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Company Law

LAW 3212
Group Assignment
Group 6
Section: 1

Case Review(s):
Case I: The Golf Cheque Book Sdn Bhd & Anor V Nilai Springs Bhd
Case II: Emile Erlanger v New Sombrero Phosphate Company & Ors
Name Matric No.
Mohamad Wafiy Bin Mohd Wary 1422033
Muhammad Khairul Azmi Bin Isa 1421979
Mohamad Ameer Bin Ayub Khan 1428617
Syed Azrul Hadif Bin Syed Ghazi 1424901
Abdul Hakim Bin Haslizan 1421439

Lecturer’s Name: Mdm. Siti Awanis Binti Othman


Date of Submission: Nov 20th, 2017
Case I
a) Cases: Golf Cheque Book Sdn Bhd & Another vs Nilai Spring Berhad

Court: Court of Appeal (Putrajaya) Gopal Sri Ram, JCA., Azmel Bin Hj Maamor., JCA.,
Zaleha Zahari, JCA Rayuan Sivil No N-02-47-200226 November 2005

Facts: On 30th October 1999, a contract was entered between The Golf Cheque Book Sdn
Bhd and Nilai Spring Berhad in which the plaintiff, the Golf Cheque Book Sdn Bhd had to
pay a sum of RM 80,000 from time to time for the usage of Nilai Spring Berhad’s golf
course. However, The Golf Cheque Book did not exist at the time of the contract and it
was only incorporated on 23rd March 2000, 5 months after the contract was signed.
Upon discovering that the Golf Cheque Book was not in existence at the time of the
contract, the defendant decided to withdraw from the contract and return back the money
paid by the plaintiff. Thereafter, the plaintiff took action against the defendant for breach
of contract. The case was then brought to the High Court. The defendant claimed that the
plaintiff was not privy to the contract and thus the High Court allowed the application of
the defendant. With the dissatisfaction of the High Court’s ruling, the plaintiff appealed
and the case was brought forward to the Court of Appeal on 26th November 2005.

b) Judgement
The appeal was allowed because of the Section 35(1) of the Companies Act 1965 and the
decision of the High Court was reversed. The respondent, Nilai Spring Berhad was ordered
to pay the cost of the appeal and other related cost incurred.

c) Issues
The issue is whether there was a valid, binding and enforceable contract between a
pre-incorporated company and its contracting parties.
To begin with, pre-incorporation company is a company that was yet to exist before
the date of its inception, in other words, the company has not yet been registered with
Registrar of Company (ROC) or Suruhanjaya Syarikat Malaysia (SSM) in case of
Malaysia. A pre-incorporation contract simply is a contract purpotedly entered into on
behalf of a company before its incorporation. It must be noted that before incorporation, a
company has no contractual capacity. In Common Law, a company is not bound to any
contract made prior to its incorporation like in Newborne v Sensolid (Great Britain) and it
also cannot be ratified as in Kelner v Baxter.

d) Holding
There were two applied rules mentioned in this case and it was in common law
which prevail during in High Court and Section 35(1) of Malaysian Companies Act 1965
that superseded the common law

e) Rationale
Common law:
The legal status of pre-incorporation contract is invalid and cannot be ratified and not
enforceable in court. Therefore, a company is not bound by a contract made prior to its
registration as the company is not existence and the contract is void. Even if in law of agency,
the principal may ratify the acts of his agent, but it is a pre-condition of ratification that the
principal must first in existence when the contract was made. In Kelner v Baxter (1866), the
common law stipulated that;
“A company cannot ratify a contract made for its benefit before it was formed; nor can it
adopt such contract by resolution. A new agreement on identical lines is necessary. The
result may sometimes be unfortunate, but follows logically from an application of the
doctrine that a principal not in being at the date of an agreement, and therefore not in a
position to be bound by it then, cannot ratify it thereafter" (per Innes CJ in Mccullogh v
Fern wood Estate Ltd [1920] AD 204)

Section 35(1) Companies Act 1965:

Companies Act 1965 is a Malaysian law that related to company in Malaysia. Under the Section
35(1), any contract or transaction entered by a company prior to its formation or by any person
may be ratified by the company after its formation and the contract then shall be bound as the
company had been existed at the date of the contract. The impact was that the legal status of a pre-
incorporated company that entered into a contract can be ratified under the virtue of Section 35(1)
and thus an outsider are secured if they entered into a contract with good faith. Section 35(1)
supersede the common law in this case and it was granted at the Court of Appeal.

