is intended to be an alternative to liquidation for
companies which are to pay their debts either by rehabilitating the company or
continuing it as a going concern or by providing a better way of either realising
its assets or affecting a scheme or compromise with the creditors.

The courts may make an administrative order if it is satisfied that the company is
or is likely to become unable to pay its debts and that such an order would be
likely to achieve one or more of the following purposes:
(a) The survival of the company, and the whole or any part of its undertaking
as a going concern;
(b) The approval of a voluntary arrangement with creditors;

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(c) The sanctioning of a scheme of arrangement; and

(d) A more advantageous realisation of the company's assets than would be
effected on a winding up.

No such order can be made after a company has gone into liquidation. A petition
for an administration order can be made by the company, the directors and the
creditors. An administrator has the power to do anything which is necessary for
the management of the company's affairs, business or property.

9.3.1 Voluntary Arrangement

ACTIVITY 9.3
Why is a voluntary arrangement essential in the law relating to
Company Law and why other countries in the world has provision for
it but not Malaysia?

From the outset, it has to be noted that Malaysian Companies Act does not
provide for the provisions of voluntary arrangement. In Malaysia the other type
of external arrangement is called a scheme of arrangement.

A scheme of arrangement may be considered where the membersÊ or creditors

rights interest should be adjusted or for the share capital to be reorganised or in a
reconstruction or merger where a group is affected. This scheme involves a
compromise or arrangement between the company and its creditors. The
members or creditors of a company may consider that it is advantageous to run
the company even though it in financial difficulty, this is where a scheme is
proposed. Generally it takes one of two forms which is a moratorium scheme of
arrangement or a compromise scheme.

However, voluntary arrangement is practiced as an alternative to winding up in

the United Kingdom and Australia. In Australia a scheme of arrangement is
considered to be expensive and with the introduction of voluntary
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administration, it is no longer common. In a voluntary arrangement a company

is given a chance of survival or if this is not possible, to maximise the return to its
creditors under voluntary arrangement if a company is in financial difficulties.
This is generally a more popular choice for the directors of a financially
distressed company.

An administrator takes over the affairs of a company with a view to a developing

a Âdeed of company arrangement' under which the company might be restored
into a financial health or put into liquidation if it cannot be saved.

Under voluntary arrangement, the company property is protected. This is

important so that creditors will not see themselves as being disadvantaged by the
delay prior to when an arrangement is entered into.

Once the administration starts the company cannot be wound up voluntarily,

however if the court is not satisfied that the administration is in the best interest
of the creditors, it may order the company be wound up. There will be a stay of
proceedings without the leave of the court or written consent of the
administration. However an execution can only be levied with the leave of the
court and a guarantee by a director or relative of a director for a liability of the
company cannot be enforced.

The interest of the secured creditors must be protected. This however, must be
balanced against any potential benefits to be gained from the administration for
all creditors.

If however, the creditors decided that the company be wound up at the meeting
or at a subsequent meeting called to vary the deed, then it will be known as a
creditorÊs voluntary winding up and the administrator is appointed as a
liquidator. The creditors may however, resolve to discontinue the administration,
in this case, the company will be returned to the control of the directors without
any further restriction.

ACTIVITY 9.4
Why does a court make an administrative order? State your
opinion.

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EXERCISE 9.1

What are the duties and powers of a receiver?

• There are various avenues available to a company which is in financial

difficulties.
• A company can be subjected to a take over or a merger both of which will
require a reconstruction of the company.
• However, a company's normal administration by the directors can be
suspended with the appointment of a receiver or an administrator.
• This is where a company will be said to be in receivership or voluntary
arrangements/administration.
• This is where the company wishes to come to an arrangement with it
creditors.
• The benefit of a voluntary arrangement is that the company has a breathing
space from any winding up orders, appointment of receivers or other
financial processes.

Receiver
Scheme of arrangement
Voluntarily arrangement

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 Topic X Liquidation
10
LEARNING OUTCOMES
By the end of this topic, you should be able to:
1. Identify the types of winding up;
2. Explain the grounds for winding up;
3. Discuss the duties of a liquidator; and
4. Apply case laws and legislation to the given fact situations.

X INTRODUCTION
The ultimate test of company law is when the company has been unsuccessful
and the ashes are raked over and knowledge of the statutory provisions is
important when dealing with unsuccessful companies.

A company stops existing when the company goes into liquidation (dissolved).
The process of dissolving a company is known as winding up or liquidation.

There are many reasons why a company may be wound up but insolvency is the
most common one. Liquidation occurs when the company is unable to pay its
debt and therefore the companyÊs assets are realized and the proceeds are paid
out in the order that is laid down in the Companies Act.

This topic will discuss the two types of procedure:

• Voluntary winding up (Part X Div 3 S254 - 267).
• Compulsory winding up (winding up by the order of the court) (Part X Div
2 S217- 253).

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10.1 VOLUNTARY WINDING UP

We will discuss the first type of procedure which is voluntary winding up and
compulsory winding up will be discussed later in the topic.

The two forms of voluntary winding up are shown in Figure 10.1.

Figure 10.1: Two forms of voluntary winding up

The sections that are applicable to both the forms of voluntary winding up are
S254 - 257 and S264 ă 267 (Table 10.1).

Table 10.1: Provision Governing Voluntary Winding Up

CA 1965 Provision
- States that in members voluntary winding up the directors must make a
declaration of solvency.
- A declaration of solvency is where the directors have made full inquiry
S257(1) as to the affairs of the company and are of the view that the company will
be able to pay its debts in full together with the current rate of interest
charged, within twelve months from the commencement of the winding
up.
This provision provides that the declaration by the director must contain a
S257(2) statement of affairs of the company. This will show the companies assets
and liabilities at the latest date possible before the declaration is made.
This provision provides that directors are guilty of an offence if he/she
S257(4) made a declaration of solvency without any reasonable ground for believing
it to be true.
This provision provides that the onus of proving that the director had
S257(5)
reasonable ground is on the director himself.

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The winding up will generally start on the day the members pass the special
resolution to wind up the company. The usual rules apply on the conduct and
calling of a meeting. The company ceases to carry on business except in so far as
may be required for its beneficial winding up. Any transfer of shares requires
the sanction of the liquidator and any alteration in the status of the companyÊs
members, will be void. The directors powers ceases on the appointment of a
liquidator unless otherwise the liquidator sanctions their continuance.

The liquidator must call for a general meeting once the companyÊs affairs are
fully wound up. The accounts of the winding up will be laid out, this will show
how the process of winding up was undertaken and how the property was
disposed.

If the liquidator is of the view that the company is unable to pay its debts in full,
he has the authority laid down in the companies act to convert the members
winding up into creditors winding up.

If the directors are unable to make a declaration of solvency but move to have the
company to be wound up voluntarily.

10.1.1 Creditor's Voluntary Winding Up

An important factor to be noted is the creditorsÊ voluntary winding is not
initiated by the creditors but by the members.

There are two ways how a creditors winding up occurs.

(a) No Declaration of Insolvency

(b) The Appointment of Liquidator by Members

A liquidator is appointed if the members form an opinion that the company
will not be able to pay its debts in full within the period specified in the
declaration when holding their meeting. A creditors meeting will be
convened by the liquidator in this instance: S259 (1).

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In the case of Re Anrite Aviation Co. Pte. Ltd. [1990], it was stated that the
liquidator must draw to the attention of the creditors their rights and lay
down a statement of assets and liabilities of the company.

