SHARES

DEFINITION: Section 4 of CA - a share is share capital of a company and includes stock except where
distinction between stock and shares is expressed or implied.
Section 98 of CA this section sets out the legal nature of shares. Shares are movable property,
transferable in the manner provided by the articles and shall not be of the nature of immovable
property.
However, a better definition of shares is in the case of Borlands Trustees v Steel Bros & Co. Ltd - the
court stated that shares represent the interest of shareholders in the company measured by a sum of
money for the purpose of liability in the first place, but also consisting of a series of mutual covenants
entered into by all the shareholders inter se.

MAIN ELEMENTS AND CHARACTERISTICS OF SHARES.

The record of legal title of the share of a company is in the register of members as per Section 16(6)
Companies issue shares for the purpose of gaining capital generally but company may issue shares for
other purposes, for example, as consideration to purchased property.
When a person is the shareholder of the company, he has prima facie rights to
Vote at general meetings
Rights to dividend.
Repayment of capital.
Entitle to share surplus assets on a winding up.

THE SHARE CERTIFICATE AND ITS EFFECT.

Section 100(1) a certificate under the common or official seal of a company specifying any shares held
by any members of the company shall be prima facie evidence of the title of the member to the shares.
A share certificate must be under common seal of the company. It will enables the company to ascertain
the identity of its members. Contents of share certificates are:
Name of the company;
Address of the registered office;
Nominal value;
Class of the shares and;
Extent to which the shares is paid up.

DELIVERY OF SHARE CERTIFICATES

Section 107(1) the company is required to issue share certificates to the shareholders within two
months of allotment, or within one month of a transfer.
At common law, if there is any person suffers loss arising from errors in the share certificates, the
company is liable.
Those who rely on the representations made in the share certificates, and suffer loss, can take legal
action of Estoppel - to stop the company from denying the contents of the share certificates. A
person who purchases shares on the faith of certificate that contains the name of a person who has
no valid title to the shares, would suffer loss if the true owner claims his right over the shares.

LIABILITY OF COMPANY FOR ISSUE OF INCORRECT SHARE CERTIFICATE

Company is liable for any loss arising from an error in the share certificate. Once a company had
issued a share certificate, the company is estopped or prevented from denying the truth of its
contents.
 For example, in the case of forged transfer, company have to restore the name of original owner of
the share and pay damages to the innocent purchaser in good faith and with value Re Bahia and
San Fransisco Rail Company
Where a share certificate states that a shareholder has fully paid shares when in fact they are partly
paid, the company is also estopped from denying that they are fully paid Burkinshaw v Nicholls
Estoppel arising from the issue of a share certificate can only operate against the company if
company has rightfully issued the share certificate.
Company may deny liability if the share certificate is not issued according to proper procedure.
In Kelapa Sawit (Teluk Anson) Sdn Bhd v Yeoh Kim Leng & Ors, company was able to prove that
the resolution authorizing the affixing of the seal of the company to the certificate was not valid as
it was not done in accordance with the companys MOA and AOA and therefore the company is not
liable.

CLASSES OF SHARES
Companies may issue different types of shares with different rights attaching to it.
Section 18(1)(c) states that the companys MOA must state the amount of share capital with which the
company proposes to register and the classes of shares which the share capital will be divided into.
A company may issue three types of shares:
Ordinary shares.
Preference shares.
Founders shares

Ordinary shares.
Ordinary shares or sometimes referred to as equity shares are shares which are not given any
special rights, it carries all the rights of the ordinary member, namely:
Unlimited voting rights in GM, which give the power to influence the policies of the company.
Entitlement to any surplus assets of the company in winding up
Right of return of capital of winding up
Not entitled to a fixed rate of dividend
In a financial year, rights to dividend come after the preference shareholder.
If the company has a poor financial year, the ordinary shareholder will receive very little or nothing.

Preference shares.
Definition in Section 4 of CA; a share by whatever name called, which does not entitled the holder
thereof to the right to vote at a GM or to any right to participate beyond a specified amount in any
distribution whether by way of dividend, or on redemption, in a winding up, or otherwise.
Section 66 of CA if the company issues preference shares, the rights attaching to the shares must
be mentioned in either MOA or AOA.
The rights of preference shares are;
Right to fixed dividend (must be stated on MOA or AOA)
Right to return of capital upon winding up in priority.
Not entitled to any surplus assets of the company in the event of winding up.
No right to vote at GM.

REDEEMABLE PREFERENCES SHARES

Section 61 allows company to issue redeemable preference shares if authorised by its AOA.
 It allow for the repayment of the principal (capital) at a particular time or on the occurrence of a
particular even prior to winding up.
Shares redeemed under Section 61 are treated as cancelled on redemption. Although the
companys share capital is reduced, a cancellation of shares under this section is not treated as
reducing the amount of the companys authorised share capital Section 61(2).

CUMULATIVE PREFERENCES SHARES

Holder of cumulative preference shares carries forward their entitlement to a distribution from one
year to the next year if no dividend is declared in a particular year.
NON CUMULATIVE PREFERENCES SHARES
holder of such shares is only entitled to the specified rate of dividend out of profits of the current
year where the dividend is declared and paid.
The holder lost its entitlement to any dividend that is not declared and paid in the relevant year.
PARTICIPATING PREFERENCES SHARES
holder of such shares is entitled to participate in the profits beyond the fixed dividends, by way of
an additional fluctuating dividend if the company is successful.
The holder of participating preference shares is also entitled to participate in the surplus assets of
the company together with the ordinary shareholders.
CONVERTIBLE PREFERENCES SHARES
These shares usually carry a right to a preferred, fixed dividend for a particular term and then allow
for or require conversion to ordinary shares at the end of the term.
SOME OF THE RIGHTS USUALLY ATTACHED TO PREFERENCE SHARES
Rights to fixed dividend (cumulative or non cumulative).
If the companys financial position is not good in a particular year and no dividend is declared, the
rights of preference shareholders may still be in better position if the rights are cumulative. In
cumulative preference shares, dividends will be carried forward and pain in subsequent years
where company make profits.
Rights to return of capital.
Upon the winding up of a company, the company will return the capital to the shareholders out of
the assets of the company. In this situation, preference shareholders will have more benefit. The
capital will be return in priority to the preference shareholders, then the remaining assets will be
returned to ordinary shareholders.
Right to participate in surplus profits.
Dividend of ordinary shareholders is never fixed. It depends on how much profits they get that
year. However, preference shareholders have fixed dividend. Preference shareholders may obtain
dividend of larger than what have been fixed if they are given the right to participate in surplus
assets.
Right to participate in surplus assets upon winding up of the company.
Upon winding up, the assets of the company will be paid to the creditors first. Then only the
shareholders capital will be distributed according to the amount they have. Once they obtain their
capital, the remaining assets are the surplus assets. Where there are surplus assets, they are
shared only among the ordinary shareholders, not the preference shareholders because that is not
their automatic right, unless they ask to participate in surplus assets. Then they can share the
surplus assets.
Limited rights to vote.
Preference shareholders have no right to vote at GM. Their voting rights are limited under Section
148(2) of CA, where they can only vote when;
 they are entitled to vote at GM when their dividends have not paid up.
(b)They are entitled to vote for the winding up of the company.
They are entitled to vote when the company decided to varies their rights.
Right to redeem.
Section 61 of CA allows company to issue redeemable preference shares if authorized by its AOA.
It allows for the repayment of the capital at a particular time or on the occurrences of a particular
event prior to winding up.
Shares redeemed are treated as cancelled on redemption.
Section 61(2) although the companys share capital is reduced, a cancelation of shares under this
section is not treated as reducing the amount of the companys authorized share capital.
TRANSFER OF SHARES

A persons complete legal title to shares in a company cannot be acquired without registration.
The provisions for transfer of shares are contained in Section 103 107 of CA.
Section 103(1) provides that a company shall not register a transfer of shares unless proper
instrument of transfer in a prescribed form has been delivered to the company. This provision is
mandatory.
When the necessary papers for transfer were in order, the shares must be registered.
For public listed companies there is no share certificate where they operate through a script less
system and the shares ownership may be checked at the Central Depositary System.
Instrument of transfer can be found in Form 32A it, requires that it be signed by both transferor
and transferee in the presence of a witness. It also provides that the consideration for the transfer
to be stated.
In the case where the shares are jointly held by 2 or more persons, for an instrument of transfer
to be effective, it must be signed by all of the joint holders. If the signature of one or more joint
holders is forged, the transfer is void.

Procedure on transfer of shares (Fully).

- Contract between transferor and transferee.
- Transferor hands over Form 32A and share certificate to the transferee.
- Transferee lodges the two documents to the company.
- The company registers name of the transferee in the register of members.
- New shares certificate issued.
- Transferee becomes a new member of the company.

Procedure on transfer of shares (Partly).

- Contract between transferor and transferee.
- Transferor hands over Form 32A and share certificate to the company for certification of transfer
(deemed to be certificated if it bears the words certified lodged)
- Transferor hands all the documents over the transferee.
- Transferee lodges the two documents to the company.
- The company registers name of the transferee in the register of members.
- New shares certificate issued.
- Transferee becomes a new member of the company.
Restrictions on transfer of shares.
Private company Section 15 of CA; must restrict the right to transfer its shares.
Public company normal restrictions found in the public company are
 i. Pre-emption right.
- Pre-emption right is the right of the first refusal, where a member who wishes to transfer their
shares must first offer it to the existing members who are willing to purchase the shares. If there
are no members willing to purchase the shares, then transfer can be made to the outsiders.

ii. Discretionary rights.

- Article 32 Table A; AOA may provide that directors may, in their absolute and unfettered
discretions, refuse to register shares.
- It must be exercised bona fide for the interest of the company as a whole.
- If the directors give reasons for the refusal, then the reasons may be challenged for
unreasonableness.
- Re Smith & Fawcett; the company had Smith and Fawcett as two shareholders holding equally
4001 shares each. Both are directors. One of them died and the son of the deceased apply to the
company to transfer 4001 shares of his father to him. The director, having discretion said that
2000 shares must be transferred to somebody else and the balance transferred to the son. The
court held that the son was not able to proof that the director did not exercise the discretion in
bona fide for the benefit of the company. The discretion stands.
- Principle;
o The directors can refuse to register a transfer without giving any reason.
o The transferee can only compel registration if he can show lack of bona fide.
o Court will presume that the directors exercise their powers honestly, unless it appears
otherwise on the face of the document or in the confession of the directors.
- Kesar Singh v Sepang Omnibus; when the directors of a company are given by the AOA absolute
and uncontrolled discretion with regard to registering a transfer of shares, the only limitation on
the directors discretion is that it should be exercised in bona fide for the interest of the company.

FORGED TRANSFER.
Definition: A forged transfer is a total nullity and the true owners name must be restored back to the
register of members.
The innocent purchaser who is without knowledge, in good faith and has provided valuable consideration
cannot acquire better title than the defective title of person who commits forgery.
This is mention in Section 27 of SOGA where it upholds the common law principle of nemo data rule.
Re Bahia v San Francisco Rail Company; the court held that
i. The true owners name must be restored back to the register of member. Forged transfer is a
total nullity.
ii. Innocent purchasers name should be removed from the register.
iii. The company is liable to pay damages because it was stopped from denying that the person
who forged the signature is the true owner.
iv. The company must demand indemnity from the immediate purchaser.
v. Immediate purchaser then may sue the forger of the owners signature.

