NUR DINIE BINTI SHARIFFUDDIN

DLA19053075

TAKE HOME TEST COMPANY LAW

NAME: NUR DINIE BINTI SHARIFFUDDIN
MATRIC NUMBER: DLA19053075

QUESTION 1
i. The potential liability on the part of Fauzi regarding the resolution.

Issue:
The first issue arises in this case is whether Fauzi who is one of the directors of the
company had breached his duties as a director during his dealing with the client,
that eventually affected the resolution, or not?

Law:

Under the common law, the director’s duties can be divided into two namely loyalty
and good faith and care and diligence. Loyalty and good faith duty can be further
divided into four duties; the duty to act in good faith in the interests of the company,
the duty to act for a proper purpose, the duty to retain discretion, and the duty to
avoid conflicts of interests.

Based on this case, Fauzi had actually breached more than 1 duty as a director,
which are, the duty to act in good faith in the interests of the company, the duty to act
for a proper purpose, the duty to retain discretion, and the duty to avoid conflicts of
interests.

Firstly, duty to act in good faith in the interest of company. The directors have a
fiduciary position and must therefore exercise their power in good faith and in the
interests of the company as a whole. By view of the case of Merchesi v Keogh: such
duty means “to act honestly refers to acting bona fide in the interest of the company
in the performance of the functions attaching to the office of director”.

While under Malaysian Law, this is in line with Section 213(1) of the Companies
Act 2016 which provides that a director of a company shall at all times exercise his
powers in accordance with the Act, for a proper purpose and in good faith in the best
interest of the company. According to Ford’s Principles of Corporations Law, in
relation to the breach of the director’s duty in endangering the interests of the
company as an independent entity, the situations would be like the director attempts
to divert or expropriate business opportunities that were supposed to be enjoyed by
the company to himself or other related parties, the director makes secret profits for
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himself, the director exposes the company to liabilities to secure his own personal
interests; or the director prioritizes the advancement of interests of third parties (for
example in cases of nominee director, the nominator) over that of the interests of the
company. 

Secondly, the duty to act in good faith in the interests of the for a proper purpose.
The director can act honestly in what he considers to be the company's interest and
yet still be in violation of his fiduciary duties. This will arise if he misapplied the
property of the company or used the authority given to him for the opposite
purposes, a director is under an obligation not to disclose information which is
confidential to the company and not to abuse corporate opportunities. For example,
avoid situations where personal interests conflict, or may conflict with the company.
For instance, by referring to the case of Mills v Mills: Dixon KJ mentioned that the
directors of a company are fiduciary agents, and a power conferred upon them
cannot be exercised in order to obtain some private advantage or for any purpose
foreign to the power.

Under Malaysian Law, by virtue of Section 218(1) of the Companies Act 2016, the
provision spelled out that the directors are prohibited from making secret profits;
using corporate information; using his position as director and taking/ using corporate
opportunity, which is in competition with the company, to gain directly or indirectly a
benefit for himself or any other.

Thirdly, directors obliged with the duty to retain discretion. That’s mean, directors
must not place themselves in a position where they are unable to make decisions in
the best interests of the company; for example, entering into transactions where they
would have to put the interests of a third party ahead of the company’s interests.
They can also delegate with proper authority. This duty means the directors cannot
undertake that they will not exercise the powers given to them in the company’s
constitution or under the Act. This is because directors must always act in the best
interests of the company.

Lastly, the duty to avoid conflicts of interest. Directors should not enter into
engagement in which there is possibility that their personal interest could conflict with
those of the company which they were bound to protect. In Malaysia, Section 221 (1)
of the Companies Act 2016 provides that every director of a company who is in any
way, whether directly or indirectly, interested in a contract or proposed contract with
the company shall, declare the nature of his interest at a meeting of the board of
directors as soon as is practicable after the relevant facts have come to the director’s
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knowledge. Therefore, by effectively disclosing his interest, the director has avoided
facing the consequences of a conflict of interest. 

The objective of Section 221 was highlighted in the recent decision of the Court of
Appeal on 11th February 2020 in the case of Delta-Pelita Sebakong Sdn Bhd v.
Wong Hou Lianq & Ors And Other Appeals [2020] MLRAU 41. In the wise words
of Her Ladyship Rhodzariah Bujang JCA: It is obvious that the said section is rooted
in the need to ensure transparency in the dealings by the management of the
company and the moral integrity of those helming the administration of the company.

