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CORPORATE LAWLAW 485FINAL ASSESSMENTPREPARED FOR:MR AZAHARI ABDUL AZIZNAME: SAIDATUL RAHIMA BINTI MOHD HALIMMATRIX NUMBER: 2020988277GROUP: AC2203CQUESTION 1Issue(s) Whether RSB can claim the insurance against the insurance company. Whether RSB, or RSB along with Ben and Amirul are liable for the de...

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SAIDATUL RAHIMA BINTI MOHD HALIM

2020988277

CORPORATE LAW LAW 485

FINAL ASSESSMENT

PREPARED FOR: MR AZAHARI ABDUL AZIZ

NAME: SAIDATUL RAHIMA BINTI MOHD HALIM MATRIX NUMBER: 2020988277 GROUP: AC2203C

AC2203C

SAIDATUL RAHIMA BINTI MOHD HALIM

2020988277

AC2203C

QUESTION 1 Issue(s) 1. Whether RSB can claim the insurance against the insurance company. 2. Whether RSB, or RSB along with Ben and Amirul are liable for the debts of the company. 3. Whether RSB has rights to take legal actions against Nadia or Pokok SB. As a general for the first issue, based on section 20(a) under Company Act 2016, a company incorporated under this Act is a body corporate and shall have a legal personality separate from its members. In a common language, company is a separate entity of its owner and company itself is an entity like human being created through legal process. Referring to Solomon V. Solomon, it provides that a company is essentially regarded as a legal person separate from its directors and shareholders. This means as a separate legal entity, a company can be sued in its own name and own assets separately from its shareholders. A company also will be liable for its own debts and liabilities. Referring to Lee v Lee’s Air Farming Ltd, the New Zealand court refused to hold that Lee was a worker because a man could not in effect employ himself. However, the Privy Council held Mrs. Lee was entitles for compensation. The Court ruled that even though Lee was the controller of the company, sole director, and chief pilot of Lee’s Air Farming Ltd, he was also an employee of the company and thus the company was a separate legal entity. A company have unlimited capacity. Under section 21(1)(b), it stated that 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 acquire, own, held, develop, or dispose of any property. A company can own property in its name even though the members have shared in the company, the property is held or owned by the company. Under section 192(1), it stated that a member shall not be liable for an obligation of a company by reason only of being a member of the company. Based on Macaura v Northern Assurance Co Ltd, the court held when Macaura sold the timber to the company, he gave up his interest in it and the company had become the owner of it. Therefor the insurance company was not obliged to pay because he had no interest in the timber that he could insure.

SAIDATUL RAHIMA BINTI MOHD HALIM

2020988277

AC2203C

Referring to current situation of Rotan Sdn Bhd (RSB), one of the directors Ben has contravening section 21(1)(b) of the business act 2016 that he sought an insurance coverage against the losses of RSB business using his own name. Section 21(1)(b) provides that a company has the ability to own a property. A company can own property in its name although the members have shares in the company, the property is held or owned by the company. In conclusion, Rotan Sdn. Bhd. (RSB) not entitled to claim the insurance against the insurance company because the insurance coverage against the losses has be insured by Ben and using his own name. As for the second issue, according to fiduciary duties, there are four types of duties which are duty to act in good faith in the best interest of the company, duty to avoid conflict interest, duty to act for proper purposes and duty to retain discretion. According to section 213(1), a director of the company shall at all the times exercise his powers for proper purpose and in good faith in the best interest of the company. Based on this section, directors must exercise their power in good faith and in the best interest of the company. The directors must develop the best interest of their company and not the interest of any group. By referring to Greenhalgh v Aderne Cinema Ltd, acting for the best interest of the company means the directors must act in the best interest of the share holders a collective group as long as the company is solvent. Under section 20(a), shareholders are legally separate from the company itself. They are generally not liable for the debts of the company and the shareholders’ liability for company debts are said to be limited to the unpaid share price, unless if a shareholder has offered guarantees. When the times of impending company insolvent or having financial difficulties, the interest of the creditors become increasingly important. The duties of the directors and shareholders change when the company having financial difficulties. The consideration of creditors’ interests is particularly relevant to the duty to act bona fide in the interests of the company. Referring to Kinsela v Russell Kinsela Pty. Ltd., where Russell Kinsela signed a lease with Mr Russell Kinsela and Mrs Joan Kinsela who is also directors and shareholders to rent a business premises at a price which was significantly below the market price. This happened when Russell Kinsela was insolvent. The court held that the Kinselas had breached their