SHARE CAPITAL AND ITS MAINTENANCE

MEANING OF SHARE CAPITAL

Share capital is capital which comes from shares i.e. when companies issue shares, the companies will get
capital contributed by those who subscribe the shares.
Section 18(1) of CA the memorandum of every company shall be stated the amount of share capital
which the company proposes to register, except for unlimited company.
A company cannot allot more shares than authorized in the MOA- case bank of Hindustan, china & japan
ltd v Alison.

TYPES OF SHARE CAPITAL.

Nominal / authorized capital the maximum amount of capital which a company is authorized to raise
by issuing its shares. Authorized capital is mentioned in terms of what is called the par value.
Issued capital an issued capital is that part of the authorized capital of a company which has been issued
to the members.
Paid up capital represents that part of the issued capital which has been fully paid up by the members,
or credited as having been paid.
Called up capital demand by the company to its shareholders to pay certain amount of their total issued
shares.
Unpaid capital - Demand by the company to its shareholders to pay certain amount of their total issued
shares.
Uncalled capital Standby capital (amount of share capital a company has not demanded yet). Sometimes
is called reserved capital. The reserve capital or reserve liability is that part of the uncalled capital which
a limited company has by a special resolution determine must not be capable of being called up except in
the event and for the purposes of the company being wound up and which cannot be called up.

THE NECESSITY FOR MAINTENANCE OF CAPITAL.

The concept of capital maintenance is geared substantially towards the protection of creditors of the
company who, in the eyes of law, have an interest in the paid up share capital and other assets of the
company. The capital is fixed, certain and every creditor of the company is entitled to look to that capital
as his security. When a creditor gives credit to a company, he gives credit of the faith of the representation
that the capital of the company shall be applied only in the legitimate course of its business and the
creditor has therefore a right to say that the corporation shall keep its capital and not returned it to the
shareholders.

PROVISIONS TO PREVENT WASTE OF SHARE CAPITAL.

1. Underwriting commission.
2. Issue of shares at discount.
3. Issue of shares at premium.
Underwriting commission (Section 58 of CA).
- Underwriter is a body / person who undertakes to subscribe certain amount of shares if public
does not want to subscribe for the shares in the company.
- It is a risk for the company if there are few subscribers because capital is important to start
companys new business.
- However, the company will have to pay certain commission to the underwriter under the
agreement even if there is no shortfall.
- Even if the shares have been subscribed by the public, the company still needs to fulfill its
obligation to fulfill its obligation to pay the underwriters commission under the agreement.
- Control of the underwriting commission is mentioned in Section 58(1)(b) where company cannot
pay more than 10% of the issued capital for the underwriters commission and cannot be lesser
than what is stated in AOA whichever is lesser.
Issue of shares at discount (Section 59 of CA).
 - The issue of shares by a company at a discount is prohibited at common law because it principle
it constitutes a reduction of share capital without the confirmation by the high court as required
under Section 64 of CA.
- This rule is established under Ooregum Gold Mining Co of India Ltd v Roper & Anor the market
value of the 1 ordinary shares of a company was 2s 6d. the company thereupon issued
preference shares of 1 each with 15s credited as paid, leaving a liability of only 5s a share. It was
held that the issue was ultra vires and the allotees were liable to pay for the shares in full.
- It cannot be dispensed with anything in the memorandum/articles, nor by any resolution at the
company, nor by any contract by the company and outsiders who have been invited to become
members of the company & who do come in on the faith of such contract.
- Section 59 of CA prohibits a company from issuing shares at a discount unless certain conditions
are met under Section 59(1):
(a) The issue of shares at a discount is authorized by resolution passed in general meeting of the
company, and is confirmed by the order of the court.
(b) The resolution specifies the maximum rate of discount at which the shares are to be issued.
(c) At least one year had elapsed since the date of which the company was entitled to commence
business.
(d) The shares are issued one month after the date on which the issue is confirmed by the court
or within such extended time as the court allows.
(e) The shares must be a class already issued.
- However noted that the wording in Section 59(1) of a class already issued. That means the
company can never issued 1st issue of shares at a discount. The rule in the Ooregums case still
applies to the 1st issue of shares. The second issue and thereafter can be issued at discount and
subject to the conditions.
Issue of shares at premium (Section 60 of CA).
- A company may at its own discretion issue shares at premium that is to say at a price over par
value.
- The premium is that part of the amount in excess of par value of the share.
- Generally a company is under no obligation to raise its shares at premium.
- The power of raising capital is a fiduciary duty/power to be exercise in the best interest of the
company (Hilder v Dexter).
- Section 60(2): the amount of premium must be paid into a special account called share premium
account where the money can be applied for certain limited purposes.
- Section 60(3): lays down on how the premiums collected on the issue of shares could be utilized
- The 9th schedule of the Act, para 2(1)(d)(i): the amount of share premium must be shown in the
balance sheet of the company at the end of the accounting period.
- Re Hume Industries (Far East) Ltd : share premiums were not divisible profits and could not be
applied to pay cumulative preferential dividends.

PROHIBITION UNDER SECTION 67 OF CA.

1. Prohibit a company from purchasing its own shares.
2. Prohibit a company from giving financial assistance for the purchase of its own shares.
Prohibit a company from purchasing its own shares.
- At common law a company is totally prohibited from purchasing its own shares.
- The simple rational behind it is that, if the company purchases its own share, capital will be
reduced mush to the detriment of creditors whom the doctrine of maintenance of capital
 protects. It amounts to return of capital to members which would the end jeopardize the
creditors protection.
- The prohibition was first expressed in the Trevor v Whitworth in this case, the executor of W, a
deceased shareholder of the company (James Schafield & Son Ltd), sold his shares in the company
to it. payment was to be made in two installments. Prior to the payment of the second installment,
the company went into liquidation. The executor claimed the balance from the companys
liquidator, T. the companys MOA did not authorize the company to purchase its own shares even
if its AOA permits.
- The rule in Trevor had been adopted by Section 67(1).
- Mookapillai & Anor v Liquidator, Sri Saringgit Sdn Bhd & Ors there, an agreement was reached
between the majority members and the minority members of a limited company, that the
company would purchase the share of the minority members for RM1,260,910 and for the
reduction of the paid up capital of the company and that the company would raise the stipulated
sum by the charge of its assets. The Federal Court held that Section 67(1) clearly prohibited the
purchase by a company of its own shares.
- The provision did not only prohibit the company form purchasing its own shares but extended to
purchasing shares in the holding company.
- Section 17 a subsidiary cannot own shares in their parent/holding company.
- Demster v NCSC those who wish to purchase shares shall use their own resources, not the
company in order to prevent unauthorized capital reduction, prejudice to shareholders interests,
alter the financial position of the company detrimentally and manipulation of shares/market.

Prohibit a company from giving financial assistance for the purchased of its own share.
Section 67(1).
- The company is prohibited from giving financial assistance o any person directly or indirectly for
the acquisition of its own shares/shares in its holding company except as is otherwise expressly
provided.
- The reason is to ensure that the rights of creditors who ultimately look to be the issued capital of
the company, are not prejudiced.

Section 67(2) provides exceptions to the general rule:

The company lends money in the course of its ordinary business;
If the financial assistance is in accordance with any scheme for the benefit of employees of the
company / employees of its subsidiary company;
If it is to employees (except directors) of its subsidiary to enable them to purchase shares in the
company / its holding.

Wallesteirner v Moir
The main test used to ascertain if s67(1) has been breached is by looking at the companys money and
looking at the companys shares and who owns it. If the companys money has been used to finance the
purchase, it has breached s67(1).
Cheah Theam Swee v OU Bank
 To breach s 67 the financial assistance must come from the company, not the shareholders.

Selangor United Rubber Estate v Craddock C wished to acquire the company, SURE. He made a
merchant bank to bid the shares for him which was accepted 79% of the companys stockholders. C, using
his puppet in SURE, makes the company lend money to a company called Woodstock. Woodlock then lend
the money to him. He paid to the bank to cover the cost of the bid. The net result was that the companys
money was lent to C through Woodstock in order to enable him to acquire share of the company. The
court held that the company was giving financial assistance to acquire the share.

What constitute financial assistance:

(a) A company guarantees/gives security for a loan made to a person in order to enable him to acquire
the companys share.
- Chung Khiaw Bank Ltd v Hotel Rasa Sayang SB & Anor appellant (the bank) had granted a company,
Johore Tenggara Sdn Bhd a fixed loan of RM1.5 million to facilitate the purchase of shares in Hotel Rasa
Sayang Sdn Bhb. The fixed loan was secured by a 1st legal charge on a piece of land owned by the hotel
and a debenture stamped up to RM1.5 million on all the assets of the hotel. This was on 1980. On 1982,
the bank granted an overdraft facility and a further term loan of RM2.5 million to the hotel secured by
landed properties of the hotel and the hotels subsidiary. One of the 1982s terms of loan was to liquidate
the 1980s fixed loan upon release of the 1982s loan. The loans were defaulted and the bank took several
actions to realize the securities provided by the hotel. The court held that the hotel had given financial
assistance contrary to Section 67.

(b) The release of a debt or obligation; if the effect of the release is to reduce the price payable for the
shares.
- Eh Dey Property Ltd v Dey Dey was a shareholder in a company together with 3 other directors. Mr.
Paul and his wife wished to purchase his shares and those of the other shareholders. An agreement was
made whereby it was deemed that Dey had repay the money that he owned to the company and the price
of his shares was reduced, so that Paul obtained Deys shares at a lower price than that payable for the
shares of the other shareholder. The court held that this amounted to giving financial assistance to Paul
to enable them to acquire the companys shares.

(c) Where a company purchased property from a person to enable him to purchase the companys
shares, even at fair price, was held to be a financial assistance.
- Belmont Finance Corporation Ltd v William Furniture Ltd B was a subsidiary of City Industrial Finance
Ltd. Grosscurth wished to acquire B. to do so he sold to B the entire shareholding of a company called
Maximum which he controlled. Using this money, G bought the shares of B from M. The net result was
that at the end of the series of transactions, G owned B which in term owned M, C, B and Bs entire fund.
Court of Appeal held that there was illegal financial assistance given to G I order to enable him to acquire
the share of B. the sale of M to B was not bona fide commercial transaction but a device to enable G to
use Bs own fund to acquire Bs share.
OTHER CASE ON PROHIBITION IN GIVING FINANCIAL ASSISTANCE
Armour Hicks Northern Ltd V Armour Trust Ltd
Two directors of P were also directors of its subsidiary company. The holding company owed one of its
shareholder. The directors of P managed to get the subsidiary company to pay debts of its holding
company and the shareholder then transferred shares in the holding company to the directors.
Held: without the directors arranging for the settlement of the debt to the shareholder, the shareholder
would not transferred the shares to the directors. This was financial assistance by a subsidiary for the
purpose of acquisition of shares in its holding company.

However, there are exceptions to the rule,

(a) Section 181(2)(c) of CA.
(b) Section 67A of CA.
(c) Section 61 of CA.

