Individual Assignment

BM054-3.5-3
Company Law

Name : Chin Kai Wen

Student Id : TP019076
Lecturer Name : Kho Guan Khai
Intake Code : UC3F1001AF
Submission Date : 19 April 2010
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Table of Content
Introduction................................................................................................................................3

The Object Clause......................................................................................................................4

The Loan.................................................................................................................................4

Object Clause..........................................................................................................................4

Directors’ Fiduciary Duties........................................................................................................6

Duty to Act Honestly..............................................................................................................6

Duty Not to Make Secret Profits............................................................................................7

Duty to Act ‘Bona Fide’ and for Proper Purpose...................................................................8

Duties of Skill, Care and Diligence........................................................................................9

Duty to Attend Meeting........................................................................................................10

Constitution of Companies.......................................................................................................11

Separate Legal Entity............................................................................................................11

Lifting the Corporate Veil....................................................................................................11

The Liquidation of The Company............................................................................................13

Role of Liquidator................................................................................................................13

Possession of The Property...................................................................................................13

Conclusion................................................................................................................................14

References................................................................................................................................15

Appendix .................................................................................................................................17

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Introduction

The case provided is similar to the Kenmark Industrial Co (M) Bhd which produces
computer workstations, cabinets and furniture, printing of packaging materials, distributing
products, as well as investment holding. (Malaysia Co., 2011) The director of this company,
James Hwang and Datuk Ishak Ismail has borrowed RM50m loan from EON Bank Bhd
without the notice of other directors under the company’s name. The problem arise and was
aware when Kenmark receives a letter from the bank in June 2010. Besides, James Hwang
disappear at the same time.(PG8 Burse Malaysia News, 2011)

The given article is about the Board Of Directors of Gemsales Ltd who are
irresponsible. Clark, Diane and Elli did not exercise their duty as the directors during a
meeting which acquire an amount of loan to purchase stocks and a large new warehouse and
showroom. Besides, all the other directors did not monitor each other and were not aware on
Bryan who is the major shareholder of Traders Ltd. He has also approach the customer to his
new company which he has open with Vince.

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The Object Clause

The Loan

Companies must act ‘inter alia’, unless expressly prohibited by their memorandum or
article, where they has an implied power to borrow to an extent which is reasonable and
necessary for the business purposes (General Auction Estate and Monetary Co v Smith). The
case Mansell v Viscount Cobham (1905) also states that the power to borrow will only be
implied if there is a need to incur emergency expenditure. The expenditure must be both
necessary and cannot reasonably be finance without resource to borrowing. Thus, the
directors of Gemsales Ltd did not offence the law as the acquired loan was necessary and
reasonable, and it benefits the company too.

Object Clause

Section 18(1)(b) states that the object clause states the main activities in which a
company is expressly or specifically engage. The object clause is important in determining
whether the company has acted ‘ultra vires’, beyond its power, thereby rendering an act void
‘ab initio’. The objects gives protection to the subscribers to understand the purpose of their
money is applied. Besides, it also protects to persons who deal with controls in the company.
On the other hand, Cotman v Broughman(1918) has also held where underwriting is
authorised by the sub-clause dealing in securities without restriction from other sub-clauses.
(Appendix 1)

In this case, the purpose of Gemsales Ltd getting loan from Friendly Bank is ‘intra
vires’. This company has borrowed a sum of $4 million in order to sustain in the competitive
environment. The amount of $3 million dollar was used to purchase stock, which is jewellery.
Moreover, the remaining of the amount, which is $1 million was used in buying a large new
warehouse and showrooms from Traders Ltd.

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Thus, the company is acting within its object clause, which is engage in the business
of importing and supplying jewellery as wholesalers to the local market. When the company
was unable to serve its loan, the bank can only sue the company but not the directors. The
case provided was unlike the case of Ashbury Railway Carriage & Iron Co v Riche, where
the defendant cannot claim damages from the company because the contract within the two
directors is ‘ultra vires’ with the object clause of the plaintiff.

