RIGHTS OF MEMBER EXCEPTION FOR THE PROPER PLAINTIFF RULE

2. The Act Should be Done by Special

Right to receive notice of meeting 1. Fraud has been Committed against the Minority Greenhalgh v Ardene Cinemas Ltd
Majority
Section 101(2) A question that may be asked is
• There are transactions which
Right to vote at members meeting • There is a general principle which provides that holders of powers should not abuse their powers. whether the resolution was passed to require special majority for
• By virtue of Section 213, a director shall exercise his powers for a proper purpose and in good faith in the best interest of the discriminate between the majority and example, the passing of a members
Right to receive dividends company. the minority so as to give the majority special resolution. If only an
• Thus, if the wrongdoers were in control, they will definitely not causing the company to take action against themselves. an advantage in which the minority was ordinary resolution was passed, the
Right to question, discuss, comment and make Section 195(1) • But when a fraud was committed against the minority, then the court will allow an action to be taken by a member on behalf of the deprived. If so, then it is fraud on the
recommendations at meetings minority who objected to the
company against the wrongdoers who were in control of the company. minority. resolution may apply to the court to
Right to restrain the company from entering Section 223 and restrain the company from acting
A). There is Fraud.
substantial value property transaction without the Section 228 on it.
Abdul Rahman Aki v Krubong Industrial Park (Melaka) Sdn Bhd &Ors
approval of the members Quins & Axtens Ltd v Salmon
=The court held that it is sufficient for the plaintiff to prove that thewrongdoers abuse their powers and they are still in control of thecompany.
The company's constitution provided that
Right to appoint proxy Section 334 i. Expropriate of Corporate Property. certain contracts must be approved by
• There is a principle that the majority members or the directors cannot expropriate the asset or property of the company by the application of Section 218 on the prohibition Salmon and Axtens. In one instance,
Right to take action against the company or Section 346 Salmon refused to consent and the
against the improper use of property, asset and Section 228 on the transaction with directors, substantial shareholders or connected persons.
directors or other members for oppression directors called for a member's meeting to
• Even if the wrongful conduct of the directors and shareholders is ratified by the members and does not come within the ambit of the above provision, action may still be taken
against them at common law. approve the transaction. Upon application
Right to take action in the name of the company Section 347 by Salmon, the court granted an injunction
Cook v Deeks
❑ Facts: The directors who were also the majority shareholders, expropriated a project which the company was negotiating. As they formed the majority, they passed a to restrain the company from acting on the
Right to wind up the company Section 464 and
shareholders resolution to declare that the company had no interest in the contract. The minority shareholders, Cook, objected and took action against the majority member's resolution.
465
shareholders.
3. The Special Rights of the Members were
• A member of unlimited company is liable to the company's debt. ❑ Held: The court held that the shareholders resolution was invalid as it was fraud on Cook, a minority shareholder in the company.
Invaded
• Where a member of a company limited by shares only liable for the
ii. Self-serving Negligence • The rights of members attached to
amount unpaid on his shares, whereas a member for a company
• There is an issue arises as to whether a minority member is permitted to commence action against the director who were negligent. their shares are found in the
limited by guarantee only liable to contribute the amount he has
Companies Act 2016 as well as in
undertaken to contribute in the event the company is wound up.
Pavlides v Jensen However, the position would be different if one of the directors benefited from the grossly undervalued sale. the company's constitution.
Facts: The directors sold an asset valued at 1 million Daniels v Daniels • Where rights of members were
PROPER PLAINTIFF RULE for 182,000. Facts: The board of directors sold one of the company's asset a grossly undervalued price to one of the directors. The director invaded, the members may take
Held: The court held that the majority shareholders subsequently sold it for a large profit. action in their own name, this is
• The impact of the doctrine of separate legal personality and the could ratify the sale thus the directors were absolved Held: The court held that such undervalued transaction which benefited one of the directors or majority shareholders was a because the injury party was the
doctrine of privity of contract is that only the parties to the contract from liability. fraud on minority. members and not the company.
can sue and be sued. • For example, where shares are
• This means that even if the company suffers losses resulting from iii. Expropriation of Minority's Property preference shares, the rights of the
any breach of contact done by the wrongdoer, a member of the • Section 36 provides that company's constitution can be altered by special resolution UNLESS prohibited by the company's constitution. However, it must be noted that any holders will be spelt out in the
company cannot sue the wrongdoer on behalf of the company. alteration on the company's constitution must also subjected to a principle that it should be for the benefit of the company as a whole. company's constitution.
• Only the company can take legal action against the wrongdoer. Pender v Lushington
• The above rule which provides that a member of a company cannot Eastmanco Ltd v Greater London Council Brown v British Abrasive Wheel Co. Facts: The company's articles provided that
take action on behalf of the company is known as the "Proper Facts: The council had a block of flats and formed a company. The council effected a policy to sell the lease of the flats, Facts: The shareholders holding 98% of the company's a member was entitled to vote for every 10
Plaintiff Rule". with each purchaser holding one share with voting rights in the company. However, the voting rights would be shares wanted to buy out the remaining shareholder. When shares up to a maximum of 100 votes. A
• This has been developed in the case of Foss v Harbottle. suspended until all flats were sold. Until then, the council would have the sole voting rights in the company. However, the minority refused, the majority passed a member's member who had many shares, transferred
after selling 12 flats, the council changed its policy and decided not to sell the remaining flats. As a result, the 12 resolution to alter the company's constitution to the effect some of his shares to Mr Pender with the
