April 2010 Part C, Question 1.

Cempaka Sdn. Bhd.

1.Shazwani Ghani 2.Firdaus Hamzah 3.Faisal Aziz

a) I. whether the directors had use the fund of company in proper purpose. • Director duties developed under common law:

1. Duty of Care, Skill and Diligence 2. Duty of Loyalty and Good Faith

• The director has the fiduciary duties owed to the company. Under the duty of loyalty and good faith, the director must act for proper purpose for the best interest of the company. Based on the case of Howard Smith v Ampol Petroleum, it stated two steps where the court will determine whether, the act of directors is for the proper purpose or not. The first step is in ascertain the actual purpose for the directors when they excercised the power. If the actual purpose is not within the lawful purpose, therefore, the act exercised for improper purpose. • In the case of Advance Bank of Australia v FAI Insurances, the directors use the company funds for the campaign to re-elect director, thus the court held the director’s act was improper purpose • As stated in section 132(1) of Companies Act 1965 that the director shall exercise his powers for a proper purpose and in good faith in the best interest of the company.

Application

• The purchase of a luxury yacht at the cost of RM 1.5 million = not within the ordinary course of business. • The purchase of a holiday bungalow at Fraser’s Hill at a cost of RM 2 million = not within the ordinary course of business. • The taking of unwarranted overseas trips under the guise of negotiating lucrative contracts on behalf of the company= improper use of company’s fund. • The consistent withdrawal for personal use = not for the benefit of the company. • The directors had use the fund, it is an improper purpose act, as it breached the duty of the directors.

II. Whether granting the loan to Marie is valid • Loan to person connected to the director. section 133 A Marle who as the director granted an intrest free loan to marie, his sister to the tune of 1 million, under section 133 A, the loan was invalid due to the fact, the connection between the director prevent the loan being granted, where it not within the ordinary course of business.

b) I. whether Remy, Martin and Cherrie (minority shareholder) can obtain remedies for the breaches made by the directors.

• Foss v Harbottle, two minority shareholders of Victoria Park Co. attempted to sue the directors who were alleged to have mismanaged the company and defrauded it of its property. Wigram VC said: “ The corporation should sue in its own name and it its name and
in its corporate character, or in the name of someone whom the law has appointed to be its representative”

• The action was dismissed on procedural grounds and 2 propositions were laid down. They were:

1. The proper plaintiff rule.
– In recognition of the company being a separate legal entity from its members, any wrong done to the company is suffered by the company. The company must be the proper plaintiff to seek legal remedy against the wrongdoers.

2. The internal management rule.
– Where certain matters may be ratified by an ordinary resolution passed by the members in the general meeting, the court is normally reluctant to interfere with the internal with the internal irregularities of a company. Where the majority does not wish the company to sue, the court will not generally permit the minority to sue on its behalf.

• Section 181 (1) allows derivative action over wider area than the common law. It covers cases of fraud on the minority and allows for just and equitable grounds to have a company wound up. The applicant under this section may initiate action whose the “affairs of the company”, or “ the power of the directors” are being conducted or exercised; or “some act of the co” or “ some resolution of the members” has been done, or merely proposed. • Remedy under Section 181 may be sought against any person who controls any respect of the company’s affairs. It could be anyone holding dominant power, not necessarily hold the majority of the votes. He could be conferred powers under the articles having control of proxy votes, or have personal influence over the majority and as such have control over their votes. The range of conduct that may be the basis for a minority member to take derivative action is extensive. The term “oppression”, “unfairly discriminates” and “ otherwise prejudicial” as meant under Section 181 will need some clarification.

• Oppression under Section 181(1)(a) has not been defined under the Act. It was defined as ‘burdensome, harsh, and wrongful’ by Viscount Simonds in Scottish Co-operative Wholesale Society Ltd v Meyer. • In Re Kong Thai Sawmill (Miri) Sdn. Bhd; Lord Wilberforce said, “ these must be a visible departure from the standards of far dealing, and a violation of conditions of far play which a shareholder is entitled to expect before a case of oppression can be made…”disregard” involves something more than a failure to take account of the minority interest: these must be awareness of that interest and to set at naught the proper company procedure”.

• In applying to the situation, Remy, Martin and Cherrie were confronted by Mick and Merle about the transaction made they were told that it was within the powers of the directors to run the business of the company. Furthermore, they also being told that it was prerogative of directors whether to recommend dividend or not and that being minority, shareholders have to accept the majority rule. • This shows that this is an oppression towards the minority shareholder. Besides, Mick and Merle also indicated to them that according to the company’s articles of association, they can be expelled if the caused trouble. This shows that Mick and Merle have personal influence over the minority.

• In conclusion, Remy, Martin and Cherrie can obtain remedies under Section 181 of Companies Act 1965