Professional Documents
Culture Documents
• What are the advantages for Mal & Lisa in conducting the Smallco Graphics business
through a company? What are the disadvantages?
1.1 Background
A company is a type of corporation and as an artificial legal entities created by law
that have this attribute of a separate legal personality. According to s16(5) CA 1965,
upon incorporation, which is evidenced by the fact that there exists a certificate of
incorporation, the company by virtue of:
Liability – a company is fully liable for its debts and obligations because
these are separate from the debts and obligations of its members
1.2 Advantage
A) Limited Liability:
A company is a separate legal entity & personality, its district from the legal personalities of
its owners or members. The company owns the assets and owes the liabilities and not the
shareholders. Under the Companies Act 1965, Mal and Lisa personal liability is limited to
the amount of investment in the Smallco Sdn Bhd. So, the advantage is for Mal and Lisa due
to them are not personally responsible for the debts and obligations of the company.
Shareholders are not liable for the company's debts beyond the amount of capital share that
they are invested and they are not required to contribute any further capital into the company
B) Perpetual Succession
The advantage of using the corporate form to carry on business is that a company’s existence
continues indefinitely until it is brought to an end through winding up and deregistration.
Perpetual succession allows for assets and obligation to be held in the company indefinitely,
reducing the cost and complexity involved in transferring those assets and obligations if the
identity of participants in the corporate charges. A company also has the distinguished
character of perpetual succession which mean that it never dies, its existence being
unaffected by such matters as the death or bankruptcy of its members. Unlimited life as
Smallco Sdn Bhd can continue of it business & no need to wind up even change in
ownership, or exit any owner from the company, or any transfer of ownership facilitated by
sale of stock either partly or wholly, or existence despite the deaths, insanity, bankruptcy of
it owners. Any think happen either Mal or Lisa on the features defining above, Smallco Sdn
Bhd still can operate as legal existence as separate from its owners, unless majority of its
shareholders decide to terminate it.
F) Transferability of Interests
A corollary of limited liability and perpetual succession is that the corporate form is
uniquely well suited to the free transferability of investors’ interest. However, these are less
relevant to small business operators, where it is unlikely large investors will be involved.
Under sec 14(3) of Company Act prohibits “outsize partnerships”. Generally, partnerships
with more than 20 partners are not permitted. Certainly, Mal and Lisa’s small business will
not have more than 20 partners and is not prevented by sec 14(3) of Company Act.
G) Company Charges
The companies have the ability to give a floating charge over their assets. They can create a
security interest over assets that are acquired, transformed and disposed of in the ordinary
course of the company’s business. The floating charge is a significant form of security in a
commercial context, where often a business’ main asset is its inventory.
B) Director Duty
Since Mal and Lisa decided that each will own five ordinary shares in the company and
appointed as a directors of the company, they become subject to the Company Act duties and
obligations. The duties of directors are to act honestly and use reasonable diligence [sec
132(1) of the Company Act] and to ensure that the company does not trade while insolvent
[sec 304 of the Company Act]. If Mal and Lisa breach these duties, they can subjects to fines
and imprisonment. They need to consider carefully obtaining legal advice or intensive
researching about all the legal requirements before deciding to use a company.
C) Disclose Obligation.
It is more difficult for companies to maintain secrecy of the business, Mel and Lisa would
have to face it’s since their accounting details are open to public. As parts of the formation
of an incorporate company is required to disclose certain information such as profits and loss
annually to authorities and also to public.
1.4 Conclusion
To form an incorporate company has more advantages than disadvantages. The court case
which first established the essential distinction between a company and its members was
Solomon vs Solomon & Co. Ltd. [1897] AC22. The Company Law gives a principle that “a
company” is a separate legal entity from its members and the bigger advantage is the limited
liability towards the company in case of a wound up. This principle is also known as the veil
of incorporation. Cases which applied this principle include Lee vs Lee Air Farming Ltd
[1961] AC.12;[1960] 3 All ER420 and Macaura vs Nothern Assurance Co. [1925] AC 619
which held that sole owners of a company were separate persons and are distinct from the
company itself. The liability of the shareholders to meet the company debt is limited to a
pre-agreed amount of invested capital share and shareholders are protected their personal
assets from the business risks involved. Other advantages such as perpetual succession,
easily transferability of interests, ability to be larger corporation, ability to raise funds, enjoy
taxation benefits and legal standards rules for agent-principal relationships. On the perceived
disadvantages are the duties imposed by the law to disclose certain company profits & losses
information to public and substantial amount of establishment & administration cost are
involving during setup & registration an incorporate company.
