Section B TWO questions ONLY to be attempted 9 (a) Five years ago, Jamie, an orphan then aged 16, wanted

d to pursue a degree course in music. Her uncle, Charles, who had looked after her since her parents passed away when she was 14, offered to pay for her studies on condition that upon her graduation she would work in his music studio for a minimum period of two years or alternatively, reimburse him a fixed sum of RM100,000. She agreed and a formal contract was signed between them. She has now completed her studies and has been offered a lucrative job with an international college of music. She does not wish to work for her uncle nor reimburse him the sum of RM100,000 and seeks your legal advice as to the validity of the contract. Required: Advise Jamie. (5 marks)

(b) On 2 January 2004, Ali wrote a letter to his friend, Bakar, offering to sell to him (Bakar) his durian orchard for RM1 million. The letter expressly stated that Ali would keep the offer open for seven days. This letter reached Bakar on 3 January 2004. On 4 January 2004, Ali changed his mind and sent a letter to Bakar revoking his offer. On the same day Bakar sent a letter to Ali accepting his offer. Alis letter of revocation reached Bakar on 6 January 2004. Upon receiving the letter Bakar immediately telephoned Ali informing him that he accepted his (Alis) offer and reminded Ali that Ali could not revoke his offer as he (Ali) had promised to keep the offer open for seven days. Required: Advise Bakar whether a valid contract has arisen between him and Ali. (5 marks)

(c) Maniam entered into a contact with Chong under which he agreed to sell to Chong, 200 packets of first class seeds ready for planting. No seeds were delivered to Chong. Chong wishes to sue Maniam for breach of contract. Required: Advise Chong on his chances of success. (4 marks)

(d) Darul wanted to renovate his house and entered into a contract with AB Contractors Sdn Bhd for this purpose. Under the terms of the contract the contractors agreed to do the following renovations according to given specifications: (i) (ii) (iii) (iv) Extend the kitchen Re-tile the floor of the entire house Construct an additional room and Re-construct the ceiling.

The total cost of renovation was agreed at RM80,000. After the construction of the additional room and the extension to the kitchen, the foundations of the house gave way due to poor soil conditions causing the entire house to collapse. The contractors are now demanding payment for the work already done, amounting to RM50,000. Darul refuses to pay. Required: Advise AB Contractors Sdn Bhd. (6 marks) (20 marks)

10 (a) Anjali and Banu decided to form a company to be called Anba Sdn Bhd (the company). After the relevant documents for registration had been submitted to the Companies Commission of Malaysia but before the company obtained its certificate of incorporation Anjali purchased a piece of land from Chong at a bargain price of RM70,000 (the market value of the land was RM100,000). After the company was formed, she sold it to the company for RM100,000 without disclosing her purchase price. The company has now discovered the true facts and wishes to rescind the sale, or alternatively, claim from Anjali the profit of RM30,000 which she made on the sale. Required: Advise Anba Sdn Bhd. (10 marks)

(b) A week before the company obtained its certificate of incorporation, Banu acting on behalf of it, entered into a contract with Suria Sdn Bhd, whereby Suria Sdn Bhd was to supply RM20,000 worth of stationery to the company. After the companys incorporation, it refused to honour the contract. Required: (i) Advise Suria Sdn Bhd as to whether it can enforce the contract against the company, or alternatively against Banu personally. (8 marks)

(ii) State whether it would make any difference to your answer if the contract contained a clause, which stated that Banu was not to incur personal liability for breach of the contract. (2 marks) (20 marks)

11 Three months ago, Jenny, Kenny, Lam and Mani were appointed as the directors of Superhomes Construction Sdn Bhd. Kenny, Lam and Mani hold 30% of the companys issued shares. Jenny does not hold any shares at all. The companys main activity is the construction and renovation of houses. The companys articles of association state, among other things, that all directors must acquire and hold at least 10,000 shares in the company. Last month, Jenny entered into a contract on behalf of the company with Nazri for the renovation of his house at an agreed price of RM250,000. Last week Kenny, who recently celebrated his 73rd birthday, was required by the board of directors to negotiate a contract for the building of five dwelling houses, with Datuk Roo Mah. Kenny successfully concluded the deal at a price of RM3 million. Ozimi, a minority shareholder, who had voted against the appointment of all the present directors because she doubted their competence and capability, has now discovered that Lam was convicted for reckless driving and sentenced to three years imprisonment. He was released from prison last year. Further, she has also found out that Mani has been a director of a number of companies in the last five years. Each of those companies is now in insolvent liquidation. Required: Advise Ozimi, who wishes to know: (a) whether each of the directors may be disqualified from acting as a director on any ground under the Companies Act 1965. (14 marks) (b) whether, in the event Jenny and Kenny are disqualified to act as directors, the contracts entered into by them on behalf of the company can be invalidated on the ground that they were so disqualified. (6 marks) (20 marks)

[P.T.O.

