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SET A

ANSWERING SCHEME FOR


BUSINESS AND COMPANY LAW
MIAQE EXAMINATION QUESTION

SECTION A

QUESTION 1

(a) Judicial Precedent


It is the process of adjudication whereby after argument before a judge, a decision
in a dispute is given. It forms one of the most important means by which the law is
created in Malaysia. In reaching his conclusion, the judge will formulate and apply
a legal principle. In accordance with certain rules, this principle may form a guide
(binding or persuasive) for future references.

The decision inter parte is of interest and importance to the parties to the litigation
and the judge will give reasons for reaching this decision and in these reasons
lies the ratio decidendi (the reason for deciding) or the legal principle behind the
decision. The ratio decidendi may bind others in similar disputes in the future.

A decision of a superior court (such as the Supreme Court) binds the lower courts
(eg; The High Courts, Sessions Courts and Magistrates‟ Courts). Therefore
binding precedents would depend on a court‟s position in the hierarchy of the
courts. Persuasive precedents are those which are not binding authorities while
binding precedents shall remain so until it is reversed on appeal or overruled.

(b) (i) Proposal: Section 2 (a) of the Contracts Act, 1950 states that when one
person signifies to another his willingness to do or abstain from doing
anything, with a view to attaining the assent of that other to the act or
abstinence, he is said to make a proposal.

Section 2(c) of the Contracts Act, 1950 calls the person making the
proposal a „promisor‟.

Section 4(1) of the Contracts Act, 1950 states that, a communication of a


proposal is complete when it comes to the knowledge of the person to
whom it is made.

Acceptance: Section 2 (b) of the Contracts Act, 1950 provides that when
the person to whom the proposal is made signifies his assent thereto, the
proposal is said to have been accepted. A proposal when accepted,
becomes a promise.

Section 2(c) of the Contracts Act, 1950 calls the person accepting the
proposal a „promisee‟.

Section 7 of the Contracts Act, 1950 provides that, for a proposal to be


converted into a promise, the acceptance of the proposal must be
unqualified and absolute.

Section 9 of the Contracts Act, 1950 states that, so far as any acceptance
of any proposal is made in words, the acceptance is said to be

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expressed. If the acceptance is made other than in words, the acceptance
is said to be implied.

(ii) Past consideration arises where the defendant‟s promise to the plaintiff
was made after the performance of an act or omission that was requested
by the defendant.

As a general rule, English law does not treat past consideration as good
consideration (Re Mc Ardle). In Malaysia, past consideration is good
consideration because of the words “has done or abstained from doing” in
the definition of consideration in section 2(d).
Past consideration is good consideration was illustrated in Kepong
Prospecting Ltd. v Schmidt.

(c) (i) Coercion: Defined under section 15 as “committing or threatening to


commit any act forbidden by the Penal Code, or the unlawful detaining or
threatening to detain any property, to the prejudice of any person
whatever, with the intention of causing any person to enter into an
agreement.”

Section 19 provides: when consent to a contract is induced by coercion,


the contract is voidable at the option of the party who was coerced.
Section 73: a person to whom money has been paid or property delivered
under coercion must repay or return it.

(ii) Undue Influence:

Section 16: a contract is said to be induced by undue influence if one party


to the contract uses his position to dominate the will of the other party to
obtain an unfair advantage over the other.

Section 16(2): a person is presumed to be in a dominant position if:

 He holds a real or apparent authority over the other party to the


contract;
 He stands in a fiduciary relation to the other party to the contract;
 He contracts with a person whose mental capacity is affected due to
age, illness or mental or bodily distress.

Section 20: Contract caused by undue influence is voidable at the option


of the party whose consent was so obtained. The court may set aside the
contract. If the party who is entitled to avoid the contract has received any
benefit under the contract, then the court may set it aside upon such terms
and conditions as the court deems fit.

(d) (i) Sale by a mercantile agent: Proviso to section 27, SOGA.

This exception applies where a mercantile agent in possession of the


owner‟s goods sells or pledges an owner‟s goods without the owner‟s
authority. A mercantile agent is a person who, in the ordinary course of his
business as such agent, has the authority to buy and sell goods. At the
time of the sale, the mercantile agent must have possession of the goods,

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or of a document of title to the goods, with the consent of the owner. In
such a case, any sale made by him of the owner‟s goods when acting in
the ordinary course of business as a mercantile agent shall be valid to
pass a title to the buyer, provided that the buyer acts in good faith and
without any notice that the mercantile agent had no authority to sell from
the owner.
This exception would not be applicable if the person is not classified as a
„mercantile agent‟.