2.1 Background
When Mal and Lisa has decide to operate their business through a private company
called Smallco Sdn Bhd and each has appointed as a Director in the company and each own
five ordinary share in the company. Both understand the advantage of forming to carry on
business through a company is their personal assets are protected by the legal principle of
“limited liability”. After Smallco Sdn Bhd is registered, has executes a one year lease from
new premises for the business. Smallco has borrows RM30,000 from Largebank to fund
expansion of their business with personally guarantee from Mal and Lisa to repayment of the
loan and give the bank a charge over their house to secure their obligations under the
agreement. At the same time, Smallco agrees to purchase some computer from a supplier
called Comco with the term of purchase agreement one-third of the purchase price is payable
on delivery with the balance payable in equal monthly installment over the following two
years. Limited liability means that a member of a company limited by shares is usually not
required to contribute amounts from their personal wealth, beyond the subscription price of
their shares, to meet the debts of the company. The effect of limited liability is to transfer the
risk of corporate failure from the investors in the venture carried on by the company to its
creditors.
1) Limited liability
2) Perpetual succession
4) Company charges
5) Taxation.
In this case of Smallco Sdn Bhd as a registered company under limited liability, if six
months after agreements are entered, Smallco Sdn Bhd were unable to make payments to the
Landlord, Largebank and Comco, the following will occur:
2.2 Landlord
The landlord would not able to recover the amount owning under the lease from Mal and
Lisa personally. This is because their liability to contribute to pay company’s debts is limited
to the amount remaining unpaid on their shares. However, if Mal and Lisa had carried on the
business as a partnership, they would be personally liable to the debt as partners. From this
case, the lease contract agreement was entered between the leaser and company. The
landlord would not able to recover the amount owning under the lease from Mal and Lisa
personally. Mal and Lisa as Directors are not required to pay additional amounts from their
personal wealth, its limited from the subscription amount of their share to meet Smallco Sdn
Bhd debts. This principle is reflected in the court case of Abdul Aziz Bin Atan & 87 Ors. Vs
Ladang Rengo Malay Estate Sdn Bhd. [1985] 2 M.L.J. 165. “The company from the date of
incorporate has perpetual succession and the Companies Act provides that the liability on the
part of the shareholders to contribute to the assets of the company will be limited in the
manner provided by law and its memorandum and articles of associations. The whole point
of forming a limited company is that the shareholders can have in their hands the
management of the business without incurring the risk of being under unlimited liability of
the debts of the company.”
2.3 LargeBank
LargeBank would take legal action against Mal and Lisa under the guarantee agreement and
they would be personally liable to the loan. If they are not able to pay the loan, their house
2.4 ComCo
Smallco agreed to purchase some computer from Comco. Under the terms of purchase
agreement, one-third of the purchased price is payable on delivery, with the balance payable
in equal monthly installment over the following two year. If in the event of Smallco fails to
do repayments after expire of six month of agreements. Comco unable to recover the balance
amount owning under the purchase agreement by Mal and Lisa personally because their
liability to contribute to meet company’s debts is limited to the amount subscripts on their
shares. If the Smallco Sdn Bhd assets have been exhausted, Comco would loss all the money
owed to them. However, if Mal and Lisa had carried on the business as a partnership, both of
them would be personally liable to the debts as partners and Comco have a right to get back
all the assets belonging from both as a debtors.
2.5 Conclusion
Under the Companies Act 1965 Section 16(5) defines that a company is the separate legal
entity, distinct from its shareholder, limited liability of it member, has perpetual succession,
may own land, may sue and be sued in its own names. Meanwhile, under the Partnership Act
1961 Section 3(1) defines that a partnership is the relation which subsists between persons
carrying on business in common with a view of profits. There are five legal differences
between a company and a partnership from the stand point of it structure, type of
registration, number of members, constitution and method of dissolution. When Mal and
Lisa carry on their business as a company, both is limited liability to the company debts.