Foss v Harbottle. purchasers who were shareholders in the company would never be entitled to voting rights so long as the council's that a member was required to sell his shares if so understanding that Mr Pender would vote
policy remained. The company brought an action against the council for changing the policy. The Council, being the only requested by the member holding 90% of the company's according to his instruction. However,
Facts: Two shareholders in the Held: It was decided that the voting shareholder passed a resolution instructing the company's directors to discontinue the action. One of the shares. during the meeting, the directors disallowed
company brought an action against conduct of the defendant was not shareholders/purchasers then applied to the court for leave to bring action on behalf of the company against the Held: It was held that the alteration of the article was to Mr Pender's votes. Mr Pender brought a
the company's directors and other an injury to the plaintiffs council (majority shareholder). enable the majority to expropriate the minority's property action against the directors.
persons. They alleged that the exclusively; it was an injury to the Held: The court held that the council had used its voting power not to promote the best interest of the company but for and thus it was a fraud on the minority. Hence, the Held: The court held that Mr Pender could
directors had misapplied the company as a whole. The company its own advantage, to the detriment of the minority shareholders. The disadvantage caused to the minority was not a alteration is ineffective. The member's property involved not sue to enforce his rights as a member.
company's property and had caused and the member are not the same trivial matter; it was a radical alteration of the basis on which the council sold the flats. It was an abuse of power by the only their shares in the company but also their rights
certain transactions to be entered thing and the action could not be majority and a fraud on the minority. attached to the shares. 4. When the Justice of the Case Requires it
into improperly maintained by the plaintiffs. • The rule in Foss v Harbottle is not
B). The Wrongdoers are in Control. Tan Guan Eng & Anor v Ng Kweng Hee & Ors conclusive. The court will allow
This case laid down the rule that the proper plaintiff to bring an action to • The plaintiff needs to establish The court said that control can be determined from the shareholding. If the majority of shares are held by the wrongdoers, then it is obvious amember to take action against the
enforce a company's rights is the company itself. While the rule has its that fraud has been committed by that they are in control. However, sometimes the wrongdoers do not hold the majority shares. Then the court may go behind the apparent wrongdoer where justice of the
advantages, it has a significant disadvantages, where the directors who are the person who is in control and ownership of the shares in order to determine whether the wrongdoers do in fact control the company. caserequires it.
alleged to have breached their duties to the company are also a majority of who decides whether action is to
the board, it is hardly likely that these directors will have the company be taken by the company. Thus, it Ting Chong Maa v Chor Sek Choon
commence legal action against them for breach of duty. is important to establish control. The plaintiff and defendant had equal shares in the company but the defendant was the managing director. Clearly, the defendant was in
control.
 INCORPORATION
VOLUNTARY WINDING UP
CONSEQUENCE OF SEPARATE LEGAL ENTITY OF A COMPANY
VOLUNTARY WINDING UP
1) LIABILITY OF MEMBERS TO CONTRIBUTE IN THE EVENT OFWINDING UP
It is a process where the members voluntarily initiate the process to close the company down with the • Section 192(1) a member shall not be liable on the debts and obligations of the company by reason only of being member of the company.
assistance of a liquidator who shall oversee the process, sell its assets and distribute the proceeds to • The liability of members to contribute to the assets if the company winds up and cannot pay its debt is limited by the CA.
creditors (if any), and the surplus is returned to the company's members as a capital distribution. • In the case of company limited by share, the liability is limited to the amount of any unpaid share held by the members. S.10(2) &Section 192(2)(d).
• In the case of company limited by guarantee, the liability is limited to the amount that they guaranteed Section 10(3) and 192(2)(b).
Section 439(1) specifies that a may be wound Section 439(2) specifies the following procedures for Re Application by Yee Yut Ee
up voluntarily if the following circumstances voluntary winding up : Facts: Previously Yee was a secretary of the company. During that time, the company retrenched staff. There is dispute with regards to the retrenchment benefit. When the matter was referred to the Industrial Arbitration Court
occurs: i. The company should submit a copy of the
and an award was made. Shortly after this, Yee was appointed as the director of the company. Subsequently, the company went into liquidation and the company's assets were not sufficient to pay for the retrenchment benefit.
i. The period fixed by the resolution to the Registrar within 7 days
The Industrial Arbitration Court made an order that Yee would be personally liable to pay for the retrenchment benefits.
constitution for the duration of from the passing of the resolution; and
the company expires; ii. Give notice within 10 days after passing Held: The order was quashed by the High Court. Except in cases of fraud, breach of warranty of authority and other exceptional circumstances, a director is not liable for the debts of an incorporated company.
ii. On the occurrence of an event of resolution:
that the constitution allows the a. in one widely circulated 2) A COMPANY'S OBLIGATION AND LIABILITIES ARE OF ITSOWN, AND NOT THOSE OF ITS PARTICIPANTS
company to be wound-up and the newspaper in Malaysia in the • Section 192(1) CA 2016:"A member shall not be liable for an obligation of a company by reason only of being a member of the company.“
company has passed a resolution national language; and • The above section provides that where a company incurs a contractual obligation or a liability in tort, that obligation or liability is the company and not an obligation or liability of its members or officers.
in a general meeting to wind-up b. one widely circulated • This is because, companies are separate entities, creditors of a company are generally unable to look to the participants in the company to pay the company's debt
the company voluntarily; newspaper in Malaysia in the Fairview Schools Bhd. V. Indani Rajaratnam & Ors
iii. The company passed a special English language. “ Limited companies are formed so that its shareholders are not exposed to unlimited liability for the company's debt. In exchange for this immunity, share capital is pumped into the company which thus becomes available to
resolution to wind-up voluntarily the company's creditors."