Section 181(2)(c).
A company by the court order, provide for the purchase of the shares or debentures of the company by
other members or holders of debentures of the company or the company itself.
Section 67A.
Allows a public company with a share capital to purchase its own shares if it is so authorized by its articles.
The purchase can only be made with the following conditions under Section 67A(2):
(a) The company is solvent at the time of the date of the purchase and will not become insolvent by
incurring the debts involved in the obligation to pay for the shares so purchased.
(b) The purchase is made through the Stock Exchange on which the shares of the company are quoted
and in accordance with the relevant rules of the Stock Exchange.
(c) The purchase is made in good faith and in the interest of the company.
Section 67A(3) the company may apply its share premium account to provide the consideration for the
purchase of its own shares.
Section 67A(3A) when the company had purchased its shares, the directors may:
(a) To cancel the shares.
(b) To retain the shares so purchased in treasury.
(c) To return part of the shares as treasury shares and cancel the remainder.
Section 61 - Redeemable preference shares.
The company may issue redeemable preference share upon terms that they may be redeemed at the
option of the company provided that the requirement of Section 61 are complied with.
- The issue of redeemable preference shares must be authorized by the AOA & redemption shall be
affected only on such terms and in such manner as provided by AOA.
- Re St James of Estate Ltd this section also only authorizes the issue of redeemable preference share,
and not to convert existing preference/equity shares into redeemable preference shares.
- Section 61(2) the redemption shall not be taken as reducing the amount of authorized share capital
of the company.
- Section 61(3)(b) the shares shall not be redeemed
 (a) Except out of profits which would be otherwise be available for dividend, or out of the proceeds
of a fresh issue of shares made for the purposes of the redemption.
(b) Unless they are fully paid up.

PROHIBITION ON COMPANIES PAYING DIVIDENDS OUT OF CAPITAL

A company can only pay dividend from profits or pursuant to Section 60 of CA (share premium account,
given in the form of shares and not in cash).
Section 365 of CA no dividend shall be payable to the shareholders of any company except out of profits
or pursuant to Section 60.
Therefore, directors of a company cannot declare dividends out of capital.
This provision is designed to prevent a reduction of capital being disbursed as payment of dividends out
of company issued capital.
To determine whether the company has profits or not is based on realized profit.

MEANING OF PROFIT
The Act does not defined the word profit or state how profit is to be assessed.
In Lee v Neuchatel Asphalte Lindley LJ said that the matters are left to men of business.
The real question for determination is whether there are profits available for distribution is to be
answered according to circumstances of each case.
Segenhoe v Atkins-If the dividens has been improperly paid ans the shareholders knew or ought to have
known of that fact, the directors are liable to repay

PROHIBITION ON COMPANIES REDUCTING THEIR SHARE CAPITAL.

Generally, a company is prohibited from reducing its issued capital unless in accordance with the Act.
So the company is prohibited to return its assets to the companys members since the effects of such a
return of capital would be to reduce the assets that are available for distributions to the creditors should
the company goes into liquidation.
However a company may reduce its capital only by complying with the procedure set out in Section 64 Of
CA.
Case: Merchant Credit Pty Ltd v Industrial & Commercial Realty Co.Ltd
MC was set up as a joint venture between Industrial Commercial Bank (ICB) and Arthur Lipper
International Ltd (ALI). It was agreed that ICB and ALI would take 47.5% of MCs share capital each.
MC proposed to develop an ice skating complex and the costs of the project was over $1million. ICB agreed
to subscribe 332, 500 shares which were taken up by ICR, a wholly-owned subsidiary of ICB. Payment was
made to MC, the balance to fund for the project was advanced by ALI. Issue of shares was deffered until
the project got approval. The project was abandoned because the planning permission could not be
obtained. ICR then commenced proceeding claiming the return of 332, 500 together with interest.
The court held that ICR were not entitled to have their money back as the money was paid for shares and
not as loan. MC have no power to return the money without reduction of capital which could only be
affected by leave of court.
Modes of reduction.
(1) Section 64(1)(a) a company may extinguished or reduce the liability on any of its shares in respect
of share capital not paid up.

Case: Re Doloswella Rubber & Tea Estate Ltd the company was incorporated with the object of
developing a rubber estate in Ceylon of about 8000 acres. Its issued capital was divided into 640 shares of
500 each on which 185 per shares had been paid. After its incorporation the company decided to limit
the area of cultivation to 4000 acres and consequently did not require the whole of its issued capital. In
other words each 500 shares was converted into a 300 shares and the amount paid up was apportioned
accordingly.

(2) Section 64(1)(b) a company may cancel any paid up share that is lost or is not represented by
available assets.

A company may pay off any paid-up share capital that is in excess of its needs.
Case: Re Fowlers Vacola Manufacturing Co Ltd in this case, because of intense competition in its food
canning business, the company abandoned this activity and consequently had capital in excess of its
needs. It resolved to reduce its capital and return the excess to its ordinary shareholders. This was done
by reducing the nominal value of ordinary shares from 10s each to 2/9 and returning 7/6 on respect of
each share.

PROCEDURE FOR REDUCTION.

Reduction is permitted if:
a. Authorised by the companys AOA;
b. Special resolution has been passed setting out the terms of the reduction; and
c. It is confirmed by court

Section 64(2) gives the opportunity to all creditors of the company to object to the reduction.
Section 64(4) provides that the court may make an order confirming the reduction on terms and
conditions as it thinks fit.
Section 64(6) further states that order of court is ineffective until lodged with Registrar.
Confirmation of court
Re Muexs Brewery Co - The court would not allow a reduction of share capital of the company if it
would discriminate the creditor in the sense that the companys liability to the creditor would not be
made.
Re Holder Investment Trust Other than the interest of creditor, the just and equitable treatment
of shareholders must also be considered by the court in order to allow confirmation for proposal to
reduce share capital.

Effect Of The Breach Of Section 67

Section 67(3) - a companys officer in default and not the company are liable for a fine of RM1000,000
or 5 years of imprisonment.
 Section 67(4) the court may, in addition to imposing penalty under subsection (3), order the
defaulting officer to pay compensation to the company / any other person who had suffered loss as
a result of the prohibition.
At common law, a transaction which breaches Section 67(1) is illegal and hence void. The company
would be prevented from recovering such a loan in court proceeding.
However, Section 67(6) a company (or any person : before 2007 amendment) can recover the
amount of any loan made in contravention of the section. Thus if a company lends money to a 3 rd
party under sec 67(1) and is void for illegality, the company can still recover the money under this
section.
VARIATION OF CLASS RIGHT

1. Definition
Class rights are rights which are attached to a class of shares. Each types of class of shares issued
by the company will have their own particular right. Most commonly class rights are given in the
articles and are attached solely to the shares. However, in exceptional circumstance it is possible
for class right to be attached to the shareholder as opposed to the shares (Cumbrian Newspapers
Group Ltd v Cumberland & Westmorland Herald Newspaper & Printing Co. Ltd )
A variation of class right is the alteration, deletion, amendment or change which has already been
attached to a certain class of shareholders. These rights can generally be found in the MOA or AOA
of the company.

2. What amounts to a variation of class right

Section 65 (1) A variation of a class right is one which directly alters the right of a class of
shareholders.
Section 65(7) when the company alters MA or AA to affect the particular shareholders, then it is
considered as variation.
A distinction must be drawn between a variation of a class right and a mere variation of the
enjoyment. Thus, Cancellation of class right amounts to a variation however the issue of new shares
that affect the value of shares in a particular class or the enjoyment of rights attaching to shares in
that class is NOT SUFFICIENT to constitute a variation of class right.
In Greenhalgh v Ardene Cinemas, the company had issued ordinary shares of 1/ each as well
as preference shares of 20s each. All shares carried the right to one vote per share. The ordinary
shareholders passed a resolution to sub-divide their shares into 20s shares. The preference
shareholders objected to this claiming that there had been a variation of their class rights and
that the procedure for so doing had not been followed. The court held that there was no
variation of the rights of the preference shareholders as their rights remained the same as
before. At best it was only a variation of the enjoyment of their class rights.
In the case of Reid House Ltd v Beneke, the company has a building that is divided into six
residential units. Articles of association clause provide that states that the company's share
capital is divided into different classes. Holders of each class of shares have exclusive rights to
use the unit accommodation. There is a modification of the rights clauses included in the article,
namely:
"Approval of a majority of the class of shares is required when matters relating to the
rights holders of the class to make any changes."
 When a resolution was passed to renovate the building, the pl did not agree. Renovations were
made, it affected the pls enjoyment to his unit as there was debris and sound disruptions thus he
objected. The ct however found that this alteration did not affect his class right but merely his
enjoyment to the class right and thus the pls plea was dismissed.
In White v Bristol Aeroplane Co Ltd [1953] this case was concerning new share issues that
diluted the voting power of the complaining preference shareholders and did but not change
the voting rights attached to the preference shares. In this case, the courts drew a distinction
between a variation of rights and a variation in the enjoyment of those rights, and held that the
share issues fell into the latter category.
EXECPTION:
1. PREFERENCE SHAREHOLDERS :
o S65(6) the issue of new preference shares ranking in pari passu with the existing preference
shares amount to variation of the existing preference shareholders rights.
o S66(1)The issue of new preferences shares with the same right as existing preferences shares is
allowed only if it is authorized/explicitly allowed in the MOA. Only in this situation will the new
preference shares not amount to variation.
2. ORDINARY SHAREHOLDERS:
o The issuing of new shares of equal voting power is not allowed only if there is an equilibrium
clause in the MOA or AOA which states that the voting power of shareholders must remain the
same.

3. Alteration of class rights under (AOA, MOA, SHAREHOLDER AGREEMENT)

AOA
Section 31 of CA; the company can alter or add the class right via special resolution but is subject
to 5 requirements.
1. Alteration does not contradict the memorandum
2. Does not contradict the companies act
3. Does not affect the rights of founder shareholders (Pang Teng Fatt)
4. Is in bona fide interest of the company
In Brown v British Abrasive Wheel Co Ltd, a company was in financial difficulties. The
majority were willing to inject more capital to save the company from liquidation but
wanted to get rid of the minority shareholders. They therefore proposed an alteration
of the articles to the effect that the majority could compel the minority to sell their
shares to them (the majority) at a fair price. The court held that this was not bona fide
for the benefit of the company. It amounted to a fraud on the minority and the alteration
was not valid.
5. Must be done through a special resolution
Article 4 of Table A; the usual procedure for the variation of class right.
Special resolution passed by a separate meeting of the class of shares.
By consent in writing by holders of of the issued shares by the class.
However, AOA can give a different procedure because each company do not have to follow Table A
Crumpton v Morrine Hall Pty Ltd
Variation of class right is invalid if procedures set out in AOA has not been complied with
Fisher v Eastheaven
The variation was made via a special resolution in a general meeting and was thus held to be invalid.