Company liability is limited to the amount of capital has been invested and personal assets
will be secure from the risk when the company in case of wound up. In the case of company
on bank loan agreements requested personal guarantee from Mal and Lisa on the loan
repayment to give bank a charged over their house to secure their obligations. If Mal and
Lisa decide not to be a guarantor and using company’s valuable assets as parts of the
agreement agreeable deal within the banks, any happen the Smallco Sdn Bhd unable to
repayment will fall to the company liabilities. Difference from the business carry on as a
partnership, if their business fail to fulfill the obligations, the creditor can charge their
3.1 Introduction
Company Act defines a director as a person appointed to the position of director or alternate
director. A Director has three broad categories of duties: -
• Statutory Duties under Companies Act 1965
• Common law Duties
• Fiduciary duties
• Common law Duties of Directors
A director of the company is given fully accountability as a role to undertake the
management of the business and affairs of the company, due to that under the Company Act
1965 a director has duties of care, skill and diligence and fall under common law of duties
and also statutory duties. Since the directors can act as and for the company, they have a
responsibility to ensure that the company does everything is obliged by law and that the
decisions they make are in the best interests of the company. The duty of directors to take
care a company can arise from a number of sources. These are:
• Duty to act with reasonable care, skill and diligence under Section 131(1A) of CA
1965;
• The business judgment rule will ensure accountability whilst providing directors with
sufficient protection to better manage companies under Section 131(1B) of CA 1965;
• The common law duty of care, skill and diligence ;
• The Contract of Employment - for executive directors and other executive officers.
• A director need not exhibit, in the performance of his duties, a greater degree of skill
than may reasonably be expected from a person of his knowledge and experience.
• A director is not required to give continuous attention to the affairs of the company
and his duty arises intermittently while performing his functions at the board
meetings.
• A director is entitled to delegate his duties. In the absence of grounds of suspicion,
the director is justified in trusting the official (to whom his duties were delegated) to
perform such duties honestly.
However, in the AWA case (AWA Ltd vs. Daniels & Ors (formally practicing as Deloitte
Haskins & Sells - 1995), the New South Wales Court of Appeal proposed the following as
the minimum standard practice of duties of care, skill and diligence expected of all directors
as:
• Director must acquire a basic understanding of the business of the company and must
be familiar with the fundamentals of the company’s business;
MGT507 Company Law Page 13 of 51
• Detailed inspection of day to day activities is not required but what is required is a
general monitoring of the company’s business affairs;
• Directors are under a continuing obligation to keep informed about the activities of
the company;
• Directors should maintain familiarity with the financial status of the company by a
regular review of financial statements.
3.3 Subco Case Study:
Question asked: Will the directors of Subco be held to have breached the statutory duty of
care, law of contract and the common law duty of care when they :
a) Appointed an executive that is a wine expert but with no experience in sales; and
b) Did not discover that the sales figures presented were false.
a) The Subco invested heavily in setting up a mail order wine distribution business and
should employ someone that is competent and reliable in same relevant industry and
experience in sales & marketing. The Subco Board of Director appointed of wine expert can
be justified only if there is a need for an expert to judge the quality of wine not for sales &
marketing. Based on AWA’s case it stated that “A director must acquire a basic
understanding of the business of the company and must be familiar with the fundamentals of
the company’s business”. In such, the Subco Directors might be held of breaching the duty
of care, skill and diligence. The company’s article of association allow for delegation of
authority. However, there is no evidence that the constitution of Subco limits the right of
directors to delegate any of their powers.
b) The financial statement for year 2001-2002 financial year show that Subco had again
made a significant loss. The Subco’s Directors did not discover that the sales figures
presented by the executive were false, are they considered breaching the duty of care? Since
the mail order wine distribution business is the heavy investment as the Directors of Subco,
they need to monitor the overall company’s business activities closely such as the total mail
order of wine, the revenues contributed by mail order and the inventory level of wine.
Besides wholly trusted looking on the sales figures presented by the executives, they shall
look into the monthly account statements above the revenues contributed by mail order
prepared by the finance department and inventory report prepared by the purchasing
department or the mail order report about the wine prepared by the sales department. They
3.6 Conclusion
For Jonny Johnson case is already provide information & actually acts in the best interest of
the company could not breach of her duty as a Managing Director of Subco when the market
rented fell substantially over the years.
For the food contamination case, Subco director could breach of duties due to not carry out
his director duties of care & diligence again the big loses such as food contamination which
will affect the reputation & revenue of the Big Bakers Sdn Bhd as a subsidiary companies of
Subco. The negligence of the common law on duty of care will usually result in the damages
of the company name and can lead to the company law sue to the directors for the
compensation or remedies.
