LAW485 - director, auditor PDF

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Summary

QUESTION 1 (5M)Kurus Sdn. Bhd. is a company that manufactures and sells herbal medicine for those who plan to maintain their weight. Unfortunately, during Covid-19, the business suffer loss and cannot paid the salary of their staffs.Meanwhile, the company recently found out that the company’s managi...

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QUESTION 1 (5M) Kurus Sdn. Bhd. is a company that manufactures and sells herbal medicine for those who plan to maintain their weight. Unfortunately, during Covid-19, the business suffer loss and cannot paid the salary of their staffs. Meanwhile, the company recently found out that the company’s managing director, Hafiz rarely goes to his office and has never paid much attention to the company’s business. The reason for this was that Hafiz has been concentrating on his own massage business called “Massage for All” that specialist in herbal treatment for its customers. It was also discovered that Hafiz had awarded one of the company’s (Kurus Sdn. Bhd.) contract to his nephew, Hariz. In return, Hariz gave Hafiz with an expensive Mercedes car. Advice Kurus Sdn. Bhd. on whether there is any legal action can be taken against Hafiz? ANSWERS: Issue: a. Whether the director, Hafiz is subjected to breaching his fiduciary duties as a director to not to compete with the company? b. Whether the awarded of one of the company’s contract to the director’s nephew, Hariz is against the good faith and best interest of the company? Law: Duties of director under fiduciary duties stated that the directors has fiduciary relationship with the company appointed by him with the relationship is based on trust and confidence where one party has obligation to protect the other person’s interest. Fiduciary duties includes that: 1. 2. 3. 4.

the director must act in good faith in the interest of the company duty to use power for proper purpose duty not to compete with the company duty to avoid any conflict of interest

Section 213(1) stated that a director of a company shall always exercise his powers according to this act, for a proper purpose and in good faith in the interest of the company. In the case of Avel Consultants Sdn Bhd v Mohammed Zain Yusoff, the respondent were the directors of the company and they formed a firm that carries out the same business as the company and solicited the company’s regular clients. They also divert certain projects from the company to their firm. The court held that there are breach of fiduciary duties as they are competing as well as using the corporate opportunity of the company. Section 218(1) stated that a director of the company shall not without consent or ractification of a general meeting to: 1. to use the company’s property 2. to use his position as a director of officer of the company

Application: 1.

Referring to Section 218(e) and case of Avel Consultants Sdn Bhd v Mohammed Zain Yusof, its shows that the director, Hafiz, is breaching his fiduciary duties because he has been a director of other company that carries out the same business as the company of Kurus Sdn Bhs which is herbal medicine. It is a vivid offence that Hafiz is competing with the company and result in not paying much attention the company itself. 2. Referring to Section 218(c) and cases of Cook v Deeks, Hafiz has misuse his position as director by awarded the company’s contract to his nephew, Hariz for his own benefits that Hafiz will get an expensive Mercedes car as return. The court held that the contract was belong to the company and the director are not entitled to expropriate it to make it belong to them. Conclusion: Overall conclusion based on the situation (a) and (b), the directors should perform their duties in a good faith and in the best interest of the company and not to compete with the company.. So, the directors should make sure every decision that they make is in the best interest of the company. If the director or officer breached their duties the company has full rights to take legal action on them. QUESTION 2 (5M) Rozita, an auditor of Syarikat Indah, requested the Board of Director for the minutes of its last meeting where several controversial decisions were made. Her request was turned down by the chairman, on the grounds that the contents of the minutes were confidential. Rozita feels that she cannot make satisfactory report on the company’s affairs unless she is given the minutes she requested for. Advice Rozita. ANSWERS: Issue: a) Whether the auditor is to access to the company’s confidential information? b) Whether Rozita is liable for breach of duties of an auditor? Law:

An auditor has given rights to: 1) 2) 3) 4)

to attend general meetings to receive notice of general meetings to speak at meeting on matter regarding the performance of his job to have an access on all relevant information at all reasonable times.

Section 266(1) stated that the auditor is duty to report to the members of the company on the company’s annual account.