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Directors’ Fiduciary Duties

Great Eastern Rly v Turner states that directors are the mere trusted or agents of the
company, trustees of the company’s money and property, agents in the transaction which they
may enter on the behalf of the company. (Refer to Appendix 4 for to whom the directors owe
their duty to.)

Duty to Act Honestly

The directors must act honestly and use reasonable diligence in the discharge of the
duties of the office at all time under Company Law section 132(1).The directors has the duty
to act in the best interest of the company. They must not put themselves in a position where
their duty to the company conflicts with his personal interest; nor must they use the powers
and assets of the company entrusted to him for improper purposes. (Lim Koei Ing v Pan Asia
Shipbuilding & Engineering) However, Bryan from Gemsales Ltd has a conflict of interest.
He has set up a new company and enter a contract with Vince. The business of the new
company is also jewellery wholesaler and supplier. On the other hand, he has also approached
Gemsales Ltd’s established customer to his new company in order to secure his own
business. This action has misused the company’s assets which is the customers. Therefore,
the director, Bryan had act dishonestly and damaged the company.

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Duty Not to Make Secret Profits

Directors must not obtain profit out of corporate assets, information and opportunities
because they are in a fiduciary position. The case of Boston Deep Sea Fishing Co v Ansell
stated that directors, who obtain commissions from client whom he had given contracts,
should refund that amount of money to his employer. Thus, Bryan was liable as he was the
major shareholder of Traders Ltd, a company which sold the warehouse and showroom to
Gemsales Ltd. He had help Traders Ltd to increase the profits. Then, he could benefit himself
by receiving a higher amount of dividend from that business. Section 131(5) Company Act
1965 has stated that directors who directly or indirectly duties might create interest with his
duties shall declare at the meeting about the fact and the nature, character and extend of the
conflict. Thus, Bryan should declare about his position in Traders Ltd.

Besides, Bryan has also disclose the private information of Gemsales Ltd to his new
company too. He understands all the customers from Gemsales Ltd and took a list of
customers from that company. Thus, Gemsales Ltd was also being damage by loosing
customer and most of the opportunities. According to Canadian Aero Services Ltd v
O’Malley, fiduciary duties of directors and senior officers shows the occurrence of a strict
ethic in the area of law. The ethic of Bryan, which abuse his power in the company ,
“disqualifies a director or senior officer from usurping for himself or diverting to another
person or company with whom or with which he is associated a maturing business
opportunity which his company is actively pursuing; he is also precluded from so acting even
after his resignation where the resignation may fairly be said to have been prompted or
influenced by a wish to acquire for himself the opportunity sought by the company, or where
it was his position with the company rather than a fresh initiative that led him to the
opportunity which he later acquire.”

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Duty to Act ‘Bona Fide’ and for Proper Purpose

The directors are under a duty to act bona fide in the interest of the company as a
whole and not for any collateral purpose. Section 132(1)(b) states that a director who made a
genuine business judgment in good faith for proper purpose, does not have a material
personal interest in the subject matter of the business judgment, is informed about the subject
matter of the business judgment to the extent the director reasonable believes to the
appropriate under the circumstances, and reasonable believes that the business judgment is in
the best interest of the company.

Alan and Bryan are not liable on the business expansion and getting the loan from the
bank. They had acted in good faith and there is no proof that there is no personal interest. The
case of Otis & Co v Pennsylvania R. Co has stated that ‘mistakes or errors in the exercise of
hones business judgment do not subject the officers and directors to liability for the
negligence in the discharge of their appointed duties’. In Aronson v Lewis (1984), the
directors who acted on a informed basis, is assumed to be in good faith and in the honest
belief that the action taken was in the best interest of the company.

However, the shareholders of Gemsales Ltd can sue Bryan under the case of Prunt v
Symons & Co Ltd (Appendix 3). Bryan has set up a new company which its business
objective is similar to Gemsales Ltd. Besides, he has also approached the clients of Gemsales
Ltd to his new company in order to secure his own business. Thus, this company could not
extend its own business because of all these reason, and later could not pay the loan to the
bank.

