Question a.)

THE INCORPORATION OF A LIMITED AND UNLIMITED COMPANY

A. INTRODUCTION

As a sole trader, Zimam runs a poultry business and is successful by showing

some profits over the years. From thereon, he incorporated his business into a

private limited company under the name of Golden Poultry Sdn. Bhd. (GPSB)

and purchased Zimam’s poultry business at RM50, 000 where Zimam received

by means of shares and debentures.

The business prospered for the first year in its operation but deteriorating

afterwards due to the bird flu virus. All the animals had been destroyed and

finally the whole farm was closed down. In his bid to recover all the losses,

Zimam has opted to make an insurance claim. Beforehand, Chan had been

appointed as a manager in GPSB but left when he knew that the company was

winding up. Chan managed to solicit/attract GPSB’s clients to do business with

him in his new company. All these were in contradictory to what Chan had

vowed when he was appointed as a manager in GPSB.

B. EXTRACT

Based on the facts described above, Zimam had himself involve into 2 types of

businesses that is common amongst businesses in Malaysia i.e. sole

trading/enterprise and private limited company under Golden Poultry Sdn. Bhd.

Apart from those two types of businesses (sole trading and private limited

company), Zimam can actually venture into other types of businesses which are

still appropriate for his poultry business e.g. partnership and public limited

company.

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C. DEFINITION OF A LIMITED AND UNLIMITED COMPANY

1. LIMITED COMPANY

In Malaysia and most part of the world nowadays, limited companies are far

more common than unlimited companies.

"Limited company" means a company limited by shares or by

guarantee or both by shares and guarantee; [S4 (1) CA 1965]

i. Limited by shares

This principle states that the liability of its members

(shareholders/owners) is limited to the remaining unpaid amount (if

any) put on his shares. [S4 (1) CA 1965]

ii. Limited by guarantee

The principle is that the liability of its members is limited to the

respective amounts which every member has contributed to the

assets of the company if it winds up. [S214 CA 1965]

iii. Limited by both shares and guarantee

Its members are liable as both shareholders and guarantors. All

members are liable to honor the guarantee irrespective of whether or

not they have shares in that company (limited by both shares and

guarantee).

Guarantee companies are normally private companies rather than

public companies and function as charitable/non-trading

organizations; e.g. college and theater clubs. [*****-Company Law.

2009]

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2. UNLIMITED COMPANY

It is a rare type of company formation. Its members are severally liable for all

obligations of the company in the case of winding up and very much the same

as a partnership company. Usually it would only be appropriate if the

company be used to keep properties/investments and will not involve itself in

any type of trade.

An unlimited company is also appropriate when the company is

operating in a field where limited liability is frown upon. All financial affairs of

the company are kept in secret from the public’s knowledge and the risk of

insolvency is minimal.

The reduction in the company’s share capital can also be done

whenever it likes provided there is power to do so in its articles of association

without the need to get the court’s approval. This company may also act as a

service company for a professional firm where limited liability is not crucial but

continuous succession is vital.

It is also not required to declare its annual accounts and reports to the

Registrar of Companies (ROC) provided that it does not involve itself in other

companies (as subsidiary/parent) which are limited. An unlimited company

may or may not have a share capital and its members may resign only if the

memorandum or articles allow it to do so. [Guidance. 2009]

"Unlimited company" means a company formed on the principle of having no

limit placed on the liability of its members. [S4 (1) CA 1965]

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D. TYPES OF LIMITED COMPANIES

1. Private Limited Company

i. Separate legal entity i.e. distinct from its owners/shareholders.