4.1 Background
Subco Bhd is one of the unlisted public subsidiary company of Listco Bhd (owns 73% of the
Subco ordinary shares) and operates a chain of supermarkets and specialty food & beverage
stores throughout Malaysia & Singapore. The Subco Board of Director has 5 members and
Jenny Johnson is acting as a managing director. Tommy Tang is also another Board of
Director & shareholders that own 10% of Subco Bhd share and there are other seven
members of Tang family shareholders hold cumulative of 17% of Subco Bhd shares.
Meanwhile, Frank Fearless is act as a managing director & CEO of Listco Bhd and also one
of the Board of Director of Subco Bhd. The Board of Director of Listco Bhd has eight
members and consists of two executive directors and six non-executives directors. The single
largest shareholders of Listco Bhd are Weldone Grain Bhd which is unlisted public company
owned by Richard Ross, with 239,775,639 ordinary shares, or 21% of the issued capital and
Listco Bhd is a public listed company. Through the current legal framework under the
Company Act 1965 in Section 132(1) has stated that “Director’s duties are fiduciary duties
of loyalty or duty to act with fidelity and trust to another”. In generally, directors owe
fiduciary duties to the company and its shareholders and not, for example, to stakeholders
such as creditors or minority shareholders (Percival v Wright [1902] 2 Ch 421; Southern
Cross Mine Mgt v Ensham Resources (2004) 22 ACLC 724). Therefore a company may
enforce fiduciary duties owed by a director. A reason for this is that otherwise, directors
would be liable and exposed to a multitude of actions (Brunninghausen v Glavanics (1999)
17 ACLC 1,247 at 1,254 per Handley JA). The most important fiduciary duty is the duty of
MGT507 Company Law Page 18 of 51
loyalty. The concept is simple that the decision makers within the company should act in the
best interests of the company and not in their own interests. The easiest way to comply with
this duty is not to engage in transactions that involve a conflict of interest.
The similar court case on Section 132(1) for fiduciary duty of loyalty in Multi-Pak
Singapore Pte Ltd v Intraco Ltd [1994] 2 SLR 282, The word 'honestly' does not mean that a
director would only be in breach of duty if he had acted fraudulently. It means to act bona
fide in the interests of the company. In exercising their discretion, the directors should only
act to promote or advance the interest of the company.
4.7 Conclusion
Company Directors are in a position of trust within their companies. The knowledge and
power they acquire through their offices creates a potential framework for abuse, whereby
Directors act for personal gain. The media is filled time and again with scandals concerning
misappropriation of company funds, bribes and secret profits. It is well known that a
5.1 Introduction
Section 132 (1) of Company Act 1965 stated that “A directors of a company shall at all times
exercise his power of a proper purpose and in good faith in the best interest of the company”.
To avoid even the appearance of a conflict of interest, a director may want to treat as a
conflict any transaction between the company and (i) the director’s spouse, descendants, or
ascendants, (ii) any entity in which such a relative is a trustee, director, officer, employee,
consultant, or agent, or (iii) any entity in which such a relative has a financial interest.
If a conflict of interest is or may be present, the director must:
• Disclose to the board of directors or relevant committee of the board the material
facts as to his or her relationship or interest.
• Not participate in any board discussion or vote, unless the company’s board
determines that the director may participate in such discussion or vote.(Section
131A(1) of CA1965)
If the board determines that the director may participate, the director may still decide that a
conflict exists and that he/ she should not participate in any discussion or vote. If a director
follows these disclosure and recusal procedures, a party challenging a transaction on the
grounds of a conflict of interest/breach of fiduciary duty will face a heightened burden.
Similar court case on Sarawak Building Supplies Sdn Bhd v Director of Forest & Co [1991]
1 MLJ 211, the fact that interested directors were absent from the meeting which passed the
Listco Bhd
Food
Subco Sdn
Product Sdn
Subco leads RM$20Million to Bhd
Bhd
Food Product with interest
free.