By virtue of Section 432(2), there are two types of voluntary winding up: 3) A COMPANY CAN SUE AND BE SUED IN ITS OWN NAME
• Section 21(1)(a) CA 2016:"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…to sue and be sued“
Members Voluntary Winding Up Creditors Voluntary Winding Up • The above section shows that the company may sue and be sued in its own name. The members cannot sue on behalf of the company.
• If the director of the company has breached his duties, it is for the company to sue the director to enforce its right and not for the other director to sue on behalf of the company.
• Members voluntary winding up occurs • This type of winding up is not initiated by the
when there is a declaration solvency. creditors, however, initiated by members but
Foss v Harbottle
• Section 443 provides the declaration of converted into creditors voluntary winding up Facts: A director of the company had misapplied the company’s property. The other shareholder of the said company brought an action against the said director
solvency is a declaration that the because the company is insolvent. Held: The injury was injury to the company. Since the company and its members are two separate personality, therefore, the shareholders cannot bring an action on behalf of the company. It was for the company to sue. The
company will be able to pay its debts • Section 449(1) provides that a meeting of the above case has laid down the "proper plaintiff rule" upon which the injured party shall be the proper organ to become the plaintiff to commence an action
within a period not exceeding 12 months company's creditors the same day or the
after the commencement of winding up following day (of the members meeting). 4) A COMPANY HAS PERPETUAL SUCCESSION
(Section 441 at the passing of resolution • By virtue of Section 447(2), the creditors may • The company is a continuing entity in law with its own identity regardless of changes in its membership. It continues in existence, until it is deregistered under the statutory procedure set out in CA
for voluntary winding up) appoint the liquidator appointed by the company • Section 20(b) CA 2016:"A company incorporated under this Act is a body corporate and shall continue in existence until it is removed from the register.“
• By virtue of Section 445, members or any other person as a liquidator. Section Abdul Aziz Atan v Ladang Rengo Malay Estate Sdn. Bhd.
appoint one or more liquidators to wind 450(2) provides that if the creditors and the Facts: All the shareholders of the company sold and transferred their entire share holdings to a certain buyer.
up the company's affairs and distributing company nominate different persons, the Issue: The court had to determine whether a change of employer took place.
its affairs. persons nominated by creditors shall be the Held: An incorporated company is a legal person separate and distinct from its shareholders. The company, from the date of incorporation, has perpetual succession and did not change its identity or personality even though the
• Directors lose their power unless the liquidator.
entire share holding of the company changed hands.
liquidator approves otherwise. • Further, Section 450(4) states that the liquidator
• Section 447(1) provides that if at any if requested by any creditor or contributory will
The company may even continue to exist despite the death of all its shareholders and directors.
time liquidator viewed that the company summon a separate meeting to determine Re Noel Tedman Holdings Pty Ltd
will not be able to pay its debt in full whether the appointment of a committee of Facts: The Company had 2 shareholders, a husband and a wife. Both of them died in a traffic accident. They left behind an infant child. The problem arises on how to transfer shares to the child. The article provides that before
within 12 months period, the liquidator inspection (Tenth schedule) is required. the transfer of shares can be done, approval from the director is required. However, since the two shareholders have died during the accident, there are no directors available, even though the company still in existence.
will call a meeting of the company's • Therefore, creditors voluntary winding occurs if: Held: The court allowed the personal representatives of the 2shareholders to appoint a new director in order to give assent to the transfer of the shares to the child.
creditor. a. No declaration of solvency; OR
• The winding up shall there after proceed b. If at anytime the liquidator 5) A COMPANY'S PROPERTY IS NOT THE PROPERTY OF ITS PARTICIPANTS
as creditors voluntary winding up. viewed that the company is • Once a company is incorporated it may own property distinct from the property of its members.
• Section 448 elaborate on the conversion insolvent. • Section 21(1)(b) CA 2016:"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 to acquire, own, hold,
to creditors' voluntary winding up if: • By virtue of Section 441, the date of develop or dispose of any property. “
a. The directors' declaration commencement of voluntary winding up is at the Macaura Nothern Assurance Co. Ltd
under Section 443 had passing of resolution for voluntary winding up. Facts: Mr Macaura transferred his interest in a timber plantation to a company controlled by him. He had insured the timber in his own named but failed to transfer the insurance policy to the company. When the timber
not been made; and • Effect of voluntary winding up are:
destroyed by fire, the insurance company refused to pay out under his policy because he did not have an 'insurable interest in the timber, as he was not its owner.
b. The creditors' meeting a. From the commencement of the
and the company winding up, the company cease
Held: even though he was the majority shareholders of the company, he doesn't have an insurable interest over the company's property. The insurance which he bought over the timber under his own personal name was void.
meeting at which it was business but the corporate state Thus, the insurance company has no obligation to pay. The company was the owner of the timber. Members only own shares in the company. A change in the ownership will not affect the ownership of the property.
resolved that the and corporate power continues
company be wound up until it is dissolved (Section 442). 6) A COMPANY CAN CONTRACT WITH ITS CONTROLLING PARTICIPANTS.
voluntarily, b. Any transfer of shares made • Because they are separate legal entities, a company and its members can enter into contract with each other.
after the commencement of • Section 21(1)(c) CA 2016:"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 to do any act in which it may
winding up shall be void. door to enter into transaction.“
c. When the winding up is Lee v Lee's Air Farming Ltd
completed, the company is Facts: The plaintiff and her husband formed a company to run an aerial crop spraying business. The husband was the sole beneficial shareholder. The husband was killed in a flying accident. Plaintiff claimed payment under the
normally deregistered workmen's compensation acts for the death of her husband.
Held: The husband and the company was two separate legal entities. Therefore, the husband was a servant of the company and plaintiff was able to recover under the workmen's compensation act for her husband's death.
Unless the company and its controller were separate legal entities, the finding that a contract existed between them would not be open to the court, because a contract requires at least two separate parties.
 What are the special circumstances?
SEPARATE LEGAL ENTITY/PERSONALITY
• Once the company incorporated it becomes a separate individual person from the person who incorporated it. 1. Where the company is used to avoid an existing legal duty or to commit fraud
• Members of the company would not automatically, in their personal capacity be entitled to the benefits nor • If a company is formed for the sole purpose of or for the dominant purpose of doing something that one of the controllers is prevented from doing in its personal capacity through
would they be liable for the responsibilities or the obligations of the company. an existing legal obligation, the courts may pierce the corporate veil to treat the obligation that binds the controllers as one that also binds the company.
Salomon v Salomon & Co. Ltd Gilford Motor Co Ltd v. Horne
Facts: Salomon owned a business. He then formed a company in the name of Salomon & Co. Ltd. (the comp.). Salomon Facts: Horne was formerly the managing director of the plaintiff company. He covenanted not to solicit customers of the company after the termination of his employment. However,
sold his shoes business to the company and in consideration, the company issued debentures to him. The company when he left the company, he set up a new company, through which he solicited the Plaintiff customers. Plaintiff argued that the court should pierce the corporate veil to recognize that
then become insolvent, and the liquidator claimed the debentures owned by Salomon. the person behind the new company was Horne, and to treat the company along with Horne as being bound by the covenant.
Held: Once the company is legally incorporated, it must be treated like any other independent person with its rights and Held: the company had been formed for the sole or dominant purpose of avoiding the covenant. It was prepared to treat the company along with Horne as being bound by it.
liabilities appropriate to itself, and that the motives of those who took part in the promotion of the company are Jones v. Lipman