f) Comments
In our opinion, we agree with the Judge Gopal Sri Ram’s judgement because the provision in
Section 35 subsection 1 of the Companies Act 1965 was drafted to protect the interest of
outsiders provided the contract was done in a good faith. However, if we were to follow the
Common Law’s position pertinent to the pre-incorporated companies, the outsider who entered
into the agreement would be victimized by the ruling even though all the requirements of the
agreement was fulfilled. As been lucidly illustrated in the case of Newborne v Sensolid [Great
Britain] where the company Sensolid was not in existence and therefore Newborne cannot
ratify the contract although all the contract’s requirements had been fulfilled. The effect of this
ruling is the contract poses negative effects on the outsiders and it is not enforceable in court.
In contrast, under section 35 subsection 1 of the Companies Act any agreement can be ratified
and the outsiders are secured when they entered into the contract in a good faith. In conclusion,
the judgement of Gopal Sri Ram was right and done in a manner that uplift the justice to the
victim.
Case II

a) Cases: Erlanger v New Sombrero Phosphate Co. (1874-80) All ER Rep. 271

Court: House of Lords Lord Penzance, The Lord Chancellor (Lord Cairns), Lord
Hatherley, Lord O'Hagan, Lord Selborne, Lord Blackburn, And Lord Gordon.

Facts: Mr. Emile Erlanger and his syndicate bought an island named Sombrero in which it
has phosphate, at a price of £55,000. He then formed a company named ‘New Sombrero
Phosphate Co. Erlanger managed to get many members of the public to invest in his newly
formed company through advertisement and promotion. He named five persons as a
director in which two of them are abroad, another two are directly controlled by him and
another director in independent from the syndicate. Eight days after its incorporation, on
20th September 1871, Erlanger sold the island to the company at a price of £110,000 on
which he did not disclose the whole transaction thoroughly. After almost a year of
operation, the company had not been successful. The shareholder passed a resolution
appointing a committee of investigation. The directors were removed and new directors
were appointed. The new committee found loopholes on the transaction made between
Erlanger and the company. The company want to recover back all the losses as such the
company had overpaid to Erlanger and his syndicate. In the Court of Appeal, Erlanger
claimed that he and his syndicate did not stand in a fiduciary position because they only
act as a seller in which the company is the one that should enquire him regarding the
transaction. However, the company argued that Erlanger and the syndicate acted as a
promoter in which they have the fiduciary relationship towards the company. The appeal
brought by Erlanger was dismissed. Then, the case was brought up to the House of Lords
by Erlanger to challenge the decision.

b) Judgement
The contract can be rescinded due to the fiduciary stand that Erlanger’s held which he had
the responsibility to disclose the whole transaction. The rescission is allowed and the
company will not be barred by laches/negligence even though that the action was taken a
year after the sales and purchase of the island took place.

c) Issue

The issue is whether there has been negligence on the part of the shareholder due to the
facts that the shareholder took a very long time (almost a year) to rescind the contract made.

To begin with, a promoter is a person who involve in the preparation or setting up the
company. The promoter has the fiduciary position in the company which they have the
responsibility to disclose any transaction made. A person who purchase property and then
create a new company to purchase the property they own, stand in a fiduciary position
towards the company to explain the reasonableness of acquiring such property. The issue
of negligence by the shareholder is not valid due to the facts that the shareholder started to
realize the whole transaction to be dubious almost a year after that. The matter was brought
forward in the annual general meeting. The transaction was not disclosed properly. The
matter of negligence or laches can be brought up if and only if the transaction was properly
disclosed. Erlanger in fact stood in a fiduciary position thus require him to do full
disclosure.

d) Holdings:
There were two applied principle mentioned in this case which are the principle of fiduciary
relationship that a promoter holds towards a company and the principle of restitutio in
integrum in which a contract can only be rescinded if there are any condition that can be
proved damaging the party.
e) Rationale:
The arguments brought upon by the appellant seem to be persuasive whereby they
contended on the basis that they did not stand in any fiduciary relationship with the
company and also with regard to the failure of the company to take promptitude actions
against the syndicate upon learning the excessive price paid.

