LAW485

CORPORATE LAW
FINAL ASSESSMENT

SEMESTER:
MARCH 2020 – JULY 2020

NAME:
STUDENT ID:
GROUP: AC220B3C

PREPARED FOR:
QUESTION 2

Issue (1):

The first issue in the question is whether Mr. Seth is entitled to enforce his right under
the debentures?

Law (1):

According to Section 20 (a) of Companies Act 2016, a company will have a separate
legal personality that is independent from its members once it had been incorporated. This
means that in the eyes of law, an incorporated company is considered as an artificial legal
person and shall has its own rights and liabilities.

This was illustrated in the case of Salomon V Salomon & Co Ltd in which the fact of
this case is that Mr. Salomon, originally a sole – proprietor of manufacturing boots, decided to
incorporate a company and sold his business to the company in exchange for shares and
debentures with a floating charge, which made him a secured creditor of the company.
Unfortunately, the company later went into liquidation and the assets were not enough to meet
the claims of both secured and unsecured creditors. The liquidator discovered that the secured
creditor was Salomon himself and on decided to pay the unsecured creditors first, claiming that
the company and Mr. Salomon were one and therefore, Salomon was personally liable for its
debt. It was held by the House of Lords that after incorporation, Mr. Salomon and his company
were two different persons and therefore, he was not personally liable for the company’s debts
and as a member of the company, he can lend money to the company. The charge given by the
company to Salomon was valid and he was entitled to be paid his debt.

This principle was later reinforced in the case of Lee V Lee’s Air Farming Ltd where
Mr. Lee formed a company to conduct his business and owned all the shares of the company
except for one. He was not only the beneficial owner of all the shares in the company, but was
also the company’s sole director, its chief and only pilot. Mr. Lee was later killed while flying for
his company and his widow made a claim for workmen’s compensation under the New Zealand
Workmen’s Compensation Legislation. The issue was whether Mr. Lee was a worker since a
man cannot employ himself. The Privy Council held that Mrs. Lee was entitled for the
compensation since the company was a separate legal entity from Mr. Lee although he was in
full control of the company.
 It is further explained in Section 21 (1) that an incorporated company shall be capable of
unlimited capacity to carry on any business or activity including a) to sue and be sued, which
means that it is for the company to sue if there are wrongs committed against it and be sued if it
committed any wrongful act, not its members; b) to acquire, own, hold, develop or dispose of
any property, which means that a member of the company shall not own the property of the
company even though he owns all the shares in the company; and c) to do any act which it may
do or to enter into transactions including entering a contract with its members.

The power which is relevant to the question is that an incorporated company shall have
the capacity do any act it may do or to enter into transactions. It is immaterial that after
incorporation, the company is still being operated by the same person who previously runs the
business. This means that an officer of a company is able to enter into any contract with the
company including to lend money to the company and become a shareholder of the company.

Section 192 (1) also provides that a member of the company shall not be liable for the
company’s debt and liabilities just by being a member of the company. As explained in the case
of Salomon V Salomon Co Ltd, only the company is liable for its debts and obligations.

Application (1):

In applying to the present case, Seth Sdn Bhd is a body corporate and is a separate
legal entity by virtue of Section 20 (a) of Companies Act 2016. This means that the company
is entitled to enjoy all the benefits provided in Section 21 (1), including the power to do any act
which it may do or to enter into transactions including entering a contract with its members. As
Mr. Seth and his company are two different entities, he is entitled to enjoy all the rights as a
secured creditor as illustrated in the case of Salomon V Salomon & Co Ltd.

Conclusion (1):

In conclusion, Mr. Seth is entitled to enforce his right under the debentures.

Issue (2):

The second issue is whether the veil of incorporation can be lifted on the ground that it is
used to evade legal obligations?
Law (2):

It was explained in Section 20 (a) together with Section 192 (1) of Companies Act
2016 that an incorporated company and its members are two separate entities, and the
members of the company cannot be made liable for any debts and liabilities of the company just
because he is a member of the company.

However, in certain circumstances, the court will lift the veil separating the company and
its members. Once the veil is lifted, the company and its members are considered as one and
therefore, the members can be made liable for the obligations of the company. The veil shall be
lifted under two rationales in which the first one is provided by the Act or also known as statutory
exceptions and the other is judicial exceptions.