absolutely irrelevant in discussing what those rights and liabilities are. Facts: Mr Lipman entered into a contract to sell land to the Pf. Before the sale was completed, Mr Lipman transferred the land to a company controlled by him. The intention was to put
the land beyond the reach of the purchasers because even though they can sue Mr Lipman for damages for failure to transfer the land to them, but they cannot compel him to transfer
• The judge further provides that the Act appears to give a company a legal existence with, as I have said, rights the land to them since the land has been transferred to the 3rd party that is the company.
and liabilities of its own, whatever may have been the ideas or schemes of those who brought it into existence Held: the court pierced the corporate veil and treated the contractual obligation on Mr Lipman to transfer the land as also binding the company. This is because the court took view that
• The principle laid down in Salomon's case is well recognized in Malaysia, as is illustrated in the following cases: the company had been used by Mr Lipman as a devise to avoid his existing contractual obligation.
i. Goh Hooi Yin v Lim Tong Ghee - where the judge decided that it was incumbent for Malaysian courts unless
there are compelling reasons not to do so. 2. Where a company is used as a veil for fraud or crime, the court will not hesitate to pull aside the corporate veil.
ii. Abdul Aziz bin Atan v Ladang Rengo Malay Estate Sdn. Bhd. Where it was held that transfer of ownership of Lim Kar Bee v. Dufortis Properties (M) Sdn. Bhd.
the shareholders does not entail a change in the entity of the company. "it is well settled that the courts have a discretion to lift the corporate veil for the purpose of discovering any illegal or improper purpose.
• With the introduction of the Companies Act 2016, the concept of the separateness of identity has been Tiu Shi Kian v Red Rose Restaurant Sdn Bhd
clearly inserted under S.20(1)(a):'"A company incorporated under this Act is a body corporate and shall have Facts: Plaintiff ran a night club in Red Rose Restaurant. Red Rose was wholly owned & controlled by Hotel Berjaya S/B, which owned the hotel in which the hotel was situated. A dispute arose
legal personality separate from that of its members. between the Plaintiff and Red Rose regarding the renewal of the Plaintiff license. Plaintiff obtained interlocutory injunction restraining Red Rose from interfering with their business. However,
Plaintiff found out that the restaurant premises were locked, in breach of the injunction. Plaintiff sought an order for committal for contempt of court against the director of Red Rose. It was
pleaded that Hotel Berjaya was actually locked up the restaurant and not Red Rose.
EXCEPTIONS Held: Hotel Berjaya and Red Rose were functionally one entity, and the devise proposed by the Defendant ought not to be allowed to defeat justice.
• Piercing the corporate veil is an exception to the doctrine of separate legal personality which has derived from
the Salomon’s case. 3. Where a company is a sham / mere facade concealing the true facts.
• Hence, the exceptions can be divided into 2 • The court may disregard the corporate veil of a company where itis used as a mere sham to design to conceal the true state of affairs.
a. Statutory exceptions under the CA. Re Bugle Press Ltd
b. Judicial exceptions. Facts: Shaw & Jackson held 4500 shares out of 10,000. Trelby held the remaining shares. Shaw and Jackson wanted to buy over Trelby’s shares. Therefore, they incorporated a company called
Tate Access Floors Inc v Boswel JS Holdings. They made an offer to purchase all the shares of Bugle Press. Shaw and Jackson accepted. Trelby declined
Browne Wilkinson VC stated; if people choose to conduct their affairs through the medium of corporations they are Held: the court disallowed the Holdings to take advantage of the section to expropriate Trelby's shares because it had been used for enabling majority shareholders to evict the minority.
taking advantage of the fact that in law those corporations are separate legal entities, whose property and actions are
in law not the property or actions of their incorporators or controlling shareholders. In my judgment, controlling 4. Where justice requires that the corporate veil be lifted
shareholders cannot, for all purposes beneficial to them, insist on the separate identity of such corporations but then Aspatra Sdn Bhd & Ors v Bank Bumiputra Malaysia Bhd & Anor
be heard to say the contrary when [it is no longer in their interest.' Mohd Azmi SCJ stated: The generality of the judicial power already vested in the superior courts by the supreme law of the land is unlimited, and for the purpose of achieving justice, the
power of the courts to do what is just under any law requires no special legislation.
STATUTORY EXCEPTIONS 'The case involved an application for an Anton Piller order and a Mareva injunction to prevent removal from the jurisdiction of assets owned by Lorrain Esme Osman, who was at all times a
1. Section 123 CA prohibits a company from giving a financial assistance for the purchase of shares in the director of Bank Bumiputra Malaysia Berhad and its wholly owned Hong Kong subsidiary, Bumiputra Malaysia Finance Ltd. The bank had a claim against Lorrain for the return of moneys which
company or shares in its holding company. the bank claimed were secret profits made by Lorrain without their knowledge and approval arising from transactions with Hong Kong companies.
2. Section 186(4): Failure of obtaining minimum subscription. After 4months when the prospectus has been Held: the court granted the Mareva injunction against Lorrain and 5companies, on the basis that the assets of those five companies(including Aspatra Sdn. Bhd.) were the assets of Lorrain.
issued and the company failed to obtain a minimum subscription all monies received from the applicants for Orri v. Moundreas
shares shall be refunded without interest or returns. Facts: Orri chartered a vessel from a company wholly owned by his brother-in-law, Moudreas. A dispute arose & the company sued Orri.
3. Section 540(1) An office of a company can be personally liable to creditors for debts incurred by the company Held: The mere existence of a cross-claim by Orri against Moundreas would not be sufficient to justify a stay. The parties to the cross-claim were not the same. The court looks behind the
if the company is being wound up but it continues to trade and incur debts with intent to defraud the creditors corporate personality to find the person truly at interest and exercise its power to grant a stay as justice might demand
or for any fraudulent purpose.
4. Section 539(3) read with 540(2) An officer who knowingly contracts a debt with no reasonable or probable 5. Where the company is acting as the agent or partner of the controller
ground of expectation that the company would be able to pay the debt is guilty of an offence. • Because they are separate legal persons, it is possible that a company is an agent or partner of its controller. However, this depends on establishing particular facts.
5. Section 140(1) of the Income Tax Act 1967 allows the Director-General of Inland Revenue to ignore • If a person incurs an obligation or holds a right as an agent for another person (the principal) then the right or obligation belongs to the principal.
transactions which have the effect of avoiding or evading tax. • Therefore, if a company was treated as the agent of a person who controlled it, any rights or obligations of the company arising under the scope of the agency would be treated as
6. Section 46 of the EPF Act 1991 This section requires the employer and employee to contribute a minimum of rights or obligations of the controller. Hence, would have the effect of piercing the corporate veil.
12% and 11%respectively of the employee's salary to EPF. If the employer who is a company failed to remit for Smith, Stone & Knight Ltd v. Birmingham Corporation
the contribution to the fund is an offence. The directors shall be jointly and severally liable with the company. A company (the parent company) that controlled another company (its subsidiary) argued successfully that the subsidiary should be treated as carrying on its business as an agent for the
parent company, entitling the parent company to receive compensation for disruption to its business when the premises on which the business was conducted were compulsorily acquired by
JUDICIAL EXCEPTIONS the local council.
Perman Sdn. Bhd. & Ors v European Commodities Sdn. Bhd. &Anor Cheong Kim Ko v. Kim Bin Realty Sdn. Bhd.
Gopal Sri Ram JCA held that: it not open to a court to disregard the corporate personality of a limited company save in Facts: Plaintiff entered into an agreement with Defendant to purchase the 4th floor of a building which under construction. The building was sold by Kim Bin to Nanyang Realty, which in turn
very exceptional circumstances' and that a litigant who seeks the court's intervention to pierce the corporate veil must sold it to C & E Tours Holdings. The transactions were subject to plaintiff's right under the contract. A dispute arose between Plaintiff and Defendant.
establish special circumstances showing that the company in question is a mere façade concealing the true facts.' Held: Realty had been formed by Holdings specifically to take over the building. Realty was bound by the terms of the 1st agreement. Realty was acting as an agent / alter ego of Holdings.
 DIRECTOR
QUALIFICATION OF DIRECTORS DUTIES AND POWERS OF DIRECTORS

