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SECTION A QUESTION 1 (a) (i) Consideration need not be adequate: Section 26, Explanation 2, Contracts Act, 1950: an agreement is not void merely because the consideration is inadequate. Illustration (f): application to the rule: A agrees to sell a horse worth $1,000 for $10 The agreement is a contract notwithstanding the inadequacy of the consideration. Case: Phang Swee Kim v Beh I Hock (1964) MLJ, 383. Held: There was adequate consideration in this case (there being no evidence of fraud or duress) because the respondent agreed to transfer the land to the Appellant for $500 when the land was subdivided. (3 marks) (ii) A contract is terminated if the things that the parties agreed to do is impossible to perform. It can either be at the time the contract was made or when the obligation became impossible to perform after the conclusion of the contract. Section 57(1) an agreement to do an act impossible in itself is void. Section 57(2) a contract becomes impossible. When a contract becomes impossible to perform, it becomes automatically void. Effect of a void contract: Section 66, Contracts Act, 1950. Obligation of person who has received advantage under void agreement or contract becomes void. The contract between David and Mark is considered as discharged by frustration. This renders the contract void for impossibility (to perform). A mud slide is an incident normally associated with heavy rain and unstable grounds. While rain and landslides may be considered as foreseeable, the incident involving Mark and David is not due to the fault of any of them and, given the facts, not within their contemplation. David however, must return the 10% paid to him earlier as a rescission of the voided contract requires so. (5 marks) (iii) Intention to create legal relations: The Contracts Act, 1950 is silent as to the specific meaning of the above. Its necessity is obviously dictated by case-laws. Presumption on intention to create legal relations: In domestic arrangements there is a presumption against the existence of an intention to create legal relations whilst in commercial arrangements the rebuttable presumption is that legal relationships are intended.

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Case: ESSO Petroleum Co. Ltd. V Customs & Excise Commissioner [1976] 1 WLR 1. Generally, it is up to the courts to ascertain the intentions of the parties from the language used and the context in which they are used as well as what is customary in such transactions. (3 marks) (b) Sales of Goods Act, 1957: (i) Goods which must be manufactured or acquired by the seller, normally after the conclusion of a contract of sale; e.g. a contract to buy a made-to-measure suit which the seller must then make. Section 2, Sales of Goods Act, specifically defines future goods. Future goods may also sometimes be classified as unascertained goods when it has yet to be separated and set aside for the buyer (an unidentified part from a specific whole); e.g. 100 liters of oil from a larger quantity stored in a particular place. (3 marks) (ii) Section 16 of the Sale of Goods Act provides an implied condition in a contract of sale that the goods shall be of merchantable quality. Goods of merchantable quality are defined as: Goods fit for the purpose or purposes for which goods of that kind are commonly bought. - Any description applicable to them; - The price, if relevant; and - All other relevant circumstances. Buyer must not expect very cheap goods to be of the same quality as more expensive ones. Other consideration might be that the goods are second hand. Goods used in the ways or ways in which goods of that class are normally used and which do not work properly or fail after an unreasonably short time or which are unsafe or causes injuries are not of merchantable quality. Goods having been badly packed by the seller with the knowledge of the kind of journey they would have to make. If damage is caused by the bad packaging, they are considered defective in quality notwithstanding that the damage occurs after the buyer has taken them away. (3 marks) Subsidiary Legislation: Interpretation Act, 1967: subsidiary legislation is defined as: any proclamation, rule, regulation, order, notification, by-law or other instrument made under any Ordinance, Enactment or other lawful authority and having legislative effect. Importance: Subsidiary legislation is important as legislation y Parliament and the State Legislature is insufficient to provide the laws required to govern every day matters. Subsidiary legislation deals with the details about which legislature neither has the time nor the technical knowledge to enact laws. (3 marks) (Total : 20 marks)
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QUESTION 2 ANSWERS (a) This question on company law tests the students on the lifting of the veil of incorporation. The veil of incorporation is a phrase that is used to denote that once a company is incorporated, it becomes in law a separate legal entity distinct and separate from the members. The company is regarded as an artificial legal person having its own rights, duties and liabilities. Among other things, the company has power to own land, may sue and be sued in its own name, enjoy perpetual succession and in the case of limited company its members enjoy limited liability. See Salomon v Salomon (1897). Although the company is a separate legal entity, there are a number of circumstances where this principle will be disregarded by the courts. This is often regarded as the lifting of the veil of incorporation. Such lifting of the veil of incorporation may occur either by virtue of a statutory provision or by established case law. The main instances are as follows: Under common law:(i) In times of war to determine the enemy character of the company. This illustrated by the case of Daimler Co Ltd v Continental Tyre & Rubber Co (Great Britain) (1916) where the court lifted the veil of incorporation to look at the nationality of the persons in effective control of the company. When the company has been set up to perpetuate a fraud or to avoid a legal obligation. In Jones v Lipman (1962) the defendant who had agreed to sell property to the plaintiff sold it instead to a company which he formed, in order to avoid an order of specific performance. The court lifted the veil of incorporation, holding that the defendant and the company were one and the same. See Aspatra Sdn Bhd v Bank Bumiputra Malaysia (1988). For tax purposes. Unit Construction Ltd v Bullock (1960). In this case the court held that three subsidiary companies in Kenya were in fact resident in UK for purposes of tax because central control and management was with the holding company in UK.