12 Tra Bell Sdn Bhd was established in the year 2001, specializing in event management. Until the end of 2002 it was quite successful and made reasonable profits. However, in the year 2003 the company faced problems in securing sufficient contracts in the light of severe market competition. In order to withstand the competition, the directors of the company decided to allow clients a 90 day credit. The company then resorted to heavy borrowing. In February 2003, it borrowed RM100,000 from one of its own directors, Mr Las Risot. This loan was unsecured. In May 2003 it borrowed RM500,000 from Fine Finance Bhd, on the strength of a debenture secured by a floating charge over all the companys assets and undertaking. This charge expressly stated that the company was prohibited from creating any other charge, whether fixed or floating, on all or any part of its assets. In August 2003 the company borrowed a further RM200,000 from Samokesh Bank. This loan was secured by a fixed charge on the companys office premises. In January 2004, the company needed more operating capital and borrowed RM300,000 from Freeloan Bank. This loan was secured by a floating charge on all the assets and undertaking of the company. It was an express term of this charge that it was to rank in priority to all other floating charges created by the company. In July 2004, the company fell deeper into debt by borrowing a further sum of RM200,000 from its director, Mr Las Risot. As security, the company issued Mr Las Risot a debenture for RM300,000 (taking into account the loan of RM100,000 given by Mr Las Risot in February 2003), secured by a floating charge on its book debts. Last week, a winding up order was made against Tra Bell Sdn Bhd. A liquidator has been appointed. The companys liabilities far exceed its assets. The liquidator seeks your advice on the order of priority in which the above debts are to be paid. Required: Advise the liquidator. (20 marks)

End of Question Paper

(b)

By s.26 of the Contracts Act 1950, an agreement without consideration is void. However, not all such agreements are void. Section 26 itself provides for several exceptions as follows: (i) Agreements made on account of natural love and affection between parties standing in near relation to each other. Such agreements must be made in writing and must be registered under the law (if any) for the time being in force for the registration of such documents. The following example is provided in s.26 as an illustration of this exception: A, for natural love and affection, promises to give his son, B, $1,000. A puts his promise to B in writing and registers it under a law for the time being in force for the registration of such documents. This is a contract. However, the phrase near relation is not defined. Thus, it would be left to the courts to decide on the facts of a particular case whether the parties were in near relation. In Re Tan Soh Sim (1951) 1 MLJ 21, it was held by the Court of Appeal that Chinese adopted children could not be regarded as being in near relation to the uncles and aunts of their adoptive mother. (ii) An agreement to compensate wholly or in part a person who has already voluntarily done something for the promisor. The section provides the following illustration: A finds Bs purse and gives it to her. B promises to give A $50. This is a contract. (iii) An agreement to compensate wholly or in part a person who has done something which the promisor was legally compellable to do. The section gives the following illustration: A supports Bs infant son. B promises to pay As expenses in so doing. This is a contract. (iv) An agreement to pay wholly or in part a statute-barred debt. The agreement must be in writing and signed by the person to be charged therewith or his lawfully authorized agent. The section gives the following illustration: A owes B $1,000 but the debt is barred by limitation. A signs a written promise to pay B $500 on account of the debt. This is a contract.

This question tests the candidates knowledge on the definition of a partnership and its essential characteristics. Partnership is best defined in the words of s.3(1) of the Partnership Act 1961. By that sub-section, Partnership is the relation which subsists between persons carrying on business in common with a view of profit. The definition of a partnership encompasses several elements. Firstly, in order for a partnership to arise, there must be an association of persons. This means that there must be more than one person. However, the number of persons cannot exceed twenty in the case of ordinary partnerships. See: s.47(2) of the Partnership Act 1961 and s.14(3)(b) of the Companies Act 1965. However, by s.14(3) of the Companies Act 1965, this limit does not apply in the case of partnerships formed for purposes of carrying on any profession or calling. Further, the relation between members of any company or association registered as a co-operative society will not constitute a partnership. See: s.3(2) Partnership Act. Secondly, the persons must be carrying on a business. Business is defined in s.2 of the Partnership Act to include every trade, occupation or profession. Thus, clubs, societies and other voluntary organizations formed for charitable or religious purposes will not be considered as partnerships. In Soh Hood Beng v Khoo Chye Neo (1897) SSLR 115 several persons had set up a loan association with the purpose of giving loans among themselves. Each member would get his turn to receive the loans. The court held that this did not amount to the carrying on of a business and could not constitute a partnership. It must also be shown that the business is currently being carried on. The ordering of goods in anticipation of carrying on a business in the future will not satisfy this requirement. See: Keith Spicer Ltd v Mansell (1970) 1 All ER 462. In this case one of the promoters of a proposed company ordered goods from the plaintiff company intending them to be used by the proposed company. The goods were delivered to the other promoters address. The issue was whether there existed a partnership between the promoters. The court held there was no partnership, as they were not currently carrying on a business, though they had the intention of carrying on a business in the future in the form of a company. Thirdly, the business must be carried on in common. This means that the partners must have possessed a common intention to carry on the business. It does not mean that all partners must be actively involved. The case of Sithambaram Chetty & Others v Hop Hing & Others (1928) SSLR 53 is illustrative. In this case two persons established a business in Penang, but their connection with it was not made public. They took no part in carrying it on, leaving its entire control to two managers. The court held that they were liable as partners to third parties who had lent money to the firm. Fourthly, the business must be carried on with a view of profit. This means that the business must be carried on with a profit motive. There has been some doubt as to whether a division of the profits is essential, but the better view seems to be that it is not necessary to divide profits. See: Lindley on Partnership. Social, recreational and other non-profit organizations will not be considered as partnerships as they do not operate with a view of profit.