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Duties of Skill, Care and Diligence

Section 132(1)(a) the duty to act with care and skill is derived from Common Law,
Donoghue v Stevenson. Thus, the law requires the directors must act honestly and use
reasonable diligence in the discharge of the duties of his office at all times. They must
consider the nature of the company’s business and cannot carry out upon principles of
distrusts. Re City Equitable Fire Insurance Co Ltd has stated the general principles regulating
the duties of a director ‘vis-à-vis’ the company.

Firstly, it stated that a director does not need to perform duties which is at a greater
degree of skill than may reasonably be expected from a person of his knowledge and
experience. Thus, the board of directors of directors of Gemsales Ltd can be assumed that
they are completely ignorance of everything regarding to jewellery, where they can be
forgiven.

However, Re Brazilian Rubber Plantation & Estates Ltd held that all directors who is
acquainted with the such nature of business must give the company the advantage of his
knowledge when transacting the company’s business. Moreover, Section 132(1)(c) also stated
that the board of directors are not prevented from relying on information provided by others
in the dispensation of their duties. The directors of Gemsales Ltd could have employed
professionals in regarding to the business of the company, for example, do some research and
understands the external economy condition and market of the jewellery, the internal cash
flow system and financial position before extending its business. The directors could do some
company reconstruction to cut down the expenses too. Thus, they are liable as they did not do
any investigation or studies before making any decisions. The case of Rolled Steel Products
(Holding) Ltd v British Steel Corpn &Ors states that to be ‘ultra vires’, a transaction has to be
outside capacity of the company, not merely in excess or abuse the power of the company.

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On the other hand, it also states that a directors is in the absence of grounds for
suspicion, justified in trusting that official to perform such duties honestly, when all his duties
are regarding to the demand of business, and the article of association. However, the directors
did not manage the company with care. They monitor each other. They were not aware that
the Bryan was the shareholder of Traders Ltd. They did not investigate the internal and
external position diligently too. Therefore, they are liable for the lost of the company
especially Bryan, who approach the customers to his new company, which causes damage to
the company.

Ellie, who did not attend the meeting, has the characteristic of Datuk Ishak Ismail, a
sleeping director of Kenmark Industrial Co (M) Bhd. She did not exercise her duty as a
director to attend the meeting. Besides, since she had signed the requisite documentation
agreeing to the expansion of the business and getting the loan, she has to go through the
‘reasonable man” test (Blyth v Birmingham Waterworks) to see if she is liable for the lost.

On the other hand, the agreement on expanding the business and getting a loan was
not agreed by majority directors. Clark who was hospitalised, Diane and Elli who was a
sleeping director did not agree during the meeting. Thus, Allan and Bryan should not
continue the plan.

Duty to Attend Meeting

Romer J. stated a director was not bound to attend all meetings unless he is reasonable
able to do so in Re City Equitable Fire Insurance. Since Clark is not guilty in this case as he
was absent in the board of meeting because he was hospitalise, and it is reasonable. Besides,
Elli can be sue by the shareholders as she was absent as usual practice. The continuous non-
attendance at meetings may render a director guilty of the breaches of trust which is
committed by others from the case of Re forest of Dean, CoalMining Co (1878). Besides,
Brusa Listing Requirement paragraph 15.05(1)(c) requires that a directorship is deem to be
vacated if he is did not attend more than half of the total Board of Directors’ meeting held
during a financial year.

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Constitution of Companies

Separate Legal Entity

A company has become a corporation upon the issue of the certificate of

incorporation by the Registrar. (Lee v Lee’s Air Farming and Macaura v Northern Assurance
Co Ltd) The case of Salomon v A. Salomon & Co stated that the shareholder are not liable to
the debt during liquidation. Thus, Friendly Bank can only sue Gemsales Ltd, but not the
directors as the objective of the loan is ‘intra vires’, within the object clause. However, the
shareholders, as the owner of the company are able to take against the director especially
Bryan for the breach of trust.