ACTIVITY 10.1

Explain the two ways a creditors winding up may occur based on

your understanding of what you have read.

10.2 COMPULSORY WINDING UP

In practice, compulsory winding up is usually initiated by an unpaid creditor
against the company.

The grounds under this section are that the company has by special resolution
resolved that the company be wound up by the court; the company does not
commence its business within a year from its incorporation or suspends its
business for a whole year, the number of members is reduced to two; the
company is unable to pay its debts (this being the most common ground); default
in the lodgment of statutory report; directors acting in their own interests; an
inspector has been appointed under Part IX; on the happening of a specific event
contained in the constitution or the court is of the opinion that it is just and
equitable that the company be wound up.

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In the case of Kok Fong Sang v Juta Villa (M) Sdn. Bhd. & Ors [1996], it was held
that until the time the court makes a final order as to whether to wind up the
company, a provisional liquidatorÊs (if there is a need to protect the companyÊs
asset prior to hearing, the court then will make such an appointment: S231)
primary duty is to maintain the status quo.

In the case of Lim Yoke Kian & Anor v Castle Development Sdn. Bhd. [2000] it
was held that if the deferment for a winding up order is for an illegal purpose,
the court will not condone this.

In the case of Miharja Development Sdn. Bhd. & Ors v Tan Sri Datuk Loy Hean
Heong & Ors [1995], the judge discussed the controversy in other jurisdictions
with regards to an application under S217(1)(a). Therefore can the board of
directors apply for a winding up on behalf of the company without convening a
general meeting to discuss?
VG George J stated:

„It is often only by a procedure of this nature that a company with widespread
financial interests affecting a great many actual and prospective creditors, let
alone shareholders, can move to protect its creditors and shareholders in the
event of a sudden financial crisis developing which leaves it in a position of
insolvency.‰

Generally a voluntary winding up is preferred over a compulsory winding up by

he members as it involves less cost and the members have a greater supervisory
role over the liquidator. However, voluntary winding up can only be initiated by
a special resolution.

Applications for a compulsory winding up are also presented by the creditors. In

a creditors petition the petitioner must satisfy that he is indeed a creditor. This
was stated in the case of Morgan Guaranty Trust Co. of New York v Lian Seng
Properties Sdn. Bhd. [1990].

Application as mentioned above can also be presented by the contributory. The

right of a contributory cannot be limited or excluded by articles of association
Re Peveril Gold Mines Ltd. (1898).

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There are cases in UK and Australia that suggests that to have a locus standi he
must show that he possesses a tangible interest in the liquidation.

If the debt is disputed on bona fide grounds, the company may apply to have the
petition dismissed as an abuse of process without waiting for the substantive
hearing. The policy behind this was explained by Jessel MR in Re London and
Paris Banking Corporation (1874).

„ ⁄.to put pressure upon the company, perhaps by threat of the advertisements,
or by some other means, to compel them to pay; in other words, to extort from
them a sum larger than they bona fide believe to be due from them, and a sum
which they had been advised by two valuers was excessive. I cannot encourage
any such course of proceedings and I therefore dismiss the appeal.‰

SELF-CHECK 10.1

Who has the locus standi in a compulsory winding up?

10.2.1 Grounds for Winding Up

The process of winding up is laid down under Rules of the High Court. The
affidavit in support of an application for compulsory winding up must be filed
with the court. It is set in a motion by a petition, which must be served to the
company, and other parties specified in the Rules. The application commences at
the time of filling of the application. It must also be advertised.

An injunction can be granted in two circumstances as shown in Figure 10.2.

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Figure 10.2: Two ways an injunction may be granted

Winding up under S218(1)(e):

This is one of the most common grounds. Unable to pay debts means that the
company must be insolvent. It is quite common for an application under
S218(1)(e) to be coupled with S218(1)(i), this is the just and equitable ground to
wind up the company.

The applicant must prove that the company is unable to pay its debts. In the case
of Calzaturificio Zenith Pty Ltd v NSW Leather & Trading Co. Pty. Ltd. [1970] ,
the judge considered the meaning of „unable to pay its debts‰ and stated:

„Merely to take a balance sheet which puts opposite each other book debts and
creditors liabilities as if they were to be equate is in my view, erroneous, it would
be necessary to make an appropriate calculation to decide when the creditors had
to be paid and when the debts were likely to be received in order to decide
whether at any particular moment in time the company was or was not able to
pay its debts as they fell due.‰

However this is a question of fact.

This is when a creditor to who a sum exceeding RM500 is owed, has served on
the company a written demand in the prescribed form requiring the company to
pay its debts and the company has for 21 days neglected to pay or if an execution
or other process issued on judgment in favour of a creditor of the company is
returned unsatisfied in who or in part or if the court is satisfied that the company
is unable to pay its debts as they fall due.

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The last situation is where the court is satisfied that the value of the companyÊs
assets is less than the amount of its liabilities, taking into account its contingent
and prospective liabilities.

In the case of Re Hong Huat Realty (M) Sdn. Bhd. it was held that extraneous
circumstances such as economic circumstances or recessions are not a good
ground for consideration.

The statutory demand must be free from any defect and must be properly served.
This notice must be served personally, however in the case of Weng Wah
Construction Co. Sdn. Bhd. v Yik Foong Development Sdn. Bhd. [1994] it was
held that the statutory demand sent by registered post is deemed to be valid
provided there is proof of physical delivery.

A statutory demand may be said to be defective in the following circumstances:

Ć An irregularity;
Ć Misstatement of an amount;
Ć A misdescription of the debt or other matter; and
Ć A misdescription of a person or entity.

The effect of winding up is that under:

After liquidation commences, the company still exists as a separate legal entity. A
company shall cease to carry on business except as is necessary for winding up.

DirectorsÊ powers cease on the appointment of a liquidator, unless the liquidator

continues them.

Employees will be served a notice of dismissal in a compulsory winding up.

However if the liquidator has the power to waive the above and allow the
employees to continue for a limited time.
:Re English Joint Stock Bank (1866)

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Debenture holders may appoint a receiver notwithstanding that the company

winding up has commenced. However, the powers of a receiver and manager are
restricted.

The Ministry of Finance must approve the person who has been appointed as a
liquidator.

10.2.2 The Duties and Functions of the Liquidator

The winding up order transfers the powers of the directors to the liquidator.
Therefore the liquidator must act in good faith and avoid conflict of interest and
not make a secret profit.
:Siltstone and Haigh Moore Coal Co. v Edey (1900)

Cotton LJ in the case of Re Silver Valley Mines (1882) described the position of a
liquidator:

„He is not in the ordinary sense a trustee. He is a person appointed by the court
to do a certain class of things; he has some of the rights and some of the liabilities
of a trustee, but is not in the position of an ordinary trustee. Being an agent
employed to do business for remuneration, he is bound to bring reasonable skill
to its performance.‰

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The principal function of the liquidator is to secure, realise and distribute the
assets (include all property owned by the company at the date of commencement
of winding up, amount due form contributories, amounts recovered from
creditors of an insolvent company who received preferential payment and excess
profits from sales to or form the company recovered from persons connected
with company) of the company to the companyÊs creditors, and if there is a
surplus, to the person entitled to it. If the liquidator mistaken seized any
property of the company and disposes of it, he will have to prove he had
reasonable grounds for believe that he was entitled to do it. He will only be liable
if negligence is proved. Table 10.2 shows the provision relating to liquidator.

