Question a.

THE INCORPORATION OF A LIMITED AND UNLIMITED COMPANY

A. INTRODUCTION

As a sole trader, Zimam runs a poultry business and is successful by

showing some profits over the years. From thereon, he incorporated

his business into a private limited company under the name of Golden

Poultry Sdn. Bhd. (GPSB) and purchased Zimam’s poultry business at

RM50, 000 where Zimam received by means of shares and debentures.

The business prospered for the first year in its operation but

deteriorating afterwards due to the bird flu virus. All the animals had

been destroyed and finally the whole farm was closed down. In his bid

to recover all the losses, Zimam has opted to make an insurance claim.

Beforehand, Chan had been appointed as a manager in GPSB but left

when he knew that the company was winding up. Chan managed to

solicit/attract GPSB’s clients to do business with him in his new

company. All these were in contradictory to what Chan had vowed

when he was appointed as a manager in GPSB.

B. EXTRACT

Based on the facts described above, Zimam had himself involve into 2

types of businesses that is common amongst businesses in Malaysia

i.e. sole trading/enterprise and private limited company under Golden

Poultry Sdn. Bhd.

Apart from those two types of businesses (sole trading and private

limited company), Zimam can actually venture into other types of

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 businesses which are still appropriate for his poultry business e.g.

partnership and public limited company.

C. DEFINITION OF A LIMITED AND UNLIMITED COMPANY

1. LIMITED COMPANY

In Malaysia and most part of the world nowadays, limited

companies are far more common than unlimited companies.

"Limited company" means a company limited by shares or by

guarantee or both by shares and guarantee; [S4 (1) CA 1965]

i. Limited by shares

This principle states that the liability of its members

(shareholders/owners) is limited to the remaining unpaid

amount (if any) put on his shares. [S4 (1) CA 1965]

ii. Limited by guarantee

The principle is that the liability of its members is limited to

the respective amounts which every member has contributed

to the assets of the company if it winds up. [S214 CA 1965]

iii. Limited by both shares and guarantee

Its members are liable as both shareholders and guarantors.

All members are liable to honor the guarantee irrespective of

whether or not they have shares in that company (limited by

both shares and guarantee).

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 Guarantee companies are normally private companies rather

than public companies and function as charitable/non-trading

organizations; e.g. college and theater clubs. [*****-

Company Law. 2009]

1. UNLIMITED COMPANY

It is a rare type of company formation. Its members are severally

liable for all obligations of the company in the case of winding up

and very much the same as a partnership company. Usually it

would only be appropriate if the company be used to keep

properties/investments and will not involve itself in any type of

trade.

An unlimited company is also appropriate when the company

is operating in a field where limited liability is frown upon. All

financial affairs of the company are kept in secret from the public’s

knowledge and the risk of insolvency is minimal.

The reduction in the company’s share capital can also be

done whenever it likes provided there is power to do so in its

articles of association without the need to get the court’s approval.

This company may also act as a service company for a professional

firm where limited liability is not crucial but continuous succession

is vital.

It is also not required to declare its annual accounts and

reports to the Registrar of Companies (ROC) provided that it does

not involve itself in other companies (as subsidiary/parent) which

are limited. An unlimited company may or may not have a share

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 capital and its members may resign only if the memorandum or

articles allow it to do so. [Guidance. 2009]

"Unlimited company" means a company formed on the principle of

having no limit placed on the liability of its members. [S4 (1) CA

1965]

A. TYPES OF LIMITED COMPANIES

1. Private Limited Company

i. Separate legal entity i.e. distinct from its

owners/shareholders.

ii. Listed under S4 (1) of the Company Act 1965

iii. Owned by 2 to 50 shareholders

iv. Owners have limited liabilities

v. Shareholders contributed to the company’s share capital and

a minimum of 2 persons will become its Board Of Directors

(BOD)

vi. BOD will determine the overall vision and mission of the

company

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 vii. A shareholder who owned 51% (or more) of the total share

capital has the voice autonomy

viii. Share can be transferred amongst its members only; not

publicly

ix. Not listed in the Kuala Lumpur Stock Exchange (KLSE)

x. Enjoy long existence even with the departure of its members

(as shares are transferable)

xi. Must bear words like “Sendirian Berhad” or “Sdn Bhd”