10

This question on agency tests the candidates knowledge on the agents fiduciary duty not to make secret profits and the remedies for breach of such duty. (a) A person is said to be in a fiduciary position towards another when the relationship between the two is one of trust and confidence. As such a person in a fiduciary position has to act honestly and in utmost good faith in all his dealings with the other and his undertakings on his behalf. He must in no circumstances make use of his position to obtain an advantage for himself without the principals consent. One of the most common situations where an agent is likely to breach his fiduciary duty is where he makes a profit out of his position as agent without the knowledge of the principal. This is known as a secret profit. This may take the form of a bribe received by the agent from the third party or any other form of financial advantage over and above the commission or other remuneration agreed to between the agent and the principal. An example of a secret profit made by a agent may be seen in the case of Tan Kiong Hwa v Andrew S.A.Chong (1974) 2 MLJ 188. In this case the plaintiff had authorized the agent to sell a flat for RM45,000. The agent sold it for RM54,000, without the plaintiffs knowledge. The court held that the difference of RM9,000 amounted to a secret profit. (b) There are several remedies available to a principal where the agent has breached his fiduciary duty and made a secret profit. These may be summarized as follows: (i) By s.168 of the Contracts Act 1950, if an agent deals on his own account in the business of the agency without first obtaining the consent of the principal and acquainting him with all material circumstances which have come to his own knowledge on the subject, the principal may repudiate the transaction if the case shows either that any material fact that has been dishonestly concealed from him by the agent or that the dealings of the agent have been disadvantageous to him. See also: illustration to s.168. By s.169 of the Contracts Act 1950 the principal is entitled to claim from the agent any benefit which may have been obtained by the agent without the knowledge of the principal. The right to recover the bribe or secret profit extends to transactions where an agent has passed on the secret profit to some other person. In Tan Kiong Hwa v Andrew S.H. Chong, the agent sold a flat at a higher price than that required by the plaintiff. The difference was paid into the account of the defendants company which had later gone into liquidation. The court held that the money could be recovered from the agent.

(ii)

(iii) The principal may refuse to pay the agent his commission or other remuneration, or recover any commission already paid. See: Andrews v Ramsay & Co [1903] 2 KB 635. (iv) The principal may sue the agent as well as the third party for damages for any loss he may have sustained through entering into the contract. A case in point is Mahesan v Malaysian Govt Officers Co-operative Housing Society Ltd [1978] 1 MLJ 149. In this case, Mahesan was a director and secretary of the Government Officers Co-operative Society Ltd, which bought certain land for RM944,000. The vendor had previously only paid RM456,000 for it. This fact was known to Mahesan who did not inform the Co-operative society, and who also had received a secret payment of RM122,000 from the vendor. The Privy Council held that the Co-operative society was entitled to recover either the secret profit received by Mahesan, or the amount of actual loss suffered by it as a result of entering into the transaction. (v) The principal may also dismiss the agent for breach of his duty. See: Boston Deep Sea Fishing & Ice Co v Ansell (1888) 39 ChD 339.

This question tests the candidates knowledge on two types of remedies for breach of contract, viz, injunction and damages. (a) Injunction An injunction is essentially an order of the court which prevents or stops the defendant from doing or continuing to do something in breach of the terms of the contract between him and the plaintiff. An injunction is a discretionary remedy and not one which is obtainable as of right. In Malaysia, the remedy of injunction may be obtained in accordance with the Specific Relief Act 1950, which provides for two types of injunctions viz, temporary injunctions or perpetual injunctions. By s.51 temporary injunctions are such as are to continue until a specified time or until the further order of the court. This temporary injunction is sometimes called an interlocutory or interim injunction and is usually granted by the court pending the outcome of a full hearing by the court. An application for an interlocutory injunction would normally be granted so long as the plaintiff has shown that there is a serious question to be tried. The purpose of the temporary injunction is to preserve the status quo of the parties until the final outcome of the court case. A case in point is American Cyanamid Co v Ethicon (1975) 2 WLR 316. See also: Mohamed Zainudin bin Puteh v Yap Chee Seng (1978) 1 MLJ 40. The perpetual injunction, on the other hand, is one that is granted by the court at the end of the hearing and upon the merits of the suit. The defendant is thereby perpetually enjoined from the assertion of a right, or from the commission of an act, which would be contrary to the rights of the plaintiff.

11

A case in point is Neoh Siew Eng & Anor v Too Chee Kwong (1963) MLJ 272, where a perpetual injunction was granted ordering a landlord to keep all communication pipes in proper repair so that water supply to the premises rented out by the landlord to the plaintiff will not be discontinued. An injunction will not be granted to prevent the breach of a contract if the contract is one that cannot be specifically enforced. This is the effect of s.54(f) of the Specific Relief Act 1950. (b) Damages An order for damages refers to an order of the court requiring the party in breach to pay the other party monetary compensation for the loss or other inconvenience suffered as a result of the breach. The measure of damages recoverable is stipulated in s.74 of the Contracts Act 1950. This is similar to the measure of damages payable under common law as established in the case of Hadley v Baxendale (1854) 9 Ex 341. By virtue of this section, when a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him: (i) (ii) which arose naturally in the usual course of things from the breach, or which the parties knew when they made the contract to be likely to result from the breach of it.