MOA
Section 21 of CA; MOA of a company may be altered to the extent and in the manner provided
by this act but not otherwise.
However, Section 21(1A) provides that if a clause that should have been in AOA being put in
MOA, it can be altered by special resolution.
However, Section 21(1B) restricts the right under (1A) does not affect the class right.
Section 18 of CA; class right need not be placed undet he MOA but once in place, cannot be
ammended, and thus under this section, if the class right is being included in the MOA, there is
possibility that it can never be altered.
Shareholders agreement.
It can be altered by doing another agreement because every shareholder must agree.
4. Members right to oppose the variation.
It is necessary to protect the rights of the holders of particular classes of shares against any
attempt by other classes to vary/change those rights.
Section 63 of the CA sets out that a creditor, shareholder or the company itself may challenge
the issuance of the shares if they have been wrongly issued.
However, in the case o Kelapa Sawit (Teluk Anson) Sdn Bhd v Dr. Yeoh Kim Leng & Ors, for the
action to be successful, the issuer of the said shares must have had a locus standi to issue the
shares in the first place.
Section 65 (1) of CA provides that holders of not less than 10% of the issued shares of the class
whose rights have been varied, if any such application is made, the variation or abrogation shall
not have effect until confirmed by the Court.
Section 65(3) Such application may be made within one month after the variation, apply to
court to set aside the variation and must be made in writing.
Section 65(4) The court may make the order if it is satisfied that the variation would unfairly
prejudice the members of the class. (Test of unfair prejudice) The decision made by the court
is final
Section 181 provides a remedy to the situation whereby if the court is satisfied that there has
been oppression, unfairly discriminates or prejudice, relief can be granted in virtue of S181(1)(b)
where the court under S181 (2)(b) can choose to prohibit, cancel or vary the resolution and also
supervise future actions of the company to ensure the problem will no longer occur.

MEETINGS
The will of the company is generally expressed through resolutions passed at the general meeting.
General meeting involved all members of a company.

TYPES OF COMPANY MEETING;

1. STATUTORY MEETING (GM)
Applies only to a public company limited by shares and by incorporation. It does not apply to a public
company limited by guarantee.
Section 142: Every public company limited by shares shall within a period of not less than one month
and not more than three months after the date at which it is entitled to commence business hold a
general meeting of the members of the company to be called the statutory meeting.
 Sole purpose of this formal meeting of members is to receive and consider the Statutory Reports of
the company together with the Auditors Report. The Statutory Report (Form 51) must:
contain particulars as provided under Section 142(3)(a)(b)(c)(d) & (e);
be certified by at least two directors;
be forwarded to every members of the company at least 7 days before the day on which the Statutory
Meeting is to be held; and
be lodged with the Registrar of Companies at least 7 days before the date of the Statutory Meeting.
At the Statutory Meeting, shareholders present are at liberty to discuss any matter relating to the
Statutory Report. If members are not happy with the state of affairs the meeting may by ordinary
resolution appoint a committee or committees of inquiry and adjourn the Statutory Meeting from
time to time.
At any adjourned Statutory Meeting, a special resolution may be passed that the company be wound
up notwithstanding any other provisions of the Act, but at least seven days notice of intention to
propose such resolution has been given to every member of the company.
Failure to hold such meeting and lodge a statutory report is a ground for compulsory winding up under
s 218 (1)(b)

2. ANNUAL GENERAL MEETING (AGM)

It is mandatory for every type of company to hold a general meeting in each calendar year as its AGM.
The AGM of every type of company under the Companies Act 1965 is required under Section143 to be
held once in every calendar year. The first AGM must be held within 18 months of its incorporation and
subsequent AGM are to be held once in every calendar year and not more than 15 months after the
holding of the last preceding AGM.
Extension of time may be granted by the Registrar of Companies if applied for under Section 143(2).
Matters to be transacted at the AGM as provided in most companies AOA and in accordance with Table
A, 4th Schedule:
to declare final dividend as recommended by the Board of Directors;
to receive and consider the audited accounts together with the reports of the Directors and
Auditors thereon;
to remove and elect directors in accordance with the Articles;
to appoint auditors and affix their remuneration.
Business other than the above ordinary business at any AGM is classified as Special Business.

3. EXTRAORDINARY GENERAL MEETING (EGM)

Subject to the Articles, EGM of members may be convened at any time for the transaction of special
business which requires attention before the next AGM.
The directors are the convening authority for an EGM whether they themselves instigate the calling
of the meeting or whether they are required to call the EGM by requisition of members. The type of
resolution includes ordinary or special resolution depending on the matters.
The most common business transacted at an EGM of Malaysian companies before the final AGM is
to empower the Directors pursuant to Section 132D to issue shares in the Company at any time upon
such terms and conditions and for such purposes as the Director may in their absolute discretion
deem fit.

4. GENERAL MEETINGS ON REQUISITION OF MEMBERS/ CLASS MEETINGS:

The law is fair to minority shareholders in that a member or members of a company with a share
capital carrying voting rights may at any time lodge a requisition requiring the Directors to
 convene an EGM for the purposes stated in the requisition. Section 144 provides in detail the
procedure of calling such EGM.
For a company not having a share capital, the quantum is one-tenth of the total voting rights of
all members having at the date concerned the right to vote at general meetings.

CONVOCATION OF MEETING
Notice of Meetings:
A meeting of a company other than for the passing of a special resolution shall be called by notice in
writing of not less than 14 days or such longer period as is provided in the AOA Section 145(2)
Therefore the AOA shall not contain a provision for a period of notice for a meeting of a company
which is less than 14 days.
The notice is to be given to every member and the auditor of the company. And in the case of a listed
company, a copy of the notice must also be given to the Bursa Malaysia.
In the case of a meeting called for the passing of a special resolution, notice of 21 days is required:
Section 152
For public companies, the AGM must be convened by 21 days notice Section 145(2A)
The 14-day or 21-day notice as referred to above shall be clear days notice if the AOA are silent on
this matter. Clear days notice means both the day of service and the day of the meeting are excluded.
Section 145(3) provides that a meeting however, may be called by notice shorter than is required (i.e.
either 14 days or 21days as the case may be) if it is so agreed:
By all the members entitled to attend and vote thereat in the case of an AGM, or
By a majority in number of the members having a right to attend and vote thereat and
together holding not less than 90% in normal value of shares giving a right to attend and vote
(and for a company not having a share capital, by a majority of not less than 95% of the total
voting rights of all members)
No proceeding shall be invalidated by defect or irregularity of notice or time unless substantial
injustice has been done which cannot be remedied Sec 355(2)
Meetings may be restricted if notice/ explainatory notes sent to shareholders are misleading
(Chequepoint Securities v Claremont Petroleum)
What is misleading is the view of the ordinary man in commerce or ordinary investor who scans the
document quickly (Deveraux Holdings v Pelsart Resources)
Accidental omission of notice of meetings to a person entitled to attend will not invalidate a meeting-
S145(5)

CONDUCT OF MEETING
1. QUORUM
Unless the AOA provide otherwise, a quorum is two members personally present Section 147(1)
Therefore in the absence of authorization in the AOA, a meeting cannot be constituted by one member
and any resolution purported to be passed at such a meeting are invalid. (United Investment & Finance
Ltd v Tee Chin Yong & Ors)
Sum Hong Kum v Li Pin Furniture Industries Pte Ltd
The AOA of a company provided that no business could be transacted unless a quorum was present. The
plaintiff was removed as a director at a meeting convened without the requisite quorum. The Singapore
High Court granted a declaration that the meeting was invalid. The court held that the procedural
irregularity in the meeting caused substantial injustice to the plaintiff and could not be validated.
 Where a person is present at the commencement of meeting, but leaves before the business is
transacted, leaving the meeting with less than the required quorum, it is a matter of construction of
the AOA as to whether the meeting is valid/invalid.
Tan Guan Eng v BH Low Holdings Sdn Bhd & Ors
o the High Court construed the relevant AOA to mean that a quorum was required only at the
time when the meeting proceeded to business. Given that there was a quorum present when
the meeting proceeded business, ie the continued meeting with the presence of only the
holder of a valid proxy was a valid meeting. Therefore the resolution passed was a valid
resolution.

For the purpose of determining whether a quorum is present, a person attending as a proxy or as a
representative of a member corporation is usually deemed to be a member: Table A article 47
However, if the AOA authorizes one person meeting, a quorum of two is required. A meeting where
one person present but holds a proxy from another member of the company is invalid - Re Salvage
Engineers Limited
A corporation that is a member of a company may, by resolution of its directors, authorize a person
to act as its representative at meetings of the company. That person is entitled to exercise the same
powers as the member corporation would have been entitled to exercise: Section 147(3)
The AOA usually require a quorum to be present WITHIN HOUR at the commencement of the
meeting in order to transact business or the meeting will be dissolved and adjourned to a later date
determined by the directors: Table A article 47
If a quorum is not present within half an hour after the appointed time of a requisitioned meeting,
the meeting is dissolved and adjourned to the time and place determined by the directors.
If no determination, the meeting is adjourned to the following week at the same time and place.
The court may order that a meeting be convened and it may direct that one member present be
deemed to constitute a quorum: Section 150 (1)

2. CHAIRMAN:
Any member present at the meeting may be elected to chair the meeting, Section 147(1)
Normally the chairman of the Board of Directors shall also act as chairman at every general meetings.
The chairmans duty is to direct the meeting and to preserve order and ensure that the proceeding are
conducted in a proper manner.

3. VOTING
The power to vote is not a fiduciary power and a shareholder owes no duty to anybody as to how he
or she will exercise their vote: Tuan Haji Ishak bin Ismail & Ors v Leong Hup Holding Bhd
Unless the AOA provide otherwise, voting is by show of hands, in the first instance.
Table A art 54 states that, by providing a show of hands, each member or representative of a member
has one vote. Proxy votes are usually not counted on a show of hands.
In Bin Hee Heng v Management Corp Strata Title No 647, it was held that the term show of hands
included a voice vote
In cases involving disputed questions, members can demand a poll: Table A article 51.
On a poll, every member present in person or by proxy or attorney usually has one vote for each share
held: Table A, article 54. Because of this, only a poll can give an accurate indication of the will of the
meeting.
Members have the right to demand a poll at a general meeting on any question or matter other than
the election of the chairman of the meeting or the adjournment of the meeting.
 Any provision in the AOA excluding this rights is void: Section 146(1)
In some cases, the chairman and certain categories of members may demand a poll where a resolution
has been defeated on a show of hands: Table A, article 51.
Section 149(1)(a): A Proxy is entitled to vote only on a poll, unless the AOA provides otherwise.
Members are generally entitled to exercise their voting rights in their own interest. This is subject to
qualification that they do not commit a fraud on the minority.

4. PROXIES
A proxy is a person authorized to vote on behalf of the appointing member. It also describes the
instrument of appointment.
Members who are entitled to attend and vote at meeting of the company are entitled to appoint a
proxy to attend and vote in their stead.
Section 149(1) - The proxy need not be a member.
Section 149(2) - Notice convening meetings of companies must state prominently that members are
entitled to appoint one or two proxies who need not be members.
Section 149(1)(a): A proxy has the same right to speak at a meeting as the appointing member, but
can only vote on poll, unless the AOA allows the proxy to vote on a show of hands.
AOA cannot exclude the statutory right to appoint a proxy
Table A, article 59 requires the instrument appointing the proxy to be deposited with the company
not less than 48 hours before the meeting at which the proxy purposes to vote, or not less than 24
hours before the taking of a poll.
A member who appoints a proxy may still elect to attend a meeting and vote in a person. The proxy
then does not have vote at that meeting but may still vote at later meetings when the appointing
member does not attend (Ansett v Butler Air Transport Ltd)

5. MOTIONS
A motion is a proposal which is being put forward at a meeting for discussion before it is formally accepted,
passed or adopted. A motion is moved by a mover or proposer and unless it is a formal motion, it does
not require a seconder unless the AOA so provide. The manner in which a motion may be adopted or
rejected is by way of a vote by those present at the meeting and entitled to vote. The commonly used
methods are:
i) by voice
ii) by show of hands
iii) by poll
iv) by ballot

6. RESOLUTION
A resolution is a motion or proposal that has been accepted or passed by the necessary majority at a
meeting duly convened and held.
For a resolution to be validly passed or adopted we have to consider several other aspects such as:
the contents and duration of any notice required to be given.
the majority required for adopting the motion as a resolution.
the persons affected by the resolution.
the proper person having been in the chair.
the presence of a quorum.