[S22 (4) CA 1965]

[Syarikat & Anda. 2009]

1. Public Limited Company

Basic criterions are the same as a Private Limited Company

except for the followings: -

i. The membership is unlimited (but with a minimum of 7

shareholders)

ii. Required to maintain a register of substantial shareholders

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 [S69L CA 1965]

iii. An entry of “Berhad” or “Bhd” is a must

iv. Shareholders free to transfer/sell their shares openly in the

share market (without permission from anybody else)

v. A prospered Private Limited Company which now has more

than 50 members, must convert its’ status to a Public Limited

Company

vi. A complete prospectus/company information e.g. financial

status and program is needed prior to the selling of shares to

the public which must be approved by the ROC [S169 (1) CA

1965]

vii. For a small company, a Statement in Lieu of Prospectus is

required under S51 CA 1965

viii. Directors/Officers can be sued if found to provide false

information

ix. Easier to get loans from financial institutions

[Syarikat & Anda. 2009]

Question b.)

DIRECTOR

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A. DEFINITION

According to the Company Act 1965, the definition of a Director can be

described as follows: -

“director" includes any person occupying the position of director

of a corporation by whatever name called and includes a person in

accordance with whose directions or instructions the directors of a

corporation are accustomed to act and an alternate or substitute

director; [S4 (1) CA 1965]

B. 1. APPOINTMENT AND QUALIFICATION

S122 (1) CA 1965 also states that every company shall have at

least (2) two directors who are staying within Malaysia. Other related

points of description related on the company directors are portrayed in

the act e.g. S122 (1A) on alternate or substitute issues, S122 (2) -

age, S122 (3) - name of directors in the memorandum or articles of

the company; etcetera.

Others; Section 123 - restrictions on appointment or

advertisement of director, S123 (1) – director must consent in writing;

otherwise regarded as a de facto director, Section 124 (3) – a director

will automatically be vacated from post if failed to fulfill his qualifying

shares (Section 124 (1) obligation within (2) two months from

appointment and S125 (1) – an undischarged bankrupt not qualified to

become a director of a company.

“De facto director - Person who is not a de jure director but

performs the acts or duties of a director, or is judged to be a director in

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law. Any person who is not technically a director but according to

whose directions and instructions (rather than expert or professional

advice) other directors and/or employees are accustomed to act is

legally deemed a de facto director. Whether or not such person fulfills

the qualifications of a director, or enjoys the rights and privileges of a

director, he or she is generally held liable as a de jure director.”

“De jure director - Person who is formally and legally appointed or

elected as a director in accordance with the articles of association of

the firm, and gives written consent to hold the office of a director. He

or she enjoys full rights and privileges of a director, and is held

individually and collectively (with other directors) liable for the acts

and/or negligence of the firm.”

[BusinessDictionary.com. 2009]

Sample Case:

In the case of Solaiappan & Ors v Lim Yoke Fan & Ors, the court held

that where a resolution was passed at a meeting without notice to the

old directors, the dismissal of the old directors with new directors is

ineffective and void. [Appointment of Directors. 2009]

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 Article of Association FOURTH SCHEDULE [Section 4, 30] - Table A

A64 of the Articles of Association (AoA) states that; a retiring

director shall be eligible for re-election. A67 of AoA states that the

number of directors can be reduced or increased and its rotation are

also applicable as long as passed by the ordinary resolution at a

general meeting.

A68 of AoA also states that company directors have the power

to appoint any person as a director – to fill an informal vacancy or an

addition to the existing directors (but not exceed the fixed number of

the regulations). The newly appointed director will hold office until the

next annual general meeting (AGM).

[Directors: Appointment, etc. 2009]

B. 2. REMOVAL

A public company may by ordinary resolution remove a director before

the expiration of his period of office provided that a successor has been

appointed. [S128 (1) CA 1965]

S128 (2) – a notice of termination shall be forwarded to the

director concerned and he is entitled to be heard on the resolution at

the meeting. S128 (3a) – states the reason for the termination of

service of a director and if the said person is not satisfied with the

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action, he can bring the case to the court for deliberation with costs on

the part of the company.