(ii)

(iii)

Under statute:(i) Section 36 Companies Act where the number of members of a company falls to one and the sole remaining member knowingly carries on business for a period longer than six months, he will be personally liable for the debts incurred after the first six months. Section 121 Companies Act where an officer signs on behalf of the company, a cheque, promissory note etc, and the companys name is not properly stated therein, he will be personally liable to the holder of the bill etc, for the amount stated therein, if the company does not pay. Section 304 (1) Companies Act where the company had incurred a debt when there was no reasonable prospect of the company being able to pay the debts of other liabilities of the company as the court deems fit.

(ii)

(iii)

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(iv)

Section 140 of the Income Tax Act 1967 where the Director General of Inland Revenue may ignore any transaction or disposition which has the affect of avoiding or evading tax. (10 marks)

(b)

This question on company law tests the candidates understanding on the roles of the board of directors and the managing director of a company. They are as follows: (i) The board of directors: 1. The directors collectively are referred to as board of directors. Typically, the board of directors are charged with the function of managing the companys business Table A, Articles 73 of the Companies Act:a. b. c. d. e. f. g. h. i. j. (ii) Management of the company Delegation of power Issue shares Transfer of shares Convene meetings of members To declare dividends To borrow money Handle the financial affairs of the company Sign cheques, promissory notes and instruments Appoint agents on behalf of the company.

other

negotiable

Managing director: 1. Under Table A, Art 91, it is a common practice for a board of directors to delegate some of its functions to a managing director:a. b. c. Day to day management of a company Agent and employee of the company The Board will supervise the managing director to ensure that he/she keeps within the sphere of authority allowed. (5 marks)

(c)