Ordinary resolutions are passed by a simple majority of those present and voting.
Special resolutions are resolutions passed at meetings requiring written notice of at least 21 days and the
approval of a majority of of such members of the company present at the meeting and voting in person
or by proxy Section 152
Resolution Requiring Special Notice means at least 28 days notice has been given Section 153
Bypass of special resolution
S.152A- If ALL (100%) members vote at a general meeting in favour of a resolution duly passed,
where relevant, as a special resolution so passed will be valid.
S.152(2)- A special resolution will still be valid at a meeting even though it was proposed less than
21 days notice will be valid if it gains not less than ninety-five per centum of the total voting
rights.

7. MINUTES
Minutes are records of proceedings and resolutions passed at the meetings.
Under Section 145(1),minutes of all proceedings of the general meetings and of meetings of directors
and of managers (if any) must be entered or recorded in books kept for that purpose within 14 days
after the meeting was held.
The minutes is to be signed by the Chairman of the meeting at which the proceedings were had or by
the Chairman of the next succeeding meeting.
The minutes that have been signed and entered in the record are conclusive evidence that a meeting
has been duly held and convened that all appointments of officers shall be deemed to be valid and
that all proceedings were duly conducted.
The minutes book shall be kept at the registered office and any member could inspect them without
charge.

EFFECT OR IRREGULARITIES
Irregularity will not affect the validity of the meeting. S.355 allows court to make orders where the
rights of members or creditors are interfered with.
Before declaring the proceedings as invalid or not, the court will weigh between the harm done to a
member as against the harm done to the company and the other members in the company. Where
the court may remedy the situation by making an order, the court will declare the proceedings as
valid.
S.355(2)- Lack of quorum and deficiency of notice cannot invalidate meeting but substantial injustice
that cannot be remedied by court which can declare proceedings invalid
Order validating irregularity will not be made where there is injustice to members who did not attend.
( Hup Seng v Chin Yin)

DUTIES OF DIRECTORS
Directors are those who are entrusted to manage a company. Since they are given broad power in the
management of a company, law imposes certain duties upon them, in the interest of the public good and
for the protection of those who invest money in the company. Breach of these duties or negligence in
performing them on the part of a director entitles the company to sue the directors for any damage which
has been suffered by the company as a result of the breach or negligence. There are 3 main duties of
director namely, fiduciary duties, duty of skill, care and diligence and statutory duties. Often fiduciary
duties and duty of skill, care and diligence overlapped with statutory duty.
1. FIDUCIARY DUTIES

The Board of Trustees of the Sabah Foundation v Datuk Syed Kechik bin Syed Mohamed a fiduciary is
someone who has undertaken to act for or on behalf of another in a particular matter, in circumstances
which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the
obligation of loyalty.

The best known fiduciary relationship are those between trustee and beneficiary.
Promoters and directors of a company is also regarded as fiduciaries with respect to the company.
Because of the trust placed in fiduciary, the courts have formulated strict principles governing
their duties and they will normally owe duties of good faith and the avoidance of conflict of
interest.
The fiduciary duty of the director is owed to the company and not to individual shareholder.

Percival v. Wright [1902] 1 Ch 421, the plaintiff had approached a company indicating their intention to
dispose of their shares in the company. The chairman, who was also director of the company, agreed to
purchase the shares from the plaintiff at the price of 12 5s per share asked by the plaintiffs. The shares
were transferred to the chairman and two other directors of the company. During the negotiations for
the sale of the plaintiffs shares, the chairman and the board were approached by one Holden with a view
to the purchase of the entire undertaking of the company at a price considerably over 12 5s per share.
The negotiation with Holden, however, ultimately proved abortive. The plaintiff brought an action against
the chairman and the other directors, as defendants, asking for the sale to be set aside on the ground that
the defendants as directors had failed to disclose the negotiations with Holden when treating for the
purchase of the plaintiffs shares.
Held: the purchasing directors were under no obligation to disclose information to their vendor
shareholders the negotiations which ultimately proved abortive and directors do not have any fiduciary
duty to the shareholders. it shows that the directors owed no fiduciary duty to the shareholders.

The directors occupy a fiduciary position and must therefore exercise their power in good faith and in the
best interest of the company as a whole.
Section 132(1) - "A director shall at all times exercise his powers for proper purpose and in good faith in
the best interest of the company."
Section 132(1A)(a) provides that a director of a company shall exercise reasonable care, skill and diligence
with the knowledge, skill and experience which may reasonably be expected of a director having the same
responsibilities. Section 132(1B) of the Companies Act 1965, a director who makes a business judgment
is deemed to meet the requirements when he;
(i) makes the business judgment in good faith for a proper purpose;
(ii) does not have a material personal interest in the subject matter of the business judgment;
(iii) is informed about the subject matter of the business judgment to the extent the director reasonably
believes to be appropriate under the circumstances; and
(iv) reasonably believes that the business judgment is in the best interest of the company.
DUTY TO ACT IN THE BEST INTEREST OF THE COMPANY
Re Smith & Fawcett Ltd
They must exercise their discretion bona fide in what they consider and not what the court may consider
to be in the interest of the company, and not for any collateral purpose.
Mills v Mills
In the ultimate analysis of what is in the best interest of the company is actually what is fair among the
shareholders. Directors are not expected to live in an unreal world of aetruism. But when making
decisions, he must apply his mind to the best interest of the company.

In the case Re W & M Roith Ltd [1967] 1 All ER 427 where Roith was the controlling spirit of what is
commonly referred to as a one-man company. He owned the majority of the companys shares and ran
the companys business. He was one of the three directors. Roith wanted to make provision for his wife
in the event of his death. He therefore entered into a contract with the company, under which his wife
would be paid a pension if he died. Of course, there was no problem in having this agreement adopted by
the company, as he controlled it. Roith duly died. His executors put in a claim for the widows pension.
The liquidator of the company rejected the claim. The court held that the liquidator was right to do so.
The reason was this: when the directors of the company agreed to make contract they were not
considering the best interest of the company. Roith considered the interest of his wife; a perfectly
laudable sentiment, but in law an impermissible factor to consider when exercising a directors power.

In the case of Parke v Daily News Ltd [1962] Ch 927 the directors of a newspaper company was going out
of business proposed to distribute a large sum of money to the companys employees out of philanthropy.
The judge held that the distribution was benefit the employees rather than the company and the
resolution to make payment were set aside.

DUTY TO ACT FOR PROPER PURPOSES

A director might be acting honestly in what he considers to be the company's interest and yet still be in
breach of his fiduciary duties. This would occur if he misapplies the companys assets or if he uses the
powers he is delegated for the wrong purpose. If a director misapplies the company's assets he is in breach
of his duty to the company. It does not matter whether he is acting honestly, or in what he considers the
interest of the company.
Howard Smith v Ampol
In this case, Millers (Company) had a mob of shareholders with majority shareholdings, and another lot
of shareholders trying to buy shares in Millers. Millers board did not want them to have majority (because
then they might be replaced), so the board sold more shares out. As a result, the voting power of the two
biggest shareholders became diluted. There were two motives: (1) to dilute the power of majority and (2)
make money for company. Court held that if self-interest is involved, directors can assert that their action
was bona fide in the interest of the company. However, self-interest is only motive it is an instance of
improper motive. In determining whether a power was exercised for a proper purpose, the court should:
(i) identify the power whose exercise is in question;
(ii) identify the proper purpose for which the power was vested in the directors;
(iii) identify the substantial purpose for which the power was in fact exercised; and
(iv) decide whether that purpose was proper.
The court in addressing this came up with a a two-stage test:
(i) to consider the power exercised by the directors, including the nature of this power and any limits
within which it may be exercised and
(ii) to examine the substantial/primary purpose for which that action was taken and to reach a conclusion
whether that purpose was proper or not.
In this case, the court found that the D has used their fiduciary power solely and primarily for the purpose
of shifting the power to decide to whom and at what price shares are to be sold and thus cannot be related
to any purpose for which the power over the share capital was conferred upon them. Here, the Directors
were held to have contravened the duty.
Mills v Mills
Here, to determine motive the court must look at the ulterior purpose by using the but-for test if not for
the ulterior motive, would the director still have acted as he did? Dixon J expressed this by saying But if,
except for some ulterior and illegitimate object, the power would not have been exercise, that which has
been attempted as an ostensible exercise of the power will be void, notwithstanding that the Ds may
incidentally bring about result which is within purpose of power and which they consider desirable:
Whitehouse v Carlton ltd Pty
The court was of the view that the mere existence of the impermissible purpose is not sufficient to render
the exercise of the fiduciary power to alot shares voidable. In this case, the test in Mills v Mills was
followed by looking at whether the improper purposes had been the dominant (the substantial object,
the moving cause) cause for the act done.
Hogg v Cramphorn Ltd
In this case the directors were invested with the power to issue shares. In exercise of that power the
directors issued shares to trustees for the benefit of employees. The purpose of the issue was to prevent
a takeover bid. The directors feared that they would lose their position as directors should the takeover
bid be successful. The court held that the directors had acted for an improper purpose as the issuance of
new shares ulterior motive was to prevent the directors from losing their position and and the share issue
was set aside.
Ngurli Ltd v McCann
courts are relatively reluctant to meddle in the affairs of the company unless absolutely necessary. In this
case the court agreed that the proper purpose test should not be strict as it is impossible for directors to
not want to further their interests as they have an interest as a shareholder. If the defendants truly and
reasonably believed at the time that what they did was for the interest of the company, they are not
chargeable with a breach of trust merely because in promoting the interest of the company they were
also promoting their own interests.
In Bamford v Bamford [1970] Ch 212 provides the general rule that if directors have exercised their power
irregularly, or acted without proper authority or acted from improper motives, they can by full and frank
disclosure to the members obtain absolution and forgiveness of their sins and the members of a company
have a general power to ratify breaches of directors duties.

REMEDIES FOR BREACH OF FIDUCIARY DUTIES

1. The company may sue for damages or for the return of specific property.
2. The company may claim any secret profit that the director made.
3. The exercise of the power which in breach of directors duties may be declared to be invalid.

2. DUTY OF SKILL, CARE AND DILIGENCE

National Mutual Life Nominees Ltd v Worn
the standard of care is assessed by the responsibilities undertaken by the directors, not personal
qualifications and this refers to the objective test.
a. duty to be skillfull
The rule is that a director does not have to possess any skill for the job and the fact that he is unskillful is
not a breach of his duty to the company. The director is under duty to exercise the power using the level
of skill that he has. If he uses less than the level of skill that he has, he is in breach of this duty.
Re City Equitable Fire Insurance Co (1925), the standard of care is that of that another director of the
same knowledge and experience and thus, there is no minimum standard of care and skill imposed.

b. duty of care
A director owes duty of care to the company of which he is a director. The standard is that of reasonable
care in that he must take care in the affairs of the company as he would reasonably take in his own affairs.
Re Brazilian Rubber Plantation & Estate Ltd Such reasonable care must be measured by the care an
ordinary man might be expected to take in the same circumstances on his own behalf

c. duty to be diligent
Re Forest of Dean Coal Mining Co Director are bound to use reasonable diligence having regard to their
position, though probably an ordinary director, who only attends at the board meeting occasionally,
cannot be expected to devote as much time and attention to the business as the sole managing partner
of an ordinary partnership, but they are bound to use fair and reasonable diligence in the management of
companys affairs and to act honestly.