A company director can be terminated within or without

Malaysia for the following reasons S130 (1): -

i. Violated his appointment contract

ii. Involved in fraud/dishonesty

iii. Imprisonment for (3) three months or more

S130A (1) described that a director of a company can be

disqualified from his post when the company is going into liquidation

AND within a period of five years from the liquidation date. He

may also be judged from whatever conduct as director of any previous

companies that makes him unfit for the post.

Article of Association FOURTH SCHEDULE [Section 4, 30] - Table A

A72 of AoA states clearly that the service of a company director can

be terminated for the following reasons: -

(a) ceases to be a director by virtue of the Act;

(b) becomes bankrupt or makes any arrangement or

composition with his creditors generally;

(c) becomes prohibited from being a director by reason of any

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 order made under the Act;

(d) becomes of unsound mind or a person whose person or

estate is liable to be dealt with in any way under the law relating

to mental disorder;

(e) resigns his office by notice in writing to the company;

(f) for more than six months is absent without permission of the

directors from meetings of the directors held during that period;

(g) without the consent of the company in general meeting holds

any other office of profit under the company except that of

managing director or manager; or

(h) is directly or indirectly interested in any contract or proposed

contract with the company and fails to declare the nature of his

interest in manner required by the Act.

[Directors: Appointment, etc. 2009]

Sample Case:

Quek Leng Chye v AG

Facts:

Two people convicted under the Singapore Companies Act equivalent

of S130 applied leave to act as directors.

Held:

Privy Council refused the application on the ground that the appellants

had failed to discharge the responsibility on them of satisfying the

court that they posses the high degree of commercial integrity, which

was required of those exercising influential managerial functions in

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 limited companies if the public was to be accorded adequate financial

protection.

Question c.)

PRINCIPLE OF SEPARATE LEGAL ENTITY

A company is considered as a separate legal entity and its liability

(to pay debts) are unlimited and must cover all debts due by means of

liquidation, receivership or administration. Liability of the members on

the other hand is limited either by shares or by guarantee. [*****-

Company Law. 2009]

The meaning of “Separate legal entity” can be described as

follows where companies are/have/can:

i. Different from its members, directors

ii. Limited liability

iii. Sue or be sued

iv. Own assets

v. Enter Contracts

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 vi. Commit crimes (corrupt)

[Answers.com. 2009]

Sample Case 1:

Salomon v Salomon & Co (1897)

A good sample case related to the separate legal entity term is the

Salomon v Salomon & Co (1897) case where Mr. Salomon was

actually putting himself in various “individualities” i.e. Director,

Shareholder, Debenture Holder and Creditor. The very same case

had been heard in (3) three different courts in the United Kingdom

(UK) i.e. High Court (HC), Court of Appeal (COA) and the House of

Lords (HOL).

Each court had given different judgments based on the

arguments presented during the hearing. The (1st) first case was

heard in the HC where a successful trader named Mr. Salomon

(leather business proprietor) who had prospered as a small trader

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and converted his business into a limited company i.e. A Salomon

Ltd. Problems arise thereafter when he was experiencing difficulty

in servicing his debt (debenture) to Mr. Broderip and other creditors.

The HC (Vaughan Williams – Judge) held that the Principal

i.e. Mr. Salomon was responsible for the debts of its Agent i.e. A

Salomon Ltd. (the company) and that the company was mere alias

of its founder (Mr. Salomon) and had not been formed in accordance

with the true spirit of the Company Act 1862. The other family

members (also shareholders); wife and (5) children were mere

nominees.

The COA (Linley – Judge) came to a judgment and endorsed

what had been held by the HC by stating that the correct analogy

between Mr. Salomon and the company was a trust relationship.

This means that the company held its property on trust for its

beneficiary, Mr. Salomon; as such the creditors of the company

were entitled to a claim against Mr. Salomon through the company.

The court would not recognize the fact that the liability of the

company should be separated from Mr. Salomon. Finally Linley J

was of the opinion that the manner in which A Salomon Ltd. was

formed indicated that it had been created for a dishonest purpose

i.e. “advice to defraud creditors”.

The HOL (highest court) on the other hand denied the belief

held by the (2) two lower courts that a company could not be

formed by one dominant character (together with the other six

persons) distinct of a substantial interest in the business formation.