Table 10.2: Provisions Relating to Liquidator

CA 1965 Provisions
S252 The court may delegate its powers to the liquidator.
This provision provides that a liquidator can hold and conduct meetings to
S237
ascertain the wishes of the creditors and contributories.
This provision provides that the liquidator has the power to settle the list of
S244 contributories, to rectify the register of member and collect and apply the
assets.
This provision provides the liquidator has the power to make calls and
S247 adjust the rights of contributories. The liquidator has the power to fix the
time within which the debts and claims must be proved.
This provision provides that the liquidator has the right to access to book
S277(5)
and records. However, a court order must be applied.
S296 This provision allows the liquidator to disclaim onerous property.

A liquidator is under a duty to maintain proper administration, collect the

companyÊs asset, they must acquaint themselves with the affairs of the company,
preserve the companyÊs assets until it is realised and distributed.

After the assets have be realised and distributed the court will dissolve the
company and realised the liquidator.

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If is proved that the company has suffered loss due to the liquidatorÊs negligence
(act or omission) or misfeasanceÊ the liquidator may be ordered to make good of
losses.
Commissioner for Corporate Affairs v Harvey [1980]

A liquidatorÊs functions can be summarised as in Table 10.3.

Table 10.3: Functions and Duties of a Liquidator

Functions of a Liquidator Duties of a Liquidator

• To take possession of the companyÊs • To take control and custody all the
asset; property and things in action to
which the company is or appears to
• To „realise‰ the companyÊs asset;
be entitled;
• To work out what debts are payable
• To conduct unbiased and impartial
by the company and any valid claims
investigations in the affairs of the
that exist against the company;
company;
• To distribute the proceeds of the
• To collect and administer the
realised assets among the creditors
companyÊs assets;
and others with legitimate claims
against the company; • To keep proper accounts and
minutes of proceedings at meetings
• To distribute to the members any
and other matters that are
surplus funds; and
prescribed during winding up; and
• To bring about the deregistration of
• To lodge various notices and reports
the company.
to Registrar of Companies.

Liquidators' powers which are provided in S236(1) can be summarised as in

Table 10.4.

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Table 10.4: Powers of a Liquidator

• To sell or dispose of the companyÊs property;

• To carry on the companyÊs business;
• To make a compromise or arrangement with creditors or
others with claims against the company;
• To make calls on contributories;
• To obtain information about the company;
• To pay any class of creditors in full;
• To appoint an advocate to assist the liquidator;
• To do all acts and execute all deeds, receipts and other
documents in the name of the company;
POWERS OF A
LIQUIDATION • To prove rank and claim in the bankruptcy of any
contributory or debtor;
• To draw, accept, make and endorse any bill of exchange
or promissory note in the name and on behalf of he
company;
• To raise money on the security of the assets of the
company;
• To take out letters of administration of the estate of any
deceased contributory or debtor;
• To appoint an agent; and
• To do all such things that are necessary in the winding
up of a company

The order in which funds are distributed in a winding up is as follows:

• Secured creditors;
• Expenses of the winding up. This includes the liquidatorÊs remuneration;
• Unpaid wages, unpaid superannuation contributions and other employee
entitlements;
• Unsecured creditors; and
• Members (on the assumption that there will be a surplus after all creditors
have been paid).

The funds available for distribution by the liquidator to creditors, and , if there is
a surplus, to members are assets owned by the company at the time of winding
up except for charged assets and assets held on trust by the company.

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Assets that come into the company's ownership after the winding up order is
made or the special resolution is passed which will include compensation
recovered by the liquidator from the director for fraudulent trading, funds from
contributories after a call has been made by the liquidator, funds that the
liquidator has "clawed back" under voidable provisions, funds recovered from
holders of void charges.

S293 incorporates S53 of the Bankruptcy Act 1967 and this must be read together
in relation to undue preferences.

However, S53(2) excludes certain transactions, if it is proven that the dealings

were made in good faith and for a valuable consideration. A creditor will not be
considered Âdealing in good faithÊ if he knew or had reason to suspect that the
company was insolvent or that the effect of the transaction would give the
creditor a preference priority or advantage over other creditors.

SELF-CHECK 10.2
As we know there are two types of winding up, can you differentiate
between the both?

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ACTIVITY 10.2

What are the duties and functions of a liquidator?

EXERCISE 10.1
Explain the difference between a memberÊs voluntary winding up
and a creditors voluntary winding up and when does the former
become the latter?

• Liquidation or winding up is the process by which the assets of the company

are collected and realised.
• Its debts are paid and surplus returned to the members ă it is the prelude to
the company's decease.
• Liquidation can take one of three forms:
(a) A member's voluntary liquidation;
(b) A creditors voluntary liquidation; and
(c) A compulsory liquidation.

Compulsary winding up
Liquidator
Voluntarily winding up

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Answers
TOPIC 1: INTRODUCTION TO COMPANY LAW
Exercise 1.1
1. The case of Salomon v Salomon & Co is very important because it establishes
the rule of separate legal entity. The rule of separate legal entity means that
the company and the persons behind it (shareholders and management
team) are considered as different entity. Therefore, members of a company
cannot be made responsible or liable for any acts of the company. The
shareholders are not liable for the debt and liabilities of the company and
cannot be sued by the companyÊs creditors. A shareholder also can be a
debtor or creditor of the company and can sue or be sued by the company.
2. In Malaysia it can be seen that the only reason for lifting the corporate veil is
for justice. The land mark case for this is Hotel Jaya Puri Sdn. Bhd. v
National Union Bar & Restaurant Workers & Anor. The other example of
cases which followed the decision are Aspatra Sdn Bhd & Ors v Bank
Bumiputra Sdn Bhd and Yap Sing Hock v Public Prosecutor.
3. The court will lift the corporate veil for the following reasons:
(a) For the sake of justice to the parties involved as can be seen in most of
Malaysian cases.
(b) When a company is used to evade legal obligations for example fraud
or façade cases.
(c) When the company is merely carrying on business as the agent of the
another so that the transactions entered into by the subsidiary can be
regarded as the transaction of the holding company.
(d) When the court realized that a group of companies was not of separate
persons, but a single economic unit.
(e) When the statutory provisions have the effect to lift the corporate veil
for example to make the directors personally liable.

Exercise 1.2
1. (a) Actual Authority
An actual authority is a legal relationship between the principal and
agent created by a consensual agreement to which they alone are
parties. When an agent of the company entered into a contract with a

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third party, and he acts within his or her actual authority, the company
is bound by the contract. The scope of the actual authority is to be
ascertained by applying ordinary principles of construction of contract
between an agent and principal. The matter to be taken into
consideration is using any proper implications from the express words
used, the usageÊs of trader or the course of business between the
parties.
The ostensible or apparent authority is t
TOPIC 2: THE MEMORANDUM OF ASSOCIATION
Exercise 2.1
1. According to S18(1) of Companies Act the memorandum of association of
every company limited by shares must contain the following clauses:
(a) The name of the company
(b) The situation of the companyÊs registered office
(c) The object clause of the company
(d) Liability of the companyÊs membership is limited
(e) If a company has a share capital, must specify the amount of share
capital with which it proposes to be registered and the division of the
share capital into shares of fixed amount
(f) An association clause.
The effect of companyÊs memorandum of association is provided in S33
Companies Act. This section provides that the memorandum of association
binds the company and its members to the same extent as if they
respectively had signed and sealed by each member.
2. There are remedies provided for the third party who has entered into an
ultra vires transaction with a company. The third party may:
(a) Sue the directors personally;
(b) Sue on the guarantee, if any;
(c) Rly on equitable doctrine; and
(d) Exercise the right of subrogation to the position of intra vires creditors
where ultra vires loan have been used to discharge intra vires loans.