Food Products Sdn Bhd & Subco Sdn Bhd is two of the subsidiary company of the Listco
Bhd. On account statement of 2002, the Listco group of companies have over 200 wholly-
owned subsidiaries and further 11 companies in which Listco has a controlling majority
interest but that are not wholly-owned subsidiaries include Subco, which is 73% owned by
Listco. Each of the individual subsidiaries companies has its own separate legal entity and
separate interests even through there are under corporate group of company. Each of the
individual companies directors much act in good faith and in the best interest of the
companies governs by the Company Act 1965. Under Section 132(1) also a general law
duty, even if director’s actions are in company’s best interests, may still be a breach of duty
if power not exercised for a proper purpose. Similarly in court case of Walker v Wimborne
that the high court held the directors must put their company’s interests before the group’s
interests. Even though the Subco Sdn Bhd is a subsidiary relationship to the Listco Bhd, the
directors of the Listco can’t act in the best interest of the Listco again Subco benefits. From
the case studies, Subco has recently sold its New Zealand bottle shop business for RM$20
million and lends RM$20 million in cash to Food Products Sdn Bhd with interest free and
also without obtaining any security from Food Product Sdn Bhd. However, looking into
Subco financial reports on 30 June 2006, Subco had net assets of RM198 million and
borrowings of RM60 million and the business has been operating at a loss for several years.
MGT507 Company Law Page 25 of 51
An intelligent, professional, honest & responsible directors of Subco Sdn Bhd would believe
that RM$20 million could be used to improve the current bad financial position in the
company than loan it out without interests. Meanwhile, there was no significant reason or
strong justification why the board of directors believe that the RM$20 million that Subco
lend to Food Products Sdn Bhd will benefits the company in present or near future.
Therefore, there is a breach of duty of the directors of Subco. Furthermore, the market each
ordinary share price of Listco’s at RM$4.45 may presume the financial position for the
company is relatively strong. So, it is the better position for Listco as a parent company to
lend money to Food Products Sdn Bhd with the substantial benefit to Listco is some of its
projects come to fruition that mention by the Frank Fearless (CEO of Litsco) instead of
Subco Sdn Bhd.
5.4 Conclusion
The duties of the directors need to act all the time honestly with the best interest of the
company. Subco directors always need to act in the best interest of its own company, and the
interest of its shareholders, members, employees, creditors and others need to be take care.
Although Subco is subsidiaries companies for Listco, the board of director cannot take
advantage again the company and minority shareholder benefits still need diligence and care.
Subco board of director should not and never breach their duties to act honestly in the best
interests of company and its employees, members, shareholders, creditors and others. The
decision made by the corporate group directors may affect other subsidiaries group company
but nevertheless if the decisions can deliver the best interest to the subsidiaries company in a
group than the directors was not in breach of his duty. When to judges this, the court will
apply the test to see there is any intelligent and honest person as a company directors.
6.1 Introduction
Directors have a duty to avoid a conflict of interest. In particular:
a) the directors must retain their freedom of action and not fetter their discretion by
agreeing to vote as some other person may direct;
b) the directors owe a fiduciary duty to avoid a conflict of duty and personal interest;
c) The directors must not obtain any personal advantage from their position as directors
without the consent of the company for whatever gain or profit they have obtained.
A director may be appointed to represent the interest of, for instance, a shareholder of
debenture holder. If he finds himself in an acute conflict of interest he should resign.
Similarly court case in Regal (Hasting) ltd verses Gulliver [1967] 2 AC 134, a company
wanted to invest in 2 cinemas, but it had insufficient funds to do so. Some of its director then
took up the opportunity and together with the company, invested in the cinemas.
Subsequently, the 2 cinemas were sold, resulting in profit to the company and some of the
directors. The shareholder of the company changed and the new management brought an
action against the director to account for the profits made. Is has held by the court that the
individual director were liable.
The director of Listco think that, in part, On-Line Groceries success is attributable to Gary
experience gained through his involving in Listco internet sales project and also turn out that
Gary has made use of a number of industry contacts while at On-Line Groceries with whom
he first developed relationships while working at Listco. In such circumstance, if the
evidence is truth that Gary has improper use of his position in Listco and made use of
company confidential information to gain opportunities for his own benefits in On-line
Groceries business could breach of his duty. If Listco take this case to the court & found
Gary is guilty on misuse of Listco company information will be breach of fiduciary duty,
Listco could try to recover some profits from RM8 million gains from Gary. Guilty of an
offence against Section 132 of Companies Act, Gary could face the possible imprisonment
MGT507 Company Law Page 33 of 51
not more than 5 year and fine up to RM$30,000. However, if there was no fact stated that
Gary has made use of a number of industry contacts while at On-Line Groceries, Gary would
not be held breach of duty to act in the interests of the company.