• A director is required to have the following qualifications as provided under Section 196(2) of CA 2016; • section 211(1) the business and affairs of the company shall be
a) He must be at least 18 years old. managed by, or under the directions of the Board
b) He must be an individual, not a company. • Section 211(2) provides that the Board shall have the powers necessary
• There is no age limit of a person who may be appointed as a director because CA 2016 does not impose any limitation. for managing and for directing and supervising the management of the
business and affairs of the company subject to any modification,
DISQUALIFICATION OF DIRECTORS exception or limitation contained in this Act or in the constitution of the
DEFINITION OF DIRECTOR company.
A person will be disqualified to hold office as a director or take part in the management of the company if,
1. [Section 198(1)(a)] He is an undischarged bankrupt
section 2(1) of the CA 2016 defines a director to includes any person 2. [Section 198(1)(b)] He has been convicted of an offence in relation to the promotion, formation or management of a corporation
occupying the position of director of a corporation by whatever name called FIDUCIARY DUTIES
3. [Section 198(1)(c) ]He has been convicted of an offence involving bribery, fraud or dishonesty
and includes a person in accordance with whose directions or instructions 4. [Section 198(1) (d)] He has been convicted of an offence under Section 213(offences relating to breach of duties), Section 217
the directors of a corporation are accustomed to act and an alternate or • Directors stand in a fiduciary relation to the company that appointed
(offences relating to breach of responsibility by a nominee director),Section 218 (offences relating to the improper use of property
substitute director him.
position to gain personal benefit), Section 228 (offences relating to transaction with directors, substantial shareholders or
• Fiduciary relationship is a relationship based on trust and confidence
connected persons) and Section 539 (offences relating to the non-proper safekeeping of a company's book of a account
Section 196 (1) provides that every private company must have at least one whereby one party has the obligation to protect the other person's
5. [Section198(1)(e)] Has been disqualified by the court under Section 199
director, whereas a public company is required to have a minimum of two interests.
directors. • In this context, a director is akin to a trustee who must act in the
➢ It is immaterial whether the act and or the Section 199 CA 2016 provides for the power of the court to disqualify persons from
interests of the beneficiary.
offences referred to in Section 198(1)(a) acting as a director or a promoter of a company if:
However, according to Section 196 (4), the alternate or substitute director • However, it is to be noted that via Section 220, all the duties of director
(b)(c) and (d) was committed within or a) [ Section 1991 (1)(a)] That person was a director of two companies which
shall not be included in the calculation of this statutory minimum number of under the common law is still applicable despite the adoption of those
outside Malaysia - Section 198(2). were wound up due to insolvency within a period of five years, and his
directors. duties under the CA 2016.
➢ Section 198(3) provides that, a bankrupt conduct as a director contributed wholly or partly to the winding up
may be appointed or hold office with the b) [Section 1991 (1)(b)] That person has contravened his duties as a director
Section 196(4)(a) provides that minimum directors must ordinarily reside in The director's fiduciary duties include:
approval of either the Official Receiver or c) [Section 1991 (1)(c)] That person has habitually contravened the CA 2016
Malaysia by having a principal place of residence in Malaysia. 1) Duty to act in good faith in the interest of the company;
the court. Whereas, if the person is d) [Section 264(1) (c)(iii)] an auditor of a company shall not also be appointed
2) Duty to use powers for a proper purpose;
Fong Poh Yoke v The Central Construction Co (M) Sdn Bhd disqualified under Section198(1) (b)(c)(d) as an officer of the company. The term officer has been defined under
3) Duty to avoid any conflict of interest:
= The word 'residence' means the person must be residing in the place with and (e) he may be appointed by re- Section 2(1) to include a director.
a) Not to use his position as such director or officer.
some degree of continuity. appointed or hold office as a director with e) [Section 208(1)(e)] if the director becomes unsound mind.
b) Not to use corporate property, information and opportunity
the leave of the Court.
to make secret profit.
c) Not to compete with the company.