ii. Listed under S4 (1) of the Company Act 1965

iii. Owned by 2 to 50 shareholders

iv. Owners have limited liabilities

v. Shareholders contributed to the company’s share capital and a

minimum of 2 persons will become its Board Of Directors (BOD)

vi. BOD will determine the overall vision and mission of the company

vii. A shareholder who owned 51% (or more) of the total share capital has

the voice autonomy

viii. Share can be transferred amongst its members only; not publicly

ix. Not listed in the Kuala Lumpur Stock Exchange (KLSE)

x. Enjoy long existence even with the departure of its members (as

shares are transferable)

xi. Must bear words like “Sendirian Berhad” or “Sdn Bhd”

[S22 (4) CA 1965]

[Syarikat & Anda. 2009]

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2. Public Limited Company

Basic criterions are the same as a Private Limited Company except for

the followings: -

i. The membership is unlimited (but with a minimum of 7 shareholders)

ii. Required to maintain a register of substantial shareholders

[S69L CA 1965]

iii. An entry of “Berhad” or “Bhd” is a must

iv. Shareholders free to transfer/sell their shares openly in the share

market (without permission from anybody else)

v. A prospered Private Limited Company which now has more than 50

members, must convert its’ status to a Public Limited Company

vi. A complete prospectus/company information e.g. financial status and

program is needed prior to the selling of shares to the public which

must be approved by the ROC [S169 (1) CA 1965]

vii. For a small company, a Statement in Lieu of Prospectus is required

under S51 CA 1965

viii. Directors/Officers can be sued if found to provide false information

ix. Easier to get loans from financial institutions

[Syarikat & Anda. 2009]

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Question b.)

DIRECTOR

A. DEFINITION

According to the Company Act 1965, the definition of a Director can be described

as follows: -

“director" includes any person occupying the position of director of a

corporation by whatever name called and includes a person in accordance with

whose directions or instructions the directors of a corporation are accustomed to

act and an alternate or substitute director; [S4 (1) CA 1965]

B. 1. APPOINTMENT AND QUALIFICATION

S122 (1) CA 1965 also states that every company shall have at least (2) two

directors who are staying within Malaysia. Other related points of description

related on the company directors are portrayed in the act e.g. S122 (1A) on

alternate or substitute issues, S122 (2) - age, S122 (3) - name of directors in the

memorandum or articles of the company; etcetera.

Others; Section 123 - restrictions on appointment or advertisement of

director, S123 (1) – director must consent in writing; otherwise regarded as a de

facto director, Section 124 (3) – a director will automatically be vacated from post

if failed to fulfill his qualifying shares (Section 124 (1) obligation within (2) two

months from appointment and S125 (1) – an undischarged bankrupt not qualified

to become a director of a company.

“De facto director - Person who is not a de jure director but performs the acts

or duties of a director, or is judged to be a director in law. Any person who is not

technically a director but according to whose directions and instructions (rather

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than expert or professional advice) other directors and/or employees are

accustomed to act is legally deemed a de facto director. Whether or not such

person fulfills the qualifications of a director, or enjoys the rights and privileges of

a director, he or she is generally held liable as a de jure director.”

“De jure director - Person who is formally and legally appointed or elected as

a director in accordance with the articles of association of the firm, and gives

written consent to hold the office of a director. He or she enjoys full rights and

privileges of a director, and is held individually and collectively (with other

directors) liable for the acts and/or negligence of the firm.”

[BusinessDictionary.com. 2009]

Sample Case:

In the case of Solaiappan & Ors v Lim Yoke Fan & Ors, the court held that where

a resolution was passed at a meeting without notice to the old directors, the

dismissal of the old directors with new directors is ineffective and void.

[Appointment of Directors. 2009]

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Article of Association FOURTH SCHEDULE [Section 4, 30] - Table A

A64 of the Articles of Association (AoA) states that; a retiring director shall be

eligible for re-election. A67 of AoA states that the number of directors can be

reduced or increased and its rotation are also applicable as long as passed by

the ordinary resolution at a general meeting.

A68 of AoA also states that company directors have the power to appoint

any person as a director – to fill an informal vacancy or an addition to the existing

directors (but not exceed the fixed number of the regulations). The newly

appointed director will hold office until the next annual general meeting (AGM).