Section 132 : As to the duty and liability of officers

Sec 132(1A) a director of a company shall exercise reasonable care, skill and diligence with -
(a) the knowledge, skill and experience which may reasonably be expected of a director having the same
responsibilities; and
(b) any additional knowledge, skill and experience which the director in fact has.

Section 132 : Business Judgment Rule

Safe habour provision that safeguard the director from negligence [Section 132(1A)] if follow Section 132
(1B)
(a) decision made in good faith
(b) no material interest
(c) must be informed about the subject matter do due diligence
(d) decision in the best interest of the company.
Section 132 (1C) : Reliance on information provided by others
Sec 132(1C) director can rely on the information provided that
(a) on reasonable ground the reliance was reliable and competent.
(b) person have expertise
(c) by another director in relation to matters within the directors authority; or
(d) no relation with the director

Section 132 (1D) : Reliance on information provided by others

Sec 132(1D) reliance made is deemed to be reasonable if it was made
(a) in good faith; and
(b) after making and independent assessment of the information having regard to the directors
knowledge and the complexity of the company.

3. DIRECTORS STATUTORY DUTIES

Section 132C(1) Directors shall not acquire or dispose companys undertaking or property of a
substantial value or portion unless approved by the company in general meeting
Meaning of substantial value or substantial portion - Section 132C (1A) and (1B)
For public listed companies listing requirements of the Stock Exchange under Securities Industry
Act 1983 shall be applicable to determine what is substantial value or substantial portion - Section
132C (1A)
Section 132C(1B) applicable to other than public listed companies substantial value or portion
means if the value exceeds 25% of the companys
a. Total assets; or
b. Total net profits; or
c. Issued share capital
whichever is higher

Director who contravenes the section shall be guilty of an offence and shall be liable to imprisonment for
five years or RM30,000 or both Section 132C(5)

SECTION 132D- ISSUING SHARES

Notwithstanding anything in MOA or AOA, directors shall not issue shares without the prior approval
of company in general meeting Section 132D(1)
However, prior approval shall not be required if the said shares is to be issued as consideration for
acquisition of shares or assets by the company and the members have been notified of the intention
to issue shares 14 days before that date of issue of shares Section 132D(6A)
Members of the company are deemed to be notified if a copy of the notification has been sent to the
last known address according to register of members and advertised in national language and English
language newspaper Section 132D(6B)
OTHER STATUTORY DUTIES
Section 142 directors of public company to hold statutory meeting
Section 144 powers to convene AGM and EGM
Section 154 Registration of resolutions and agreements
Section 156 Recording minutes of meetings
Section 167 Keeping a proper accounting records
Section 169 tabling of profit and loss accounts, balance sheet and directors report at the AGM

REMEDIES
FOSS V HARBOTTLE
It is clear law that in order to redress a wrong done to the company, the action should prima facie be
brought by the company itself. This cardinal principle has been laid down in the case of Foss v. Harbottle
The Corporation should sue in its own name and in its corporate character, or in the name of someone
whom the law has appointed to be its representative.

The proper plaintiff rule

The proper plaintiff rule lay down that any wrong done to the company is suffered by the company. The
company must be the proper plaintiff to seek legal remedy against the wrongdoers.
Majority rule
On the other hand the majority rule states that the company must be run in accordance with the wishes
of the majority.

Common Law Exceptions

As a result of the unsatisfactory effect of the rule, there are several CL exceptions to the rule in Foss v
Harbottle. A minority member can bring an action against the company or its controllers where:
(1) the act of the company ultra vires or illegal
(2) where the act complained of infringes personal rights (member personal right)
(3) where a special resolution was needed but the company acted in breach of it
(4) where the act amount to a fraud on the minority
(5) where justice requires that the court should intervene to assist an otherwise helpless minority
(the interest of justice requires)

1. Where the act is ultra vires or illegal

When the majority shareholders may take a decision for a co, it must be within the companys powers
and does not contravene the general law.
In Ashbury Railway Carriage & Iron Co v Riche (1875) LT 450, such an act is wholly void and is not capable
of being ratified even by all the members of the company subsequently.
An individual shareholder may bring an action at common law if the co was acting or intending to enter
into an ultra vires or illegal transaction.
The Act expressly allows members of the company to bring an action directly against the company to bring
an action directly against the co or its directors, for examples:
(a) where in proceeding by any member of a company against the present or former officers of the
co, the HC has power under Sec 20(2)(a) to restrain the co from doing an ultra vires act
(b) where any member of a co may apply to the HC to restrain the directors from entering into a
transaction in contravention of Sec 132(1)-approval of co required for disposal of cos property by
director
(c) where any member of co may apply to the HC to restrain the co from entering into an
arrangement

2. where the act complained of infringes personal rights (member personal right)
Where an individual members right have been infringed they may bring an action against the company.
These membership rights arise from the Act, articles or separate shareholders agreement.
Among the example of act that infringe the members personal rights are:
(i) when co breach contractual rights in Sec33(1) which provides the M&A constitutes contractual
relationship between members & the company & members inter se.
(ii) co does not comply with the provision in Sec65, for instance the co alter the provision in contrast
with AOA that vary the right of shareholders
When personal rights of shareholders have been affected, members are not bound by the rule in Foss v
Harbottle which disable them to take action on behalf of the company. Instead, they can bring the action
themselves. This is simply because the alleged wrong is done to the members themselves.
In Pender v Lushingston (1877) 6 ChD 70; where the co want to alter article, 60% shareholder want to
alter but another 40% do not want to alter. The resolution has passed and the minority shareholder has
no right to sue. This case concerned the right to have members vote recorded.
In Wood v Odessa Waterworks Co. (1889)42 Ch D 636; where it was the right to have dividends paid in
cash as the articles so specify.

3. where a special resolution was needed but the company acted in breach of it
Certain transactions of a co may require certain procedures be complied with. Either the Companies Act
may require the passing of a special resolution, or the articles may specify a particular procedure. If the
requirement of a particular procedure has not been complied with, an individual shareholder may bring
action to ratify them.
In the case of Edwards v Halliwel (1950) 2 AER 1064; 2 members of a trade union successfully restrained
an attempt by the delegate meeting to increase the members contribution without obtaining 2/3 majority
acquired under their rule.

4. where there is fraud on minority

This exception has been considered as the true exception to the rule, as the other exceptions may be
commenced as personal actions, or where the statute provides for the necessary actions in case of
contravention. Two elements must be satisfied before a member can bring an action to enforce the
companys rights. He must establish:
(i)Fraud on the minority;and
(ii)The wrongdoer is in control
i) Fraud includes abuse or misuse of power whereby the majority obtains an unfair gain at the expense of
the minority. The term minority may refer to the co itself. Where the co is the injured party, the action is
derivative in nature. Fraud on minority coves:
1. Appropriation of corporate property or opportunities
In Cook v Deeks(1916) AC 554; there are four directors with equal share. 3 of them do not like the 4th
fellow. The 3 out of four build a new co and brought the money to the new co. then they called up for the
meeting and ratify what they did. So this is fraud because the 4th fellow was unhappy.
2. Ratification of directors breach of duty
3. Majority obtaining a benefit at the expense of the minority
4. Preventing an action from being brought
In Estmanco (Kilner House) Ltd. V Greater London Council (1982) 1 AIIER 437; the court held that the
decision of the co to discontinue proceedings against the Council amounted to a fraud on minority.

(ii) wrong doer in control

The minority member who uses the exception of fraud on the minority must also establish that the
wrongdoer prevents action from being brought under the cos name.
Wrongdoer control may exist if the wrongdoer has a majority of the votes, or the majority has approved
a fraud on the minorities where they obtain some benefit, or that the co suffered some loss or detriment,
and where the co has shown that it was unwilling to sue.
According to Prudential Assurance Co. Ltd v. Newman Industries Ltd. (No.2) [1980] 2 AIIER 841; a majority
of the votes, may not necessarily be numerical control. Control can be construed either because of the
wrongdoers influence over the majority, he can obtain.
In the case of Brown v British Abrasive Wheel Co (1919) 1 CH 290; a co was in deep financial difficulty
and was about to go into a liquidation. The majority shareholder wanted to safe the co by putting in more
capital and safe the co. they wanted to alter the article to the effect that may compel the minority to sell
their share to them at lower price. The court held that this was not for the benefit of the co because you
can safe the co without the alteration. Therefore there is fraud on minority.

DERIVATIVE ACTION
Therefore in order to bring action on behalf of the company, the statutory derivative action under
Companies Act (Amendment) Act 2007 were introduced.
In Chio Tan Seng v Chong Chai Huat, Abdul Malik Ishah J stated that a derivative action is an action
where a member is not suing to enforce his own rights but that of the co. Any rights which the member
has derive from the co.
The effects of this action are:
(1) if the action is successful, compensation is paid to the co, not to the individual member
(2) action is expensive, minority shareholder may not be reimbursed
(3) minority shareholders must prove preliminary issues for instance fraud on minority
(4) time consuming
(That is why statutory derivative action is rarely applied)
Therefore Sec 181A-181E were introduced to simplify actions brought on behalf of the co. these sections
can be regarded as new statutory derivative action to allow a complainant to apply for leave of the Court
to bring an action on behalf of the co.

Sec 181A allows the complainant to bring an action on behalf of the company if he is a member of a
company, or a person who is entitled to be registered as member of the company, any former member of
the co if the application relates to circumstances in which the member ceased to be member, any director
of the company and the Registrar.
Sec 181B requires a complainant to seek leave of the court to bring a derivative action in the name of
the company. However in order for the court to grant a leave the complainant must acting in good faith
and it appears to be in the best interest of the company.
Sec 181C provides proceeding brought, intervened in or defended under Sec 181A may be settled only
with leave of the Court. This provision allow the court to reject the settlement of action if it considerers
the terms unfair or unjust.
Sec 181D provides that the fact that the alleged wrong to the company may be approved or ratified by
the members is not by itself sufficient for a stay or dismissal of the action. The directors having breached
their duties to the company may have their liabilities excused by the general meeting by the process of
ratification.
In granting leave, Sec 181E of the Act may grants the Court wide ranging the powers in making such orders
as it thinks appropriate. Aside from authorising the complainant or some other person to control the
conduct of the proceeding, Sec 181E (1)(a) provides some other orders the Court may grant includes
(i) Sec 181E(1)(b)- the Court is able to grant specific directions for the conduct of the proceeding
(ii) Sec181E(1)(c)- Access to information
(iii)Sec181E (1)(d) & (e)- these provisions allow the Court to relieve the burden of costs on the complainant
by allowing both payment by the co of reasonable legal fees and disbursements incurred by the
complainant, and also a wider order for the indemnity for all the costs incurred.