We will first look at the argument with regard to their fiduciary relationship with the
company. Despite their claim that they have no relationship other than just a regular “buyer
and seller” who makes profit from the purchasing and selling of the island. We would like
to quote the what Lord Gordon has said “Having acquired the property, the syndicate
resolved to form a company for the working of the produce of the island, and to make over
the purchase to that company. They became promoters of the company, and prepared the
necessary documents for its formation, and issued a prospectus to the public with the view
of inducing the public to take up its shares. In doing this the syndicate changed the position
it originally held, and put itself in a fiduciary relation to the company which it was engaged
in forming. It thus became incumbent on the promoters not only to make a full disclosure
of the position they as owners of the property which they proposed to sell to the company
held in regard to that property, but also to make arrangements, by the appointment of
competent officials, and otherwise, for enabling the company to form an independent
judgment as to the propriety of purchasing the property of the promoters, and of the value
of that property, and the price to be paid for it”. In light of his statement, we can see that
the syndicate is in fact serves as the promoter of the company and therefore have the
obligation i.e. fiduciary relationship to disclose any benefits that would be earned by them.
Thus, the argument that the stood no fiduciary relationship is futile.

Next, we look at the argument with regard to delay in taking action against the
syndicate which would then prevented them from rescinding the contract and deny their
right which they would have been entitled to. The issue that the company had committed
laches or negligence in taking late action against the syndicate may seem to be obvious.
However, if we were to scrutinize what happened throughout the period we can see that
there had been few “false” meetings in which after the board of directors was replaced then
only the company started to take action against the syndicate. One may argue that, the
company had committed negligence because they failed to repudiate the contract earlier
and instead they continued the operation. Only after a year of conducting the business
activity and loss was incurred then only they decided to bring this case to the court. We
must go through at more detailed manner about this matter. The company did inquire about
the excessive price paid and even established an investigation body to investigate this
matter. The issue whether the previous director should have inspected the price paid is
irrelevant since he is in fact a “creature” appointed by Erlanger and he believed that the
price paid was a good bargain for the company and it was done in a good faith. With regard
to the impossibility of restitutio in integrum whereby the it would be unjust to cancel or
rescind the contract and the land need sto be returned back to its original owner. Thus in
this case, the restitutio in integrum can be used provided that the phosphate mine needs to
be must be put in statu quo, in other words, return back to its original condition; the mining
activity, profit generated from it and the hard work of all the people involved should be
returned as well, in which it is impossible.

g) Obiter Dicta

Obiter dicta can be described as thoughts or observations stated in a case that are
not directly relevant to the outcome of the case. It somehow can help or guide in future
court decisions. Regarding to the case Emile Erlanger v New Sombrero Phosphate
company, it was laid down that the observations of Lordship in the Appeal Court were
made obiter. For instance, Lord Penzence, one of the judges in the case has mentioned
about the maxims of equity that somehow can be related to the case. He stated that how
maxims of equity can help determined judgment in the case. The lord mentioned about on
how Courts of Equity have given protection and relief against the pressure of unfair
advantage resulting from the relation and mutual position of the parties to those relations
such as principal and agent, trustee and the beneficiary of trust, parent and child, guardian
and ward, priest and penitent and others.
Next, Lord Hatherly gives some analogies regarding on how term fraud can
precedence to the discussed case. He gives several case can lead to fraud. The first is
between vendor and purchaser. He stated that vendor cannot do what was at one time
asserted by this bill, namely, disclose what he has paid in effecting his own anterior
purchase before asking an enhanced price from him to whom he seeks to sell the
property. Next, between partner and co-partner. The lord stated that partners must have a
good faith in each other so that they can avoid fraud happened between them. If good
faith is absence in making the decision, then it can lead to fraud. Last, between an agent
for a purchaser receives a gratuity from the vendor. Agent for purchaser should aware by
not receiving any gratuity from the vendor as it will be seen as bribe and soon it can
question the validity of the contract.

f) Comments
In our opinion, we agree with the House of Lords’ judgement in protecting the interest of
the company in which the court did not take into consideration the claim made by Erlanger
that said there had been negligence on the part of the company. Right from the start,
Erlanger tried to use all the possible ways in escaping from the responsibility in disclosing
the whole transaction towards the company. The promoter of the company, which in this
case is Erlanger himself, stand in a fiduciary position. The issue of delay claimed by
Erlanger was denied as the context of ‘delay’ itself was not met. This is explained in the
case of The Lindsay Petroleum v. Hurd.
The principle of fiduciary position used in the court in this judgement gave a clear indicator
or message that any person cannot use the company to make a secret profit without
informing or disclosing the whole transactions to the investors and the shareholders. The
effect of this principle poses a positive effect on the company and it protects the interest of
company.