[Directors: Appointment, etc. 2009]

B. 2. REMOVAL

A public company may by ordinary resolution remove a director before the

expiration of his period of office provided that a successor has been appointed.

[S128 (1) CA 1965]

S128 (2) – a notice of termination shall be forwarded to the director

concerned and he is entitled to be heard on the resolution at the meeting. S128

(3a) – states the reason for the termination of service of a director and if the said

person is not satisfied with the action, he can bring the case to the court for

deliberation with costs on the part of the company.

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A company director can be terminated within or without Malaysia for the

following reasons S130 (1): -

i. Violated his appointment contract

ii. Involved in fraud/dishonesty

iii. Imprisonment for (3) three months or more

S130A (1) described that a director of a company can be disqualified from

his post when the company is going into liquidation AND within a period of five

years from the liquidation date. He may also be judged from whatever conduct

as director of any previous companies that makes him unfit for the post.

Article of Association FOURTH SCHEDULE [Section 4, 30] - Table A

A72 of AoA states clearly that the service of a company director can be

terminated for the following reasons: -

(a) ceases to be a director by virtue of the Act;

(b) becomes bankrupt or makes any arrangement or composition with his

creditors generally;

(c) becomes prohibited from being a director by reason of any order made

under the Act;

(d) becomes of unsound mind or a person whose person or estate is

liable to be dealt with in any way under the law relating to mental disorder;

(e) resigns his office by notice in writing to the company;

(f) for more than six months is absent without permission of the directors

from meetings of the directors held during that period;

(g) without the consent of the company in general meeting holds any

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other office of profit under the company except that of managing director

or manager; or

(h) is directly or indirectly interested in any contract or proposed contract

with the company and fails to declare the nature of his interest in manner

required by the Act.

[Directors: Appointment, etc. 2009]

Sample Case:

Quek Leng Chye v AG

Facts:

Two people convicted under the Singapore Companies Act equivalent of S130

applied leave to act as directors.

Held:

Privy Council refused the application on the ground that the appellants had failed

to discharge the responsibility on them of satisfying the court that they posses the

high degree of commercial integrity, which was required of those exercising

influential managerial functions in limited companies if the public was to be

accorded adequate financial protection.

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Question c.)

PRINCIPLE OF SEPARATE LEGAL ENTITY

A company is considered as a separate legal entity and its liability (to pay

debts) are unlimited and must cover all debts due by means of liquidation,

receivership or administration. Liability of the members on the other hand is limited

either by shares or by guarantee. [*****- Company Law. 2009]

The meaning of “Separate legal entity” can be described as follows where

companies are/have/can:

i. Different from its members, directors

ii. Limited liability

iii. Sue or be sued

iv. Own assets

v. Enter Contracts

vi. Commit crimes (corrupt)

[Answers.com. 2009]

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Sample Case 1:

Salomon v Salomon & Co (1897)

A good sample case related to the separate legal entity term is the Salomon

v Salomon & Co (1897) case where Mr. Salomon was actually putting

himself in various “individualities” i.e. Director, Shareholder, Debenture Holder

and Creditor. The very same case had been heard in (3) three different

courts in the United Kingdom (UK) i.e. High Court (HC), Court of Appeal

(COA) and the House of Lords (HOL).

Each court had given different judgments based on the arguments

presented during the hearing. The (1st) first case was heard in the HC where

a successful trader named Mr. Salomon (leather business proprietor) who

had prospered as a small trader and converted his business into a limited

company i.e. A Salomon Ltd. Problems arise thereafter when he was

experiencing difficulty in servicing his debt (debenture) to Mr. Broderip and

other creditors.

The HC (Vaughan Williams – Judge) held that the Principal i.e. Mr.