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TOPIC 3: ARTICLES OF ASSOCIATION

Exercise 3.1
S33 provides the memorandum and the articles when registered bind the
company and its members to the same extent as if they respectively had been
signed and sealed by each member. The effect of this S33 is to create a binding
obligation on the members in their dealings with the company, between the
members themselves and on the company in its dealing with members.

Therefore, only members can enforce the provision either against the company or
for themselves. The member cannot enforce the provisions for his benefit in some
other capacity that of member. It was decided in the case of Chung Kiaw Bank
Ltd v Four Seas Communication Bank Ltd that the articles of a company
constituted a contract only so far as they concerned the company and members in
their capacity as members. The articles did not apply to business transactions
undertaken by company in its capacity as trader, such as transactions of lending
money on security which could be undertaken with non members.

As regards to the rights of members against the company, to what extent they can
enforce their rights? The only class of obligations for which there is no dispute as
to a memberÊs right of enforcement is those obligations which may be regarded as
pure membership or insider rights. However, the other obligations which may be
termed as „outsider rights‰ even they are also contained within the companyÊs
constitution, are generally unenforceable as stated by Ashbury J in the case of
Hickman v Kent and Romney Sheep Breeders Association Ltd. An outsider rights
may be enforceable in a situation where the enforcement of the right necessarily
involves the enforcement of insider rights, or directly enforceable in a situation
where the outsider right is supported by a separate contract.

However, when we refer to S31 the section provides that a company may alter a
term of its articles by the passing of a special resolution that is by a three quarters
majority vote. So, when there is alteration of the articles what will happen to the
rights of the members? An alteration must be made bona fide for the benefit of
the company as a whole. This is to prevent a majority of three-quarters of the
membership from adopting an article by which the majority could seek to gain an
advantage at the expense of the minority of the membership.

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TOPIC 4: LEGAL INCIDENTS OF MEMBERSHIP

Exercise 4.1

In the case of Foss v Harbottle, it was decided that the minority shareholders
cannot bring an action against the companyÊs directors because the wrong done
by the directors was towards the company and it only the company could sue.
There are three principles or rules established from this case. They are:
(a) The proper plaintiff principle
(b) The internal management principle
(c) Irregularity principle

From these principles, it was established that the company is the proper body to
bring any and the courts will not interfere with the internal management of a
company. It is for the company to decide whether it is being properly managed.
From these rule it can be said that sometimes the rules might infringe the right of
minority shareholders. Therefore there is need for certain exceptions in order to
protect this minority group. According to the case of Edwards v Halliwell, the
exceptions are;
(a) Fraud on Minority by Wrongdoers in Control
Fraud on minority has nothing to do with actual fraud or deception at
common law. It is sufficient to show that the majority control used their
power for an oblique motive and not for the true purpose for which the
power was entrusted to them. The term of fraud on minority is now
included in S181 of Companies Act and this may be committed when the
majority expropriates the companyÊs property, ratifies directorÊs breach of
duties and also when there is oppression of the minority.
(b) Invasion of the Personal Rights of Members
The shareholder himself may bring an action in the court of law.
(c) Ultra Vires Act
When the ultra vires or illegal act has been committed by the company, then
any shareholder is entitled to bring an action to restrain the company from
doing such act.
(d) Material Procedures Irregularity
As a general rule, the court will not interfere in any internal management of
the company, but when there is irregularity in procedures for instance if the
act done by the company was one which required a special majority which
was not obtained then the court will interfere for the sake of the minority
group.

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Exercise 4.2

As a general rule, every shareholder has a right to transfer his shares to whom he
likes, unless the articles of association provide to the contrary. However, the
company may restrict the transfer of its shares. Such restrictions usually fall
within pre-emption clauses or refusal clauses.

The directors is the body who are given power by the articles to refuse to register
a transfer or give the existing members right to take up the shares sought to be
transferred, in proportion to the shares already held by them. This principle was
decided in the case of Rayfield v Hand.

Any restriction contained in the articles must be clear and unambiguous. In the
case of Greenhalgh v Mallard and case of Arunachalam & Ors v Kwality Textiles
(M) Sdn Bhd the courts decided that the courts will construe the restriction
narrowly even though expressly provided by the articles.

Table A Article 22 empowers directors to decline to register a transfer of shares to

a person of whom they do not approve where the shares are partly paid or over
which the company has a lien. According to S105(1), the company that refuses to
register a transfer of shares shall within one month after the date which the
transfer was lodged send to the transferor and transferee notice of such refusal.

TOPIC 5: DIRECTORS
Exercise 5.1

A director may only be removed in a general meeting of shareholders if the

articles empower to do so. As regards to the removal before the expiration of his
term of office, according to S128, the company must pass an ordinary resolution
in general meeting. This is allowed even if it is contrary to the articles or separate
agreement between the director and the company. In addition, Table A Article 69
also provides that the company may remove any director before the expiration of
the term of office by ordinary resolution. However, the articles may be altered by
a special resolution.

In the case of Solaiappan v Lim Yok Fan, the Federal Court held that the power to
remove directors under S128 co-existed with any power contained in the articles.
The power to remove directors which is exercised is only valid if special notice is
given. In this case, the notice given was not in accordance with the article.
Therefore, the removal was invalid.

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S128 is applicable where the removal is by resolution and not by the company
article. In the case of Tien Ik Sdn Bhd v Kuok Khoon Hwong Peter, the articles of
the company allowed a director to be removed by serving notice in accordance
with its articles and signed by a majority of directors. The Supreme Court held
that S128(2) does not apply to the removal of a director by notice under which the
director was required to vacate his office as director may apply to cases where the
director is removed.

Exercise 5.2

The directors of a company owe fiduciary duties to the company. The duties owe
by directors is not to the individual shareholders except in special circumstances
like in the case of Coleman v Mayers. The fiduciary duties of directors include:
(a) To act bona fide in the interest of the company
(b) To exercise their power under the companyÊs constitution for proper
purpose
(c) To avoid conflict of interest and not to profit from their position
(d) Not misuse of corporate funds
(e) Not misuse of confidential information
(f) Not competing with the company
(g) Honesty and diligence
(h) Duty of care and skill

There are five remedies available to the company if the director breached his
duties. They are:
(a) If a company has suffered a loss, then compensation may be sought either
through compensation in equity or on the basis of any tortious liability for
damages for negligence or deceit.
(b) If a company has suffered no loss but a director has enriched himself at the
expense of company due to breach of his fiduciary duty, the company may
account profit from the director.
(c) The principles of equity allow the courts to trace property that may have
been misapplied from the company. Therefore, the company may recover
the property from directors and any third party who are not innocent
purchasers.
(d) If the director breaches their duty in entering into a contract on behalf of the
company, then it may be rescinded in certain circumstances.
(e) If there is a service contract between a director and a company, a breach of
duty will amount to breach of the contract of employment and entitled the
company to dismiss the director.

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TOPIC 6: MEETINGS
Exercise 6.1

There are four types of meetings.