This question on company law tests the candidates understanding on the alteration of the Articles of Association and restrictions of the company to alter its Article of Association. Company may alter its Art of Association (AA) in accordance with s 31 where the AA can be altered by passing special resolution but subject to following restrictions: (i) (ii) (iii) (iv) It must not be illegal; Cannot authorise anything forbidden by the MOA; Must not require members to take or subscribe for more shares or increase their liability to the company unless they have given written consent s 33(3). Alternation must be done bona fide for benefit of the company i.e. must be fair to all members and not discriminate between classes of shareholders Greenhalgh v Arderne Cinemas (1951) (5 marks) (Total: 20 marks)
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SECTION B QUESTION 3 (a) Section 3 (1) of the Partnership Act, 1961. Partnership is the relation which subsists between persons carrying on business in common with a view of profit. (3 marks) Samad is not a partner because he is not carrying on a business for profit with Muthu and Leong. Section 3(1) of the Partnership Act 1961 defines partnership as the relation which subsists between persons carrying on a business in common with a view of profit. The exclusion of a person from profit sharing of a partnership is a definitive indication that he is not a partner. (4 marks) Samad is not a partner because he is an employee of the partnership. Muthu and Leong are partners carrying on a business in common. Samad was engaged to manage the business and is promised a share of the profit of the business as an insentive. Samad being a servant of the partnership is not a partner within the said definition even though he may share the profit. Section 4(c)(ii) of the Partnership Act, 1961. Section 4 In determining whether a partnership does or does not exist, regard shall be had to the following rules: (i) The receipt of a person of a share of the profits of business is prima facie evidence that he is partner in the business, but receipt of such a share, or of a payment contingent on or varying with the profits of a business does not of itself make him a partner in the business; and in particular: (ii) A contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such; (4 marks) (d) Dissolution of partnership by operation of law. - if the partnership was entered into for a fixed term and the term expires section 34(1) (a), Partnership Act, 1961; - If the partnership was entered into for a single adventure or undertaking, and that adventure or undertaking terminates section 34(1) (b), Partnership Act 1961; - if the partnership was entered into for an undefined time, by any partner giving notice to determine (or end) the partnership section 34(1) (c), Partnership Act, 1961. Case: Sukhinderjit Singh Muker v Arumugam Deva Rajah [1998] 2 MLJ 117. (4 marks)

(b)

(c)

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(e)

Five (5) ways in which a partnership may be dissolved: (i) By agreement: o If the duration of partnership is specified in the partnership agreement; on the expiry of the period; o If the partners mutually agree to dissolve. (ii) By death or bankruptcy; Section 35(1), Partnership Act, 1961; (iii) By charging on shares; Section 35(2), Partnership Act, 1961; (iii) By supervening illegality; Section 36, Partnership Act, 1961; (iv) By Court order, upon application by a partner when a partner is insane or permanently incapacitated or where a partners conduct prejudicially affects the carrying on of the partnership business; Section 37, Partnership Act, 1961. (5 marks) (Total : 20 marks)

QUESTION 4 (a) Ways by which an agency may arise: (i) By express appointment by the principal: it may be either written or oral. Even a letter written or words spoken may be effective as an express appointment. By implied appointment: the law can infer the creation of an agency by implication when a person, by his words or conduct holds out another person as having authority to act for him: Section 140, Contracts Act, 1950. By ratification: it can arise in any one of the following situations: o An agent who was duly appointed has exceeded his authority; or o A person who has no authority to act for the principal has acted as if he has the authority. By necessity, i.e. by operation of law in certain circumstances; By doctrine of estoppel or holding out. When any one of the above situation arises, the principal can either reject the contract or accept the contract so made: Section 149, Contracts Act, 1950. When the principal accepts and confirms such a contract, the acceptance is called ratification and it may be expressed or implied. Section 150, Contracts Act, 1950. (3 marks) (b) Duties of agents towards principal: (i) To obey the principals instruction; section 164, Contracts Act, 1950 (ii) In the absence of instructions from the principal, to act according to custom, when instructions are not given;
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(ii)

(iii)