The HOL defended that the Company Act 1862 (s 6) was clear; that

the incorporation of a company was actually an independent

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 corporate entity and separated from its founder, Mr. Salomon. The

verdict was absolute.

[Separate Legal Entity. 2009]

Based on the Salomon V Salomon & Co. case, it shows that the term

“separate legal entity” (or corporate veil) really had been clearly

defined/uphold and followed ever since. It means that the most important

effect of incorporation is that it becomes a separate entity i.e. a legal

“person” of its own divorced from its members e.g. shareholders/owners.

As a legal entity/”person”, a company is liable to sue or be sued in

its own name. A company may also own properties under its name as a

“person” and a continuous existence is guaranteed without any influence

from its members/shareholders which are bankrupts, departed, terminated

etcetera. A company as a “person” can also enter into a contract with any

of the shareholders.

Sample Case 2:

The principle was also applied in Lee V Lee’s Air Farming Ltd (1961)

Lee v Lee’s Air Farming Ltd [1961]

Lee was a pilot and owned all the shares, except one held by

is wife, in the company that he formed. He was also only director of

the company whose business was spraying crops from the air. He

was employed at a salary as chief pilot. Later, he was killed in an air

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 crash while piloting the company’s aircraft. The question was

whether he was a ‘worker’ for the purposes of a Workers’

Compensation.

The Privy Council held that since the company was a legal

person separate from its shareholders, Lee was a ‘worker’ of the

company, even though he was the controlling shareholder and sole

director.

S16 (5) of CA 1965 provides that upon incorporation a company

“shall be a body corporate ……with power to hold land”. Although the

word used is specific, i.e. land, being separate legal entity a company may

own any other types of property, not only land. [Company Law. 2009]

So based on those two (2) sample cases presented above, it has

clearly shown that a registered company under the company act is

categorized as a legitimate entity/individual/person and thus separated

from its owners/shareholders. This very same principle also applies to

Zimam and GPSB where GPSB is considered as separate from Zimam and

therefore, the company shall bear responsible for all its activities and

consequences. Zimam on the other hand who is the shareholder of the

company holds limited liabilities and therefore is not liable for the debt as

what the separate legal entity principle holds.

From this principle of separate legal personality, it follows that the

debts of a company are the responsibility of the company and not its

shareholders/members. A company can also own assets and the

shareholders have no share (proprietary interest) in those assets and can

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enter into a contract with a shareholder. A company must sue in its own

name and not in the names of its members, for any wrongdoings/offence s

committed against it.

Question d.)

DEBT FINANCING

Every company in the business communities can not avoid from getting

themselves involved in financial loan/debt financing. The very reason for

this can be none other than to increase profits. This can be achieved by

expanding its share control in the market, expanding human capitals

(quantity & expertise) and technologies, efficient and effective

management capabilities etcetera.

A few terms need to be highlighted when it comes to discussing of

the debt financing topic. The terms normally related to debt

financing/financial loan of a company are as follows: -

i. Secured creditor

ii. Debenture (debenture holder)

iii. Bond

iv. Fixed Charge

v. Floating Charge

vi. Crystallization

vii. Liquidation

i. Secured Creditor

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 A secured creditor is a creditor which has the benefit of a

security interest over some or all of the assets of the debtor.

[Wikipedia. 2009]

If the debtor goes bankrupt, a secured creditor will

enforce his security over (the distribution of liquidation of)

the debtor’s assets without having to compete with the

unsecured creditors/non-preferential creditors.

ii. Debenture

A debenture is a series of bonds, which evidences the fact

that the company is liable to pay an amount specified, with

interest, and is generally secured on a charge over the

property. [Debenture and charges. 2009]

A debenture holder is to be paid with a certain

percentage of interest based on what has been stipulated in

the debenture certificate. This payment is mandatory

whether or not the debtor company is making profit.

S38 (1) states that a document issued by a borrowing

corporation certifying that a person named there in respect of

any deposit with or loan to the corporation the registered

holder of a specified number or value of:

a) Unsecured notes or unsecured deposit notes

b) Mortgage debentures or debenture stock; or

c) Debentures or debentures stock

i. Bond

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 Bond is also a loan/debt for business financing purpose. Just

like debenture, bond is issued by a debtor/issuer (borrower)

to the creditor/holder (lender ) over an amount of monies

borrowed. Upon maturity, the issuer is liable to pay the

holder a certain amount of interest known as coupon.