There are four situations under the statutory exceptions. The situations are a) Section
539 (3) and 540 (2) of Companies Act 2016 which provided that an officer of a company is
committing an offence if he contracted debts at the time where the company has no ability of
repayment and may be declared by the court to be personally responsible for the debt; b)
Section 540 (1) which states that an officer, knowingly involved himself in fraudulent trading,
shall be personally liable for the liabilities he incurred; c) Section 140 (1) of Income Tax Act
1967 which explain about avoidance of payment of tax; and d) Section 46 of Employee
Provident Fund which explain the offence on failure of a company to remit contribution.

Under the Judicial exception, there are 5 situations where the veil of incorporation shall
be lifted which are a) when the company is used to evade legal obligation; b) where the
company is used to commit fraud or improper purpose; c) where the company is employed as
an agent or alter ego of its controller; d) when the court is asked to promote justice or to
exercise an equitable discretion; and e) when groups of company are in reality a single
economic unit.

Based on the question, the related law falls under the judicial exception, which is when
the company is used to evade legal obligations. This means that the company is incorporated
so that the officer can avoid his contractual obligations or do the things he may not do on his
own.
 The example can be seen in the case of Jones V Lipman. In this case, Lipman who
entered into a contract to sell his land to Jones, changed his mind and decided to not sell it. To
avoid his obligation, he set up a company and transfer the ownership of the land to the
company. Jones then sought an order of specific performance against Lipman and the
company. The company put up a defense that it was not the party against whom specific
performance could be ordered. The court held that the company was a device used by Lipman
to avoid his contractual obligations in the eyes of law, and therefore, both Lipman and the
company were ordered to perform the contract and transfer the ownership of the land to Jones.

Another example is illustrated in the case of Gilford Motor Co V Horne where in this
case, Horne was formerly an employee of Gilford Motor and signed a contract where he agreed
not to solicit the company’s customers after the termination of his employment. However, after
leaving the company, Horne set up his own company and solicit the customers of Gilford Motor
through the company. It was held that the company incorporated by Horne was used as a sham
which enabled him to evade his legal obligation.

Application (2):

As seen in the present case, Alexa Sdn Bhd is used by Alexa to avoid her legal
obligation to not solicit or entice away the customers of Seth Sdn Bhd. In this situation, the court
will lift the corporate veil and ignore the separate entity of the company and its members in
order to identify the real person behind the wrong conduct which is Alexa who used Alexa Sdn
Bhd to breach her contract with Seth Sdn Bhd. Once the veil is lifted, Alexa can be held liable
for breaching her contractual obligation as illustrated in the case of Gilford Motor Co V Horne.

Conclusion (2):

In conclusion, the veil of incorporation can be lifted on the ground that it is used to evade
legal obligations.
QUESTION 4

Issue (1):

The first issue in the question is whether Melody of the Night Sdn Bhd is entitled to reject
the claim made by the executors for the widow’s pension?

Law (1):

In accordance with Section 2 (1) of Companies Act 2016, the word “director” is defined
to include a person who holds the position of a director of a company regardless of whatever
name he is called by, a person who controls the actions of the board of directors with or without
appointment and a substitute director.

A director of a company is responsible in exercising the fiduciary duties of a director.

There are three fiduciary duties of a director. The first one is duty of director to act for proper
purpose and in good faith in the interest of the company under Section 213 (1) of Companies
Act 2016. Next, the duty of exercising skill, care and diligence in accordance with Section 213
(2) which means a director of a company is expected to be capable of performing his duties as
what is expected from him or any other directors and exercising any additional skills or
experience that he might in fact have. Last, the duty of a director to avoid conflict of interest
which falls under Section 218 (1).

The related provision for the question falls under Section 213 (1) of Companies Act
2016. The first limb of this provision explained that it is the duty of a director to perform his duty
in a good faith and in the best interest of the company. This means that a director must always
prioritize the interests of the company while performing his duties and. The second limb of this
provision provided that a director must exercise his power for a proper purpose which means
that a director must employ the power and assets that he is entrusted with for the purpose they
were given and not for any collateral purpose.

The example for duty to act for good faith was illustrated in the case of Re W & M Roith
Ltd where Mr. Roith, who was a director of the company, was terminally ill and wanted to
provide for his wife. He then entered into a contract with the company to pay a pension to his
widow if he die without taking into consideration the interest of the company. After Mr. Roith
died, his executors put in a claim for his widow’s pension. It was held that the company was
entitled to reject the claim as the contract was not made in good faith and therefore, was not
binding on the company.
 An example for duty to act for proper purpose can be seen in the case of Howard Smith
Ld. V Ampol Petroleum Ltd. The fact of this case was that Howard Smith and Ampol, who
owned shares in Miller, were competing to take control of Miller. The directors of Miller thought
that it would be for the best interest of the company to be taken over by Howard Smith and
issued shares to Howard Smith in order to dilute Miller’s share capital. This made Howard
Smith’s bid more likely to succeed. Ampol sought a declaration from the court that the share
issue was undertaken for an improper purpose. It was held that the directors had misused their
powers as the issue of shares was not to raise money but to assist Howard Smith to take over
the company.