APPOINTMENT OF DIRECTORS VACATION OF OFFICE

• Section 196 (1) provides that every private company must The office of a director may become vacant as provided under Section 208 in one of the following events: Duty To Exercise Power For Proper Purpose And Act In Good Faith In The Interest Of The Company
have at least one director, whereas a public company is 1. Where the director resigns from his office by giving a written notice to the company at its
required to have a minimum of two directors. registered office as provided under Section 208(2). • Section 213(1) provides that: “A director of a company shall at all times exercise his powers in accordance with this Act, tor
• Section 202(1) provides that the first director of the 2. Where he retires in accordance with this Act or the company’s constitution but is not re- a proper purpose and in good faith in the best interest of the company.”
company shall be the person named in the application for elected. • A director must act honestly at all times for the interest of the company. This means he must give first priority to the
the incorporation of the company. 3. Where he is removed from his office in accordance with this Act or the constitution of the company's interest overall other conflicting interests.
• That person must have consented to the appointment as a company;
Re Smith and Fawcett Ltd Lord Greene MR said that, "They must exercise their discretion bona fide in what they consider - not what
director of a company in writing and make a declaration that 4. Where the director has been disqualified from being a director under Section 198 or Section
the court may consider- to be in the interests of the company, and not for any collateral purposes. Thus, the courts will not interfere
he is not disqualified from being appointed or holding office 199.
with directors' decision of what is best for the company as long as the directors did not place any importance on other competing
as a director of a company under CA 2016 - Section 201. 5. Where he becomes unsound mind or a parson whose person or estate is liable to be dealt with
interests.
in any way under the Mental Health Act 2001.
6. Where he dies. Re W & M Roith Ltd
7. Where he vacates his office in accordance with the constitution of the company. Facts: A director who was also the majority shareholder in the company entered into a contract with the company to pay a pension
to his wife upon his death. Following his death, his executors made a claim to the company for payment of the pension.
REMOVAL OF DIRECTOR
Held: The claim was rejected by the company's liquidator and was upheld by the court. The directors had not considered the
➢ [Section 206(1)(a)] For a private company, the removal of a director is subject to the constitution of the company
company’s interest when they made the contract. Instead, it specifically favoured the interest of one person namely the director's
➢ [Section 208(1) (b) and Section 208(2)] For a public company, a director may be removed by ordinary resolution before the expiration of the director's tenure of office
widow. Hence, it was a clear breach of the duty to act bona fide for the company's interest.
➢ Section 206 is applicable to all cases of removal of a director for a public company despite any contrary provisions in the company’s constitution or any agreement
between a public company and a director. Walker v Wimborne
➢ [Section 208(3)] A special notice is required of a resolution to remove a director under this section - The director has the right to have representations sent to all members The directors of a company in discharging their duty to the company must take account of the interests of its shareholders and
by the company and to speak at the meeting. creditors. Any failure by the directors to take into account the interests of creditors will have adverse consequences for the
➢ Section 207 (2) provides that a director who is to be removed shall begiven the right to make oral representation or written representation not exceeding a reasonable company as well as for them.
length on the resolution to remove him
 Duty To Exercise Power For Proper Purpose

• section 213(1) provides that: "A director of a company shall at all times exercise his powers in accordance with this Act, for a proper purpose Re Duomatic Ltd
and in good faith in the best interest of the company. “ Facts: The directors decided to pay compensation to a former director for loss of office. The Companies Act required that such payment be disclosed to
• Directors must act according to their job specification. the shareholders. Due to ignorance of the statutory requirement, the directors did not make any disclosure with the result that the payment became
• Directors may honestly believe they are doing something for the interest of the company and yet commit a breach of duty. unlawful.
• One of the factors to be considered is whether the directors had exercised their duty in compliance with: Held: The directors were liable for misapplication of company's funds as they had failed to act for proper purpose despite the fact that they had acted
• The Companies Act. And The company's constitution And Other relevant statutes. honestly.