Bond and stocks are both securities; the difference is

that a bondholder only acts as a creditor whereas a stocks

holder is also considered as a shareholder where he has stack

in the company i.e. as an owner. [InvestorWords.com.

2009]

ii. Fixed Charge

Fixed charge is a charge or a mortgage which attaches over a

specific asset. It is an equitable security. Charges are

created for the purpose of providing security to a lender.

S108 (3) (K) provides that a charge over a credit balance in

a deposit account is a registrable charge.

Lord Atkins in the case of National Provincial and Union

Bank of England v Charnley [1924] defined a charge as:

“…..in a transaction for value both parties evince an

intention that property, existing or future, shall be made

available as a security for the payment of a debt, and that

the creditor shall have at present right to have it made

available, there is a charge even date, and though the

creditor gets no legal right of property, either absolute or

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 special, or any legal right to possession, but only get a right

to have the security made available by an order of the court.

If those conditions exist, I think there is a charge.”

[BBUS2103-Company Law. 2009]

The Fixed Charge Calculator:

= EBIT + Fixed Charge (before tax)

_______________________________

Fixed Charge (before tax) + Interest

Where;

EBIT is Earnings before Interests and Tax

[Investopedia. 2009]

A fixed charge is one which attaches to a specific

property (usually land). The company can only deal with the

property subject to the terms of the charge and generally

may not dispose of the property until the charge has been

discharged and the loan repaid.

[Goh Wong Pereira. 2009]

Should a company have the intention to dispose of the

property; it must first obtain the consent of the lender.

[Holroyd v Marshall. 1862]

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Sample Case 1

Siebe Gorman & Co. Ltd. V Barclays Bank Ltd. [1979]

Property which is subject to a fixed charge and which is sold

on to a third party without the chargee’s consent will remain

subject to the charge unless the third party is a bona fide

purchaser without notice, of the existence of the charge.

However, providing the charge is registered, the third party

will be deemed to have notice of its existence.

Sample Case 2

The creation of a fixed charge on the book of debts of a

company was affirmed in the following case:

United Malaysian Banking Corporation Bhd v aluminex

(M) Sdn Bhd

In order to create a fixed charge over a corporate asset, the

asset in question must be identifiable, although it need not

be in existence at the time the charge was created. The

property to which a fixed charge may attach can be a future

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 property. The holder of fixed charge has rights which are to

be found within the document creating the charge.

[*****- Company Law. 2009]

iii. Floating Charge

A floating charge does not attach on any specific property

and may attach to all the company’s assets. The company is

free to deal with these assets until the happening of certain

events stipulated by the lender (such as an appointment of a

receiver), upon which the charge crystallizes and becomes

fixed. [Goh Wong Pereira. 2009]

In other words, it is a form of security given by a

company on all/specific category of its assets/property.

These assets are normally shifting/circulating into and out of

its ownership e.g. raw materials, inventory, trading stocks

and debt book. The charge “floats” over these assets and

allow the company to continue dealing with them in the

ordinary course of its business. The lender holds a valid

security on this shifting fund of assets but has no right to

interfere in the business conducts but only deals with the

charges assets.

Sample Case

Illingworth v Houldsworth [1904]

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 In the above case, Lord Macnaghten has elaborated and

differentiated both fixed charge and floating charge. [*****-

Company Law. 2009]

“A specific charge, I think, is one that without more

fastens on ascertained and definite property or property

capable of being ascertained and defined; a floating charge,

on the other hand, is ambulatory and shifting in its nature,

hovering over and so to speak floating with the property

which it is intended to affect until some event occurs or some

act is done which causes it to settle and fasten on the subject

of the charge within its reach and grasp”.

If the floating charges happen to crystallize/default on

certain circumstances, the said assets will automatically

become fixed charge. Then it is up to the lender whether or

not to appoint a receiver, suing under the contract or proving

in the winding up.

iv. Crystallization

Crystallization occurs when a company has defaulted in its

charge. Here the charge becomes a fixed charge over the

said assets (held by the borrowing company). Crystallization

will also occur upon the appointment of a receiver/liquidator

to facilitate distribution of assets; or when the troubled

company winds up. [*****- Company Law. 2009]

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v. Liquidation

Other terms for liquidation are dissolve and winds up.