Application (1):

In the present question, Mr. Night had ignore the interest of Melody of the Night Sdn Bhd
by breaching the duty that had been provided in Section 213 (1). As Mr. Night had neglected
his duty as a director by putting his wife’s interest first while making the decision to enter into the
contract with the company, the company is entitled to reject the claim which had been resulted
by Mr. Night’s decision as illustrated in the case of Re W & M Roith Ltd.

Conclusion (1):

In conclusion, Melody of the Night Sdn Bhd is entitled to reject the claim made by the
executors for the widow’s pension.

Issue (2):

The second issue in the question is whether Ka and Limba can be held liable for breach
of duty to avoid conflict of interest and not to profit from their position?

Law (2):

It was provided in Section 218 (1) of Companies Act 2016 that it is the duty of the
directors to avoid any conflict of interest with the company. This means that without the consent
or ratification of a General Meeting, a director is prohibited, to gain directly or indirectly benefit
for himself or any other person or cause loss to the company by a) using the company’s
property; b) using any information acquired by virtue of his position as a director or officers of
the company; c) using his position as such director or officers; d) using any opportunity of the
company which he became aware of while performing his duty as the director or officer of the
company; and e) by engaging in business which is in competition with the company.

As provided in Section 218 (1) (c), a director will breach his duty if he misuse his
position as the director to make profit for himself and cause loss to the company. This means
that a director shall not, in whatever situation, use his position in the company for his personal
interest. A director is also prohibited from taking advantage of a business opportunity at the
expense of the company as provided in Section 218 (1) (d). This means that a director may not
divert any opportunity that presents itself to the company to another company or to other
interests associated with him.

The example was shown in the case of Cook V Deeks where three out of four directors
at Toronto Construction Company had formed a new company to enable them to get a contract
which was formerly awarded on behalf of Toronto Construction Company. The fourth director
who does not involved in the said act sued on behalf of Toronto Construction Company. It was
held that the contract belonged to the company and the directors were not entitled to
expropriate it to make it belong to them.

Section 218 (1) (e) provided that a director shall not enter into a competition with a
company, which means that a director is prohibited from engaging in a business which is the
same as the company’s business. The example for this provision could also be seen in the case
of Cook V Deeks.

Another example can be seen in the case of Personal Automation Mart v Tan Swee
Sang in which the fact of this case is that the defendant was the director of the plaintiff. She
then set up another company in direct competition and diverted a key business project to that
company and also paid herself more salary than due. The judge held that there was a breach
and she was ordered to pay damages. Even if the company did not make losses, but there is a
conflict and the director make a profit, he has to be accountable for the profit.

By virtue of Section 218 (2) of Companies Act 2016, a director who is charged with the
breach of duties shall be committing an offence and, if found guilty, may be liable to
imprisonment not exceeding 5 years or a fine not exceeding RM3 Million or both. Unlike under
Section 132 of the Companies Act 1965, the new provision does not provide for civil liability
where the officer in default would be liable to the company for any profit made by him or for any
damage suffered by the company because of the breach.
 However, the company may claim damages during the event of winding up in
accordance with Section 541 or claim other remedies under other written law as provided in
Section 220 such as the company may claim the profit made by the director, claim equitable
compensation or the exercise of power which is in breach of the director’s duty may be declared
to be invalid.

Application (2):

In applying to the present question, Ka and Limba had breached their duty as the
directors of Melody of the Night Sdn Bhd as they had misused their position as directors by
using it to enter into the contract personally leading them to acquire the opportunity which could
have been used by the company to gain profit through a lucrative construction contract to by
virtue of Section 218 (1) (c) and Section 218 (1) (d). They also set up a new company that
would be in rivalry with Melody of the Night Sdn Bhd which was explained in Section 218 (1)
(e). As illustrated in the case of Cook V Deeks, Ka and Limba could not take benefits of the
contract for themselves when it was originally an opportunity of the company and if found guilty,
they are liable to punishment specified under Section 218 (2).

Conclusion (2):

In conclusion, Ka and Limba can be held liable for breach of duty to avoid conflict of
interest and not to profit from their position.