6.6 Conclusion
The law on conflict of interest has been strictly imposed in the Company Act 1965. In-order
to avoid unnecessary conflict of interest between directors personal interest and company
interest, every director of a company who is in any way, whether directly or indirectly,
interested in a contract or proposed contract with the company shall, as soon as practicable
after the relevant facts have come to his knowledge, declare the nature of his interest at a
meeting of the directors of the company. A duty to avoid possible conflict of interest and to
disclose the intention of interest for the business opportunity which may offers to the
directors in current line of company business or the company has considered & rejected the
corporate opportunities at a general meeting with shareholder shall obtain the permission
from the company for grapping those opportunity. Every director of a company who holds
any office or possesses any property whereby whether directly or indirectly duties or
interests might be created in conflict with his duties or interests as director shall declare at a
meeting of the directors of the company the fact and the nature character and extent of the
conflict. In Gary case that he had informed and disclose the intention to take up the corporate
opportunity if the proposal rejected by the board of Listco in the board meeting and Frank
Fearless as a CEO of Listco has given permission to “go for it” wishes the best in new
venture for the resignation of Gary. Gary decide resign from his position with Listco and
joint Interco with personal investment of RM$2 million as a minority shareholder, also
become CEO of newly establish On-Line Groceries company and take up the opportunity. In
such circumstance, Gary would not breach of his duties and Listco cannot recover the RM$8
million profits gain from Gary in relation to his investment in On-Line Groceries business.
7.1 Background
Subco Bhd has acquired Tang Supermarket Bhd and owns all the issued shares in 1996.
Prior to 1996, Phil Peters is the Finance Director of the Tang Supermarket Bhd. Jenny
Johnson the MD of Subco Bhd, has recently discovered that, in 1994, when Phil Peters as a
Finance Director of Tang Supermarket was lend money to a company without sufficient
security. Finally, the company did not repay the loan eventually. Based on the fact of
Canadian Aero Service Ltd v O’Malley (1973) 40 DLR (3d) 371, the courts held O’Malley
and Zarzycki breaching his duty as director even though he argued that he had resigned from
the Canadian Aero and therefore not subject to any duties. Due to this, Phil Peters can be
sued for breach of duty even he is no longer the Finance Director of Tang Supermarket. He
cannot avoid his duty and responsibility done on 1994 before the company acquired by
Subco and resigning from his position as director from Tang Supermarket.
7.5 Conclusions
MGT507 Company Law Page 37 of 51
As a director, Phil Peter needs to act all the time honestly with the best interest of the
company even thought already resign from the post in the company, she still hold an
accountability from lent money to a company on an inadequate security. Phil Peter has
responsibility to disclose this obligation & stated in the financial reports to the potential
buyer before the company been acquire & get back the loan from lender before hand over
the company to new buyers. Phil Peter should not put themselves in the risk or dangerous of
a breach of duty which will result in compensation or imprisonments or both and even been
automatically disqualify for a specified period of time set by the Court either involving
direct or indirect or taking parts in the management of any company in Malaysia. Phil Peters
can be sued for breach of duty even he is no longer the Finance Director of Tang
Supermarket. He cannot avoid his duty and responsibility done on 1994 before the company
acquired by Subco and resigning from his position as director from Tang Supermarket.
8.1 Background
Rufus Tang is one of the minority shareholders and own only 5% of Subco share. As a
minority shareholder, Rufus Tang has become frustrated with what he sees as the
mismanagement of Subco. He thinks the incompetence and laziness of Subco directors has
substantially reduced the value of his share in Subco in recent years. He also believes that
transactions within the Subco group have been undertaken without sufficient regard to the
separate interests of Subco. The Subco directors all receive generous directors’ fees and
other benefits such as free overseas travel and unrestricted use of Subco fleet of chauffeur
driven cars. He sees the Subco board as an “old boy’s club” designed to reward loyalty to
Listco and discourage critical evaluation of management. Rufus Tang wants to threaten the
Subco board with an action under Section 181 of Companies Act 1965, but has been advised
that the oppression remedy is really a remedy for small privately owned company.