(ii) Sale by one of several joint owners: provision of Section 28, SOGA.

This exception applies where one of several joint owners of goods sells
the goods without the consent of the other joint owners.

The requirements for this section to operate are:


 The seller must be a joint owner in sole possession;
 The sole possession must be with the permission of the other joint
owners;
 The buyer must act in good faith without notice that the seller had no
authority to sell.

If all the above requirements are met, the seller will pass a good title to the
buyer.

QUESTION 2

(a) Duties of an agent towards his principal under the Contracts Act, 1950:
- S. 164: Agent‟s duty in conducting principal‟s business; in accordance to the
principal‟s directions or in the absence of such directions to conduct business
in accordance with the custom which prevails in doing business of the same
kind;

- S. 165: Skill and diligence required from agent; to conduct business with as
much skill as is generally possessed by persons engaged in similar business,
unless the principal has notice of his lack of skill;

- S. 166: An agent is bound to render proper accounts to his principal on


demand;

- S. 167: It is an agent‟s duty to communicate with the principal and in cases of


difficulty, to use all reasonable diligence in communicating with his principal;

- S. 168:If an agent deals on his own account in the business of the agency,
without first obtaining the consent of his principal, and acquainting him with all
material circumstances which have come to his own knowledge on the
subject, the principal may repudiate the transaction; if the case shows either
that any material fact has been dishonestly concealed from him by the agent,
or that the dealings of the agent have been disadvantageous to him.

- S. 169:If an agent without the knowledge of his principal, deals in the business
of the agency on his own account instead of on account of his principal, the
principal is entitled to claim from the agent any benefit which may have
resulted to him from the transaction.

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- S. 170: An agent may retain, out of any sums received on account of the
principal in the business of the agency, all monies due to himself in respect of
advances made or expenses properly incurred by him in conducting such
business, and also such remuneration as may be payable to him for acting as
agent.

- S. 171: It is an agent‟s duty to pay sums received for the principal subject to
deductions of all monies due to himself as prescribed under Section 170.

(b) (i) 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.

(ii) 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.

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.

(c) Advising Ijan:


This case involves the principles on agency. When Mello engages Ijan to do
something, Mello is the principal and Ijan 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.

Ijan is advised that he cannot recover the losses arising out of his conviction of
the offence, since the act which he was employed to do, is a criminal act (i.e.
dealing and promoting illegal deposit taking). 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.
Section 176 of the Act however, does provide for situations where agents may be
indemnified against consequences of acts done in good faith, although it cause
injury to the rights of third persons. In this situation, had Ijan not known that the
Mello did not have the permit to take deposits, he may claim to have done the act
in good faith or out of innocence. This was not the case, however, since Ijan was
fully aware of the state of things from the very beginning.
Therefore, Mello is not liable to indemnify Ijan due to the fact that the act done by
Ijan was unlawful. In this situation, Ijan will have to bear the losses on his own.

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QUESTION 3

(a) (i) Liabilities of partners for ordinary torts committed in the course of
business:

Section 12, Partnership Act, 1961:


Where any wrongful act or omission of any partner acting in the ordinary
course of the business of the firm or with the authority of his co-partners,
loss or injury is caused to any person not being a partner in the firm, or
any penalty is incurred, the firm is liable thereafter to the same extent as
the partner so acting or omitting the act.

In this situation, Pin was negligent and had negligently caused a patient to
lose his tooth. This accident happened in the course of the partnership
business and as a direct consequence of the partner‟s negligence. Subject
to evidence and principles of the law of torts, the partnership may most
probably be liable for the damages caused to the patient as a result of the
accident. Therefore, even though Pun may have nothing to do with the
incident, he may still be liable as a partner.

(ii) Five ways in which a partnership may be dissolved:


(1) By agreement: if the duration of the partnership is specified in the
partnership agreement, the partnership is dissolved on the expiry of that
period;

(2) Unless the partnership agreement provides otherwise, the partnership


will be dissolved upon the death or bankruptcy of a partner - Section 35(1),
Partnership Act, 1961;

(3) A partnership may be dissolved at the option of the partners, if one of


the partners charges his share in the partnership – Section 35(2),
Partnership Act, 1961;

(4) A partnership may be dissolved by supervening illegality – Section 36,


Partnership Act, 1961;

(5) A partnership may be dissolved by a court order, upon application by a


partner when one partner is insane or permanently incapacitated or where
a partner‟s conduct prejudicially affects the carrying on of the partnership
business – Section 37, Partnership Act, 1961.