Howard Smith Ltd v Ampol Petroleum Ltd

Facts: Millers was subject to a takeover offer by Ampol. Howard Smith Ltd made a rival offer. Ampol and its associated company, Bulkships, who in combination already held 55% shares of Millers, rejected the offer. The majority of Millers board were in favour of the Howard Smith Ltd takeover bid. In order to
facilitate the bid, they agreed to issues enough shares to Howard Smith Ltd to reduce Ampol and Bulkships to minority shareholders. Millers did at the time need to raise some capital. Ampol sought to have the share issued set aside.
Held: In determining whether the duty had been breached, the court had to examine the 'substantial purpose for which the power is exercised and to reach a conclusion whether that purpose was proper or not'. In this case, the purpose was "simply and solely to dilute the majority voting power held by Ampol
and Bulkships so as to enable a then minority shareholders to sell their share more advantageously 'The court concluded that, there was nothing legitimate as the basis for the directors action except 'honest behaviour and that was not in itself enough to validate the share issue. Thus the power had therefore
been improperly exercises and the share issue was set aside

Duty to Avoid Conflict Of Interest

• A director stands in a fiduciary relation to the company hence he must avoid placing himself in a situation where his personal interest may a) Use the property of the company;
conflict with his duties. b) Use any information acquired by virtue of his position as a director or officer of the company;
• Section 218(1) of the CA 2016 provides that. "A director or officer of a company shall not, without the consent or ratification of a general c) Use his position as such director or officer;
meeting: d) Use any opportunity of the company which he became aware of, in the performance of his functions as the director or officer of the company;
• It is to be noted that the director that breach of duty under Section218(1) committed an offence and shall on conviction be liable to e) Engage in business which is in competition with the company to gain directly or indirectly, a benefit for himself or any other person, or cause
imprisonment for a term not exceeding 5 years or a fine not exceeding RM3 million or to both. detriment to the company

a) Misuse the property of the company. b) Misuse of information = A director is prohibited by Section 218(1)(b) from using any corporate
Tan Sri Tan Hian Tsin V. Public Prosecutor information or opportunity acquired by virtue of his position as a director to gain benefit for himself
Held: Misusing the company's fund for a director's own benefit constitutes a criminal breach of trust. Avel Consultants Sdn Bhd v Mohammed Zain Yusof
Paul A Davies (Aust) Pty. Ltd. V. Davies Facts: The respondents were the directors of a group of companies. They formed a firm that carried out the
Facts: The plaintiff was a company carrying on business of a car dealer. Due to a down turn in the business, the directors decided to enter into a new venture in which they purchased a freehold same business as the company and solicited the company's regular clients. They also diverted certain
property. The purchased was made in their own name but was financed partly from company funds in the form of interest free loan to the directors and party from a bank loan to them. Subsequently projects from the company to the firm.
the company faced financial problem and eventually placed in voluntary liquidation. The liquidator brought an action against the directors for breach of fiduciary duty to the company. Held: The court decided this was a clear breach of fiduciary duty as it was competing as well as using
Held: the director were liable for breach of fiduciary duty as they had used the company funds for their own private purposes and not for the company corporate opportunity of the company.

c) Misuse his position as director = A director cannot use his position to obtain benefit for himself. This is prohibited under Section 218(1) (c). e) Not to compete with the company = There is no absolute rule that a person cannot become director of more than one
Cook v Deeks company. In fact, it might be difficult to avoid appointing the same person as director of two competing companies if only
Facts: Three out of four directors at Toronto Construction Company had formed a new company (Dominion Construction Company) to enable them to get a contract which was formerly few persons possess the type of skill and knowledge required to run that type of business .Breach of duty will only arise
awarded on behalf of Toronto Construction Company. The fourth director who does not involved in the said not sued on behalf of Toronto Construction Company. when the potential conflict has not been properly disclosed to the company.
Held: The contract was hold belonging to the company and the directors were not entitled to expropriate it to make it belong to them Avel Consultants Sdn Bhd v Mohammed Zain Yusof
Mahesan v Malaysia Government Officers' Co-operative Housing Society Facts: The respondents were the directors of a group of companies. They formed a firm that carried out the same business
Facts: The appellant was a director of the society which was formed for the purpose of providing houses for government servants. He had purchased land at the price of RM 456,000 as the company and solicited the company's regular clients, They also diverted certain projects from the company to the
and sold it to the society for RM 944,000. He received a bribe of RM 122,000 (a quarter of the profit). firm.
Held: The court held that the appellant had breached his duty as director by accepting the bribe and subsequently causing losses to the society. The society could have purchased the Held: The court decided this was a clear breach of fiduciary duty as it was competing as well as using corporate opportunity
land at RM 456,000instead of doubling the price. The society was given the option to either recover the sum of the bribe or to claim damages for breach of duty. of the company.