• Statutory meetings
• Annual general meeting
• Extraordinary general meeting
• Class meeting

(a) Statutory Meetings

The rule governing the statutory meeting is provided in S142 of the
Companies Act. This section provides that a statutory meeting must be held
by a public limited company with a share capital within a period of not less
than one month but not more than three months after the date on which the
company is entitled to commence its business.
The directors must send a copy of a statutory report to every members at
least seven days before the meeting. The statutory report must contain
information as provided by S142(3) which includes:
• Total number of shares allotted, the consideration for the allotted
shares and the amount paid up as partly paid up.
• The total amount of cash received in respect of allotted shares.
• An abstract of receipts and payments up to seven days before the date
of the report.
• The names and addresses of the directors, trustees of debenture
holders, auditors, the managers and secretaries.
• Particulars of any contract proposed to be modified with the approval
of the meetings, together with particulars of the modifications.
The report must be certified by two directors.
The list of members and number of shares held by them also must be
available during the meeting.
According to S142(10),it is an offence by any defaulting officer and every
director who failed to take reasonable steps to secure compliance with the
provision of S142. A company may be compulsorily wound up if it fails to
hold the statutory meeting and lodge the statutory report as provided by
S218(1)(b).

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(b) Annual General Meeting

The rule governing annual general meeting is provided under S143. Every
company must hold an annual general meeting every year, with an interval
of not more than 15 months between one annual general meeting of the
company and the next meeting. As long as the company holds its first
annual general meeting within 18 months of its incorporation, it need not
hold it in the year of incorporation or sometimes in the following year.
The annual general meeting is generally set up by directors or the court on
application of members. The object of the meeting is to enable the members
to meet together and confront the directors al least once a year. The agenda
of the meeting is as follows:
• Declaration of dividend
• The consideration of the account
• Balance sheet
• The report of the director
• The report of the auditors
• The election of the directors in place of those retiring
• The appointment and removal of directors
• The fixing of remuneration of the auditors
(c) Extraordinary General Meeting
Any general meeting which is not an annual general meeting. According to
Table A Article 44, it provides that directors may whenever they think fit,
convene the extraordinary general meeting. The directors are bound to
convene a meeting on the requisition of:
• Two or more members holding not less than 10% of issued share
capital of the company, or
• Where the company does not have share capital, not less than 5% of
the members.
Requisition by members is through written notice to call for meeting to be
given to the directors. The notice must state the object of meeting, signed
and deposited at the registered office of the company. After receiving such
requisition, the directors must convene meeting within two months.
According to S152(1) if a meeting is convened to pass a special resolution,
then at 21 days notice in writing must be given and the notice must specify
the intention to propose a special resolution.

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(d) Class Meeting

A class meeting is a meeting of certain class of shareholders and it is usually
to decide matter which affect their particular class of share. The meetings
are regulated in accordance with the terms of companyÊs articles. The
standard quorum required at class meetings is two people holding or
representing by proxy at least one third in nominal value of the issued share
capital of the class.

Exercise 6.2

Every member of a company has a right to vote at a general meeting of the

company unless the companyÊs constitution denies that right. The right to vote is
generally determined by the provisions in the company constitution that is the
article of association.

There are two methods of voting at the company meetings that is by show of
hands and voting by poll. According to Table A Article 54, each member of the
company having a share capital has one vote when voting by show of hands and
one vote per share if a poll is taken. Members of a company have the right to
demand a poll at a general meeting on any question or matter other than the
election of the chairman of the meeting or the adjournment of the meeting. The
chairman and certain categories of members may demand a poll where a
resolution has to be defeated by show of hands.

Only members are entitled to vote at a meeting of the company (except

represented by proxy). An ordinary shareholder enjoys full voting rights unless
otherwise provided by Table A Article 57. In this situation, the member cannot
vote unless all calls or other sums payable by the member in respect of membersÊ
shares have been paid.

Where the company has issued more than one class of shares the companyÊs
constitution may provide for the different classes of shareholders to have
different voting rights.

TOPIC 7: CORPORATE FINANCE 1: CAPITAL,

DIVIDEND AND SHARE
Exercise 7.1

The rights of one group of shareholders might be different from other group of
shareholders. This is because share confers different rights to its holders. The
ordinary shareholders have the following rights:

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(a) To share equally in any dividend

(b) Right to vote at general meeting of the company
(c) The payment of dividend depends on company profits
(d) No automatic right to a dividend
(e) To be repaid their capital on winding up
(f) Right to share pro-rata in any surplus of winding up

The preference shareholders on the other hand have the following rights:
(a) Fixed amount of dividend and is paid before anything is paid to ordinary
shareholders
(b) Not entitled to vote at general meeting unless dividends in arrears
(c) Preferential right to repayment of a capital on a winding up of company
(d) No right to share in surplus assets on winding up.

TOPIC 8: CORPORATE FINANCE 2: FINANCIAL

ASSISTANCE, DEBENTURE, CHARGES,
CAPITAL MAINTENANCE AND REDUCTION
OF CAPITAL
Exercise 8.1

1. The rule prohibiting financial assistance was stated in the case of Trevor v
Whitworth. The House of Lords in the case decided that a company is
prohibited from purchasing its own shares except where specifically
provided for by Companies legislation. The rule was adopted by S67(1) of
Companies Act 1965 which states that a company is prohibited from giving
direct or indirect financial assistance for the purpose of or in connection with
a purchase or subscription by any person of the shares in the company
unless expressly provided.

2. Financial assistance is permitted where the company lends money in the

course of its ordinary business, if the financial assistance is in accordance
with any scheme of the for the benefit of employees of the company or its
subsidiary or if the financial assistance is to the employees of its subsidiary
to enable them to purchase shares in the company or its holding company.

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3. The principle of a company acquiring its own shares or which is also known
as share buy back means any transaction by which a company buys back its
own shares from existing shareholders. This principle is prohibited by S67 of
Companies Act except in certain circumstances provided by the Act for
example as under S67A which allows such purchase if authority is given in
the companyÊs articles.

4. The rule is undesirable because it allows the current board and management
of the company to entrench their control, manipulation of the share prices by
the company management and the most important reason is for the
protection of those dealing with the company who are entitle to assume that
money subscribed by shareholders for the purpose of the companyÊs
business are to be available to meet their claims against the company and
also this rule may allow the company members to be treated unfairly
between themselves.

TOPIC 9: CORPORATE RECONSTRUCTIONS, MERGERS

AND TAKEOVERS AND ARRANGEMENTS
Exercise 9.1

The overall power of the receiver is stated by the decision of court in the case of
Tan Ah Teck v Coffral (Malaysia) Sdn Bhd. which states that „a debenture
holderÊs receiver is only empowered to act and to do all thing which he is
authorized according to the debenture and the covering trust deed which provide
for his appointment.‰ The debenture usually laid down the following powers to:
(a) Take possession of or dispose of companyÊs property
(b) Borrow money and grant security over property
(c) Appoint professionally qualified person to assist
(d) Employ or dismiss employees
(e) Bring or defend legal actions on behalf of company
(f) Carry on companyÊs business
(g) Call up uncalled capital.

As regards to the duties of receiver, both legislation and common law provide
number of duties which include a duty in relation to the property charge that is
gathering the assets, managing them, and realizing those assets as necessary to
pay the secured creditors but not to ignore the interest of other creditors of the

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company. A receiver also owes a duty to act in good faith and a duty of care to
obtain the best market price for the sale of the charged properties.

TOPIC 10: LIQUIDATION

Exercise 10.1

There are two types of companyÊs winding up that is compulsory winding up

and voluntary winding up. Under voluntary winding up, it can be divided into
two that is memberÊs voluntary winding up and creditorÊs voluntary winding up.
For the memberÊs voluntary winding up, the directors must make a declaration of
solvency that is where the directors have made full inquiry as to the affairs of the
company and are of the view that the company will be able to pay its debt in full.
A special resolution resolving to wind up the company must be passed and the
members then may appoint a liquidator.