However, the section also states that such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. See: Bee Chuan Rubber Factory Sdn Bhd v Loo Sam Mooi [1976] 2 MLJ 14; Tham Cheow Toh v Associated Metal Smelters Ltd [1972] 1 MLJ 171. Damages may be classified as substantial, nominal or exemplary. Substantial damages refers to the compensation which is intended to put the aggrieved party in the position that he would have been in had the breach not occurred. Nominal damages refers to a token award granted by the court where the plaintiff has proved the defendants breach but has suffered no actual loss. Exemplary damages refers to an award of damages which is intended to penalize a defendant for his breach. The plaintiff in this case will be awarded more than his actual financial loss. It is only awarded in special circumstances such as breach of promise of marriage.

This question, which contains two parts, tests the candidate on the meaning of constructive dismissal and the remedies for an employee who has been unjustifiably dismissed. (a) Constructive dismissal refers to a situation where the employee has resigned in circumstances where the employer has made it intolerable for the employee to continue working for the employer. This may occur where the employer has breached the contract of employment thereby entitling the employee to resign. For example, if the employer had demoted the employee or subjected him to unfair or oppressive working conditions designed to humiliate him to the extent that the employee can no longer tolerate it and feels forced to resign, he may be said to have been constructively dismissed. The case of Bumpus v Standard Life Assurance Co Ltd (1974) IRLR 232, provides a good illustration. In this case, the employee was faced with demotion. He wrote a letter of resignation to his employer indicating his refusal to accept the demotion and thereby accepting the repudiation by the employer. The court held that he had been constructively dismissed. The Supreme Court, in the case of Wong Chee Hong v Cathay Organisation (M) Sdn Bhd (Civil appeal No. 194 of 1986), stated that whether there has been a constructive dismissal is to be determined by two factors. First, did the employers conduct amount to a breach of the contract of employment going to the root of the contract, or had he shown an intention not to be bound by the contract, thereby entitling the employee to resign? Secondly, did the employee make up his mind and act within a reasonable time after the employers conduct? See: MPH Bookstores Sdn Bhd and Lim Jit Sing (Award 179 of 1987). (b) There are three possible remedies available to an employee who has been unjustifiably dismissed. (i) Reinstatement and backpay This is a remedy whereby the employee is put back into the position he would have been in had it not been for the unjustifiable dismissal. Reinstatement requires that the employee should be restored to his previous position so far as his capacity, status and emoluments are concerned. He is then entitled to backpay, i.e. arrears of salary from the time of his dismissal to the time of his reinstatement. See: Western India Automobile Association v Industrial Tribunal (1949) LLJ 256. Compensation in lieu of reinstatement and backpay The court may order compensation in lieu of reinstatement and backpay where it is not possible or advisable to order reinstatement. Reinstatement may be refused where the employer has lost confidence in the employee or where such reinstatement may lead to an apprehension of breach of industrial peace. Reinstatement will of course be impossible, for example, where the employee has died after the commencement of legal proceedings. The compensation payable is usually at the rate of one months pay for each year of service subject to a maximum of 24 months.

(ii)

12

Section B TWO Questions ONLY to be attempted 9 Evergreat Sdn Bhd is a company having as its main object the manufacture and sale of motorcar spare parts. Its directors are Ali, aged 72 and Bakri, aged 69. Last week, the company appointed two more persons, Charlie and Desmond, to the board of directors. The articles of association of the company requires each director to own at least 1,000 shares in the company. Jamilah, a shareholder, has discovered the following: (i) Charlie was convicted of fraudulent trading five years ago when he was a director of Funtime Bhd. (ii) Desmond has previously been a director of two companies, Desmo Sdn Bhd and Mondes Bhd. Desmo Sdn Bhd went into insolvent liquidation four years ago while Mondes Bhd was wound up one month ago on grounds of insolvency. (iii) Bakri, who has been a director since 1990, has still not obtained any shares in the company. Required: Advise Jamilah: (a) Whether there are any grounds on which all or any of the directors can be disqualified as directors. (12 marks) (b) Whether directors can be removed from office before the expiry of their term of office and, if so, the procedure for doing so including the protection, if any, afforded to the directors. (5 marks) (c) Whether a director is free to resign from office at any time he wishes. (3 marks) (20 marks)

10 Jamal and Kamal decided to form a private limited company called Mal and Mal Sdn Bhd. The relevant documents for registration were submitted to the Companies Commission of Malaysia on 2 January 2003. Jamal and Kamal agreed that after the formation of the company they would appoint Kamals brother, Rahim, as the companys manager. A formal letter of appointment dated 5 January 2003 was sent to Rahim. The letter was signed by Jamal, for and on behalf of Mal and Mal Sdn Bhd. On 6 January 2003, Jamal, on behalf of Mal and Mal Sdn Bhd, entered into a contract with All Trade Sdn Bhd for the purchase of RM20,000 worth of office equipment. Jamal also purchased, in his own name, a computer from his brothers computer firm for RM5,000, for use by the company. After the company was formed, Jamal sold the computer to it for RM10,000. He did not disclose the original purchase price of the computer. Kamal, who owned a piece of land in Johore, sold it to the company at its current market value of RM2 million. The purchase on behalf of the company was approved by Jamal and Kamal as directors of the company. This land had been purchased by Kamal 30 years ago at a mere RM2,000. However, Kamal did not disclose this matter either to the board of directors or to the members of the company. Required: In relation to company law advise: (a) The company, whether it is bound by the agreement to appoint Rahim as the manager. (5 marks)

(b) All Trade Sdn Bhd, whether the contract to supply the office equipment can be legally enforced against Mal and Mal Sdn Bhd or any other party, as Mal and Mal Sdn Bhd refuses to accept delivery of the equipment. (5 marks) (c) The company, as to the most appropriate remedy that it can seek against Jamal for failure to disclose the true value of the property. (5 marks) (d) The company, whether it can seek to recover the profit made by Kamal on the sale of the land to it, on the basis that Kamal had breached his fiduciary duty to the company to disclose the original purchase price of the land. (5 marks) (20 marks)

[P.T.O.