Application:

Applying the laws, principles and provisions stated above in current case of Fauzi,
we can see that as a director, he had breached the duties of loyalty and good faith,
that subdivided into four duties; the duty to act in good faith in the interests of the
company, the duty to act for a proper purpose, the duty to retain discretion, and the
duty to avoid conflicts of interests.

For the first duty, which is the duty to act in good faith in the interests of the
company, we all know that upon incorporation, a company acquires a legal
personality separate from that of its member. So, when Fauzi as the director who
also one of the members of the company attempts to redirect or deprive business
opportunities by channel and contract those projects to his own firm, that were
supposedly to be enjoyed by the company(Zupertech Sdn Bhd), clearly, it is not
consider as company’s interest, but it has been done for his personal interest.

For the second duty to act for a proper purpose, in this case, Fauzi has misused his
position and power as a director who given trust and responsibility to deal with the
client and to disclose the details of negotiation in board meeting. However, during his
presentation of progress of the project negotiation, he persuaded the board to not
proceed with further negotiation with the clients and participated in the vote
together with other directors. All of the acts stated above were done in order to gain
himself personal interests.

Lastly, he breached the duty to retain discretion and to avoid conflicts of interest
when he is in position having personal relationship with the clients and unable to
make decisions in the best interests of the company. He entered into transaction that
he set aside company’s interest for the sake of his own interest. He even neither
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disclose about his personal relationship with the clients to the other members of the
company, nor the fact that he has his own private firm providing the same services
with the company.

Answer:

Yes, in this case, Fauzi had actually breached his duties as a director of the company
when he abused the trust to influence the bord of directors, that eventually affected
the resolution, and he will potentially be liable for all the breach done.

Conclusion:

Therefore, Faiz as the member of the company has strong reasons and authorities to
bring further action against Fauzi like applying for a lawsuit. Fauzi may be liable for
breach of duties of loyalty and good faith that he owed the company.
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ii. The possibility for Faiz to apply for an injunction order to prevent the board from
acting on the resolution, AND the procedures.

Issue:

The second issue in this case is, is it possible for Faiz as a member of the company
to apply for an injunction order to prevent the board from acting on the resolution? If
possible, what kind of procedures that he may go further?

Law:

This case involved the breach of directors’ duties; therefore, it is a wrongful act
against company. If a wrong has been committed against the company, the member
cannot take action on behalf of the company based on the principle of Foss v
Harbottle. The ruling in Foss v Harbottle is known as Proper Plaintiff Rule. In the
case of Foss v Harbottle, 2 members out of 10 alleged that the directors had caused
the company to buy a piece of land at an inflated price from another company in
which the directors and some other members had interest. The minority members
took legal action against the directors. Hence, the court held, the wrong was
committed against the company. Only the company has the legal standing to sue,
not members.

However, if the wrongdoer is in control and is authorised by the company’s

constitution to decide whether the company is to take action to enforce its rights, the
wrongdoer will not proceed with an action against himself and eventually the
company is at disadvantage by relying absolutely on this rule. Because of that, there
are four common law exceptions laid down for this rule namely fraud on minority,
special majority, personal rights and when the justice requires. These exceptions
allow members to bring further action on the wrongdoers. And for this case, there are
two exceptions might be applicable which are the exception of fraud on minority and
the exception when the justice requires.

The first exception which is of fraud on minority arises from the general principle that
holders of power should not abuse their powers which is in line with s213 of CA
2016. There are 2 elements need to be proven by the plaintiff which are, there is
fraud and the wrongdoers are in control. To prove there is fraud, it is sufficient for
the plaintiff to prove that the wrongdoers abused their powers and they are still in
control of the company. This principle has been mentioned in the case of Abdul
Rahim bin Aki v Krubong Industrial Park (Melaka) SB & Ors (1995). For the
element of the wrongdoers are in control, the plaintiff needs to prove that the
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defendant is in control because of his authority and power to the company and the
members. Therefore, pursuant to the case of Ting Chong Maa v Chor Sek Choon
(1989) where the plaintiff and defendant had equal shares in the company, but the
defendant was the managing director. Clearly the defendant was in control.