Salomon was responsible for the debts of its Agent i.e. A Salomon Ltd. (the

company) and that the company was mere alias of its founder (Mr. Salomon)

and had not been formed in accordance with the true spirit of the Company

Act 1862. The other family members (also shareholders); wife and (5)

children were mere nominees.

The COA (Linley – Judge) came to a judgment and endorsed what

had been held by the HC by stating that the correct analogy between Mr.

Salomon and the company was a trust relationship. This means that the

company held its property on trust for its beneficiary, Mr. Salomon; as such

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the creditors of the company were entitled to a claim against Mr. Salomon

through the company. The court would not recognize the fact that the liability

of the company should be separated from Mr. Salomon. Finally Linley J was

of the opinion that the manner in which A Salomon Ltd. was formed indicated

that it had been created for a dishonest purpose i.e. “advice to defraud

creditors”.

The HOL (highest court) on the other hand denied the belief held by

the (2) two lower courts that a company could not be formed by one dominant

character (together with the other six persons) distinct of a substantial interest

in the business formation. The HOL defended that the Company Act 1862 (s

6) was clear; that the incorporation of a company was actually an

independent corporate entity and separated from its founder, Mr. Salomon.

The verdict was absolute.

[Separate Legal Entity. 2009]

Based on the Salomon V Salomon & Co. case, it shows that the term

“separate legal entity” (or corporate veil) really had been clearly defined/uphold

and followed ever since. It means that the most important effect of incorporation is

that it becomes a separate entity i.e. a legal “person” of its own divorced from its

members e.g. shareholders/owners.

As a legal entity/”person”, a company is liable to sue or be sued in its own

name. A company may also own properties under its name as a “person” and a

continuous existence is guaranteed without any influence from its

members/shareholders which are bankrupts, departed, terminated etcetera. A

company as a “person” can also enter into a contract with any of the shareholders.

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Sample Case 2:

The principle was also applied in Lee V Lee’s Air Farming Ltd (1961)

Lee v Lee’s Air Farming Ltd [1961]

Lee was a pilot and owned all the shares, except one held by is wife,

in the company that he formed. He was also only director of the company

whose business was spraying crops from the air. He was employed at a

salary as chief pilot. Later, he was killed in an air crash while piloting the

company’s aircraft. The question was whether he was a ‘worker’ for the

purposes of a Workers’ Compensation.

The Privy Council held that since the company was a legal person

separate from its shareholders, Lee was a ‘worker’ of the company, even

though he was the controlling shareholder and sole director.

S16 (5) of CA 1965 provides that upon incorporation a company “shall be a

body corporate ……with power to hold land”. Although the word used is specific, i.e.

land, being separate legal entity a company may own any other types of property, not

only land. [Company Law. 2009]

So based on those two (2) sample cases presented above, it has clearly

shown that a registered company under the company act is categorized as a

legitimate entity/individual/person and thus separated from its owners/shareholders.

This very same principle also applies to Zimam and GPSB where GPSB is

considered as separate from Zimam and therefore, the company shall bear

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responsible for all its activities and consequences. Zimam on the other hand who is

the shareholder of the company holds limited liabilities and therefore is not liable for

the debt as what the separate legal entity principle holds.

From this principle of separate legal personality, it follows that the debts of a

company are the responsibility of the company and not its shareholders/members. A

company can also own assets and the shareholders have no share (proprietary

interest) in those assets and can enter into a contract with a shareholder. A

company must sue in its own name and not in the names of its members, for any

wrongdoings/offence s committed against it.

Question d.)

DEBT FINANCING

Every company in the business communities can not avoid from getting themselves

involved in financial loan/debt financing. The very reason for this can be none other

than to increase profits. This can be achieved by expanding its share control in the

market, expanding human capitals (quantity & expertise) and technologies, efficient

and effective management capabilities etcetera.