The facts show that Desmond had been a director of Desmo Sdn Bhd which went into insolvent liquidation four years ago, and was also a director of another company, Mondes Bhd, which went into insolvent liquidation one month ago. Thus he has been a director of two companies which have gone into insolvent liquidation within five years of each other. If it can be shown that his conduct as a director makes him unfit to be involved in the management of a company he may be made subject to a disqualification order and thereby disqualified to act as director of Evergreat Sdn Bhd. In the case of Bakri, he is disqualified as a director by virtue of s.124 of the Companies Act 1965. By that section, every director, who is by the articles required to hold a specified share qualification and who is not already so qualified, shall obtain his qualification within two months after his appointment or such shorter period as is fixed by the articles. Under the section a director must vacate office if he does not obtain his share qualification within the stipulated period, or if after obtaining it, he ceases at anytime to hold his qualification. The question provides that under the articles of association of Evergreat Sdn Bhd, all directors must own at least 1,000 shares in the company. Bakri has been a director since 1990 (i.e. for the last thirteen years), but has still not satisfied the share qualification. Thus he is disqualified as a director and must vacate office. (b) By s.128(1), a director of a public company may be removed from office by an ordinary resolution before the expiry of his term of office, notwithstanding anything in its memorandum or articles of association or in any agreement between it and him. However, before such a director can be removed, the section requires that special notice must be given to the company of any resolution to remove a director. Upon receiving such a notice, the company is required forthwith to send a copy of the said notice to the director concerned. The director concerned has the right to make written representations of a reasonable length and require that copies of them be forwarded to the members. If the company does not comply either because it received the representations too late or due to its own default, the director may require the representations to be read out at the meeting. He is also entitled to attend the meeting and to be heard orally. Where a director is removed pursuant to the procedure above but such removal results in a breach of contract between the director and the company, the director is entitled to damages. See: Southern Foundries Ltd v Shirlaw (1940) AC 701. In the case of private companies such as Evergreat Sdn Bhd, the procedure for removal of a director will depend on its articles of association. If Evergreat Sdn Bhd has its articles in the form of Table A, article 69 would apply. It provides that a company may, subject to s.128, remove a director by ordinary resolution. Hence, Jamilah may be advised that the directors may be removed in accordance with the procedure discussed above. If the removal results in a breach of contract the company would have to pay damages. (c) A director may be able to resign from office at anytime he wishes. A directors resignation is subject to s.129(6) of the Companies Act 1965. It states that notwithstanding anything contained in this Act or in the memorandum or articles of a company or in any agreement with a company, a director of a company shall not resign or vacate his office if, by his resignation or vacation from office, the number of directors of the company is reduced below two, i.e. the minimum required under the Companies Act. Any purported resignation or vacation of office in contravention of this section shall be deemed to be invalid. However, by s.129(7) this rule does not apply where a director is required to resign or vacate his office by reason of not obtaining his share qualification or by reason of his disqualification under this Act or any other written law. Jamilah may therefore be advised accordingly.

10 This question tests the candidates ability to identify, analyze and apply the law relating to duties and liabilities of promoters and the effect of pre-incorporation contracts. The given problem involves the law on promoters and pre-incorporation contracts. Promoters are persons who are responsible for the formation of the company. Cockburn CJ in the case of Twycross v Grant (1877) defined a promoter as one who undertakes to form a company with reference to a given project and to set it going and who takes all the necessary steps to accomplish that purpose. Promoters are said to be in a fiduciary position in relation to the company. This means that they must act honestly, i.e. in good faith and for the benefit of the company, make adequate disclosure to the company and must not make any secret profit out of the promotion. Disclosure would be adequate if it is made either to an independent board of directors or to all the present shareholders. Where the promoters have breached their duties the company has the following remedies available to it: (i) (ii) It may rescind any contract made with the promoter, as in Erlanger v New Sombrero Phosphate Co (1978) 3 App Cas 1218. It may sue the promoter to recover any secret profit made by him, as in Gluckstein v Barnes [1900] AC 240.

(iii) It may sue the promoter for damages for breach of fiduciary duty, as in Re Leeds and Hanley Theatres of Varieties Ltd [1902] 2 MLJ 180. Promoters often enter into contracts on behalf of the company prior to its formation. Such contracts are called pre-incorporation contracts. At common law, such contracts were totally void. See: Kelner v Baxter (1866) LR 2 CP 174. However, in Malaysia, pre-incorporation contracts are governed by section 35(1) and 35(2) of the Companies Act 1965.