SAIDATUL RAHIMA BINTI MOHD HALIM

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AC2203C

duties where they could not, as shareholders, approve their own misconduct due to the detriment it caused Russell Kinsela’s creditors. When they nearly liquidate, Russell Kinsela’s assets were in a practical sense the creditors’ asset, rather than the shareholders assets. The fiduciary duty to consider creditor interests during insolvency are not able to be avoided by a shareholders’ ratification. Referring to The Bell Group Ltd (in liq) v Westpac Banking Corporation, the restructuring of financing arrangements which constrained the pool of assets accessible to creditors upon the liquidation was found to breach of the fiduciary duties of directors. The importance in these decisions is that the scope the duties owed by the directors to creditors shows up to have been extended and as a result has caused contention among the legal commercial communities. However, as for the exception for this issue, under company act 2016 section 539(3), its stated that if in the course of winding up of a company or in any proceedings against a company, an officer of the company who knowingly was a party to the contracting of a debt had, at the time the debt was contracted, no reasonable or probable ground of expectation, after taking into consideration the other liabilities, if any, of the company at the time, of the company being able to pay the debt, commits an offence and shall, on conviction, be liable to imprisonment for a term not exceeding five years or to a fine not exceeding five hundred thousand ringgit or to both. Other than that, under section 540(2), Where a person has been convicted of an offence under subsection 539(3) in relation to the contracting of such a debt as is referred to in that section, the Court on the application of the liquidator or any creditor or contributory of the company may, if the Court thinks proper so to do, declare that the person shall be personally responsible without any limitation of liability for the payment of the whole or any part of that debt. In the current situation of Rotan Sdn. Bhd. (RSB), referring to the section 20 companies act 2016 states the law will treat the company and members as two separate legal entity. Thus, the directors are not liable for the company debt. To overcome financial difficulties, the directors borrowed RM500,00 from Zass Bank despite knowing that the company has no ability of repayment of the debt. If the company is not able to pay off the debt, the directors, Ben and Amirul will be guilty of an offence under section 539(3) of Company Act 2016. In addition, the court can declare the directors to be personally liable for the repayment of the debt by virtue of section 540(2) of the Company Act 2016.

SAIDATUL RAHIMA BINTI MOHD HALIM

2020988277

AC2203C

In conclusion, the directors, Ben and Amirul can be held personally liable for the debts owed to Zass Bank Bhd. Zass Bank Bhd can sue the directors for the RM500,000 debt in case of default in payment. As for the third issue, according to the section 20(a), a company incorporated under this Act is a body corporate and shall have a legal personality separate from its members with no regards to section 192(1) which is a member shall not be liable for an obligation of a company by reason only of being a member of the company. However, under certain circumstances, there will be an exception where the court will lift the veil of corporation. This is the situation where the court may ignore the separate legal personality of the company and look at the members of the company and make them liable for the debts of the company. Under judicial exception, the court will lift the veil of corporation when the company is used to evade legal obligation. This is which a person uses the company to as an instrument to evade a contractual duty or legal obligation consequently making the company and that person become a single body. By referring to the Gilford Motor Co v Horne, where Horne was formerly the managing director of the Gilford Motor Bhd. He agreed not to solicit customers of the company after the termination of his employment. However, when he left the company, he set up a new company through which he solicited the Gilford Motor Bhd. customer. The court held an injunction against Horne and his company, having held that he breached his contract even though he was not the one who personally solicited the customer. Refer to the situation, during the period when Nadia was serving as a director and acting as shareholder of Rotan Sdn. Bhd. (RSB), she agreed that upon leaving the company, she shall not solicit the clients and customers of RSB. However, after Nadia set up a new company called Pokok Sdn. Bhd. (Pokok SB) having the same business activity as her former company, her sister who are the shareholder of the company secretly solicit clients and customers of RSB. Nadia denied her involvement in dealing with the client from RSB. Therefore, the court will lift the veil of corporation to investigate who is responsible behind this act. Hence, Nadia is no longer a separate legal entity as stated in section 20 of Company Act 2016 but as a single entity due to her using the company to evade her legal obligation of solicit customers of RSB. This can be seen in the case Gilford Motor Co v Horne where the court held that both of Horne and the company having held that he had breached his covenant. Thus, as for Nadia and the company is liable for the act of the company even