(b) Dormant/Sleeping partner: a partner who takes no active part in the management
of the partnership business. He may have provided the capital for the business
but leaves the management of the partnership business to the other partners.

Quasi partner: A quasi partner is not a partner. However, he may be liable for
debts of the partnership as a result of a legal principle called “holding out”.

(c) The issue in this case is whether a duty of care is owed by the firm of auditors,
Hitong & Associates to Raiders Bhd.

As a general rule, an external auditor of a company, in auditing the accounts


under the Companies Act, 1965, owes no duty of care to members of the public at
large who may rely on the audited accounts to lend money to the company or to
buy shares in the company.

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An external auditor owes no duty of care to individual shareholders in the
company who have relied on the audited accounts to increase their shareholding
in the company.

In Caparo Industries PLC v Dickman & Ors., the respondent relying on the
accounts of a public company that was audited by the appellant, bought shares in
the company. It was later discovered that the audited accounts were inaccurate.
As a result of the reliance on the audited accounts, they suffered loss. An action
was brought alleging that the accounts of the company audited were inaccurate
and misleading and that the auditors were negligent in auditing the accounts.

HOL: The auditors did not owe a duty of care to the respondents. The purpose of
the audited accounts prepared by the auditors was to enable the shareholders as
a body to buy more shares in the company with a view to profit. The auditor‟s
statutory duty in auditing the accounts was owed to the body of the shareholders
as a whole and not to individual shareholders or the public at large.

In the present situation, Raiders Bhd is alleging that they had appointed and relied
on the auditors to conduct the audit and due diligence process with the express
intention of acting upon the report. This fact is known by Hitong & Associates and
that their negligence had caused Raiders Bhd. loss.

Therefore, based on the case of Re Kingston Cotton Mill (1896), it was held that:
It is a duty of the auditor to bring to bear on the work he has to perform that skill,
care and caution which a reasonably competent, careful and cautious auditor
would use. What is reasonable skill, care and caution must depend on the
particular circumstances of each case.

In our situation, Raiders Bhd. did not only rely on the skill, care and competence
of Hitong & Associates, but they also have a fiduciary relationship with the
auditors. Under the circumstances, there is no doubt that Hitong & Associates
owes a professional duty of care towards Raiders Bhd. and should be liable for
the losses incurred.

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QUESTION 4

Suggested answers

4(a)(i)

• A certificate of incorporation shall be issued if the pre- registration procedures have


been complied with – Section 16 (4)
• The certificate of incorporation serves as conclusive evidence that a company has
been duly registered from the date mentioned in the certificate – Section 361
• The certificate shall state:
a. type of company registered;
b. date of registration;
c. name of company;
d. company number

A company incorporated when it is issued with a certificate of incorporation by the


Registrar of the companies (see Form 8 and 9 in the Second Shedule of the
Companies Act 1965).

 If its is a public company, the form of the certificate of incorporation is found in Form
8.
 If it is a private company, the relevant form is in Form 9.
 The date of company‟s incorporation is stated in its certificate of incorporation.

4(a)(ii)
The effects of incorporation are stated in Sec 16 (5) CA 1965.
“…shall be a body corporate…capable forthwith of exercising all the functions of an
incorporated body and of suing and being sued and having perpetual succession and a
common seal with power to hold land but with such liability on the part of the members to
contribute to the assets of the company in the event of its being wound up…”

1. “Body Corporate” & Separate Legal Entity


• Once the company is duly registered, the law shall regard the company to be of a body
corporate – Section 16 (5)
• The persons whose names appear in the company‟s register of members from time to
time shall be the members of the company (Section 16(6)) and together they shall be a
body corporate.
• Cases :Salomon v. A. Salomon Co. Ltd (1897); Lee v Lee's Air farming Ltd

2. Ability to sue and be sued


 As the company is a separate legal entity, it can sue and be sued in its own name. It
can sue in respect of rights that it has, and if it has liabilities, others may sue against it.
 The members of the company generally cannot take any legal action on behalf of the
company. Only the company itself can enforce its rights. This is called the „proper
plaintiff‟ rule and it was established in the case of: Foss v Harbottle (1843)

3. Ability to own land


 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.Case: Macaura v Northern
Assurance Co Ltd.

