You are on page 1of 6

PROPOSAL COMPANY LAW UUUK 3063

[THURSDAY 4.00 P.M 5.00 P.M]


PROBLEM SET 7: QUESTION 4

GROUP MEMBERS
Muhammad Nur Sadiqin Bin

A146690

Mohd Khusni
Kevin Brendan Kung
Choo Wen Chun
Nurul Eleena Roslan
Nurul Farahusna Razak
Nur Fatin Bintin Mohamad

A146459
A146487
A146474
A146440
A146475

Farid
Steward Lee Wai Foong
Amalina Johar
Vesvanathan Jeevaji Ganaesan
Nazrul Farid Bin Amirudin
Anis Asmira bt Amir

A146973
A146472
A146468
A146481
A146421

Sharifuddin
Wan Nur Nini Adila Binti Wan

A145485

Omar
Muhammad Hafizuddin Bin

A146670

Salehuddin
Mohamad Naufal bin Mohamed

A146461

Nasorllah Antezem
Nor Hanani Mazlan
Ooi Onn Kit
Muhammad Farhan Bin

A146436
A146434
A145508

Khairuddin

PRELIMINARY MATTER: POTENTIALLY RELEVANT PROVISIONS


FROM THE COMPANIES ACT.
There is a common law rule which states that directors must not take corporate
property, information or opportunities without the permission of the company. This
rule is said to build upon the common law conflict rule, where a director takes
corporate property, information or opportunities without the permission of the
company, the director places his personal interest over his duty to act in the interests
of the company. Since the profit is made without the companys permission, it is
deemed to be secret profit, thus breaching his duty as a director.
The above common law rule has been incorporated into the Companies Act
1965 under Section 132(2) which states a director or officer of a company shall not,
without the consent or ratification of a general meeting use the property of the
company, use any information acquired by virtue of his position as a director or officer
of the company, use his position as such director or officer, use any opportunity of the
company which he had become aware of, in the performance of his function as the
director or officer of the company or 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 detriment to the company.
We should also refer to Section 132(6) which states the director would
include the chief executive officer, the chief operating officer, the chief financial
controller or any other person primarily responsible for the operations or financial
management of a company, by whatever name called.
In the present case, Gary was the Chief Financial Officer, thus it is
unequivocal that on the face of it Section 132(2) is applicable onto him. It can also be
assumed that Gary had utilized information (possibly confidential such as trade secrets

and business contacts) in On-Line Groceries which is in violation of Section 132(2)


(b). Gary could also be said to have violated Section 132(2) (d) as he only became
aware and acted on the opportunity to join Interco through his position as the CFO of
Listco. However, Section 132 deals with duties and liabilities of subsisting directors
of a company. In the case at hand, Gary has left Listco to join On-Line Groceries.
Hence, it is our position that these provisions no longer apply to him.
That being said, there are circumstances where the fiduciary duty of a director
may survive his resignation. This principle is based on common law which will be
further discussed in the next section.
QUESTION 1: CAN LISTCO RECOVER THE RM8 MILLION FROM GARY
IN RELATION TO HIS INVESTMENT IN ON-LINE GROCERIES?
As mentioned above, there are circumstances in which a former directors fiduciary
duty survives his resignation. These circumstance were stated in the case of Island
Export Finance Ltd v Umunna which are: 1) where there exists a maturing business
opportunity enjoyed by the company; 2) where this opportunity is being actively
pursued by the company; and 3) where the directors resignation was prompted or
influenced by his wish to acquire for himself the opportunity or where it is the
directors position with the company rather than a fresh initiative that led him to the
opportunity.
It is noteworthy that the opportunity refers to the joint venture between
Listco and Interco. In the present dispute, the first situation fails because there is no
maturing business opportunity as the proposition by Interco was an act of instigation
not a subsisting agreement that is about to mature. The second situation also fails as
the facts clearly state the Listco expressly rejected the proposition by Interco, meaning
Listco is no longer actively pursuing the opportunity. The only complication is the
third situation as Gary only became aware of the opportunity by virtue of his position
as CFO of Listco and not through his own initiative.
However, there are two crucial facts to be taken into consideration which are:
1) Listco had bona fide rejected the proposition by Interco; and 2) Gary had disclosed