SAIDATUL RAHIMA BINTI MOHD HALIM

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AC2203C

though she is not the one who personally solicited the customer. This is because, Nadia used her company to evade contractual obligation. In conclusion, Rotan Sdn. Bhd. (RSB) has right to take legal actions against Nadia and Pokok Sdn Bhd. having held that she had breached her covenant. Overall, Rotan Sdn. Bhd. (RSB) not entitled to claim the insurance against the insurance company because the insurance coverage against the losses has be insured by Ben and using his own name and has right to take legal action against Nadia and Pokok Sdn Bhd. The directors, Ben and Amirul can be held personally liable for the debts owed to Zass Bank Bhd.

SAIDATUL RAHIMA BINTI MOHD HALIM

2020988277

AC2203C

Question 4 Issue Whether the resolution to alter the company constitution that require Kamal to sell his shares is expropriation of members’ property. As for the general rule, according to the rules in Foss v Harbottle, some shareholders of the company attempted to sue the directors and certain other shareholders for mismanaging and misapplies the company’s property. However, the action was dismissed on procedural grounds and two rules were properly laid down by the court which are the proper plaintiff rule and the majority rule. Proper plaintiff rule for a wrong done to the company is the company itself because the company is capable of suing. While the majority rule can be applied when the majority decide that the company should not taken any action for the wrong done to it, then there can be no use in having litigation about it. However, in certain situation where a shareholder or debenture holder, who feel cheated or who disagree with ultra vires contract made by the company, the shareholder or debenture holder may perhaps seek protection by claiming remedy on ground of oppression. According to section 346(1)(a) of Company Acts 2016 allows a member as a debenture holder to apply to the court for an order on the ground that the affairs of the company are being conducted or the powers of the directors are being conducted in manner of oppressive to one or more other members or debentures including himself or in disregard of his or their interest as member, shareholders of the company. Other than that, by referring to section 346(1)(b) where is some act of the company has been done or is threatened or that some resolution of the members, holders of debentures or any class of them has been passed or is proposed which unfairly discriminates against or is otherwise prejudicial to one or more of the members or holders of debentures (including himself). Based on Scottish Cooperative Co v Meyer, concerning the predecessor of the unfair prejudice provision, an action for oppression. Oppression means conduct which is burdensome or harsh or wrongful. There are four exceptions to the rules Foss v Harbottle. One of the exceptions is fraud on minority. Fraud on minority is a fraud committed against the company where minority is directly or indirectly affected by a decision of a controlling majority. Fraud in the context of company law means an abuse of power whereby the majority secures an unfair gain at the expense of the minority, the injured party need not actually be the minority shareholders, it