Liquidation means that the company is unable to pay its debt

and all assets belonged to the company will be apprehended

and the earnings/total values are paid out according to what

is laid down in the Companies Act. [*****- Company Law.

2009]

According to Wordnetweb (2009); liquidation refers

to the termination of a business operation by using its assets

to discharge its liabilities.

There are two (2) ways to go about with the liquidation

process:

i. Voluntary winding up (Part X Div 3 S254 – 267)

– Divide into two (2) forms:

a) Members’ voluntary winding up

Certain provisions are lined out for this purpose

namely S257 (1) – a declaration of solvency

made by directors; S257 (2) – showing the

latest assets and liabilities; S257 (4) – true/false

of declaration made by directors; and S257 (5)

– directors have reasonable proof before going

for liquidation

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 b) Creditors’ voluntary winding up

S260 (1) provides that when this happens, the

company must convene a meeting of creditors

and called within 14 days from the date of

proposal for winding up. Both creditors and the

company can nominate a liquidator for the

process (but normally creditors will prevail in

terms of the selection of liquidators).

Under S259 (1), a creditors meeting will

be convened by the liquidators if the debtor

company feels it is unable to fulfill its debts in

time (as stipulated in the declaration). In the

case of Re Anrite Aviation Co. Pte. Ltd.

[1990]; it was highlighted that the liquidators

must attract the creditors’ attention on their

rights. A statement of assets and liabilities of

the company will also need to be listed down.

i. Compulsory winding up – ordered by the court

(Part X Div 2 S217 -253)

This type of winding up is normally initiated by an

unpaid creditor against the debtor company. But this

winding up process can also be requested by a

company just like the voluntary winding up that allows

both parties to request for a winding up hearing.

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 S217 (1) provides the list of persons who can

initiate these proceedings i.e. the company, a creditor,

a contributory, a liquidator, the Minister and the

central bank.

Sample Case 1

In the case of Lim Yoke Kian & Anor v Castle

Development Sdn. Bhd. [2000] it was held that if

the deferment for a winding up order is for an illegal

purpose, the court will not overlook this.

Sample Case 2

In a creditor’s petition; the petitioner must satisfy that

he is indeed a creditor. This was stated in the case of

Morgan Guaranty Trust Co. of New York v Lian

Seng Properties Sdn. Bhd. [1990].

In the Zimam’s case scenario, he was actually holding various

positions when it comes to the incorporation of GPSB. The positions were

director, shareholder (under GPSB), debenture holder and creditor (sole

proprietor). Zimam (as a director/shareholder of GPSB) was not a debtor

because it was the company (as a separate legal entity) i.e. GPSB who was

in debt to Zimam when it purchased Zimam’s business by means of shares

and debentures.

Page 26 of 35
 So in this case, it was GPSB who held the position as a debtor under

the separate legal entity principle and that Zimam was only practicing his

responsibilities behind (corporate veil) the company’s name. In the case

of Zimam being the only secured creditor (debenture holder), he is

certainly liable for a distribution of assets of the debtor i.e. GPSB should

the company winds up.

As discussed above, S38 (1) CA 1965; certified that a secured

creditor i.e. Zimam is protected for his deposit to the company with a

value of unsecured notes, mortgage debentures and/or debenture stock.

As a secured creditor, Zimam has the right to the income of the company,

the right to return of capital, the right to return of capital in a liquidation,

taxation and also voting. [Cases & Materials In Company Law. 2009]

Question e.)

DERIVATIVE ACTION

GPSB was making profit in the first year of its business after being

incorporated from a sole trader status. Thereafter, the business has

collapsed due to the bird flu disease. Zimam could only think of one way

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to save his business; i.e. making insurance claims to recover back all his

losses. Here, the term derivative action and other case sample needs to

be highlighted when it comes to discussing of this topic.

Derivative action - a lawsuit brought by a corporation shareholder

against the directors, management and/or other shareholders of the

corporation, for a failure by management. In effect, the suing shareholder

claims to be acting on behalf of the corporation, because the directors and

management are failing to exercise their authority for the benefit of the

company and all of its shareholders. This type of suit often arises when

there is fraud, mismanagement, self-dealing and/or dishonesty which are

being ignored by officers and the Board of Directors of a corporation.