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4. Perpetual succession
• The company is immortal. It will continue to live until it is properly wound up or struck off
the register.
• Even if all the member dies, the business still exists.Case: Re Noel Tedman Pty Ltd

5. Liabilitiy of members
The liability of members depends on whether the companyis a limited liability or unlimited
liability company. Section 16(5) Companies Act 1965 provides that members of the
company shall be liable to contribute to the assets of the company in the event of it being
wound up.

6. Common Seal
Section 16(5) of the Companies Act provides that upon the incorporation of a company,
the company shall have a common seal. The name and company number shall appear on
the seal (section 121(1)(a)
The Common seal is affixed on share certificates issued by the company and the seal also
may be affixed on contracts made by the company.

QUESTION 4(b)
Suggested Answers
4(b)(i)

Section 31 of the Companies Act 1965 stipulates that a company may alter its articles of
association by passing special resolution. Such alteration will take effect on the date of
resolution or such later date specified in the resolution but subject to following restrictions:
(i) The new article must not be illegal;
(ii) The new article must not be inconsistent with the company's memorandum of
association ;
(iii) The procedure for alteration must comply with the procedure prescribed in the
Companies Act 1965.
(iv) The new article requiring members to take or subscribe for more shares or
increase their liability will not bind existing members unless written consent
were given prior. (Section 33(3))
(v) 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)

Case: Brown v British Abrasive Wheel Co (1919) - Articles cannot be altered to opress
or discriminate the minority or to take away their rights or their property or the property of
the company. Thus a resolution which compels the minority to sell their shares to the
minority will generally be void.

4(b)(ii)
Alteration of the object Clause
• Section 28 (1) allows a company to alter its object clause by special
resolution.
• Notice of a general meeting where it is proposed to alter the object of the
company must be given to all members and debenture holder – Section 28 (3)
• Application for cancellation of an alteration to the objects clause must be
made within 21 days after the passing of the special resolution – Section 28 (6).
• This application may be made by holders of not less than 10% of the
company‟s issued capital - Section 28 (5)
• When such application is made, the alteration does not have any effect unless
confirmed by the court.

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QUESTION 4(c)
Suggested Answers
4(c)

The term promoter is used to refer to those persons who are involved in the formation of a
company and those persons who enter into contracts on behalf of a company before that
company has received its certificate of incorporation.
Persons who take steps related to establishing a new company are known as the
company‟s promoters. See Twycross v Grant. The Companies Act does not define the
term „promoter‟ except for the purpose of liability in regards to the company‟s prospectus
(section 4(1)).

Duties and responsibilities of promoters as follows:


 A promoter is in fiduciary relationship with the company promoted.
 Therefore, he is under obligation to act in the best interest of the company
promoted and avoid conflict of interest.
 He must disclose his interest in any dealings with the company promoted and
failure to do so is a breach of fiduciary duty.
 Full disclosure. The law requires the disclosure by the promoters to be full, frank
and explicit. See Gluckstein v Barnes (1900).
 If this is not possible, then disclosure should be made to the shareholders of the
company.
 A promoter must make full and frank disclosure of his interest in a dealing with the
company promoted.
 A promoter who acquires any property for the intended company is presumed to do
so as the trustee of the company and must hand over the property to the company
at the price it was acquired.
 Non-disclosure of promoter‟s interest in a dealing with the proposed company
entitles the company to the equitable remedy of recession of contract.
 Case: Farview Schools Bhd v Indrani a/p Rajaratnam (No 2)

QUESTION 4(d)
Suggested Answers
4(d)

The regulatory bodies associated with Corporate Governance are as follows :


(a) Companies Commission of Malaysia

The Companies Commission of Malaysia ('CCM") administers and regulates the


Companies Act 1965. The functions of the CCM are found in section 17 of the Companies
Commission of Malaysia Act 2001. The Chief Executive Officer of the CCM is the Registrar
of the Companies ("ROC"). The ROC ensures that companies in Malaysia and their
officers comply with the provisions of Companies Act 1965.