According to Companies Act, there is no section to stop any members to bring oppression
action again to the company and its directors who unfairly treated it members or shareholder
and oppression remedy can applies to all type of companies register in Malaysia include
public, private companies, big or small. Due to that, as a minority shareholders, Rufus Tang
have own right to applied oppression remedy action again the board of Subco when he thinks
that the action of board of Subco has an oppressive effect and the action of the company &
actions by the directors which may harmful and oppressive, unfair discrimination or unfairly
prejudicial against its members and failure of directors to act in the best interest of the
company.
b) The transactions within the Subco group have been undertaken without sufficient regard
to the separate interests of Subco?
This fact could form the basis of an oppression action. The transactions within the Subco
group have been undertaken without sufficient regard to the separate interests of Subco
can constitute a breach of fiduciary duty by the Subco directors. However, evidence of
inadequate transactions have been found such as the Subco directors breached their duty
to act in the best interest of company by lending RM20 millions to a wholly-owned
subsidiary of Listco with interest free and without obtaining any security for the loan is
again the interest of Subco company. Although Listco is parent companies of Subco, the
board of Subco cannot take advantage again Subco interests by diversify the Subco
money to Listco own-subsidiary companies. Subco board of director should not and
never breach their duties to act honestly in the best interests of company and its
employees, members, shareholders, creditors and others. Base of this fact, Rufus Tang
c) The Subco director’s all receive generous director’s fees and other benefits such as free
oversees travel and unrestricted use of Subco’s fleet of chauffeur driven cars?
According to the above mentioned allegation can be the basis for oppression. The board
of Subco not acts in the best interest of the minority shareholders, it members and not act
in the good faith for the company as a whole. The generous action taken by the Subco
directors is harmful, disregard of members’ interests and unfairly prejudicial or unfairly
discriminatory and misappropriation of company funds may lead to refused to pay
dividends or inadequate dividend given to its members or unjustifiable failure to pay
dividends. The benefits such as free oversees travel & unrestricted use of Subco’s fleet of
chauffeur driven cars is course of conduct designed by Subco directors to further their
own interests to the detriment of the company or the minority shareholders. Also
diversion of profits where Subco directors paid themselves generous directors’ fees and
salaries may not declare dividends and neglect of the duty of care, skill and diligence.
Base of this fact, Rufus Tang can take oppression action under Section 181 of CA1965
again the board of Subco and its directors.
d) The Subco board as an “old boy’s club” designed to reward loyalty to Listco and
discourage critical evaluation of management?
The above mentioned allegation can’t form the basis for oppression. The Subco board
has special designed to reward loyalty to Listco is breach of best interest of company as a
separate entity. Although Subco is subsidiary companies of Listco, the board of Subco
cannot take advantage again Subco interests by diversify the interest to Listco. The
disability & incapability of directors to manage the company do not lead themselves to
an oppression action. The directors’ failure to act in the best interest of company do held
as long there was an evidence to prove that the directors purposely designed the reward
loyalty program for the sole benefit of Listco instead of its own company Subco. Rufus
Tang may bring legal action against Subco’s directors for breach of duty to act in good
faith with the best interest of the company and proper purpose under Section 132(1) and
under common law duty of care and diligence. If found guilty under Section 132, the
directors of Subco can be fine up to RM30,000 or imprisonment for 5 years or both.
8.7 Conclusion
The duty of directors is to ensure that the oppression remedy must not exist in their
companies. A director has to act bona fide in the best interests of the company and not for
any collateral purpose. In doing so, the director must make sure he does not in any way
benefit from the act of good faith or have any interest whatsoever in the act and make sure
all the action taken do not lead to oppression action such as disregard of members’ interests
and unfairly prejudicial or unfairly discriminatory conduct. The interest of minority
shareholders or members need to take care of their affairs carefully, ensure exercised fairly
treatment to all and to avoid unnecessary oppression action taken by minority shareholders
or members or even debenture holders. Shareholders have the right to ensure that a company
is properly run. This right is enforced via the derivative action. In fact any person whose
interests have been, are or would be affected by the conduct or likely conduct of another
person in contravention of the Companies Act can apply for an injunction. Similarly that
same aggrieved person may apply for an injunction to require a person to do an act or thing
that he is required to do by the Act. Due to that, directors of Subco must all the times act
fairly and does not heart or harmful or burdensome conduct to their minority shareholders
interests. Any visible departure from the standards of fair dealing and a violation of the
conditions of fair play which a shareholder is entitled to expect before a case of oppression
can be made. If the oppression evidence is truth, Rufus Tang can applied legal action under
Section 181 of CA1965 again the board of Subco & its directors.