The second exception that may be applied in this case is the exception when the
justice requires. The common law exceptions to the rule in Foss v Harbottle can
never be conclusive. It has a catch-all exception that the court will allow a member to
take action against the wrongdoer where the justice of the case so requires. For
instance, in the case of Taylor v National Union of Mineworkers (Derbyshire
Area) shows that a member by virtue of his right may sue against a threatened lawful
act and may set aside the unlawful act by bringing a derivative action which are
proceedings brought by a member of a company in respect of a cause of action
settled in the company and seeking relief on behalf of the company.

Hence, in order to apply for these exceptions for the sake of injunction over the
wrongdoers, there are 3 types of procedures available. Firstly, Personal Action. This
procedure allowed the member to take action if he is deprived of his rights as a
member of if his property is expropriated. For instance, refer to the case of Pender v
Lushington which confirms that a company member's right to vote may not be
interfered with, because it is a right of property. Furthermore, any interference leads
to a personal right of a member to sue in his own name to enforce his right.

Secondly, Representative Action. This action is taken by a member on behalf of

himself as well as other members. He represents himself and other affected
members for the rights of members generally are affected. This will avoid multiplicity
of actions in respect of the same matter.

Thirdly, Derivative Action. By applying for this procedure, although the proper
plaintiff is a company, the court allows the minority members to commence action
against the wrongdoers. As the company is the victim, it has to be made a party to
action and will be bound the court judgment. The court can order damages be paid
by the wrongdoers to the company. The result of derivative action will also bind
members, so this will avoid multiplicity of proceedings. The rights of minority
shareholders to compensation in a derivative action under common law illustrated in
the case of Wallersteiner v Moir, where the court recognized that a minority
shareholder who brings a derivative claim may have a right of compensation of his
costs against the company. This right is only available when a minority shareholder
has acted bona fide in bringing the claim. 
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The common law derivative action has been abrogated by virtue of section 347 of
CA2016: The right of any person to bring, intervene in, defend or discontinue any
proceedings on behalf of the company at common law is abrogated.

If the action brought satisfied the court, surely there will be statutory remedies
granted. By referring to section 351 of CA 2016, this provision provides remedies in
a situation where a person engages or intends to engage in a conduct which is
against the CA 2016. ROC or any person whose interests have been affected may
apply to the court for remedies such as: restrain order, order for wrongdoer to
perform acts, interim injunction, payment of damages.

Application:

Applying the principle of Proper Plaintiff Rule in current case and the exceptions
applicable as stated above, it can be seen here that at first, Faiz as the member of
the company may not have the right to take an action over the wrongdoer, Fauzi as
the Proper Plaintiff Rule state the member cannot take action on behalf of the
company, based on the principle of Foss v Harbottle. However, in order to prevent
injustice because of Fauzi, the wrongdoer who also the director of the company who
has control over and authorised by the company’s constitution decided to not
proceed with an action against himself, therefore, few exceptions laid down.

First exception which is fraud on minority is applicable in this case since the elements
to prove the fraud might be arise here. To prove there is fraud, it is sufficient for Faiz
as the plaintiff to prove that the Fauzi had abused his power as the director who
obliged to deal with the clients and eventually conducted breach of duties and he is
still in control of the company.

For the second exception which is when the justice requires, it can easily be proven
as there are clear there was an abused of trust by Fauzi when he contract those
projects to his own private firm, he never disclose his personal relationship with the
clients to the board of directors and he actually gained his personal interest by
breaching his duties as director.

So, by applying those exceptions, Faiz may bring an action by using Derivative
Action procedure instead of Personal Action or Representative Action since this
offence deprived the right of company, not personal right and derivative action will
also bind members, so this will avoid multiplicity of proceedings. The court will allow
Faiz as one of minority members to commence action against Fauzi. As the company
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is the victim, it has to be made by a party to action and will be bound the court
judgment.

Answer:

Yes, it is possible for Faiz to apply for an injunction order as mentioned in the
provision of section 351 of CA 2016.

Conclusion:

In conclusion, Faiz as the member of the company may apply for those exceptions of
Proper Plaintiff Rule and file a lawsuit against Fauzi the wrongdoer who also the
director of the company. Hence, if the court satisfied, the injunction order that
provided in section 351 will be granted.
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QUESTION 2

A. Discuss the effect of object clause under the Companies Act 2016

An objects clause can be defined as a provision in a company's constitution stating

the purpose and range of activities for which the company is carried on. Actually, the
objects clause is set by the shareholders for directors to conduct the company’s
businesses within provision of object clause.

