QUESTION 1

Aladdin is the CEO of Magical Homes Sdn. Bhd. He signed a joint venture agreement
on 16 November 2009 to develop land in Christmas island to construct residential
homes, with Jaffar, an undischarged bankrupt. Jafar was appointed the Managing
Director of the development company Christmas Magic Sdn. Bhd. pursuant to a series
of contracts between 16 November 2009 and 13 January 2010. Aladdin did not know
that Jaffar was an undischarged bankrupt and sow seeks to rely on section 38 IA 1967
and sections. 24 and 66 of the Contracts Act 1950 for a declaration that Jaffar and his
nominees did not have any enforceable rights under the contracts. Advise Aladdin and
Jaffar on the legality of the contracts entered into and their respective rights and
liabilities.

The first issue that arise is whether the contracts entered into by both Aladdin and
Jaffar are valid and enforceable?

According to S.38 (1) (d) of the Insolvency Act 1967 (IA), where it clearly states that
the bankrupt shall not carry on any business or become a director of the company
without the prior permission of the DGI. In Topps Company Inc v Mall Jaya Sdn Bhd,
S.38(1) and S. 109(m) & (d) of BA clearly prohibits an undischarged bankrupt from
otherwise directly or indirectly taking part in the management of any company. If the
bankrupt has failed to comply with this section, he will be punished for contempt of
court pursuant to S.38 (2) of the IA 1967. On a side note, S.24 of the Contracts Act
1950 (“CA 1950”) had also stated that an agreement shall not be lawful it is forbidden
by law in the very first instance. In Kwan Chew Shen v Citibank NA [1987] 2 CLJ
(Rep) 704 where it was held that there appeared to be no blanket provision anywhere
in the Bankruptcy Act to the effect that a bankrupt was incapable of entering into a
contract. It is of significance to note the following passage by VC George J (as His
Lordship then was) from the case to give the ruling its proper context once a person is
adjudged bankrupt the right to enter into contracts ceases until such time as he is
discharged. Besides, we have also the case of Foo Fatt Chuen v Jacobson Cheong
Weng Hin & Ors [2012] 8 MLJ 522 where again the court has affirmed that since the
undischarged bankrupt shall not carry on any business without the permission by the
DGI, any subsequent contracts entered were also void.

By applying to current situation, Jaffar who is an undischarged bankrupt has become

the Managing Director of the company named Christmas Magic Sdn. Bhd. And had
even entered into a few contract. Aladdin who is a CEO of another company. Clearly,
this violates S.38 (1) (d) when Jaffar who is an undischarged bankrupt has become the
director of the company without any prior sanction from the DGI. In line with these
arguments, even though none of the express provisions in IA 1967 have expressly
prohibited Jaffar from entering into contracts with Aladdin. However, as implied from
the cases, his right to enter into a contract ceases at the moment he is being adjudged
bankrupt. What is worse here is that Jaffar has violated the fundamental rule of S.38
(1) (d) in which he shall not be allowed to become a managing director or carry on
any business by entering into contracts with Aladdin without “going through” the DGI.
This would undeniably render the contracts void and unenforceable since no
agreement shall be held valid if it is expressly forbidden by the law as per S.24 of CA
1950.

Therefore, the contracts entered into by both Aladdin and Jaffar are invalid and
unenforceable. Hence, Jaffar and his nominees did not have any enforceable rights
under the contracts.

Since the contracts can be voided, it leads to the next issue of what are the possible
rights and remedies that the other party which is Aladdin may legally enforce? As
provided above, the contracts entered between Jaafar and Aladdin are void ab initio

According to S.66 of the CA 1950, when the agreement is void, all the parties shall be
restored to their original position if they have received any advantages under such
void agreement. This section has also been applied in Foo Fatt Chuen v Jacobson
Cheong Weng Hin & Ors [2012] 8 MLJ 522 which bears the similar facts with our
given facts here. In that case, the court held that the advantage received by the first
defendant and the nominees shall be restored to the plaintiff. This is because a
contemnor ought not to be permitted to enjoy, or keep the fruits of his contempt, is
also stressed, based on the argument that s 38(2) deems it a contempt of court for the
bankrupt to commit any default under s 38(1).

On the facts, any advantage whether it is pecuniary or non-pecuniary in nature

received by Jaafar or his nominees shall be restored to Aladdin because he should
keep the fruits of his contempt in which he can even be punished for contempt of
court under S.38 (2) upon violating S.38 (1) (d) of IA 1967. Therefore, it will be the
right of Aladdin to be restored to his original position as if the contract has not been
occurred. Not only that, but Aladdin is also entitled to sue Jaffar for fraudulent
misrepresentation because on the facts he did not honestly inform Aladdin that he is
actually an undischarged bankrupt before entering into the contracts. Relying on the
case of Newlake Development Sdn Bhd v Zenith Delight Sdn Bhd & Ors [2021] 9
MLJ 581 where the court stated that fraudulent misrepresentation comes under the tort
of deceit. To succeed in his claim, the respondent in this case needs to establish that
he had acted in reliance on the fraudulent misrepresentation and that the
representation was false. As a result, he had suffered damage. Based on the given
facts, we are clear that Aladdin did not know that Jaffar was an undischarged
bankrupt and by purely relying on the fraudulent misrepresentation by Jaafar, he
entered into the contracts with Jaffar. As a result, he had suffered damage.

Therefore, it is very likely that Aladdin would succeed in his claim for fraudulent
misrepresentation against Jaffar. However, in suing an undischarged bankrupt for
these remedies, Aladdin is required to go through the DGI which means Aladdin has
also the right to seek remedies through the DGI. Whereas for Jaafar, it is very clear
that he has acted dishonestly and fraudulently where without any knowledge and
permission of the DGI, he has been appointed as a managing director of the company
and continue to carry on the business. S.38 (2) of IA 1967 has given the power of DGI
to punish Jaafar on the application of the DGI for not complying with the bankruptcy
order.

Prepared by ,

Marvin Raja
1161100438