Section 266(3) stated that the duty of an auditor is to form an opinion of the following matters and to state in the report whether he is obtained all information and explanation that he required Application: 1) Referring to Section 266(3) the auditor, Rozita, shall disclose that she is not given all the information she is required due to the chairman’s opinion that he cannot access the company’s confidential information. Rozita did not breach her duties as an auditor because he is not given the access to company’s information where it is the rights of an auditor to have full access on company’s information at any time. 2) Referring to case of Daniels v Anderson, it shows that Rozita, an auditor is negligent for not warning the board regarding the company’s affairs. This is because she already requested to the board on the minutes of the meetings. However, she did not warn to the board about the report of the company that she need to make. Conclusion: In conclusion, Rozita is subjected to breach of his duties for not warning the board about her rights as an auditor towards the access of company’s confidential information. QUESTION 3 (5M) Ahmad is a director of Tarik-tarik Sdn. Bhd. He had purchased a second handtractors for the company. However, he failed to check the condition of the tractors. Soon after the purchase, it was discovered that all the tractors were in a very poor condition. The company suffered huge losses for repairing the tractors. On the other hand, Abu who is one of the directors of Tarik-tarik Sdn. Bhd. is about to retire. Ahmad and the other director, Ali decided to use the company’s fund to purchase a pension policy for Abu. Advise Tarik-tarik Sdn. Bhd. as to whether Ahmad and Ali have breached his director’s duty towards the company. ANSWERS: Issue: 1. Whether the company can take any legal action on Ahmad, the director for the losses of repairing the tractors? 2. Whether the directors, Ali and Abu is liable to breach of duties of director?

Law:

Under Section 21(1) which is a company shall be capable of exercising all the functions of a body corporate and have the full capacity to carry on or undertake any business or activity including: - To be sued or sue - To acquire, own, hold, develop or dispose any property, and - To do any act which it may do or to enter into any transaction. Thus, Section 21(2) provided that a company shall have the full rights, powers and privileges for the purpose mentioned in subsection (1). According to cases Paul A Davies (Aust) Pty. Ltd v Davies, the plaintiff was a company of business car dealer. The director decided to enter into a new venture which they purchased a freehold property. The purchase was made on their own name but partly using the company’s finance and a bank loan. Unfortunately, the company faced a financial problem and placed in voluntarily liquidation. The liquidator take an action against the directors for breach of its fiduciary duties. The court held that the directors were liable for breach of its fiduciary duties because the have used the company’s fund for their own benefits and not for the company.

Application: 1) Section 215(2) stated that a director when rely on the information provided by others must still act in good faith and make independent information assessment based on the director’s knowledge. Referring to this Section 215(2), the director, Ahmad must act in good faith and use his director’s knowledge to make a better decision when acquire the tractors for the company. Based on the Section 21(1) the company is liable to take legal action on Ahmad for the huge losses cause by him.

2) Referreing to cases Paul A Davies (Aust) Pty. Ltd v Davies, the directors, Ali and Ahmad, has breach the fiduciary duties of director. This is because they purchase a pension policy for one of the directors, Abu, by using company’s fund. It shows that the company’s fund is used for the director’s own purpose and not for the company.

Conclusion: In a conclusion, there are three duties of a director which are fiduciary duties, duty of skill, care and diligence and the last one is statutory duties. The directors breached

duties that was imposed by the law to them. There are remedies available for breaching their duties which are rescission of contract, recovery of profit or suing for damages, injunction and return of specific property.

QUESTION 4 (5M)

Rania is the auditor for Cantik Sdn. Bhd. She has been directed to carry out an audit of the company's account and to prepare a report for the company's annual meeting. Rania discovered that some pages from the company records were missing and several invoices showed signs of being altered. Rania referred the matter to the company's manager, Mr. Quack, who told her that the company's office was renovated a few months before and thus, some documents were misplaced. Mr. Quack also told Rania that the altered invoices were due to some clerical mistakes. Rania accepted the explanation and did not take any initiative to investigate further. It turned out that Mr. Quack had defrauded the company and caused losses amounting to RM 1.8 million. The company now wishes to sue Rania for negligence. Advise the company whether they can take action towards Rania. ANSWERS: Issue: 1) Whether the auditor, Rania, is liable to breach of duties? 2) Whether the company can take legal action against the auditor? Law: Duties of auditor is to carry out an audit on the company’s account and to verify whether the company’s report is true and fair value of its affairs before it is being let out other members. In cases of Re Kingston Cotton Mill Co (No.2), stated that the accounts of the company had been falsified for years by the director. The auditor asked the director regarding the matters, and the director told the auditor that he had no intention to commit fraud and the auditor did not detected the fraud because he relied on the statements given by the director. He did not make any further investigation and was sued by the company for the negligence after the director after the director make a confession. The court held that the auditor is not negligence as he had no reason to suspect and question the director’s honesty. Application: 1) Referring to cases Re Kingston Cotton Mill Co (No.2), stated that Rania is not liable of breach of duties regarding the negligence to further ask the manager’s statement. 2) Referring to Section 286(1) of the Act given immunity to the auditor against suit for defamation. It shows that the company cannot take any legal actions

on the auditor for the fraud cause by the manager. This is because the auditor has been given a privilege for any suit for defamation towards her. Conclusion: As a conclusion, the auditor is not subjected and not liable to any breach of duties. As long as the auditor is doing her job according to the legal law, they will be not be taken any actions against them. However, if the auditor did not comply with the common law duties, they are liable with breach of duties....