A few terms need to be highlighted when it comes to discussing of the debt

financing topic. The terms normally related to debt financing/financial loan of a

company are as follows: -

i. Secured creditor

ii. Debenture (debenture holder)

iii. Bond

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iv. Fixed Charge

v. Floating Charge

vi. Crystallization

vii. Liquidation

i. Secured Creditor

A secured creditor is a creditor which has the benefit of a security

interest over some or all of the assets of the debtor. [Wikipedia.

2009]

If the debtor goes bankrupt, a secured creditor will enforce his

security over (the distribution of liquidation of) the debtor’s assets

without having to compete with the unsecured creditors/non-

preferential creditors.

ii. Debenture

A debenture is a series of bonds, which evidences the fact that the

company is liable to pay an amount specified, with interest, and is

generally secured on a charge over the property. [Debenture and

charges. 2009]

A debenture holder is to be paid with a certain percentage of

interest based on what has been stipulated in the debenture

certificate. This payment is mandatory whether or not the debtor

company is making profit.

S38 (1) states that a document issued by a borrowing

corporation certifying that a person named there in respect of any

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deposit with or loan to the corporation the registered holder of a

specified number or value of:

a) Unsecured notes or unsecured deposit notes

b) Mortgage debentures or debenture stock; or

c) Debentures or debentures stock

iii. Bond

Bond is also a loan/debt for business financing purpose. Just like

debenture, bond is issued by a debtor/issuer (borrower) to the

creditor/holder (lender) over an amount of monies borrowed. Upon

maturity, the issuer is liable to pay the holder a certain amount of

interest known as coupon.

Bond and stocks are both securities; the difference is that a

bondholder only acts as a creditor whereas a stocks holder is also

considered as a shareholder where he has stack in the company i.e.

as an owner. [InvestorWords.com. 2009]

iv. Fixed Charge

Fixed charge is a charge or a mortgage which attaches over a specific

asset. It is an equitable security. Charges are created for the purpose

of providing security to a lender. S108 (3) (K) provides that a charge

over a credit balance in a deposit account is a registrable charge.

Lord Atkins in the case of National Provincial and Union Bank

of England v Charnley [1924] defined a charge as:

“…..in a transaction for value both parties evince an intention

that property, existing or future, shall be made available as a security

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for the payment of a debt, and that the creditor shall have at present

right to have it made available, there is a charge even date, and

though the creditor gets no legal right of property, either absolute or

special, or any legal right to possession, but only get a right to have

the security made available by an order of the court. If those

conditions exist, I think there is a charge.”

[BBUS2103-Company Law. 2009]

The Fixed Charge Calculator:

= EBIT + Fixed Charge (before tax) _______________________________

Fixed Charge (before tax) + Interest

Where;

EBIT is Earnings before Interests and Tax

[Investopedia. 2009]

A fixed charge is one which attaches to a specific property

(usually land). The company can only deal with the property subject to

the terms of the charge and generally may not dispose of the property

until the charge has been discharged and the loan repaid.

[Goh Wong Pereira. 2009]

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Should a company have the intention to dispose of the

property; it must first obtain the consent of the lender. [Holroyd v

Marshall. 1862]

Sample Case 1

Siebe Gorman & Co. Ltd. V Barclays Bank Ltd. [1979]

Property which is subject to a fixed charge and which is sold on to a

third party without the chargee’s consent will remain subject to the

charge unless the third party is a bona fide purchaser without notice,

of the existence of the charge. However, providing the charge is

registered, the third party will be deemed to have notice of its

existence.

Sample Case 2

The creation of a fixed charge on the book of debts of a company was

affirmed in the following case:

United Malaysian Banking Corporation Bhd v aluminex (M) Sdn

Bhd

In order to create a fixed charge over a corporate asset, the asset in

question must be identifiable, although it need not be in existence at

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the time the charge was created. The property to which a fixed

charge may attach can be a future property. The holder of fixed

charge has rights which are to be found within the document creating

the charge.