If the business falling within the range of object clause and carried out in accordance
with the object clause, there would be intra vires or in easiest word, it have no effect
at all, but any business or activities that falling over the range of object clause would
be ultra vires. In the context of company law, “ultra vires” describes a doctrine
whereby a company cannot do anything which is beyond the object clauses
contained in its memorandum of association.

In the words of Lim Beng Choon J, delivering the judgment of the High Court
in Public Bank Bhd v Metro Construction Sdn Bhd: “A company’s objects as
stated in its memorandum cannot be departed from. An attempted departure is as
invalid as if the memorandum were a statute of incorporation; it is ultra vires the
company and cannot be validated by assent of a general meeting of the members or
by taking judgment against the company by consent or estoppel.”

The effect of the contract being found to be ultra vires is, the transaction is invalid or 
void regardless of the intention of the partners. If the directors have entered into a
venture that may not come under the scope of the company's object clause, the
directors will be directly responsible for any damages caused. Any shareholder can
take civil action against the directors and claim that they be compensated for the
damages and losses suffered.

Under Malaysian Law, by virtue of section 14(3) CA2016 on the other hand requires
the application for the incorporation of a company to include the nature of business of
the proposed company. A company is also required to state the nature of its business
in its annual return as section 68 CA2016. As for company limited by guarantee, it is
a requirement to state its objects in its constitution by virtue of section 38(3). For
companies with constitution, section 35(2)(a) of the same act provides that if the
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constitution states the objects of the company, the company shall be restricted from
carrying on any business or activity that is not within those objects.

Section 21 of CA 2016 provides 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 (a) to sue and be sued; (b) to acquire, own, hold,
develop or dispose of any property; and (c) to do any act which it may do or to enter
into transactions; and shall have the full rights, powers and privileges for the
aforementioned purposes.

The fact that section 21(1) CA2016 already stated that a company has full capacity
to carry on or undertake any business or activity, it is not realistic to expect
outsiders dealing with a company to examine the company’s constitution in
order to ascertain if the company is acting within its object clause or not. It would
impose great inconveniences and would hinder normal business practice.

Therefore, section 39 of CA2016 provides that the doctrine of constructive notice

does not apply to the contents of the constitution or any documents relating to the
company which has been registered by the ROC. Thus, an outsider can assume
that he is dealing with the company in its full capacity. He can also rely on
Turquand’s rule.
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B. Explain the significance of Turquand’s rule.

Turquand's rule or the "indoor management rule" has been laid down to encourage
business dealing as an individual dealing with a corporation in good faith is entitled to
make some judgments about the regularity of the company's internal affairs and
dealings. Following the principle of Turquand’s rule, a person dealing with the
company is entitled to presume that all internal procedures of the company have
been complied with. Therefore, Turquand’s rule is a practical approach to solve
problems facing by outsiders because the outsiders would have difficulty to discover
what is going on in the company.

By virtue of Turquand’s rule, a third party or the outsiders who was not aware that the
company lacks of capacity or acts beyond its object clause when the contract was
made, can enforce the contract, as the company is still bound and cannot use
such incapacity as a defence to avoid the contract.

Section 213 CA2016 provides that it is the duty of directors, CEO, CFO, COO and
any person primarily responsible for the management of the company to exercise
his powers for a proper purpose and in good faith in the best interest of the
company. Thus, it should follow that the company could sue the director for acting
ultra vires of the company’s object clause.

Section 39 of CA 2016, stipulates that no person shall be deemed to have notice or

knowledge of the contents of the constitution or any other document relating to a
company, due to the fact that the constitution or document has been registered by
the Registrar or that it is available for inspection at the registered office of the
company, with the exception of documents relating to instrument of charges.