14

By s.35(1), a pre-incorporation contract may be ratified by a company after its incorporation. Once it is ratified, the contract becomes binding between the company and the other party and each may sue the other to enforce it. See also Cosmic Insurance Corpn. Ltd v Khoo Chiang Poh [1981] 1MLJ. 61. By s.35(2), prior to ratification by the company the person or persons who purported to act in the name of the company shall, unless there is an agreement to the contrary, be personally bound by the contract or other transaction and entitled to its benefit. Applying the above law to the given problem, advice may be given as follows: (i) the agreement to appoint Rahim as the manager was made by Jamal on behalf of Mal & Mal Sdn Bhd, prior to its incorporation. Hence it is a pre-incorporation contract. As has been explained above, such a contract was void at common law. By s.35(1) it may be ratified by the company after its incorporation. However, the company has not ratified the contract. Therefore the company may be advised that it is not bound by contract. The contract to supply office equipment to Mal and Mal Sdn Bhd cannot be enforced against it by All Trade Sdn Bhd as it is a pre-incorporation contract. As has been explained, by s.35(1) such a contract may be ratified by the company after it is incorporated. Since Mal & Mal Sdn Bhd has not ratified the contract, after its incorporation, the contract is not binding against it. However, by s.35(2) of the Companies Act, prior to ratification the person who acted on behalf of the future company may be personally bound by the contract, unless there is an express agreement to the contrary. Thus, All Trade Sdn Bhd may enforce the contract against Jamal personally. (iii) Jamal is a promoter of Mal & Mal Sdn Bhd. As explained above, promoters owe fiduciary duties to the company. As such they cannot make any profit at the expense of the company. They are required to make disclosure to the company of any such profit. Where they have breached their duties the company may sue for rescission of the contract, for recovery of the secret profit or for damages for breach of contract. In the present case, Jamal bought the computer for RM5,000 in his capacity as promoter. The company is thus entitled to purchase it at that price. As Jamal made a profit of RM5,000 by selling it to the company for RM10,000, the best remedy for the company is to sue Jamal for recovery of the secret profit of RM5,000. See: Gluckstein v Barnes [1900] AC 240. The company may be advised accordingly. (iv) The company may be advised that it is unlikely to be successful if it sues Kamal for the recovery of the profit made by him on the sale of his land to the company. Although Kamal as the promoter of the company has breached his fiduciary duty by failing to disclose to the company the original purchase price of the land, he did not purchase the property in his capacity as a promoter. The company in such case only has the option of rescinding the contract or affirming it. See: Re Cape Breton Co (1885) 35 Ch D 795; Tracy v Mandalay (1953) 88 CLR 215.

(ii)

11 This question contains two parts. Part (a) tests the candidates on the effect of a forged transfer of shares while part (b) tests the candidates on special resolutions and resolutions requiring special notice. (a) (i) A forged transfer is a total nullity as no title can pass under such transfer. This is so even if the company has informed the original owner that a transfer of his shares has been lodged with the company and the owner has not responded. Therefore ABC Sdn Bhd is bound to restore the true owner to the register of members. As Ah Kong has been removed from the register of members, he is entitled to be put back on the register. A case in point is Barton v London & North Western Railway (1889) 24 QBD 77. In this case, a company wrote to an executor of a deceased shareholder stating that a transfer of the testators stock had been lodged with it and that unless she sent a reply within a week, the stock would be transferred to the transferee. She did not reply and the company proceeded to register the transfer in the name of the transferee. Later, she brought an action to have her name restored to the register of members. The court held that she was entitled to be so restored. (ii) The issue of a share certificate by a company is a representation by the company that the person named therein is the owner of the shares. Thus it gives rise to estoppel as to title. As Mei Mei had relied on the share certificate issued by ABC Bhd to John Chin, it would be estopped from denying Mei Meis right to the shares. A case to illustrate this point is Daily Telegraph Co v Cohen (1905) 5 SR (NSW) 520, where, as a result of a forged transfer, the original owner was removed from the register of members and replaced by the first transferee, X, who was duly issued with a new share certificate by the company. X in turn transferred the shares to Y, who was the registered shareholder when the forgery was discovered. The court held that the original owner was to be restored to the register of members, but Y was entitled to damages from the company as it was estopped from denying Ys title. Therefore Mei Mei would be entitled to damages from ABC Sdn Bhd. John Chin, on the other hand, does not have a right to claim anything from ABC Sdn Bhd. To make matters worse, the company may claim an indemnity from him. Cases have held that when a person lodges a transfer with the company, he impliedly promises that the transfer is genuine. When it is later discovered that it was not so genuine he has to indemnify the company for the loss that it suffers. A case in point is Sheffield Corporation v Barclay (1905) AC 392. In this case, A and B were joint owners of some stock in a company. A forged Bs signature and had the stock transferred to a bank as consideration for a loan. The bank later transferred the stock to a third party. When B discovered the forgery, he sued the company which was compelled by the court to buy equivalent stock and have it registered in Bs name. The company in turn sued the bank for an indemnity. The court held that the bank was liable to pay the indemnity.

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Section A SIX questions ONLY to be attempted 1 Sources of Malaysian law comprise both written as well as unwritten law. Explain these sources. (10 marks)

(a) Explain the term consideration in relation to the law of contract.