[*****- Company Law. 2009]

v. Floating Charge

A floating charge does not attach on any specific property and may

attach to all the company’s assets. The company is free to deal with

these assets until the happening of certain events stipulated by the

lender (such as an appointment of a receiver), upon which the charge

crystallizes and becomes fixed. [Goh Wong Pereira. 2009]

In other words, it is a form of security given by a company on

all/specific category of its assets/property. These assets are normally

shifting/circulating into and out of its ownership e.g. raw materials,

inventory, trading stocks and debt book. The charge “floats” over

these assets and allow the company to continue dealing with them in

the ordinary course of its business. The lender holds a valid security

on this shifting fund of assets but has no right to interfere in the

business conducts but only deals with the charges assets.

Sample Case

Illingworth v Houldsworth [1904]

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In the above case, Lord Macnaghten has elaborated and

differentiated both fixed charge and floating charge. [*****- Company

Law. 2009]

“A specific charge, I think, is one that without more fastens on

ascertained and definite property or property capable of being

ascertained and defined; a floating charge, on the other hand, is

ambulatory and shifting in its nature, hovering over and so to speak

floating with the property which it is intended to affect until some event

occurs or some act is done which causes it to settle and fasten on the

subject of the charge within its reach and grasp”.

If the floating charges happen to crystallize/default on certain

circumstances, the said assets will automatically become fixed

charge. Then it is up to the lender whether or not to appoint a

receiver, suing under the contract or proving in the winding up.

vi. Crystallization

Crystallization occurs when a company has defaulted in its charge.

Here the charge becomes a fixed charge over the said assets (held by

the borrowing company). Crystallization will also occur upon the

appointment of a receiver/liquidator to facilitate distribution of assets;

or when the troubled company winds up. [*****- Company Law.

2009]

vii.  Liquidation

Other terms for liquidation are dissolve and winds up. Liquidation

means that the company is unable to pay its debt and all assets

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belonged to the company will be apprehended and the earnings/total

values are paid out according to what is laid down in the Companies

Act. [*****- Company Law. 2009]

According to Wordnetweb (2009); liquidation refers to the

termination of a business operation by using its assets to discharge its

liabilities.

There are two (2) ways to go about with the liquidation process:

i. Voluntary winding up (Part X Div 3 S254 – 267)

- Divide into two (2) forms:

a) Members’ voluntary winding up

Certain provisions are lined out for this purpose namely

S257 (1) – a declaration of solvency made by directors;

S257 (2) – showing the latest assets and liabilities;

S257 (4) – true/false of declaration made by directors;

and S257 (5) – directors have reasonable proof before

going for liquidation

b) Creditors’ voluntary winding up

S260 (1) provides that when this happens, the

company must convene a meeting of creditors and

called within 14 days from the date of proposal for

winding up. Both creditors and the company can

nominate a liquidator for the process (but normally

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creditors will prevail in terms of the selection of

liquidators).

Under S259 (1), a creditors meeting will be

convened by the liquidators if the debtor company feels

it is unable to fulfill its debts in time (as stipulated in the

declaration). In the case of Re Anrite Aviation Co.

Pte. Ltd. [1990]; it was highlighted that the liquidators

must attract the creditors’ attention on their rights. A

statement of assets and liabilities of the company will

also need to be listed down.

ii. Compulsory winding up – ordered by the court

(Part X Div 2 S217 -253)

This type of winding up is normally initiated by an unpaid

creditor against the debtor company. But this winding up

process can also be requested by a company just like the

voluntary winding up that allows both parties to request for a

winding up hearing.

S217 (1) provides the list of persons who can initiate

these proceedings i.e. the company, a creditor, a contributory,

a liquidator, the Minister and the central bank.

Sample Case 1

In the case of Lim Yoke Kian & Anor v Castle Development

Sdn. Bhd. [2000] it was held that if the deferment for a

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winding up order is for an illegal purpose, the court will not

overlook this.