On the other hand, the creditorÊs voluntary winding up is when there is no

declaration of solvency. The company must convene both members and creditors
meeting and both meeting must nominate a liquidator. According to S260(1), if
different persons are nominated then the creditors choice will prevail. Therefore,
the creditors will control the liquidatorÊs conduct.

A memberÊs voluntary winding up can become a creditorÊs voluntary winding up

if the liquidator appointed by members is of the view that the company is unable
to pay its debt in full. Therefore it is the duty of the liquidator to convert the
members winding up into creditors winding up.

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238 X CASE LISTS

Case Lists
Abdul Rahim bin Aki v Krubong Industrial Park (Melaka) Sdn Bhd (1995) 3 MLJ
417;
Aberdeen Railway Co v Blaikie Bros (1843-60) All ER 249;
Allen v Hyatt (1914) 30 TLR 444;
Allied Properties Sdn Bhd v Semua Holdings Sdn Bhd & Ors (1988) 3 MLJ 185;
Armour Hicks Northern ltd v Armour Trust Ltd (1980) 3 All ER 833
Arunachalam & Ors v Kwality Textiles (M) Sdn Bhd (1990) 2 MLJ 167;
Attorney General for Hong Kong v Reid (1993) 3 WLR 1143;
Automatic Self- Cleansing Filter Syndicate Co Ltd v Cunninghame (1906) 2 Ch 34;
Avel Consultants Sdn Bhd v Mohammed Zain Yusof (1995) 4 MLJ 146;
AWA Ltd v Daniels (1992) 10 ACLC 933;
Ayer Molek Rubber Co Bhd & Ors v Insas Bhd & Anor (1995) 2 MLJ 734;

Balkis Consolidated Co Ltd v Tomkinson (1893) A.C 396;

Bamford v Bamford (1970) Ch 212;
Barnes v Addy (1874): R 9 Ch App 244;
Berry and Stewart. V Tottenham Hotspur Football Club Co Ltd (1935) Ch 718;
Birch v Cropper (1889) 14 App Cas 525
Bloomenthal v Ford (1897) A.C 156;
BorlandÊs Trustee v Steel Brothers & Co ltd (1901) 1 Ch 279
Boston Deep Sea Fishing v Ansell (1888) 39 Ch D 339
Botibol v Botibol (1947) 1 All ER 26
Bradbury v English Sewing Cotton co ltd (1923) AC 744, 767
Brown v British Abrasive Wheel (1919) 1 Ch 290;
Burkinshaw v Nicholls (1878) 3 App Cas 1004;
Bushell v Faith (1970) AC 1099

Calzaturificio Zenith Pty Ltd v NSW Leather & Trading Co Pty Ltd (1970) VR 605
Case of Cheiw Sze Sun & Anor v Cast Iron Products Sdn Bhd & Ors (1994) 1 CLJ
157
Central Securities (Holding) Bhd v Haron bin Mohamed Zaid (1979) 2 MLJ 244;
Che Wan Development Sdn Bhd v Cooperative Central Bank Bhd (1990)2 MLJ
365
Cheah Theam Swee & Anor v Overseas Union Bank Ltd & Ors (1989) 1 MLJ 426 ;
Utama Wardley & Anor v Leggan laut Development Sdn Bhd & Anor (1991) 3
CLJ 2233
Chequepoint Securties Ltd v Claremont petroleum NL (1986) 11 ACLR 360,
Ching Kiaw Bank Ltd v Hotel Rasa Sayang Sdn Bhd (1990) 1 MLJ

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 CASE LISTS W 239

Chong Lee Swee v PP (1985) 1 MLJ 75;

Chua Boon chin v JM Mc Cormack (1979) 2 MLJ 156
Clavering, Son & Co v Goodwins, Jardine & Co Ltd (1891) 18 R 652;
Cocoa Processors Sdn Bhd v United Malayan Banking Corp Bhd & Ors (1988) 3
MLJ 491
Coleman v Myers (1977) 2 NZLR 297
Commissioner for Corporate Affairs v Harvey (1980) VR 669
Commonwealth Bank v Friedrich (1991) 9 ACLC 946
Cook v Deeks (1916) 1 AC 554;
Cooperative Central Bank Ltd v Feyen Developments Sdn Bhd (1995)3 MLJ 313
Cotman v Brougham (1918) AC 514;

Dalkeith Investments Pty Ltd, Re (1985) 3 ACLC 74;

Daniels v Anderson (1995) 13ACLC 614
Daniels v Daniels (1978) 2 All ER 89;
Datuk HJ Haron bin Hj Idris & Ors v Public prosecutor (1978) 1 MLJ 240;
Datuk Tan Leng Teck v Sarjana Sdn Bhd & Ors (1997) 4 MLJ 329
David Hey v New Kok Ann Realty Sdn Bhd (1985) 1 MLJ 167;
David Lau Tai Bek v Lau Ek Ching Sdn Bhd (1972) 1 MLJ 217
Devereaux Holdings Pty Ltd v Pelsart Resources NL (1985) 9 ACLR 956
Dimbula Valley (Ceylon) Tea co ltd v Laurie (1961) Ch 353
Dorchester Finance Co Ltd v Stebbing (1989) BCLC 498

Ebrahimi v Westbourne Galleries (1973) 2 WLR 1289;

Edwards v Halliwell (1950) 2 All ER 1064;
EH Dey Pty Ltd ( In Liquidation) v Dey (1966) VR 464
Electro Cad Australian Pty Ltd & Ors v Metagi RCS Sdn Bhd & Ors (1998) 3 MLJ
422;
Eric Lau Man Hing v Eramara Jaya Sdn Bhd & ors (1998) 7 MLJ;
Espstathis v Greek Orthodox Community of St George (1987) 13 ACLR 691
Estmanco (Kilner House) Ltd v Greater London Council (1982) 1 All ER 437;
Ex parte Westburn Sugar Refineries Ltd (1951) AC 630
Expo International v Chant Pty ltd (1979) 2 NSWLR 820

Finance Co. v Williams Furniture Ltd. (No. 2) (1980) 1 All ER 393

Foo Tong Eng v Po Fun Suan (1982) 1 MLJ 337
Foss v Harbottle (1843) 2 Hare 461;

Gambotto v WCP Ltd (1995) 182 CLR 432 (HC of Australia);

Glavanics v Brunninghausen (1996) 14 ACLC 345
Goh Kim Hai Edward v Pacific Can Investment Holding Ltd (1996) 2 SLR 109
Greenhalgh v Arderne Cinemas Ltd (1946) 1 All ER 512
Greenhalgh v Mallard (1943) 2 All ER 234;

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240 X CASE LISTS

Grinstead v Britannia Brands ( Holdings) Pte Ltd (1996) 2 SLR 97

Guan Seng Co Sdn Bhd v Tan Hok Chan (1990) 1 MSCLC 90, 551;
Guinness plc v Saunders (1990) 2 AC 663

HarloweÊs Nominees Pty Ltd v Woodside ( Lake Entrance) Oil Co NL (1968) 121
CLR 483;
Harta Empat Sdn Bhd v Koperasi Rakyat Bhd (1997) 1 MLJ 381
Hellenic & General Trust Ltd (1975) 3 All ER 382
Hilton International Ltd v Hilton (1988) 4 NZCLC 64,721 ;
Holroyd v Marshall (1862) 10 HLC 191; 11 ER 999.
Howard Smith Ltd v Ampol Petroleum Ltd (1974) AC 821
Humes Ltd v Unity APA Ltd (1987) 5 ACLC. 15