(3 marks)

(b) Explain, with reference to the Contracts Act 1950, what are the exceptions to the rule that contracts without consideration are void. (7 marks) (10 marks)

With reference to the Partnership Act 1961 define a partnership and explain its main elements. (10 marks)

(a) An agent is in a fiduciary position towards the principal and as such he has a duty not to make any secret profit out of the performance of his obligations. Explain this duty. (3 marks)

(b) Discuss the remedies available to a principal when the agent has breached his duty not to make a secret profit. (7 marks) (10 marks)

Where there has been a breach of contract, the aggrieved party has recourse to a number of remedies. In this context, explain the nature and scope of the following remedies: (a) Injunction. (b) Damages. (5 marks) (5 marks) (10 marks)

In the context of employment law: (a) Explain what is meant by constructive dismissal. (b) Discuss the remedies available to an employee who has been unjustifiably dismissed. (4 marks) (6 marks) (10 marks)

11 Jalil and his wife, Bibee, are the directors of Jati sdn Bhd, a company dealing in the sale and repair of personal computers. Each of them holds 30% of the companys issued shares. The other shareholders are Chong and Rani each holding 20% of the issued shares. Chong and Rani have discovered that Jalil and Bibee have been squandering the funds of the company. The company made a profit of RM10 million last year. Of this amount RM15 million was used up by the directors in entertainment expenses purportedly on behalf of the company. They bought a Rolls Royce at the cost of RM15 million in the name of the company. A donation of RM2 million was made to the Blissful Old Folks Home. Bibees mother is a resident of that home where she is well taken care of. The company has bought a piece of land from Ratu, Bibees sister, for RM3 million. The true value of the property is only RM1 million. Jalil and Bibee received a gift of RM300,000 from Ratu in appreciation of their kindness. You are required to advise Chong and Rani on the following queries: (a) Have the directors breached any fiduciary duty to the company? (6 marks)

(b) Have they breached any provision of the Companies Act 1965 in relation to the purchase of the land from Ratu, and if so, with what consequences? (7 marks) (c) Can they (Chong and Rani) institute an action on behalf of the company against Jalil and Bibee to make them liable to the company for the loss arising from the breach of their (Jalils and Bibees) fiduciary duties? (You are not required to discuss any statutory remedies for minority shareholders.) (7 marks) (20 marks)

Applying the law to the present problem, the directors may be advised that they may proceed to make the company purchase the shares subject to the conditions stated above. In particular, the directors must be reminded that the purchase must be made in good faith and for the benefit of the company. In so far as they wish to arrest the fall in the share price and restore investor confidence, they would certainly be acting in good faith for the benefit of the company. But the facts indicate that they might also have an intention to ultimately profit themselves. If that were so, they may not be acting in good faith and the validity of the intended purchase may be challenged as not being in good faith for the benefit of the company.

11 This problem question on company law, which contains three parts, tests the candidates knowledge and application skills in relation to directors duties as well as the rule in Foss v Harbottle and the derivative action. (a) It is quite clear that the directors have breached their fiduciary duties towards the company. It has long been established that directors are fiduciaries in relation to the company and as such they must at all times act honestly and in good faith for the benefit of the company. Their fiduciary duties can broadly be divided into the following main categories: (i) Duty to act in the best interest of the company. This means that a director must, in making a decision for the company, consider whether it would be for the benefit of the company. If the decision is primarily for his own or a third partys benefit, he would be in breach of this fiduciary duty. See: Re W & M Roith Ltd (1967). (ii) Duty to act for a proper purpose. This means that a director must exercise the powers bestowed upon him for the right purpose. The best example of a breach of this duty can be found in cases such as Hogg v Cramphorn (1967) and Howard Smith v Ampol Petroleum Ltd (1974), where the directors exercised the power to issue shares for the purpose of forestalling a takeover bid. The court held that the primary purpose of the power to issue shares is to increase the share capital of the company in the event the company is in need of such funds. To utilise that power to frustrate a possible takeover of the company was considered a breach of the fiduciary duty to act for a proper purpose (iii) The duty to avoid conflict of duty and personal interest This duty requires the director not to use his position as a director to make a personal profit for himself or for another. Thus he cannot make secret profits nor usurp corporate opportunities. See: Regal (Hastings) Ltd v Gulliver; IDC v Cooley. In the given problem the facts indicate that the directors had squandered the companys funds on matters which were not beneficial to the company. The purchase of the Rolls Royce and the expenditure of RM1 million in entertainment expenses are possibly matters which are not in the best interest of the company. However if these matters are within the powers of the directors, it may be difficult to challenge them in practice. See: Re Kong Thai Sawmill Sdn Bhd where the court held that there was no oppression against minority shareholders where the majority had incurred expenses in the name of the company which, though seemingly extravagant, were within the scope of their power. In relation to the donation of RM2 million to the Blissful Old Folks Home, at first glance it seems to be within the scope of the power of the directors. However, as the facts indicate that such donations may have been given to ensure that Bibees mother was well taken care of, it may be concluded that the directors had not acted in the best interest of the company and are therefore in breach of the fiduciary duty. See: Re W & M Roith Ltd. With regard to the purchase of the piece of land from Ratu for RM3 million, when its true market value was only RM1 million, it is clear that the directors have breached their fiduciary duty to act honestly and in the best interest of the company. They have taken a gift of RM300,000. This amounts to a secret profit. Hence they may also be considered to be in breach of their duty not to make secret profits. See also: Mahesan v Malaysian Government Officers Cooperative Housing Society (1978) (b) In relation to the purchase of the land from Ratu, the directors are also in breach of ss.132C and 132E of the Companies Act 1965. Section 132C states, among other things, that directors cannot carry into effect any transaction for the acquisition of an undertaking or property of a substantial value, which would materially and adversely affect the performance or financial position of the company, unless it has been approved by the company in general meeting. Section 132C(5) states that any director who contravenes the provision of the section will be guilty of an offence. The penalty is imprisonment for five years or a fine of 30,000 ringgit or both. It is not clear whether the purchase of the land for RM3 million would be regarded as a transaction of substantial value as the section does not define substantial value. However, in the event of any doubt, the safer option would be to get approval of the members in general meeting. As no such approval has been given, the directors are likely to be held liable under this section. In addition to s.132C, the transaction may also fall foul of s.132E. By that section a company may not enter into any agreement or transaction with a director of the company or director of its holding company or with a person connected with a director, to dispose to or acquire from such a director or person, a non cash asset of the requisite value unless the arrangement or transaction is first approved by a resolution of the company in general meeting.