Lifting the Corporate Veil

The benefit of forming a company has enable the business to be undertaken with
limited financial liability to its member in the event of liquidation of business. However, such
doctrine was often being abuse. Thus, the corporate veil should be drawn aside to enforce the
rules of company law and prevent fraud or other evasion. Eng Hong Timber Trading Co Sdn
Bhd v The ‘Loon Sheng’ Owners & Ors (1979) held that such action will be taken whenever
there is a trading with an enemy, fraud and improper purpose, avoidance of contractual
covenants agency and group enterprise.

Mason J. has stated that the they directors are under an obligation not to promote his
personal interest by pursuing any profit in circumstances in which there is a conflict or a real
or substantial possibility of a conflict between his personal interest and those of the persons
whom his is bound a protect in the case of Hospital Products Ltd v United States Surgical
Corp. However, Bryan has breach his duty of trust as a director. He has created a conflict
during the times when Gemsales Ltd was having financial difficulties.

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First, the company has purchase a showrooms and warehouse from Traders Ltd where
Bryan was the major shareholder. The reasons for Traders Ltd was able to compete with other
competitors and obtain the business, was because Bryan who was working as the director of
Gemsales Ltd. He was able to check the competitors’ price list and provide a better price.

Secondly, Bryan formed set up a new company with his partner, Vince where it is
same line of business as Gemsales Ltd. He was the director of Gemsales at the same time too.
Thirdly, he has stolen the company’s assets, which is the customers list for his own usage.
The customers of Gemsales Ltd were persuaded to his new company too. Thus, both of these
two points were similar to Gilford Motor Co Ltd v Horne (1933) where the defender was
prevented by an Injunction from soliciting the clients of his former employer. Besides, the
new company and the defendant act as one under the corporate veil.

Lastly, Bryan should be reliable to pay the debt from Friendly Bank too. The “but-for-
test” (Barnett v Chelsia Keinton Hospital) can be used in such condition. Gemsales Ltd
would not have suffer losses and damages but for Bryan’s breach of duty as listed above.

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The Liquidation of The Company

Role of Liquidator

Upon Gemsales Ltd’s liquidation, the shareholder may appoint a liquidator whom he
is responsible to gather, protect and realise the company’s assets. He must investigate and
report to creditors about the company’s affairs such as the organisation’s assets and total
amount to be realised, liabilities of the company, estimate expenses to wind up and others.
Then, he will deduct his pays for his operational expenses and any expenses in court
proceeding for his appointment. He will then pay the following accordingly: employees
(section 191), debenture, creditors and lastly, the shareholders. On the other hand, he has to
apply for deregistration of the company on completion of the liquidation too. (Australian
Securities & Investment Commission, 2008)

Possession of The Property

Since Gemsales Ltd had used the amount of money which were borrowed to purchase
some fix assets and current assets and these assets will be act as the securities to its creditors.
The warehouse and showroom are the fix charges while the stocks are the floating charges for
the bank. Thus, the creditor, Friendly Bank will crystallise and claim the ownership of these
property when the company winds up. Besides, Section 294 can be overcome as the stocks
were purchased more than six months and the bank is holding the Title of the warehouse and
showroom. However, the bank might sue the company as the value of stocks will be
depreciated and unable to cover the debt. The stocks also might not be able to be sold off
because the reputation of the company was damage.

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Conclusion

Bryan is liable for the damage of the company. He has breach the fiduciary duties as
the directors of Gemsales Ltd. He did not act honestly and ‘bona fide’. He had conflict of
interest when his new business was being set up. The new business was in the same business
line as Gemsales Ltd. Moreover, the customer was approached to that company too. He has
made secret profit indirectly where he is the shareholder of Traders Ltd, where they had
purchase some assets. Further, Bryan and Allan were liable for not using their skills carefully
before entering a contract with Friendly Bank. They did not consider whether the borrowing
was outside the capacity of the company.

Therefore, Bryan is liable to pay all the debts and the amount which Gemsales Ltd
suffered. The company enter the status of insolvency directly because of Bryan (but-for-test).