Illingworth v Houldsworth (1904) AC 355 at 358

Industrial Concrete Products Bhd v Concrete Engineering Products Bhd (2001) 2
MLJ 332;
Industrial Development Consultants Ltd v Cooley (1972) 1 WLR 443

Jaya Medical Consultants Sdn Bhd v Island & Peninsula Bhd & Ors (1994) 1 MLJ
520;
Jimat bin Awang v Lai Wee Ngen (1995) 3 SLR 769

Kang Chong Yeow; exp Mivan Far East Sdn Bhd (2001) 3 MLJ 98
Kaye v Croydon Tramway Company (1898) 1 Ch 358;
Kelapa Sawit ( Telok Anson) Sdn Bhd v Yeoh Kim Leng & Ors (1991) 1 MLJ 301
Kesar Singh v Sepang Omnibus Co Ltd (1964) MLJ 122;
Kinsella v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722
Kok Fong Sang v Juta Villa (M) Sdn Bhd & Ors (1996) 2 MLJ 666
Kumagai Gumi Co Ltd v Zenecon Kumagai Sdn Bhd & Ors (1994) 2 MLJ 789;

Lee v Chou Wen Hsien (1985) PC

Lee v Neuchatel Asphalte Co (1889) 41 Ch D 1
Leong Ah Hong v Hup Seng Co ltd (1963) MLJ 164,
Lim Cheong Kern v Vacpak Realty Sdn Bhd & Anor (1999) 5 MLJ 296;
Lim Hean Pin v Thean Seng Co Sdn Bhd (1992) 2 MLJ 10
Lim Ow Goik & Anor v Sungei Merah Bus Co ltd (1969) 2 MLJ 101 (High Court);
Lim Tai Ming & Sons Credit Sdn Bhd v Lim Tuck Thien (2001) 1 MLJ 57
Lim Yoke Kian & Anor v Castle Development Sdn Bhd (2000) 4 MLJ
Loch v John Blackwood (1924) AC 783;
Low Peng Boon v Low Janie (1000) 1 SLR 761;
Low Peng Boon v Low Janie (1999)1 SLR 761 ;
Lum Sow Kuen v Chuah Chong Heong & Ors (1998) MLJ 39

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 CASE LISTS W 241

M Harris Ltd petitioners 1956 SC 207

Mahesan v Malaysian Government OfficersÊ Co-operative Housing Society (1978)
1 MLJ 149
Majujaya Holding Sdn Bhd v Pens-Transteel Sdn Bhd & ors (1998) 2 MLJ 399;
Malaysian Industrial Development Finance v Eureka Alloy Sdn Bhd (1989) 2 MLJ
117
Matang Holdings Bhd & Ors v Dato San Choon & Ors (1985) 2 MLJ 406
Menier v HooperÊs Telegraph Works Ltd (1874) 9 Ch App 350;
Miharja Development Sdn Bhd & Ors v Tan Sri Datuk Loy Hean Heong & Ors
(1995) 1 MLJ
Mistmorn Pty Ltd v Yasseen (1996) 14 ACLC 1387;
Mohamed & anor (1999) 6 MLJ 497
Moodie v W & J Shepherd Ltd (1949) 2 All ER 1044;
Morgan Guaranty Trust Co of New York v Lian Seng Properties Sdn Bhd (1990) 1
MLJ 282
Mui Sdn Bhd v Hong Leong Bank Bhd (1998) 6 MLJ 203;
Multi Pak Singapore Pte Ltd (In Receivership) v Intraco Ltd & Ors (1994) 2 SLR 282

National Provincial and Union Bank of England v Charnley (1924) 1 KB 431

National Road & Motorists Association v Parker (1986) 4 ACLC 609
Neptune (Vehicle Washing Equipment) Ltd (1995) 3 All ER 811
New Kok Ann Realty v Development & Commercial Bank Ltd New Hebrides ( in
liquidation) (1987) 2 MLJ 57
Newcare Sdn Bhd v Sri Alam Sdn Bhd (2000) 2 MLJ 353
Newhart Developments v Cooperative Commercial Bank Ltd (1978) 2 WLR 636
(CA) at p641
NFU Development Trust Ltd (1973) 1 All ER 135
Ng Chee Keong v Ng Teong Kiat Highlands Plantations Ltd (1980) 1 MLJ 45;
Ng Eng Hiam v Ng Kee Wei & Ors (1963) MLJ 1963;
Norman v Theodore Goddard (1991) BCLC 1028
NRMA Ltd v Parker (1986) 6 NSWLR 517;
Nyuk Fung & ors v Pan Global Equities Bhd (1991) 1 MLJ 152
Owen Sim Liang Khui v Piasau Jaya Sdn Bhd & Anor (1996) 1 MLJ 113;

Parke v Daily New Ltd (1962) Ch 927

Parsons v Sovereign Bank of Canada (1913) AC 160
Pavlides v Jensen (1956) Ch 565;
Pender v Lushington (18770 6 Ch D 70
Percival v Wright (1902) 2 Ch 421
Percival v Wright (1902) 2 Ch 421
Personal Automation Mart Pte Ltd v Tan Swee Sang (2000) MSCLC 97,298
Peso Silver Mines v Cropper (1966) 58 DLR (2d)
PP v G Choudhury (1981) 1 MLJ 76

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Precision Dippings Ltd v Precision Dippings Marketing Ltd (1986) Ch 447

Prudential Assurance Co Ltd v Newman Industries Ltd (1982) Ch 204;
Public Prosecutor v Allan Ng Poh Meng (1990) 1 MLJ

QBE Insurance Group Ltd v ASIC (1993) 10 ACLC 1490

Queensland Mines ltd v Hudson (1978) 53 AJLR 399;
Quek Leng Chye v AG (1950-1985) MSCLC 341

Rayfield v Hand (1960) Ch 1;

Re Anrite Aviation Co Pte Ltd (1990) 3 MLJ 396
Re B Johnson & Co (Builders) Ltd (1955) 2 All ER 775
Re Bahia and San Francisco Railway Co (1868) L.R. 3 Q.B. 584
Re Brazilian Rubber Plantations & Estates Ltd (1911) 1 Ch 425
Re Canadian Javelin Ltd (1977) DLR (3d) 439
Re City Equitable Fire Insurance Co Ltd (1925) Ch 407
Re Clifton Springs Hotel Ltd (1939) VLR 27;
Re Coombe (1911) 1 Ch 723
Re Davis Investment (East ham) Ltd (1963) 3 All ER 926;
Re DÊJan of London Ltd (1993) BCC 646
Re Doloswella Rubber & Tea Estates Ltd (1917) 1 Ch 213
Re Duomatic Ltd (1969)2 Ch 365
Re Edinburgh WorkmanÊs Houses Improvement co Ltd (1935) SC 46
Re El Sombrero ltd (1958) Ch 900
Re English Joint Stock Bank (1866) 3 Eq 205
Re Fowlers Vacola Manufacturing Co Ltd (1966) VR 97
Re Gee Hoe Chan Trading co Pte Ltd (1991) 3 MLJ 137;
Re Inkerman Grazing (1972) 1 ACLR 102 at p106
Re Isle of Thanet Electricity Supply co Ltd (1950) Ch 161
Re Jermyn Street Turkish Baths Ltd (1971) 1 WLR 1042;
Re Kong Thai Sawmill (Miri) Sdn Bhd (1978) 2 MLJ 227 ;
Re Lee Behrens Ltd (1932) 2 Ch 46
Re Lin Securities (Pte) (1988) 1 MLJ 137
Re Manchester & Milford Railway Co (1880) 14 Ch D 645
Re Norvabron Pty Ltd Pty Ltd (1987) 5 ACLC 184;
Re Ontario Express and Transportation Co (1894) 21 OAR 646, CA
Re Overton Holdings Pty Ltd (1984) 2 ACLC 777;
Re Rhodesian Manufacturing Co ltd (1927) SASR 310
Re Rica Gold Washing Co (1878)
Re Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 852;
Re Roberts v Walter Developments Pty Ltd (1997) 15 ACLC 852;
Re Saltdean Estate co ltd (1968) 1 WLR 1844
Re Smith & Fawcett Ltd (1942) 1 All ER 542;
Re Spanish Prospecting Company ltd (1911) 1 Ch 92