of his intention to leave Listco and join Interco in the event Listco rejects the offer.
Dealing with the first fact, the court in the case of Peso Silver Mines Ltd v Cropper,
stated that a director is allowed to take an opportunity for himself without the
necessity of disclosure to the company if the company had genuinely rejected the said
business opportunity. Applying this principle to the present case, in light of the fact
that Listco had bona fide rejected the opportunity evidenced by the phrase after
detailed consideration of the Listco board and without any mention of Garys
influence to that end, we opine that Gary has acted lawfully in leaving Listco and
joining Interco. At this juncture, we would like to emphasise that though Gary had no
obligations to disclose his intentions to the Listco board, he had taken it upon himself
to do so. In the case of Queensland Mines Ltd v Hudson, if a company is fully
cognizant of a directors intention to take up an opportunity which was rejected, the
director would not be deemed to be in breach of his duty if he makes a profit out of
the opportunity.
In conclusion, we believe that since Listco had bona fide rejected the business
opportunity and Gary had disclosed his intentions to the Listco board, Listco cannot
claim the RM8 Million profit made by Gary in relation to his investment in On-Line
Groceries as Gary cannot be said to have breached his duty.

QUESTION 2: CAN LISTCO RECOVER THE RM8 MILLION FROM GARY


IN RELATION TO HIS INVESTMENT IN ON-LINE GROCERIES IF GARY
HAD NOT DISCLOSED HIS INTENTIONS TO JOIN INTERCO
Referring to the question above, it will be a different discussion if Gary decided not to
disclose his intentions to join Interco. Under common law, it is agreed that directors
cannot make secret profits from the use of corporate assets, information or
opportunities as they have a fiduciary relationship with the company itself. This strict
rule is portray in the case of Boston Deep Sea Fishing & Ice Co v Ansell, where a
director of a fishing company entered into a contract to purchase fishing vessels and
boxes of ice. The director contracted with a third party that rewarded him with a

commission and the director did not report to the company of the said bonuses and
later was found out receiving it. The court held that the director must return the
commission as he had made secret profits out of the contract made on behalf of the
company.
Another case that can be referred to is Regal Hastings v Gulliver where in this case,
the court ordered the directors to pay back all the profits that they had made by selling
the shares to the new Board of Directors of the company as the opportunity for them
to make the profits come from their position as the director of the company. The court
further held that without their position as directors, they will never have the
opportunity to gain such profits. The next case to be referred is Industrial
Development Corporation v. Cooley, where the director who was also an architect
was asked to negotiate a contract with the Gas Board. In the negotiation, the director
found out the Gas Board was not prepared to give the contract to the company but was
instead prepared to give it to the director personally. Stating it was a failed negotiation
to the company, he later resigned from the company and subsequently successful in
obtaining the contract from Gas Board as well as gaining substantial amount of profit.
The court held that the said director must return all the profits received to the
company even though it did not suffer any losses as he had gained the profits by his
position as a director of the company. Hence, he had breach his fiduciary duty by
making secret profits out of his position as a director.
However, in Peso Silver Mines Ltd v Cropper, the court held that the directors are
free to keep the profits that they received out of their position as directors if the
company itself rejected the offer made by the third party who give the profit to the
director. Applying these principles to the present case, we truly believed that although
Gary did not disclose his intentions to join Interco, Listco cannot recover RM8
Million as they themselves had bona fide rejected the proposal after detailed
consideration of the Listco Board. Although Garys silence contributed to breach of
fiduciary duty, we do believed that after an offer was rejected directors are able to
comply with the offer as long as it does not in reliance of fraudulent actions.

In conclusion, we believe that since Listco had bona fide rejected the business
opportunity even though Gary did not disclose to the board, Listco cannot claim the
RM8 Million profit made by Gary in relation to his investment in On-Line Groceries.