Statutory Remedies for Minority

(1) Sec 28(5) and (7) provides petition for cancellation of an alteration of the object of the company. The
application can only be made if the holders are not less than 10% apply to the court. The application can
be made 21 days after the date on which the resolution altering the object of the company took place.
However if 9% who was not happy with the alteration, they have to look for another remedy.
(2) Sec 65(1) and (4) provides remedy when there is a variation of class right, then the holders of not less
than 10% may apply to the Court to have the variation cancelled. However the application should be made
within one month.
(3) Sec 197 provides the member can make an application in requiring investigation of affairs of a company
by inspector at direction of Minister and recommend the company to winding up. In this case the company
has a share capital, not less than 200 members or of members holing not less than 1/10 of shares. On the
other hand, if the company has no share capital unless 1/5 in number of the persons on the companys
register of members.
(4) Sec 181 provides remedies in the case of oppression. Basically this section provides remedies for 4
matters such as oppression, disregard, unfair discrimination and prejudice.
(5) Sec 218(1) provides winding up when directors have acted in their own interest instead of the best
interest of the co, failure of substratum, deadlock, breakdown of mutual trust and confidence, fraud,
oppression and mismanagement (Re William Brooks) (Re Trivoli Freeholds- the list under 218 is not
exhaustive)
(6) Section 20(3) remedy for ultra vires act- if the Court deems it to be just and equitable, set aside and
restrain the performance of the contract and compensation for the loss or damage sustained
(7) Section 144(5) A meeting at which a special resolution is to be proposed shall be deemed not to be
duly convened by the directors if they do not give such notice.
Duties of Directors
Directors are those who are entrusted to manage a company. Since they are given broad power in the
management of a company, law imposes certain duties upon them, in the interest of the public good and
for the protection of those who invest money in the company. Breach of these duties or negligence in
performing them on the part of a director entitles the company to sue the directors for any damage which
has been suffered by the company as a result of the breach or negligence. There are 3 main duties of
director namely, fiduciary duties, duty of skill, care and diligence and statutory duties. Often fiduciary
duties and duty of skill, care and diligence overlapped with statutory duty.

3. FIDUCIARY DUTIES

The Board of Trustees of the Sabah Foundation v Datuk Syed Kechik bin Syed Mohamed a fiduciary is
someone who has undertaken to act for or on behalf of another in a particular matter, in circumstances
which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the
obligation of loyalty.

The best known fiduciary relationship are those between trustee and beneficiary.
Promoters and directors of a company is also regarded as fiduciaries with respect to the company.
Because of the trust placed in fiduciary, the courts have formulated strict principles governing
their duties and they will normally owe duties of good faith and the avoidance of conflict of
interest.
The fiduciary duty of the director is owed to the company and not to individual shareholder.

Percival v. Wright [1902] 1 Ch 421, the plaintiff had approached a company indicating their intention to
dispose of their shares in the company. The chairman, who was also director of the company, agreed to
purchase the shares from the plaintiff at the price of 12 5s per share asked by the plaintiffs. The shares
were transferred to the chairman and two other directors of the company. During the negotiations for
the sale of the plaintiffs shares, the chairman and the board were approached by one Holden with a view
to the purchase of the entire undertaking of the company at a price considerably over 12 5s per share.
The negotiation with Holden, however, ultimately proved abortive. The plaintiff brought an action against
the chairman and the other directors, as defendants, asking for the sale to be set aside on the ground that
the defendants as directors had failed to disclose the negotiations with Holden when treating for the
purchase of the plaintiffs shares.
Held: the purchasing directors were under no obligation to disclose information to their vendor
shareholders the negotiations which ultimately proved abortive and directors do not have any fiduciary
duty to the shareholders. it shows that the directors owed no fiduciary duty to the shareholders.

The directors occupy a fiduciary position and must therefore exercise their power in good faith and in the
best interest of the company as a whole.
Section 132(1) - "A director shall at all times exercise his powers for proper purpose and in good faith in
the best interest of the company."
Section 132(1A)(a) provides that a director of a company shall exercise reasonable care, skill and diligence
with the knowledge, skill and experience which may reasonably be expected of a director having the same
responsibilities. Section 132(1B) of the Companies Act 1965, a director who makes a business judgment
is deemed to meet the requirements when he;
(i) makes the business judgment in good faith for a proper purpose;
(ii) does not have a material personal interest in the subject matter of the business judgment;
(iii) is informed about the subject matter of the business judgment to the extent the director reasonably
believes to be appropriate under the circumstances; and
(iv) reasonably believes that the business judgment is in the best interest of the company.

DUTY TO ACT IN THE BEST INTEREST OF THE COMPANY

Re Smith & Fawcett Ltd
They must exercise their discretion bona fide in what they consider and not what the court may consider
to be in the interest of the company, and not for any collateral purpose.
Mills v Mills
In the ultimate analysis of what is in the best interest of the company is actually what is fair among the
shareholders. Directors are not expected to live in an unreal world of aetruism. But when making
decisions, he must apply his mind to the best interest of the company.

In the case Re W & M Roith Ltd [1967] 1 All ER 427 where Roith was the controlling spirit of what is
commonly referred to as a one-man company. He owned the majority of the companys shares and ran
the companys business. He was one of the three directors. Roith wanted to make provision for his wife
in the event of his death. He therefore entered into a contract with the company, under which his wife
would be paid a pension if he died. Of course, there was no problem in having this agreement adopted by
the company, as he controlled it. Roith duly died. His executors put in a claim for the widows pension.
The liquidator of the company rejected the claim. The court held that the liquidator was right to do so.
The reason was this: when the directors of the company agreed to make contract they were not
considering the best interest of the company. Roith considered the interest of his wife; a perfectly
laudable sentiment, but in law an impermissible factor to consider when exercising a directors power.

In the case of Parke v Daily News Ltd [1962] Ch 927 the directors of a newspaper company was going out
of business proposed to distribute a large sum of money to the companys employees out of philanthropy.
The judge held that the distribution was benefit the employees rather than the company and the
resolution to make payment were set aside.
DUTY TO ACT FOR PROPER PURPOSES
A director might be acting honestly in what he considers to be the company's interest and yet still be in
breach of his fiduciary duties. This would occur if he misapplies the companys assets or if he uses the
powers he is delegated for the wrong purpose. If a director misapplies the company's assets he is in breach
of his duty to the company. It does not matter whether he is acting honestly, or in what he considers the
interest of the company.
Howard Smith v Ampol
In this case, Millers (Company) had a mob of shareholders with majority shareholdings, and another lot
of shareholders trying to buy shares in Millers. Millers board did not want them to have majority (because
then they might be replaced), so the board sold more shares out. As a result, the voting power of the two
biggest shareholders became diluted. There were two motives: (1) to dilute the power of majority and (2)
make money for company. Court held that if self-interest is involved, directors can assert that their action
was bona fide in the interest of the company. However, self-interest is only motive it is an instance of
improper motive. In determining whether a power was exercised for a proper purpose, the court should:
(i) identify the power whose exercise is in question;
(ii) identify the proper purpose for which the power was vested in the directors;
(iii) identify the substantial purpose for which the power was in fact exercised; and
(iv) decide whether that purpose was proper.
The court in addressing this came up with a a two-stage test:
(i) to consider the power exercised by the directors, including the nature of this power and any limits
within which it may be exercised and
(ii) to examine the substantial/primary purpose for which that action was taken and to reach a conclusion
whether that purpose was proper or not.
In this case, the court found that the D has used their fiduciary power solely and primarily for the purpose
of shifting the power to decide to whom and at what price shares are to be sold and thus cannot be related
to any purpose for which the power over the share capital was conferred upon them. Here, the Directors
were held to have contravened the duty.
Mills v Mills
Here, to determine motive the court must look at the ulterior purpose by using the but-for test if not for
the ulterior motive, would the director still have acted as he did? Dixon J expressed this by saying But if,
except for some ulterior and illegitimate object, the power would not have been exercise, that which has
been attempted as an ostensible exercise of the power will be void, notwithstanding that the Ds may
incidentally bring about result which is within purpose of power and which they consider desirable:
Whitehouse v Carlton ltd Pty
The court was of the view that the mere existence of the impermissible purpose is not sufficient to render
the exercise of the fiduciary power to alot shares voidable. In this case, the test in Mills v Mills was
followed by looking at whether the improper purposes had been the dominant (the substantial object,
the moving cause) cause for the act done.
Hogg v Cramphorn Ltd
In this case the directors were invested with the power to issue shares. In exercise of that power the
directors issued shares to trustees for the benefit of employees. The purpose of the issue was to prevent
a takeover bid. The directors feared that they would lose their position as directors should the takeover
bid be successful. The court held that the directors had acted for an improper purpose as the issuance of
new shares ulterior motive was to prevent the directors from losing their position and and the share issue
was set aside.
Ngurli Ltd v McCann
courts are relatively reluctant to meddle in the affairs of the company unless absolutely necessary. In this
case the court agreed that the proper purpose test should not be strict as it is impossible for directors to
not want to further their interests as they have an interest as a shareholder. If the defendants truly and
reasonably believed at the time that what they did was for the interest of the company, they are not
chargeable with a breach of trust merely because in promoting the interest of the company they were
also promoting their own interests.
In Bamford v Bamford [1970] Ch 212 provides the general rule that if directors have exercised their power
irregularly, or acted without proper authority or acted from improper motives, they can by full and frank
disclosure to the members obtain absolution and forgiveness of their sins and the members of a company
have a general power to ratify breaches of directors duties.

REMEDIES FOR BREACH OF FIDUCIARY DUTIES

1. The company may sue for damages or for the return of specific property.
2. The company may claim any secret profit that the director made.
3. The exercise of the power which in breach of directors duties may be declared to be invalid.

4. DUTY OF SKILL, CARE AND DILIGENCE

National Mutual Life Nominees Ltd v Worn
the standard of care is assessed by the responsibilities undertaken by the directors, not personal
qualifications and this refers to the objective test.
a. duty to be skillfull
The rule is that a director does not have to possess any skill for the job and the fact that he is unskillful is
not a breach of his duty to the company. The director is under duty to exercise the power using the level
of skill that he has. If he uses less than the level of skill that he has, he is in breach of this duty.
Re City Equitable Fire Insurance Co (1925), the standard of care is that of that another director of the
same knowledge and experience and thus, there is no minimum standard of care and skill imposed.

b. duty of care
A director owes duty of care to the company of which he is a director. The standard is that of reasonable
care in that he must take care in the affairs of the company as he would reasonably take in his own affairs.
Re Brazilian Rubber Plantation & Estate Ltd Such reasonable care must be measured by the care an
ordinary man might be expected to take in the same circumstances on his own behalf

c. duty to be diligent
Re Forest of Dean Coal Mining Co Director are bound to use reasonable diligence having regard to their
position, though probably an ordinary director, who only attends at the board meeting occasionally,
cannot be expected to devote as much time and attention to the business as the sole managing partner
of an ordinary partnership, but they are bound to use fair and reasonable diligence in the management of
companys affairs and to act honestly.

Section 132 : As to the duty and liability of officers

Sec 132(1A) a director of a company shall exercise reasonable care, skill and diligence with -
(a) the knowledge, skill and experience which may reasonably be expected of a director having the same
responsibilities; and
(b) any additional knowledge, skill and experience which the director in fact has.

Section 132 : Business Judgment Rule

Safe habour provision that safeguard the director from negligence [Section 132(1A)] if follow Section 132
(1B)
(a) decision made in good faith
(b) no material interest
(c) must be informed about the subject matter do due diligence
(d) decision in the best interest of the company.