Sample Case 2

In a creditor’s petition; the petitioner must satisfy that he is

indeed a creditor. This was stated in the case of Morgan

Guaranty Trust Co. of New York v Lian Seng Properties

Sdn. Bhd. [1990].

In the Zimam’s case scenario, he was actually holding various positions when

it comes to the incorporation of GPSB. The positions were director, shareholder

(under GPSB), debenture holder and creditor (sole proprietor). Zimam (as a

director/shareholder of GPSB) was not a debtor because it was the company (as a

separate legal entity) i.e. GPSB who was in debt to Zimam when it purchased

Zimam’s business by means of shares and debentures.

So in this case, it was GPSB who held the position as a debtor under the

separate legal entity principle and that Zimam was only practicing his responsibilities

behind (corporate veil) the company’s name. In the case of Zimam being the only

secured creditor (debenture holder), he is certainly liable for a distribution of assets of

the debtor i.e. GPSB should the company winds up.

As discussed above, S38 (1) CA 1965; certified that a secured creditor i.e.

Zimam is protected for his deposit to the company with a value of unsecured notes,

mortgage debentures and/or debenture stock. As a secured creditor, Zimam has the

right to the income of the company, the right to return of capital, the right to return of

capital in a liquidation, taxation and also voting. [Cases & Materials In Company

Law. 2009]

Page 24 of 33

Question e.)

DERIVATIVE ACTION

GPSB was making profit in the first year of its business after being incorporated from

a sole trader status. Thereafter, the business has collapsed due to the bird flu

disease. Zimam could only think of one way to save his business; i.e. making

insurance claims to recover back all his losses. Here, the term derivative action and

other case sample needs to be highlighted when it comes to discussing of this topic.

Derivative action - a lawsuit brought by a corporation shareholder against

the directors, management and/or other shareholders of the corporation, for a failure

by management. In effect, the suing shareholder claims to be acting on behalf of the

corporation, because the directors and management are failing to exercise their

authority for the benefit of the company and all of its shareholders. This type of suit

often arises when there is fraud, mismanagement, self-dealing and/or dishonesty

which are being ignored by officers and the Board of Directors of a corporation.

[Gerald N. Hill and Kathleen T. Hill. 1981-2005]

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The common law

In company law, the wishes of majority normally prevailed over the minority and had

since become the general rule.

Foss v Harbottle (1843) – The Majority Interest

Facts

Two minority shareholders (Richard Foss and Edward Starkie Turton) brought an

action against the directors (Thomas Harbottle, Joseph Adshead, Henry Byrom,

John Westhead and Richard Bealey) of the company (Victoria Park Company)

alleging that they had defrauded the company in a number of ways, including selling

land to the company at an excessive price. They asked the court to order the

directors to compensate for the losses incurred by the company.

Held

The court refused. The conduct of the directors was a wrong done to the company

and only the company could sue. As the board was still in existence and it was still

possible to call for a general meeting (of the company), there was nothing to prevent

the company from determining (whether or not) to bring an action.

Page 26 of 33

[Company Law Club. (2009)

When a wrong is done to a company, the court will normally reject the case if

brought up. This is because; it is the power of the company and up to it to decide on

action to be taken to resolve the issue. The reasons for this can be explained under

the following principles: -

i. The Proper Plaintiff Principle

The company is the proper plaintiff (pursuer) in any action to correct a

wrong against it.

ii. The Internal Management Principle

The court will not interfere with the internal management of a

company. It is for the company to decide whether it is being properly

managed.

iii. The Irregularity Principle

A member cannot sue to rectify a mere informality where the act

would be within the company’s powers if done properly and the wishes

of the majority are clear.

[*****- Company Law. 2009]

Page 27 of 33

The problem with the rule is that; the majority of shares belong to directors

and therefore they are in the best position for being unfair. This for sure will

not let the directors take any action on themselves. A minority protection is

thus necessary to protect their interest (as stated in the S181 and S218

CA1965 - Remedy in cases of an oppression.) and had been recognized in

the case of Edwards v Halliwell.