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The section only applies to non cash assets of the requisite value. A non cash asset is any asset other than cash. Requisite value will include any asset whose value exceeds RM250,000. As the transaction in issue is land worth well above RM250,000 it is caught by the prohibition in s.132E. Ratu, being the sister of the director, Bibee, is a person connected with a director. See: s.122A. As no resolution has been obtained from the members in general meeting, the directors are in breach of s.132E. By s.132E(3) the director concerned and the person connected with him and any other director who authorised the arrangement shall, in addition to any other liability be liable: (i) (ii) to account to the company for any gain which he had made directly or indirectly by the arrangement or transaction, and jointly and severally with any person liable under this subsection, to indemnify the company for any loss or damage resulting from the arrangement or transaction.

Further, by s.132E(6) the director or person connected and any director who authorised the transaction will be guilty of an offence and may be imprisoned for five years and fined a maximum of RM30,000 or both. (c) As the company is a separate legal entity and the directors have breached their fiduciary duties to the company, only the company may sue the directors to remedy the wrong. This is the essence of the rule in Foss v Harbottle. One aspect of the rule is the proper plaintiff rule. This rule states that where a wrong is done to a company only the company may sue to remedy it. However, there are several exceptions to the rule in Foss v Harbottle. The most important one is where the wrongdoers are in control of the company and their acts amount to a fraud on the minority. There would be a fraud on the minority where the wrongdoers have breached their fiduciary duties and in particular have expropriated company property for themselves. See: Cook v Deeks (1916). Where the minority can show that there is a fraud on the minority, they may be allowed to institute an action on behalf of the company through a procedure known as a derivative action. On the facts of the case, it is likely that Chong and Rani will be able to institute a derivative action on behalf of the company to make Jalil and Bibee liable to the company for the loss resulting from the breach of their fiduciary duty to the company.

12 This problem question on contract law, contains four parts. Parts (a) and(b) test the candidates knowledge and ability to identify and apply the law relating to certain basic elements of a contract. Part (c) concerns frustration of contracts and part (d) relates to agreements to pay statute barred debts. (a) The legal issue in this problem is whether silence will amount to consent, thereby giving rise to a valid contract. The general rule is that an agreement will only come into existence where one party has made a proposal (offer) to another and that other has accepted the proposal. The acceptance must be communicated to the proposer. By s.7(b) of the Contracts Act 1950 the acceptance may be expressed in some usual and reasonable manner, unless the proposal prescribes a manner in which it is to be accepted. While the offeror (proposer) may waive the need for communication of acceptance, the offeree must do something positive to accept, for example, by performing the conditions of the proposal. Section 2(b) of the Contracts Act 1950 requires the offeree to signify his assent to the proposal. Thus, silence on the part of the offeree cannot amount to an acceptance. Neither can a proposer state in the proposal that if the offeree does not reply within a stipulated time, the offer is deemed to be accepted. This may be highlighted by the case of Felthouse v Bindley (1862). In this case the plaintiff wrote to his nephew offering to buy his horse at a certain price. The letter also stated, If I hear no more about him, I consider the horse mine at that price. The nephew did not reply the letter. The court held that there was no valid acceptance. The silence on the part of the nephew did not amount to consent. Applying the law to the present problem, Ali may be advised that he will not be successful in suing Bidin for breach of contract. (b) An agreement will arise where one party has made a proposal (offer) to another party and that other has unconditionally accepted it. See: ss.2(a) and (b) Contracts Act 1950. By s.7(a) the acceptance must be absolute and unqualified. In the event the person to whom the proposal is made varies the terms of the proposal, he is deemed to be making a counter-proposal (counter-offer). A counter offer has the effect of destroying the original offer. This is well illustrated in the case of Hyde v Wrench (1840). In this case the defendant offered to sell his estate to the plaintiff for 1000 pounds sterling. The plaintiff replied by letter that he was willing to purchase at 950 pounds sterling. When the defendant did not reply, the plaintiff sent another letter to the defendant accepting the original offer price. The court held that there was no contract between the parties. The counter-offer made by the plaintiff destroyed the original offer. Applying the law to the given problem, Chee Seng may be advised that he will not be successful if he sues Mohan for breach of contract.

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