(b) Securities Commission

The Securities Commission ("SC") is established under the Securities Commission Act
1993. Section 15 of the Act deals with some of its core functions:
 toregulate matters relating to secutrities and derivatives;
 to ensure that provisions of the securities laws are complied with;
 to promote and regulate corporate governance and approved accounting standards
of listed corporations

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(c) Bursa Malaysia

Bursa Malaysia Securities Bhd issues and regulates the BMLR. All listed companies must
comply with the BMLR.

QUESTION 5(a)(i)
Suggested answers
5(a)(i)

Procedure and validity

For a public coompany, the procedure is prescribed in Section 128 of Companies Act,
1965. It applies regardless of any provision to the contrary in the public company's
memorandum and articles of association.

Removal of director of a public company is subject to Section128 provides that a director


can be removed only by an ordinary resolution passed at a general meeting. Special
notice of 28 days must be given to Andrew. Since the letter of removal is not consistent
with Section 128 therefore the letter is invalid.

As laid down in section128. Notice of intention to remove must be given 28 days before
the general meeting. At the meeting a resolutions passed by a majority of votes must be
obtained.

5(a)(ii)

Rights of a director to be removed

He has the right to make written representation as to why he should not be removed, have
it circulated to the members or if not sent, to have his written representation read out at the
meeting.

5(a)(iii)

Rights on payment of compensation

Section 128(7) provides that a person removed as a director may claim compensation or
damages arising from his removal. If Andrew had entered a contract of service with AAA
Bhd and the company breaches the contract by removing him, he may claim
compensation.

5(b)(i)
Ordinary shares
 Section 4 of the Companies Act 1965 defines 'equity share' to mean any share
which is not a preference share.
 Ordinary share also known as equity shares of the company. There are no special
right attached to an ordinary share. The holder is entitled to a dividend if declared
by the company (Section 365).
 The holder of ordinary share is entitled to surplus assets or profits in a winding up,
if there any. He is also entiled to attend, speak and vote at the company's general
meetings (Section 148(1))

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5(b)(ii)
Preference shares
 A Preference share is then defined in the same section to mean a share. Preference
shares carry restricted voting rights unlike ordinary shares which are usually given the
right to vote in all matters in a company.
 A Preference share does not entitle the holder to the right to vote at a general
meeting or to any right to participate beyond a specified amount in any distribution
whether by way of dividend or on redemption, in a winding up or otherwise.
 A Preference shares carry a prior right to receive an annual dividend at a fixed rate
and they are not entitled to participate in any additional dividend over and above their
specified rate. Ordinary shares do not carry any special dividend rights apart from an
implied right to participate in the company profits, if any.

5(b)(ii)
Redeemable preference shares
Are preference shares which are redeemable at the option of the company. The issue of
redeemable preference shares must be authorised by the articles and redemption can
only be effected on such terms and in such manner as provided by the articles. In
addition, section 61 further states that the shares cannot be redeemed unless they are
fully paid up and the redemption is out of profits or out of the proceeds of a fresh issue of
shares made for the purposes of the redemption.

5(c)
A limited company cannot return its capital to its members. However, the Companies Act
has a few exceptions :-
(1) Shares may be issued at a discount provided that requirements of section
59 are complied with.

(2) A companymay reduce its capital under section 64 if the company's


articles allow it, the members have passed a special resolution and the
court has approved it.

(3) A listedpublic company may purchase its shares on the Stock


Exchange if it satiefies the requirements in section 67A.

(4) Section 67(2) recognises three exceptions where a company may


provide financial assistance for the purchase of its own shares or the
shares of its holding company.

5(d)
Reconstruction
The term is generally used when one company transfers the whole of its business and its
assets to a new company and return the shareholders of the old company are given
shares by the new company. Where creditors are involved, reconstruction can be
achieved by using the scheme of arrangement or compromise procedure under Section
176. Where the company is in voluntary winding up, reconstruction can be carried out by
the liquidator by exercising his powers under section 270.

Scheme of arrangement
A scheme of arragement or compromise under section 176 is basically an arrangement
or compromise by which the rights of members or a class of members or the rights of
creditors or a class of creditors are varied. Section 176 can also be used for a company
(that is not hopelessly insolvent) and its creditors to arrive at a compromise, the purpose
of which is to allow a company to recover from its financial difficulties.