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References

Books

• Chan, CC, Koh TN and Ling, SW, 2006, Malaysia Company Law: Principles &
Practice, 2nd ed., Thomson Asia Pte Ltd, Malaysia

Internet

• 2010, Chapter 10 Corporate Capacity and Authority [online], available from

http://www.clrg.org/cuuploads/editor/file/chpt10.pdf [Accessed 29 March 2011]

• Australian Secutities & Investments Commisions, 2008, Insolvency: A Guide For

Shareholders [online], available from
http://www.asic.gov.au/asic/pdflib.nsf/LookupByFileName/Insolvency_guide_for_sh
areholders.pdf/$file/Insolvency_guide_for_shareholders.pdf [Accessed 3 April 2011]

• Cases on Company Law [online], available from http://www.cwgsy.net/private

%2Fsljohn/compcases.html [Accessed 29 March 2011]

• Law Essays UK, 2011, Foss v Harbottle (1843) 2 Hare 461[online], available from
http://www.law-essays-uk.com/resources/revision-area/company-law/cases/foss-vs-
harbottle.php [Accessed 1 April 2011]

• Lee, SS, Implications on some Recent Amendments to the Companies Act 1965
[online], available from www.leesweeseng.com/upload/AmendmentsToCA1965.ppt
[Accessed 29 March 2011]

• Malaysia Co., 2011, Kenmark Industrial Co. (M) Bhd [online], available from
http://www.malaysiaco.com/kenmark-industrial-co-m-bhd/ [Accessed 21 March
2011]

• Nair, A, 2008, Role of Official Liquidator in Winding Up [online], available from

http://www.csstudentsonlineclub.com/download/arathywindingup280204445.293220
827.pdf [Accessed 3 April 2011]

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• PG8 Bursa Malaysia News, 2010, Kenmark (7030) [online], available from
http://pg8.biz/viewtopic.php?f=4&t=767&start=10 [Accessed 21 March 2011]

• Sidhu BK, 2010, What’s going on in Kenmark? [online], available from

http://biz.thestar.com.my/news/story.asp?
file=/2010/6/5/business/6409435&sec=business [Accessed 29 March 2011]

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Appendix

Appendix 1

Cotman v Brougham 1918

The objects clause contained no fewer than 30 sub clauses that permitted the rubber company
to carry on almost any business. The memorandum stated that every sub clause should be
regarded as a substantive clause in its own right. The company underwrote and was allotted
shares in an oil company. When the oil company was wound up the rubber company was
placed on the list of contributories.

HELD: The rubber company was held liable as the underwriting was held to be intra vires the
rubber company.

Appendix 2

Rolled Steel Products Holdings Ltd v British Steel Co 1985

RSP had two directors one of whom owed a substantial sum to a subsidiary of BS through a
company he owned. RSP entered into a guarantee to BS for the debt of the company owned
by one of the RSP directors. The objects clause of RSP stated that it had the power of making
a guarantee. At the board meeting at which the guarantee was given the director concerned
did not declare his personal interest in it. BS received a copy of the board minutes and should
have realised that the decision to guarantee the debt was invalid.

HELD : The decision to give the guarantee was invalid.

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Appendix 3

The directors had issued new shares to create sufficient majority to enable them to
pass a sufficient majority to enable them to pass a special resolution. The shares were not
issued ‘bona fide’ but for the directors’ self interest.

Appendix 4

The directors owe a fiduciary duty to the company. They must be ‘bona fide’, act in
good faith, for the benefit of the company. The rule in Foss v Harbottle (1843) states a person
who breach his duty, ‘prima facie’ the company, will be brought to action. Besides, they are
also responsible to the company’s creditors upon winding up. Lord Lowry held that directors
performs a special duty to the creditors of the company by agreement or representation in the
case of Kuwait Asia Bank EC v National Mutual Life Nominees Ltd. The directors also has
duties to individual shareholders as they must consider the interest of the shareholders in the
discharge of their duty to the company. Lastly, English Companies Act 1985, section 309 also
provides that directors must perform functions which includes the interest of the company’s
employees in general, as well as the interest of its members.

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