d) Misuse of company opportunity = A director may not employ the company's corporate opportunity to make personal gains. Even if the director had resigned from the company, the duty not to take corporate opportunity continues.
Canadian Aero Service Ltd v O'Malley
Facts: The defendants were respectively the president and executive Vice-president of the plaintiff company (Canaero). Canaero was Interested in certain contracts in Guyana. The defendants conducted negotiations on behalf of Canaero. Subsequently, they formed another company, Terra and resigned from
Canaero while negotiation was still going on. Terra then bid and won the contract.
Held: The court found that the defendants had breached their fiduciary duty by using the corporate opportunity that properly belonged to Canaero in order to make personal gains. Although they had resigned from the company, they still owed a fiduciary duty to Canaero. Even it the company incapable of
performing the contract had it a chance of doing it, the director can still be liable for breach of duly.
Industrial Development Consultants Ltd v Cooley
Facts: IDC was interested in certain contracts with the Eastern Gas Board (EGB). EGB was not satisfied with the set-up of IDC and declined to grant it the contract. Instead, IDC approached the managing director, Cooley and offered him the post of project manager for the projects. Cooley resigned from the
company and took up the post. IDC sued him for secret profit.
Held: The court found Cooley liable as he had obtained the post by way of the opportunity presented by the company. Therefore, he had made personal gains from the use of corporate opportunity. It was immaterial that IDC could not have obtained the contract themselves.
Peso Silver Mines Ltd v Cropper
Facts; The company (Peso) had several mining claims in Canada. A prospector approached Peso with an offer to purchase some of his mining claims which were located close to Peso's mining area. Peso’s board of directors which included Cropper considered and rejected the offer. Later on, the company's
geologist persuaded Cropper to form a syndicate to mine the rejected claims. Accordingly, a new company was set up where Cropper was one of the directors. Cropper later left Peso, peso constituted an action against Cropper for secret profit.
Held: The court decided that Cropper did not breach his duty on two reasons. First, Peso had rejected the offer before Cropper made a move to acquire the claims. Second, Cropper did not use any confidential information obtained as director of Peso to acquire the claims. His decision was purely based on
speculation and there was a possibility the venture might not be successful
 Duty of Skill, Care and Diligence Business Judgment Reliance on Information
• A director is appointed by the members of a company for whatever reasons they like. • A business judgment means any decision on whether or not to take action in respect • Sometimes, in making a decision the director might have to
• There is no requirement that a director must possess any special skill or knowledge to be a director. of a matter relevant to the company's business this has been provided under Section rely on the information given by other person.
• Hence, if a director did not perform his job in the way expected by the members due to a lack of skill or 214(2). • Thus Section 215(1) provides that he may rely on the
knowledge, the members could not take any action against the director • To safeguards the directors from being liable for the wrong decision which he made information, professional or expert advice, opinion, reports or
• .Section 213(2) of the CA 2016:"A director of a company shall exercise reasonable care, skill and and caused losses to the company, Section 214 provides that a director who makes a statements including financial statements and other financial
diligence with business judgment is deemed to meet the requirement of the duty of skill, care and data, prepared, presented or made by:
a) The knowledge, skill and experience which may reasonably be expected of a director having the same diligence under Section 213(2) and the equivalent duties under the common law and a) An officer who the director believes to be reliable and
responsibilities; and in equity and thus cannot be sued for breach of his duty. competent;
b) Any additional knowledge, skill and experience which the director in fact has. • Section 214(1) provides that, a director is deemed to have made a business b) A professional or expert retained by the company;
• Based on the above section, it shows that the CA 2016 requires that a director to have a minimum skill judgment if he: c) Another director;
base or a minimum objective standard. Therefore, if a director is having a additional knowledge, then he a) Makes the decision for a proper purpose and in good faith. d) A committee to the board of directors, on which the director
will be assessed against a reasonable person who has that additional knowledge, skill and experience. b) Does not have a material personal interest in the subject matter. is not a member.
• A director is therefore deemed to have the knowledge, skill and experience: c) Makes the decision based on information given which the director reasonably • However, it is to be noted that according to Section 215(2), a
1) Which he actually has; believes to be appropriate under the circumstances . director when relying on the information provided by others,
2) Which a person carrying his functions should be expected to have. d) Reasonably believes the decisions is in the best interest of the company. All the four must still.
• In addition these principles are now extended to the CEO, CFO,COO and other person primarily conditions must be fulfilled. If not and he is sued, he has to prove that he did 1) Act in good faith;
responsible for the management of the company. discharge his duty with reasonable care, skill and diligence. 2) Make independent assessment of the information based on
the director's knowledge

Delegation Duty of Disclosure of Interest

• Reading Section 210 together with Section 216, a director, • Section 221 provides that if a director has interest in any way directly or indirectly in a contract or proposed contract, he is to declare as soon as practicable, the nature of his interest at the
CEO,CFO, COO and any person primarily responsible for the board of directors' meeting.
management of the company. May delegate any power of the • section 221(9) where his spouse, natural child, adopted child or Step child has interest in the shares of the other contracting party. he is also deemed to have interest in the contract and
board to a committee, director, officer, employee, expert unless should declare that interest.
such delegation is prohibited by: • A director is not deemed to be interested in the contract just because of the following:
1) The CA 2016: 1) The director is a member or creditor of the other contracting party and the director's interest is not material.
2) The company's constitution; 2) That contract is related to any loan given to the company and guaranteed by the director unless the company's constitution provides otherwise.
3) The board resolution; 3) The other contracting party is a related company unless the company's constitution provides otherwise.
4) The members' resolution.

Duty Not Be A Party to A Contract with The Company

• The rule that disallows a director from making a contract with the company is based on the possibility that the director may attempt to get the best out of the deal for himself to the detriment of the company.
• Normally, parties to a contract wish to obtain the most benefit i.e. the highest price for selling and the lowest for buying.
• A director might be tempted to quote a higher price for a property that he sells to the company when it was possible for the company to buy at a lower price.
Aberdeen Railway Co v Blaikie Bros.
Facts: The railway company made a contract to purchase some equipment from a him called Blalkie Bros. One of the company; directors was a partner in the firm. He did not disclose this to the other, directors.
Held: This was a breach of duly as the directors personal interest would compel him to get the firm to sell the equipment at the highest price possible while his duty as director demanded him to obtain the equipment at the lowest price possible. This was clearly a conflict of
interest thus, the director was liable for breach of duty and the company was entitled to have the contract set aside
Transvaal Lands Co v New Belgium (Transvaal) Land &Development Co
Facts: S and H were directors of Transvaal Lands. Both were shareholders in New Belgium where S was one of the directors. S persuaded the board of Transvaal Lands to purchase certain shares of New Belgium. When Transvaal Lands discovered that S and H were
interested parties in the transaction, the company sought to set aside the contract.
Held: The court agreed that as both S and H clearly had conflicting Interest in the contract. Thus, they had breached their fiduciary duty by not disclosing the matter to the board.