Edwards v Halliwell – The Minority Interest

Facts

A trade union had rules equivalent to articles of association under which any increase

in the contributions of members had to be agreed by a 2/3 majority (in a ballot of

members). A meeting was decided by a simple majority (1/3) to increase the

subscriptions without holding a ballot. The plaintiffs, as a minority of members,

applied for a declaration that the resolution was invalid.

Held

The rule in Foss v Harbottle did not prevent a minority of members suing because the

matter could be allowed by a greater than simple majority (2/3). Jenkins LJ

indentified four exceptions to the Rule in Foss v Harbottle:

i. Fraud on the minority by wrongdoers in control

ii. Invasion of the personal rights of members

iii. Ultra vires acts

iv. Material procedural irregularities

Page 28 of 33

[*****- Company Law. 2009]

Based on the discussion described above, it is clearly shown that there were two (2)

relevant issues that had caused the GPSB’s business to collapse i.e. bird flu disease

and Chan’s misbehavior (as a person who was in power). But still; the business was

already destined to collapse due to the disease. Chan has foreseen this to happen

and "pulled" out all GPSB's clients out into his new business.

So does this mean that it is actually the action taken by Chan that really had

caused GPSB to crumble; whereas the disease was just a minor problem that could

be rectified gradually? Suppose it is so. Therefore; I strongly believe that GPSB will

fail in the insurance claim because this is about mismanagement/fraud/dishonesty.

The same thing will happen should Zimam was the one who held the

insurance because the insurance company will not see this as something that is

unexpected/unforeseen; but clearly a mismanagement circumstance on the part of

the company where Zimam (shareholder) had "power" to manage the company right.

This has been confirmed when Zimam appointed Chan as a manager.

Chan has promised to abide by the restrictive covenant signed that should he

leaves GPSB; he will not reveal any trade confidentialities or solicit its clients for

another company. Chan’s action was an action of dishonesty to GPSB and caused a

substantial loss to the company. This is so because GPSB could survive with the

Page 29 of 33

disease problem and grow even stronger in the future (or even change its name).

The loss had been decisive when Chan dishonestly “hijacked” GPSB’s customers

into his own business. GPSB on the other hand will face a huge problem to regain its

good name after the fall to compete in the market in the future.

.

G. REFERENCE

1. Latha R. (2009). LIMITED COMPANY. ***** ***** ***** ***** ***** ***** ***** ***

2. S4 (1) of Company Act 1965. (2009). Limited by shares. [Online]. Available:

http://www.ssm.com.my/acts/fscommand/a125.htm. [2009, October 26].

3. S214 of Company Act 1965. (2009). Limited by guarantee. ***** ***** ***** *****

***** *****

4. Guidance. (2009). 'LIMITED LIABILITY' -VS- 'UNLIMITED LIABILITY'. [Online].

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5. Syarikat & Anda. (2009). JENIS-JENIS PERNIAGAAN. [Online]. Available:

http://ca2on9-biz.blogspot.com/2008/10/perkongsian-partnerships-syarikat.html

[2009, October 28]. (Translated)

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http://www.ssm.com.my/acts/fscommand/a125.htm. [2009, October 30].

7. COMPANY LAW 2ND EDITION. (2009). Appointment and Qualification of Director.

***** ***** ***** *****.

Page 30 of 33

8. Appointment of Directors. (2009). Solaiappan & Ors v Lim Yoke Fan & Ors. *****

***** ***** *****

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adp.mmu.edu.my/e-notes/anushia/notes/Topic%203(b).ppt [2009, November 02].

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***** *****

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02].

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***** ***** *****

Page 31 of 33

17. InvestorWords.com. (2009). Bond Definition. [Online]. Available:

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***** ***** ***** *****

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[2009, November 07].

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