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(iii) To exercise care skill and diligence in carrying out his work and to use such skill as he possesses; section 165, Contracts Act, 1950 (iv) To give proper account for all monies handled by him as an agent and to produce such accounts, when required by principal; section 166, Contracts Act, 1950 (v) To pay to principal all sums he received on behalf of the principal; however, section 174, Contracts Act, 1950 gives the agent the right to retain his principals property in his possession until his remuneration is paid. (vi) To communicate with the principal; in cases of difficulty, an agent must use all reasonable diligence in communicating with and seeking to obtain instructions from the principal. However, in emergencies, he may use his discretion. (vii) No conflicting interest between agent and his duty; section 169, Contracts Act, 1950 (viii) Not to tell other parties about any information or document entrusted to him by the principal; (ix) Not to make secret profit; (x) Not to delegate his authority. (5 marks) (c) Distinction between apparent authority and actual authority of an agent: Apparent authority: Apparent or ostensible authority is that which is not expressly given by the principal but which the law regards the agent as possessing although the principal has not consented to the exercise of such authority; Watteau v Fenwick [1893] 1 QB 346. Actual authority: Actual authority is that which is expressly given by the principal to the agent orally or in writing, or implied from the express authority given, from the circumstances of the case, the custom or usage of trade, or the situation and conduct of the parties. (4 marks) (d) This case involves the principles on agency. When Raz engages Bakar to do something, Raz is the principal and Bakar is his agent. In the absence of an express contract, the employer of an agent is bound to indemnify the agent against the consequences of all lawful acts done by the agent in exercise of the authority conferred upon him: Section 175, Contracts Act, 1950. Bakar is advised that he cannot recover the RM5,000.00 as well as his legal expenses since the act which he was employed to do is a criminal act (i.e. arson or destroying another persons property). By virtue of Section 177 of the Contracts Act, 1950: where one person employs another to do an act which is criminal, the employer is not liable to the agent, either upon an express or an implied promise, to indemnify him against the consequences of that act. (5 marks)

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(e)

Exceptions to the general principle that an agent cannot delegate authority given to him by his principal: Maxim: delegatus non potest delegare (i) (ii) (iii) (iv) (v) (vi) where the principal approves or consents to the delegation of authority; where it is presumed from the conduct of the parties that the agent has the power to delegate his authority; where the custom or practice of the trade or business permits delegation; where the nature of the agency is such that delegation of the authority to another person is necessary to complete the business; In case of necessity or an unforeseen emergency; where the act to be done is purely ministerial or clerical and does not involve the exercise of discretion. (3 marks) (Total: 20 marks)