SAIDATUL RAHIMA BINTI MOHD HALIM

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may also be the company itself. As exception to the proper plaintiff rule and arises from general principal that holders of power should not abuse their powers. Based o section 123 of Company Act 2016, it provides that a director exercises his powers for a proper purpose and in good faith in the best interest of the company. Refer to Abdul Rahim Bin Aki v Krubong Industrial Park (Melaka) Sdn. Bhd. Gopal Sri Ram made the following points in relation to fraud on minority. First, fraud on minority is a term of art and has absolutely nothing whatsoever to do with actual fraud or deception at common law. Second, it is not necessary to prove dishonesty before a minority shareholder may claim relief under exception and lastly, it is sufficient for a plaintiff to show that the majority had abused their power vested in them in the sense that they used their power for a collateral purpose and not for the true purpose for which such powers were granted. Fraud on minority has been held to have been present in expropriation of members’ property. It may be fraud on minority for the majority shareholders to use their voting power so as a deprive a member of his shares in the company. This is usually achieved by altering the article of association (AOA) and may only be done if adequate compensation is paid and it can be shown to be bona fide for the best interest of the company as a whole. There are some situations when does someone stop being a member of a company. First, they transfer their shares to another person and transferee is registered as the new shareholder. Second, under section 127 of Company Act 2016, where they transfer their shares back to the company under a buy- back. Third, under section 116 Company Act 2016, the shares have been cancelled by the company under a reduction of capital. Next, someone will stop being a member of a company when the partly paid shares are forfeited when the person fails to pay a call and lastly, the company is deregistered and ceases to exist. Referring to Sidebottom v Kershaw Leese & Co. Ltd, the minority members were doing a competing business. The company passed a members ’ resolution to alter its articles to the effect that a member who was in a competing business could be required by the director to transfer his shares to another member. The court held the resolution was valid and the alteration effective as it was for the benefit of the company as a whole. Based on Brown v British Abrasive Wheel Co, a company required further capital. The majority shareholders held 98% of the issued capital but would only provide further capital if they could buy up the remaining issued shares. The minority shareholders refused to sell, so

SAIDATUL RAHIMA BINTI MOHD HALIM

2020988277

AC2203C

the general meeting passed a special resolution to alter Article of Association (AOA), so as the require minority shareholders to sell their shares if requested by 9 out of 10 of the shareholders. The court held that the alteration was fraud on the minority because the majority were trying to achieve by compulsion which they had failed to achieve by negotiation. The minority shareholder was allowed to maintain the action. Refer to this situation of Wow Company Sdn. Bhd., the majority shareholders of the company passed a resolution to declare that the company had no interest in the said project but being objected by Kamal who holds 5% of the company’s shares. However, the objection by Kamal who is the minority shareholder has created insecurity for majority shareholder and also the director of the company Aidil, Zul and Haziq. They subsequently passed another members’ resolution to alter the company constitution. The resolution would require Kamal to sell his shares if requested by the members that are holding 90% of the company’s shares. Referring to the case of Sidebottom v Kershaw Leese & Co. Ltd, it held that the resolution was valid and the alteration effective as it was for the benefit of the company as a whole. However, based on Brown v British Abrasive Wheel Co, the court held that the alteration was fraud on the minority because the majority were trying to achieve by compulsion which they had failed to achieve by negotiation. In this situation, the alteration of the constitution was carried out with intention to remove Kamal as a minority shareholder. In conclusion, if the alteration of company’s constitution can be proven to be oppressive and expropriate the members’ property, Kamal should take a legal action against the majority shareholder and seek for the court order to remedy the matter. This is due to the resolution to alter the company constitution that require Kamal to sell his share is an expropriation of members property. As the remedies in case of oppression under section 346(2) of Company Act 2016, if on such application the Court is of the opinion that either of those grounds is established, the Court may make such order as the Court thinks fit with the view to bringing to an end or remedying the matters complained of, and without prejudice to the generality of subsection (1), the order may (a) direct or prohibit any act or cancel or vary any transaction or resolution; (b) regulate the conduct of the affairs of the company in the future; (c) provide for the purchase of the shares or debentures of the company by other members or debenture holders of the company or by the company itself; (d) in the case of a purchase of shares by the company, provide for a reduction accordingly of capital of the company; or (e) provide that the company be wound up....