9.1 Introduction
While attending a marketing conference, Barry Boon meet Wanda West, the CEO of a direct
marketing company called Sales Concepts Sdn Bhd. Wanda tells Barry that Sales Concepts
is about to conclude an agreement to license a direct marketing system to Foodies Berhad, a
competitor of Subco. Barry believes that the system would be suitable for Subco but knows
that he will have to move quickly. He offers Wanda RM3 million for the license. Wanda
produces a licensing agreement and Barry signs the document “for and on behalf of Subco”.
Wanda says she will arrange for the agreement to be executed under seal by Sales Concepts
and sent over to Subco in a few days. The following week, Jenny Johnson receives the
agreement. She is not as enthusiastic about the direct marketing system as Barry is. In her
opinion Subco is not bound by the agreement and is not required to pay the amount owing
under it. Can Sales Concepts enforce the licensing agreement again Subco?
A company can make a contract through an agent by two type of authority: 1) Actual
authority; and 2) Apparent authority. The actual authority can arise in two ways: a) From the
company’s articles of association; or b) By the board of directors delegating its power &
some of their own actual authority. There are several generic types of authorities; authority
may be express, implied, or apparent. “Express authority” is that which is found within the
plain meaning of a written grant of authority. “Implied authority” is that which is necessary
or appropriate for exercising express authority and therefore be inferred from the express
authority. “Apparent authority” is not actual authority at all. Company should avoid this
apparent of authority and should not rely on apparent authority as a basis for acting, because
the company may be held liable, under the doctrine of “estoppels” for resulting harm to the
persons rely to their detriment on an appearance of authority. The implied actual authority
can arise by implication from things the principal says and does include:
i. Appointing someone to a certain position; and
ii. Otherwise acting to give the person authority, including through “acquiescence”.
9.7 Any different If the agreement has been signed by Jenny Johnson (MD of Subco)
and Head of Subco Marketing Department?
There was no fact to show that the Subco’s board has given the implied actual authority to
Jenny Johnson as a MD of Subco and the Head of Subco’s Marketing Department to sign the
MGT507 Company Law Page 49 of 51
contract ‘on behalf of Subco’ with Sales Concepts Sdn Bhd. If Jenny Johnson signs the
contracts agreement with Sales Concepts Sdn Bhd, Subco may bind by the licensing
agreement. Similarly to the court case of Entwells Pty Ltd v National and General Insurance
Co Ltd (1991) 6 WAR 68 stated that if a Managing Director did not have actual authority, a
company may still have been liable because of his or her apparent authority. In the case of
Hely-Hutchinson v Brayhead Ltd [1968], the court have said that the appointment of MD
involve a grant of implied actual authority to “do all such things as fall within the usual
scope of that office”. So, the appointment of the Jenny Johnson as a MD of Subco will
involve a grant of implied actual authority as well. The usual scope of a MD's powers
depends on what is customary or usual for a MD in a similar company carrying on a similar
business. In general, the courts have said that:
i. A MD's functions include dealing with everyday matters, supervising the daily
running of the company, supervising the other managers and generally being in charge
of the company's business
ii. A MD may engage others to provide services for the company and authorize agents to
make contracts on the company's behalf of the kind that the MD could make;
iii. A MD of a trading company has no usual authority to enter into a transaction that is
not considered to be an ordinary trading transaction;
iv. A MD can guarantee loans made to the company's subsidiary, indemnify persons who
have given such guarantees and give guarantees of payment of debts owed by other
persons;
Based on point (v), the agreement that Jenny Johnson signed cannot be characterized as an
ordinary trading transaction. However, considering the strong financial and size of Subco
that the net assets of RM198 million and loan of RM60 million, the Court would hold that
Subco MD’s have sufficient implied actual authority to enter the RM3 million agreement on
behalf of the company. However, if the Head of Subco’s Marketing Department had signed
the agreement, it could argue that this fell within the implied actual authority of that
executive officer. The Head of Subco’s Marketing Department just has apparent authority.
Looking into the agreement that worth RM3 million, the court may say that the amount is
too large and no implied actual authority of a senior executive below MD level.