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Re SQ Wong Holding (Pte) Ltd (1987) 2 MLJ 298

Re The Swan Brewery co Ltd ( No 2) 1976 3 ACLR 168.
Re Tivoli Freeholds Ltd (1972) VR 445;
Re Totex & Adon Pty Ltd (1980) 4 ACLR 769
Re VGM Holdings Ltd (19421 I All ER 224 at 225, (1942) Ch 235 at 239.
Re Victoria Steamboats Ltd (1897) 1 Ch 158
Re W & M Roith Ltd (1967) 1 All ER 427
Re Yenidje Tobacco Co Ltd (1916) 2 Ch 426;
Re Yorkshire Woolcombers Association Limited (1903) 2 Ch 284, Romer LK
Regal (Hastings) Ltd v Gulliver (1942) 1 All ER 378
Residue Treatment & Trading Co ltd v Southern Resources Ltd (1988) 6 ACLC
1160;
Rossfield Group of Operators Pty Ltd v Austral Group Ltd (1981) Qd R 279
Ruben v Great Fingall Consolidated (1906) AC 439
Russel v Northern Bank Development Corporation Ltd (1992) BCLC 1016
Ryan v Edna May Junction Gold mining Co NL (1916) 21 CLR 487,

Sabah Penang Development Sdn Bhd v Yeng Hing Enterprise Sdn Bhd (1996)
MLJ 589;
Sanford v Sanford Courier Service pty Ltd (1986) 5 ACLC 394
Scott v Scott (1943) 1 All ER 582
Scottish Co-Operation Wholesale Society v Meyer (1959) AC 324;
Securities (Holding) Bhd v Haron bin Mohamed Zaid (1979) 2 MLJ 244;
Selangor United Rubber Estates Ltd v. Cradock (No. 3) (1968) 2 All ER 1073,
(1968) I WLR 1555
Shanghai Hall Ltd v Chong Mun Foo & Ors (1967) 1 MLJ 254
Sharpe v Dawes (1876) 2 QBD 26
Shirlaw v Southern Foundries (1926) Ltd (1939) 2 All ER 113;
Sidebottom v Kershaw leese& Co Ltd (1920) 1 Ch 154;
Siebe Gorman & co Ltd v Barclays Bank ltd (1979) 2 Lloyds Rep 142.
Simmah Tiber Industries Sdn Bhd v David Low See Keat & Ors (1999) 5 MLJ 421
Sing Eng (Pte Ltd v PIC Property Ltd (1990) 3 MLJ 129;
Solaiappan & ors v Lim Yoke Fan & Ors (1968) 2 MLJ 21
Sovereign Life Assurance Co v Dodd (1892) 2 QB 573 at 583
Spies v R (2000) 74 ALJR 1263
Spokes v Grosvenor Hotel and West End Railway Terminus Co (1877)
St Michael Uranium Mines Ltd v Rayrock Mines Ltd (1958) 15 DLR (2d) 609, Ont
CA.
Standard Chartered Bank of Australia v Antico (1995) 13 ACLC 1381;
Steen v. Law ( 1 9631 3 All ER 770, (19641 AC 287
Steinberg v Scala (Leeds) Ltd (1923) 2 Ch. 452, CA;
Sum Hong Kum v Li Pin Furniture Industries Pte ltd (1996) 2 SLR 488
Sycotex v Baseler (1994) 122 ALR 531

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Tan Ah Teck v Coffral ( Malaysia) Sdn Bhd (1992) 1 MLJ

Tan Guan Fong v BN Low Holdings Sdn Bhd & Ors and others actions (1992)
MLJ 205
Tan Sri Tan Hian Tsin v PP (1979) 1 MLJ 73 ;
Tay Bok Choon v Tahansan Sdn Bhd (1987) 1 MLJ 433;
Tay Say Geok v Tay Ek Seng Co Sdn Bhd (1974) 2 MLJ 70
The Board of Trustees of the Sabah Foundation & Ors v Datuk Syed Kechik bin
Syed Mohamed & Anor (1999) 6 MLJ 497,
Thomas Marshall (Exporters) Ltd v Guinle (1978) 3 WLR 116
Tien Ik Sdn Bhd & Ors v Kuok Khoon Hwong Peter (1992) 2 MLJ 689;
Tivoli Freeholds ltd (1972)VR 445;
Tneu Beh v Tanjong Kelapa Sawit Sdn Bhd & Ors (1995) 1 CLJ 941
Tong Chong Fah v Tong Lee Hwa & ors (1968) 1 MLJ 97;
Trevor v Whitworth (1887) 12 App Cas 409 at 423
Tuan Ishak bin Ismail & Ors v Leong Hup Holdings & other appeal (1996) 1 MLJ
661
Tullio v Maoro (1994) 2 SLR 489;

United Malaysian Banking Corporation Bhd v Aluminex (M) Sdn Bhd by the
Supreme Court
United Overseas Bank Ltd v Forward Overseas Credit (1998) 1 MLJ 496

Walker v Winborne (1976) 137 CLR1 ;

Wallace Kevin James v Merrill Lynch International Bank Ltd (1998) 1 SLR 785
Wallersteiner v Moir (1974) 3 All ER 217
Waterhouse v Jamieson (1870) 8 M HL 88;
Wayde v New South Wales (1984)9ACLR 349;
Wayde v new South Wales Rugby League ltd (1985)
Webb v Earle (1875) 20 Eq 556
Weng Wah Construction Co Sdn Bhd v Yik Foong Development Sdn Bhd (1994) 2
MLJ 266
WestonÊs case (1868) LR 4 Ch App 20S15 CA 1965;
White House v Carlton Hotel Pty Ltd (1987) 5 ACLC 421;
Will v United Lankart Plantations Co Ltd (1914) AC 11l
Winthrop Investments ltd v Winns Ltd (1975) 2 NSWLR 666;
Wong Kim Fatt v Leong & Co Sdn Bhd & Anor (1976) 1 MLJ 140;
Wong Kin Fatt v Leong & Co Bhd (1976) 1 MLJ 140

Yap Sing Hock & Anor v Public Prosecutor (1992) 2 MLJ 714;
Yap Sing Hock Holdings Bhd v Chuah Teong Hooi & Ors (1989) 2 MLJ 503
Yeng Hing Enterprise Sdn Bhd v Datuk Dr Ong Poh Kah (1988) 2 MLJ 60

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