[Gerald N. Hill and Kathleen T. Hill. 1981-2005]

The common law

In company law, the wishes of majority normally prevailed over the

minority and had since become the general rule.

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Foss v Harbottle (1843) – The Majority Interest

Facts

Two minority shareholders (Richard Foss and Edward Starkie Turton)

brought an action against the directors (Thomas Harbottle, Joseph

Adshead, Henry Byrom, John Westhead and Richard Bealey) of the

company (Victoria Park Company) alleging that they had defrauded the

company in a number of ways, including selling land to the company at an

excessive price. They asked the court to order the directors to

compensate for the losses incurred by the company.

Held

The court refused. The conduct of the directors was a wrong done to the

company and only the company could sue. As the board was still in

existence and it was still possible to call for a general meeting (of the

company), there was nothing to prevent the company from determining

(whether or not) to bring an action.

[Company Law Club. (2009)

When a wrong is done to a company, the court will normally reject

the case if brought up. This is because; it is the power of the company

Page 29 of 35
and up to it to decide on action to be taken to resolve the issue. The

reasons for this can be explained under the following principles: -

i. The Proper Plaintiff Principle

The company is the proper plaintiff (pursuer) in any action to

correct a wrong against it.

ii. The Internal Management Principle

The court will not interfere with the internal management of a

company. It is for the company to decide whether it is being

properly managed.

iii. The Irregularity Principle

A member cannot sue to rectify a mere informality where the

act would be within the company’s powers if done properly

and the wishes of the majority are clear.

[*****- Company Law. 2009]

The problem with the rule is that; the majority of shares belong to

directors and therefore they are in the best position for being unfair.

This for sure will not let the directors take any action on

themselves. A minority protection is thus necessary to protect their

interest (as stated in the S181 and S218 CA1965 - Remedy in

cases of an oppression.) and had been recognized in the case of

Edwards v Halliwell.

Page 30 of 35
Edwards v Halliwell – The Minority Interest

Facts

A trade union had rules equivalent to articles of association under which

any increase in the contributions of members had to be agreed by a 2/3

majority (in a ballot of members). A meeting was decided by a simple

majority (1/3) to increase the subscriptions without holding a ballot. The

plaintiffs, as a minority of members, applied for a declaration that the

resolution was invalid.

Held

The rule in Foss v Harbottle did not prevent a minority of members suing

because the matter could be allowed by a greater than simple majority

(2/3). Jenkins LJ indentified four exceptions to the Rule in Foss v Harbottle:

i. Fraud on the minority by wrongdoers in control

ii. Invasion of the personal rights of members

iii. Ultra vires acts

iv. Material procedural irregularities

[*****- Company Law. 2009]

Page 31 of 35
Based on the discussion described above, it is clearly shown that there

were two (2) relevant issues that had caused the GPSB’s business to

collapse i.e. bird flu disease and Chan’s misbehavior (as a person who was

in power). But still; the business was already destined to collapse due to

the disease. Chan has foreseen this to happen and "pulled" out all GPSB's

clients out into his new business.

So does this mean that it is actually the action taken by Chan that

really had caused GPSB to crumble; whereas the disease was just a minor

problem that could be rectified gradually? Suppose it is so. Therefore; I

strongly believe that GPSB will fail in the insurance claim because this is

about mismanagement/fraud/dishonesty.

The same thing will happen should Zimam was the one who held

the insurance because the insurance company will not see this as

something that is unexpected/unforeseen; but clearly a mismanagement

circumstance on the part of the company where Zimam (shareholder) had

"power" to manage the company right. This has been confirmed when

Zimam appointed Chan as a manager.

Chan has promised to abide by the restrictive covenant signed that

should he leaves GPSB; he will not reveal any trade confidentialities or

solicit its clients for another company. Chan’s action was an action of

dishonesty to GPSB and caused a substantial loss to the company. This is

so because GPSB could survive with the disease problem and grow even

stronger in the future (or even change its name). The loss had been

decisive when Chan dishonestly “hijacked” GPSB’s customers into his own

business. GPSB on the other hand will face a huge problem to regain its

good name after the fall to compete in the market in the future.