QUESTION 5 (a) This company law question, which contains three parts, tests the candidates knowledge and understanding on the restrictions on payment of dividends. (i) The liability of the directors at common law A director who allows a dividend to be paid when there are no profits commits a breach of his duty by misapplying the companys funds. In Hilton International Ltd v Hilton & Anor (1998), dividends including capital dividends may be paid only out of profits, or putting the matter conversely, may not be paid out of paid up capital without the Courts approval of a reduction of capital. At common law, directors of a company who are responsible for the payment of a dividend out of capital are jointly and severally liable to repay to the company the amount of the distribution together with interest. See Re Oxford Benefit Building and Investment Society (1886). In this case, the act of the directors was considered as a breach of trust. However, in Lucas & Anor v Fitzgerald & Anor (1903), directors who do not know or ought not to have known that the dividend had been declared otherwise than properly paid out may not be responsible. (5 marks) (ii) Liability of the directors under the Companies Act 1965 Section 365(2) of the Companies Act provides that every director or manager of a company who wilfully pays or permits to be paid any dividend out of what he knows is not profits except pursuant to section 60 shall be liable to the creditors of the company for the amount of the debts due by the company to them respectively to the extent by which the dividends so paid have exceeded the profits. That amount may be recovered by the creditors or the liquidators suing on behalf of the creditors. The time to assess the officers knowledge is the time of declaration and not the time of payment. See Marra Development Ltd v BW Rofe Pty Ltd (1977). Section 365(2) of the Companies Act creates a criminal offence. The penalty is heavy and carries a jail sentence of ten years or a fine of RM250,000 or both. It is important to note that the company itself is not liable under section 365. (5 marks) (iii) The company may be advised that members who receive dividends knowing that there are no profits out of which to pay them will be liable to refund those dividends. See Towers v African Tug Co [1904]. They will hold such moneys as constructive trustees on the basis that they have received and become chargeable with part of the trust fund. See Barnes v Addy (1874). They may be
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made to indemnify the directors who are compelled to restore the sums paid away illegally. See Re Alexandra Palace Co (1882). However, members of the company who receive dividends innocently cannot be compelled to refund the amount. See Re Denham & Co (1888). (4 marks) (b) This question on company law tests the candidates understanding on the alteration of the Article of Association in relation to preference share holders. Preference share holders may be able to challenge the validity of the alteration if its amounts to a variation or abrogation of their class rights s 65(1). A variation of class right is one which directly alters the right of class of shareholders: 1. Class rights may only be varied with the consent in writing of the holders of threefourths of the issued shares of that class or sanction of a special resolution passed at a separate meeting of the holders of the class of shares. 2. If the prescribed procedure has not been followed, the variation of class rights is not valid. (6 marks) (Total: 20 marks) QUESTION 6 (a) This question on company law tests the candidates knowledge on the doctrine of maintenance of capital. (i) Proten Sdn Bhd may reduce its capital in accordance with the provisions states under section 64 of the Companies Act 1965 where it provides that: 1. A company may if authorised by its articles, reduce its capital by passing a special resolution subject to confirmation by the court. One of the ways to reduce capital is by paying off any paid up share capital which is in excess of the needs of the company. 2. According to section 64, a company may reduce share capital if: a. Such a reduction is authorised by the Articles of Association. b. Special resolution is passed c. Court confirms the reduction. 3. Subject to the above Proten is allowed to reduce share capital by doing: a. Extinguish or reduce liability on any of its share in respect of share capital not paid-up. b. Cancel any paid-up capital which is lost or unrepresented by available assets or unrepresented by available assets or c. Pay off any paid-up capital which is in excess of the needs of the company. (6 marks) (ii) The concept of capital maintenance is primarily for the protection of creditors. In the eyes of the law, the creditors have an interest in the issued share capital and other assets of the company. In the case of Proten Sdn Bhd, if the reduction involves either diminution of liability on unpaid share capital or the payment to any shareholder of any paid up share capital and in any other case if the High Court so directs:
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1. The creditor who at the date fixed by the High Court is entitled to any debt or claim, shall be entitled to object to the reduction; 2. The High court shall settle a list of creditors so entitled to object to the reduction and may publish notices fixing a final day on or before which creditors not entered on the list may claim to be entered; and where the debt or claim of a creditor is not discharged or has not determined and the creditors does not consent to the reduction, the court may dispense with the consent of that creditor on the company securing payment of his debt or claim by appropriating as the court directs. (4 marks) (b) This question on company law tests the candidates knowledge on the issue of shares at a discount or at a premium. A company must maintain its capital. Under the common law a company cannot issue shares at a discount Oregum Gold Mining of India v Roper (1892). However, this rule has been modified by s 59 of the Companies Act which allows company to issue shares at a discount subject to certain conditions:(i) Issue of shares at a discount must be of a class already issued; (ii) Issue of shares at a discount must be authorised by a resolution passed at a general meeting of the company and confirmed by order of the court. (iii) The resolution must specify the maximum rate of discount at which the share are to be issued; (iv) Every prospectus relating to the issue of share must contain particulars of the discount allowed; and (v) Shares must first be offered to the present holders of the issue shares of that class in proportion to the shares held by them. They must be given a time period of at least 21 days to accept the offer. As regards to issue of shares at a premium, it is possible to obtain more than the nominal value of the companys shares. The amount of which the consideration given exceeds the nominal value is known as the premium. A company may issue shares at a premium. If the company does so, the premium must be reflected in a share premium account which is treated as capital for the purpose of reduction of capital under section 69(1). A share premium account must be created even if the consideration of the shares is obtained otherwise than in cash s 69(1). (10 marks) (Total: 20 marks)

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