In a nutshell, it is real that many who has dealings with companies do not routinely
perform checks on the company’s documents. Accordingly, section 39 helps to
reinforce the protection afforded by the Turquand’s rule. 
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QUESTION 3

i. The historical development of the above division under the English law.
The creation of a separate board of directors to control or rule or oversee a
corporation has taken place over legal history on a gradual and indefinite basis. Until
the end of the 19th century, it was typically thought that the general meeting which
consists of all shareholders was the sole organ of the corporation and that the
board of directors merely served as a representative of the company under the
control of the shareholders of the general meeting. This concept was applied in the
case of Isle of Wight Rly Co v Tahourdin (1884) LR 25 Ch D 320).

However, by 1906, the English Court of Appeal had made it clear in the decision of
Automatic Self-Cleansing Filter Syndicate Co Ltd v Cuninghame [1906] 2 Ch 34
that the division of powers between the board and the shareholders in general
meaning depended on the construction of the articles of association. In the sense of
this development, where the Board exercised its management decisions on the basis
of the powers conferred on it by the Articles, the shareholders in general meeting did
not intervene with their legal exercise. The articles of the company shall serve as a
contract under which the shareholders have decided that "the directors and the
directors shall manage themselves". In easiest word, the general meeting could not
interfere with their lawful exercise.

Further, in John Shaw & Sons (Salford) Ltd v Shaw [1935] 2 KB 113 by Greer LJ
as follows: “A company is an entity distinct alike from its shareholders and its
directors. Some of its powers may, according to its articles, be exercised by directors,
certain other powers may be reserved for the shareholders in general meeting. If
powers of management are vested in the directors, they and they alone can exercise
these powers. The only way in which the general body of shareholders can
control the exercise of powers by the articles in the directors is by altering the
articles, or, if opportunity arises under the articles, by refusing to re-elect the
directors of whose actions they disapprove. They cannot themselves usurp the
powers which by the articles are vested in the directors any more than the directors
can usurp the powers vested by the articles in the general.”
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In Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821, the Privy Council
highlighted that directors, in the course of exercising their management powers, may
take a decision, and such decision may not necessarily be in accordance with the
wishes of members, and in such situation, members cannot interfere with the
directors’ powers.

In conclusion, the issue related to division of powers between directors and members
in a company under English law has been evolved from the powers only rely on the
members to the division of power that based on construction of company’s article.

ii. The effect of the new section 195 of the Companies Act 2016 to the concept of
division of powers between directors and members.

The Companies Act 2016 incorporate a new section 195 which gives the rights to
members to question, discuss, comments and make recommendations at
general meetings. Section 195 allows members to participate in the management of
the company by extending their recommendation to the board of directors. Such
recommendation can be made through members’ general meeting. This provision
stipulates on the members’ rights for management review.

Subsection (1) provides that the chairperson of a meeting of members of a company

shall allow a reasonable opportunity for members at the meeting to question, discuss,
comment or make recommendation on the management of the company. Subsection
(2) mentioned that a meeting of members may pass a resolution under that
section which makes recommendations to the Board on matters affecting the
management of the company. Subsection (3) further states that any
recommendation made under subsection (2) shall not be binding on the Board,
unless the recommendation is in the best interest of the company, provided
that: (a) the rights to make recommendations is provided for in the constitution, or (b)
passed as a special resolution.

Therefore, it introduces two different natures of recommendations which can be

extended by members to the board of directors pertaining to management matters of
the company. First and foremost, is non-binding recommendation, and secondly, is
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binding recommendation on the board of directors subject to fulfilment of the

either two conditions stated in the subsection (3).

The recent addition of section 195, which acts as a medium for members to express
their opinions and suggestions to directors, and where directors can take these views
and advice into account, is considered to be one of the key reforms under the
Companies Act 2016.

However, this integration has led to diverse views from legal experts in Malaysia.
Chan W. M. (2017) found out that, by allowing members to participate with the
administration of the company, the division of powers between the members and
their directors becomes unclear and, therefore, it is not obvious who can decide if the
recommendation made by the members is in the best interest of the company.

Mohd Sulaiman et al. (2018) have addressed the dispute between section 195, which
has an impact on a member's ability to request a meeting, and the conventional view
that forbids members from holding a meeting of members to pass a resolution on
issues beyond the expertise of the directors. This conventional view has been
established in the case of NRMA Ltd v Parker (1986) 6 NMSWLR 517.

As a conclusion, the implementation of section 195 of the Companies Act 2016

somehow disturbs the clear separation of control and regulation of companies by
opening doors for members to forward their recommendations on the management of
the company to their board of directors.
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