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QUESTION 6
Suggested answers
6(a)(i)

A realised gain resulting from the sale of a company's fixed assets may be used to pay a
dividend. This was decided in Lubbock v British Bank of South America (1892).
However, certain precautions were advocated in Foster v New Trinidad Lake Asphalte
Co (1901). It appears from Foster's case that it would be necessary to revalue the fixed
assets to see that the profit made from the sale was intended a capital profit. In other
words, the whole capital amount must be taken into consideration to see whether the
gain that was made was in actual fact a profit. Mimie would be advised to follow the
precaution stated in Foster's case.

6(a)(ii)

Mimie would be advised that if the articles state that dividends may be paid from "the
profits of the business', there must be business profits before dividends can be paid. A
profit derived from the sale of the company's fixed assets is not a profit of the business.
See Wall v London & Provincial Trust Ltd (1920)

6(a)(iii)
It is quite basic that the source of the profits to be used for paying the dividend must
derive from the company itself which declares and pay the dividend and not from another
company. In Industrial Equity Ltd v Blackburn (1977) the High Court of Australia
decided that the profits belonging to a subsidiary could not be applied to pay for the
dividend of its holding company, partly because „it is a natural consequence of the
separate personality of each company.‟ Applying the rule in Industrial Equity, hence,
Alpha Bhd may be advised that it cannot declare its dividends from profits its gets from its
subsidiary company, Beta Sdn Bhd.

6(a)(iv)
The answer to this question is YES. Since it is a share of profits, dividends need not be
paid in cash. Payment can be satisfied by distribution to the shareholders by way of
bonus shares. See Dickson v Federal Commissioner of Taxation (1939-1940).
Indeed, under section 365(5) it defines a dividend as including a payment by way of
bonus. Unless it is permitted by the memorandum or articles, a company may not pay
some shareholders in cash and others in kind. See Industrial Equity Ltd v Blackburn
(1977).

6(b)
Difference between members voluntary winding up and creditors winding up petition:-
There are generally two types of winding up, (i) compulsory winding up or winding up by
the court and (ii) voluntary winding up. Volunrtary winding up may be further devided into
members' voluntary winding up and creditors' voluntary winding up. A members' voluntary
winding up is only possible if the company is solvent.
(i) Members' voluntary winding up is commenced by a resolution of the
members. In a members voluntary winding up petition - directors have
to make a declaration of solvency (Section 257). Members are
responsible for appointing the liquidator.
(ii) If company is insolvent or subsequent to a members voluntary winding
up petition, the liquidator appointed by the members forms the opinion
that thedebts of the company will not be paid in full, it will then
proceed as a creditors winding up petition. The liquidator may then
summon a meeting of creditors and lay before them a statement of

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assets and liabilities of the company in accordance with section 259.
The creditors have the option to replace the liquidator with their own
nominee.
6(c)
The AGM must be held in the state in which the registered office is situated. Primas Sdn
Bhd is a company incorporated in Malaysia, so the registered office must be in Malaysia
and not in Macau.
6(d)

The Objects Clause - Doctrine of Ultra vires

• When an act is performed or a transaction is carries out which, though legal in itself,
is not authorized by the objects clause in the memorandum or by statute, it is said to
be ultra vires the company.
• Ultra mens BEYOND and Vires means POWER. i.e. Ultra Vires means beyond the
power.

Common law position

• Any act by a company, which is not specified in its object or power, is regarded as
void at common law.
• Such act is referred to as being ultra vires, that is beyond the power of the company.
• In the past, the doctrine of ultra vires was strictly applied to protect the interest of the
shareholders and creditors.
• Case: Ashbury Railway Carriage & Iron Co v Riche
• Case: Re Jon Beauforte (London) Ltd

Malaysian Position –

SECTION 20 (1)-(2) (a)(b)(c) and 20(3)

• In Malaysia, ultra vires doctrine has been modified by Section 20. The effect is that
if certain transaction is valid, the fact that the company did not have the capacity to
enter into it is immaterial.
• Section 20(1), by virtue of this section, ultra vires transactions are valid and binding
upon the company.
• However, it cannot be said that the ultra vires doctrine is not applicable altogether in
Malaysia. Companies are still expected to act within the scope of the objects clause
as can be seen from Section 20(2).
• The company‟s lack of capacity may only be relied in 3 situations:
a. Proceedings by any member or holder of floating charge to restrain the
company from doing any act, conveyance or transfer of property to or by the
company;
b. Proceedings by the company or member of the company against the present
or former officers of the company; and
c. Any petition by the Minister to wind up the company.

END OF QUESTION PAPER

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