Page 32 of 35
 .

G. REFERENCE

1. Latha R. (2009). LIMITED COMPANY. ***** ***** ***** ***** *****

***** ***** ***

2. S4 (1) of Company Act 1965. (2009). Limited by shares. [Online].

Available: http://www.ssm.com.my/acts/fscommand/a125.htm. [2009,

October 26].

3. S214 of Company Act 1965. (2009). Limited by guarantee. ***** *****

***** ***** ***** *****

4. Guidance. (2009). 'LIMITED LIABILITY' -VS- 'UNLIMITED LIABILITY'. [Online].

Available: http://www.ukcorporator.co.uk/guidance/G62a.php [2009,

October 28].

5. Syarikat & Anda. (2009). JENIS-JENIS PERNIAGAAN. [Online]. Available:

http://ca2on9-biz.blogspot.com/2008/10/perkongsian-partnerships-

syarikat.html [2009, October 28]. (Translated)

6. Company Act 1965. (2009). “Director”. [Online]. Available:

http://www.ssm.com.my/acts/fscommand/a125.htm. [2009, October 30].

7. COMPANY LAW 2ND EDITION. (2009). Appointment and Qualification of

Director. ***** ***** ***** *****.

8. Appointment of Directors. (2009). Solaiappan & Ors v Lim Yoke Fan & Ors.

***** ***** ***** *****

Page 33 of 35
9. FOURTH SCHEDULE [Section 4, 30] - Table A. Directors: Appointment, etc.

[Online]. Available:

http://www.ssm.com.my/en/acts/fscommand/a0125sc004.htm [2009,

November 02].

10. Companies Act 1965. (2009). Section 130 - Power to restrain certain

persons from managing companies. Available:

http://www.ssm.com.my/acts/fscommand/a125.htm. [2009, November 02].

11. Answers.com. (2009). WikiAnswers- Explain the term Separate Legal

Entity in corporate law? [Online]. Available:

http://wiki.answers.com/Q/Explain_the_term_Separate_Legal_Entity_in_cor

porate_law [2009, October 30].

12. Company Law. (2009). Effect of Incorporation. [Online]. Available:

adp.mmu.edu.my/e-notes/anushia/notes/Topic%203(b).ppt [2009,

November 02].

13. Separate Legal Entity. (2009). Salomon V Salomon& Co. ***** *****

***** ***** ***** *****

14. BusinessDictionary.com. (2009). de facto & de jure director. [Online].

Available: http://www.businessdictionary.com/definition/de-jure-

director.html [2009, November 02].

15. Wikipedia. (2009). Secured Creditor. [Online]. Available:

http://en.wikipedia.org/wiki/Secured_creditor [2009, November 03].

16. COMPANY LAW 2ND EDITION. (2009). Debentures and Charges. ***** *****

***** ***** ***** *****

17. InvestorWords.com. (2009). Bond Definition. [Online]. Available:

http://www.investorwords.com/521/bond.html [2009, November 04].

Page 34 of 35
18. COMPANY LAW 2ND EDITION. (2009). Fixed Charge & Floating Charge. *****

***** ***** ***** ***** *****

19. Goh Wong Pereira Advocates & Solicitors. (2009). What is the difference

between a fixed and floating charge. [Online]. Available:

http://www.gohwongpereira.com/articles/fixed&floating.html [2009,

November 04].

20. COMPANY LAW 2ND EDITION. (2009). Holroyd v Marshall - Fixed Charge.

***** ***** ***** ***** ***** *****

21. Investopedia. (2009). Fixed Charge Coverage Ratio. [Online]. Available:

http://www.investopedia.com/terms/f/fixed-chargecoverageratio.asp

[2009, November 04].

22. TheFreeDictionary. (2009). Derivative Action. Gerald N. Hill and Kathleen

T. Hill (1981-2005)

23. Company Law Club. (2009). The common law - the rule in Foss v.

Harbottle (1843) 2 Hare 461. [Online].

Availablehttp://www.companylawclub.co.uk/topics/faq170.htm [2009,

November 06].

24. Companies Act 1965. (2009). S181 and S218 CA1965 - Remedy in cases

of an oppression. [Online]. Available:

http://www.ssm.com.my/acts/fscommand/a125.htm. [2009, November 07].

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