Section 132 (1C) : Reliance on information provided by others

Sec 132(1C) director can rely on the information provided that
(a) on reasonable ground the reliance was reliable and competent.
(b) person have expertise
(c) by another director in relation to matters within the directors authority; or
(d) no relation with the director

Section 132 (1D) : Reliance on information provided by others

Sec 132(1D) reliance made is deemed to be reasonable if it was made
(a) in good faith; and
(b) after making and independent assessment of the information having regard to the directors
knowledge and the complexity of the company.

3. DIRECTORS STATUTORY DUTIES

Section 132C(1) Directors shall not acquire or dispose companys undertaking or property of a
substantial value or portion unless approved by the company in general meeting
Meaning of substantial value or substantial portion - Section 132C (1A) and (1B)
For public listed companies listing requirements of the Stock Exchange under Securities Industry
Act 1983 shall be applicable to determine what is substantial value or substantial portion - Section
132C (1A)
Section 132C(1B) applicable to other than public listed companies substantial value or portion
means if the value exceeds 25% of the companys
d. Total assets; or
e. Total net profits; or
 f. Issued share capital
whichever is higher

Director who contravenes the section shall be guilty of an offence and shall be liable to imprisonment for
five years or RM30,000 or both Section 132C(5)

SECTION 132D- ISSUING SHARES

Notwithstanding anything in MOA or AOA, directors shall not issue shares without the prior approval
of company in general meeting Section 132D(1)
However, prior approval shall not be required if the said shares is to be issued as consideration for
acquisition of shares or assets by the company and the members have been notified of the intention
to issue shares 14 days before that date of issue of shares Section 132D(6A)
Members of the company are deemed to be notified if a copy of the notification has been sent to the
last known address according to register of members and advertised in national language and English
language newspaper Section 132D(6B)

OTHER STATUTORY DUTIES

Section 142 directors of public company to hold statutory meeting
Section 144 powers to convene AGM and EGM
Section 154 Registration of resolutions and agreements
Section 156 Recording minutes of meetings
Section 167 Keeping a proper accounting records
Section 169 tabling of profit and loss accounts, balance sheet and directors report at the AGM

REMEDIES
FOSS V HARBOTTLE
It is clear law that in order to redress a wrong done to the company, the action should prima facie be
brought by the company itself. This cardinal principle has been laid down in the case of Foss v. Harbottle
The Corporation should sue in its own name and in its corporate character, or in the name of someone
whom the law has appointed to be its representative.
The proper plaintiff rule
The proper plaintiff rule lay down that any wrong done to the company is suffered by the company. The
company must be the proper plaintiff to seek legal remedy against the wrongdoers.
Majority rule
On the other hand the majority rule states that the company must be run in accordance with the wishes
of the majority.
Common Law Exceptions
As a result of the unsatisfactory effect of the rule, there are several CL exceptions to the rule in Foss v
Harbottle. A minority member can bring an action against the company or its controllers where:
(1) the act of the company ultra vires or illegal
(2) where the act complained of infringes personal rights (member personal right)
(3) where a special resolution was needed but the company acted in breach of it
(4) where the act amount to a fraud on the minority
(5) where justice requires that the court should intervene to assist an otherwise helpless minority
(the interest of justice requires)

1. Where the act is ultra vires or illegal

When the majority shareholders may take a decision for a co, it must be within the companys powers
and does not contravene the general law.
In Ashbury Railway Carriage & Iron Co v Riche (1875) LT 450, such an act is wholly void and is not capable
of being ratified even by all the members of the company subsequently.
An individual shareholder may bring an action at common law if the co was acting or intending to enter
into an ultra vires or illegal transaction.
The Act expressly allows members of the company to bring an action directly against the company to bring
an action directly against the co or its directors, for examples:
(a) where in proceeding by any member of a company against the present or former officers of the
co, the HC has power under Sec 20(2)(a) to restrain the co from doing an ultra vires act
(b) where any member of a co may apply to the HC to restrain the directors from entering into a
transaction in contravention of Sec 132(1)-approval of co required for disposal of cos property by
director
(c) where any member of co may apply to the HC to restrain the co from entering into an
arrangement

2. where the act complained of infringes personal rights (member personal right)
Where an individual members right have been infringed they may bring an action against the company.
These membership rights arise from the Act, articles or separate shareholders agreement.
Among the example of act that infringe the members personal rights are:
(i) when co breach contractual rights in Sec33(1) which provides the M&A constitutes contractual
relationship between members & the company & members inter se.
(ii) co does not comply with the provision in Sec65, for instance the co alter the provision in contrast
with AOA that vary the right of shareholders
When personal rights of shareholders have been affected, members are not bound by the rule in Foss v
Harbottle which disable them to take action on behalf of the company. Instead, they can bring the action
themselves. This is simply because the alleged wrong is done to the members themselves.
In Pender v Lushingston (1877) 6 ChD 70; where the co want to alter article, 60% shareholder want to
alter but another 40% do not want to alter. The resolution has passed and the minority shareholder has
no right to sue. This case concerned the right to have members vote recorded.
In Wood v Odessa Waterworks Co. (1889)42 Ch D 636; where it was the right to have dividends paid in
cash as the articles so specify.

3. where a special resolution was needed but the company acted in breach of it
Certain transactions of a co may require certain procedures be complied with. Either the Companies Act
may require the passing of a special resolution, or the articles may specify a particular procedure. If the
requirement of a particular procedure has not been complied with, an individual shareholder may bring
action to ratify them.
In the case of Edwards v Halliwel (1950) 2 AER 1064; 2 members of a trade union successfully restrained
an attempt by the delegate meeting to increase the members contribution without obtaining 2/3 majority
acquired under their rule.

4. where there is fraud on minority

This exception has been considered as the true exception to the rule, as the other exceptions may be
commenced as personal actions, or where the statute provides for the necessary actions in case of
contravention. Two elements must be satisfied before a member can bring an action to enforce the
companys rights. He must establish:
(i)Fraud on the minority;and
(ii)The wrongdoer is in control

i) Fraud includes abuse or misuse of power whereby the majority obtains an unfair gain at the expense of
the minority. The term minority may refer to the co itself. Where the co is the injured party, the action is
derivative in nature. Fraud on minority coves:
1. Appropriation of corporate property or opportunities
In Cook v Deeks(1916) AC 554; there are four directors with equal share. 3 of them do not like the 4 th
fellow. The 3 out of four build a new co and brought the money to the new co. then they called up for the
meeting and ratify what they did. So this is fraud because the 4th fellow was unhappy.
2. Ratification of directors breach of duty
3. Majority obtaining a benefit at the expense of the minority
4. Preventing an action from being brought
In Estmanco (Kilner House) Ltd. V Greater London Council (1982) 1 AIIER 437; the court held that the
decision of the co to discontinue proceedings against the Council amounted to a fraud on minority.

(ii) wrong doer in control

The minority member who uses the exception of fraud on the minority must also establish that the
wrongdoer prevents action from being brought under the cos name.
Wrongdoer control may exist if the wrongdoer has a majority of the votes, or the majority has approved
a fraud on the minorities where they obtain some benefit, or that the co suffered some loss or detriment,
and where the co has shown that it was unwilling to sue.
According to Prudential Assurance Co. Ltd v. Newman Industries Ltd. (No.2) [1980] 2 AIIER 841; a majority
of the votes, may not necessarily be numerical control. Control can be construed either because of the
wrongdoers influence over the majority, he can obtain.
In the case of Brown v British Abrasive Wheel Co (1919) 1 CH 290; a co was in deep financial difficulty
and was about to go into a liquidation. The majority shareholder wanted to safe the co by putting in more
capital and safe the co. they wanted to alter the article to the effect that may compel the minority to sell
their share to them at lower price. The court held that this was not for the benefit of the co because you
can safe the co without the alteration. Therefore there is fraud on minority.
DERIVATIVE ACTION
Therefore in order to bring action on behalf of the company, the statutory derivative action under
Companies Act (Amendment) Act 2007 were introduced.
In Chio Tan Seng v Chong Chai Huat, Abdul Malik Ishah J stated that a derivative action is an action
where a member is not suing to enforce his own rights but that of the co. Any rights which the member
has derive from the co.
The effects of this action are:
(1) if the action is successful, compensation is paid to the co, not to the individual member
(2) action is expensive, minority shareholder may not be reimbursed
(3) minority shareholders must prove preliminary issues for instance fraud on minority
(4) time consuming
(That is why statutory derivative action is rarely applied)
Therefore Sec 181A-181E were introduced to simplify actions brought on behalf of the co. these sections
can be regarded as new statutory derivative action to allow a complainant to apply for leave of the Court
to bring an action on behalf of the co.

Sec 181A allows the complainant to bring an action on behalf of the company if he is a member of a
company, or a person who is entitled to be registered as member of the company, any former member of
the co if the application relates to circumstances in which the member ceased to be member, any director
of the company and the Registrar.
Sec 181B requires a complainant to seek leave of the court to bring a derivative action in the name of
the company. However in order for the court to grant a leave the complainant must acting in good faith
and it appears to be in the best interest of the company.
Sec 181C provides proceeding brought, intervened in or defended under Sec 181A may be settled only
with leave of the Court. This provision allow the court to reject the settlement of action if it considerers
the terms unfair or unjust.
Sec 181D provides that the fact that the alleged wrong to the company may be approved or ratified by
the members is not by itself sufficient for a stay or dismissal of the action. The directors having breached
their duties to the company may have their liabilities excused by the general meeting by the process of
ratification.
In granting leave, Sec 181E of the Act may grants the Court wide ranging the powers in making such orders
as it thinks appropriate. Aside from authorising the complainant or some other person to control the
conduct of the proceeding, Sec 181E (1)(a) provides some other orders the Court may grant includes
(i) Sec 181E(1)(b)- the Court is able to grant specific directions for the conduct of the proceeding
(ii) Sec181E(1)(c)- Access to information
(iii)Sec181E (1)(d) & (e)- these provisions allow the Court to relieve the burden of costs on the complainant
by allowing both payment by the co of reasonable legal fees and disbursements incurred by the
complainant, and also a wider order for the indemnity for all the costs incurred.

Statutory Remedies for Minority

(1) Sec 28(5) and (7) provides petition for cancellation of an alteration of the object of the company. The
application can only be made if the holders are not less than 10% apply to the court. The application can
be made 21 days after the date on which the resolution altering the object of the company took place.
However if 9% who was not happy with the alteration, they have to look for another remedy.
(2) Sec 65(1) and (4) provides remedy when there is a variation of class right, then the holders of not less
than 10% may apply to the Court to have the variation cancelled. However the application should be made
within one month.
(3) Sec 197 provides the member can make an application in requiring investigation of affairs of a company
by inspector at direction of Minister and recommend the company to winding up. In this case the company
has a share capital, not less than 200 members or of members holing not less than 1/10 of shares. On the
other hand, if the company has no share capital unless 1/5 in number of the persons on the companys
register of members.
(4) Sec 181 provides remedies in the case of oppression. Basically this section provides remedies for 4
matters such as oppression, disregard, unfair discrimination and prejudice.
(5) Sec 218(1) provides winding up when directors have acted in their own interest instead of the best
interest of the co, failure of substratum, deadlock, breakdown of mutual trust and confidence, fraud,
oppression and mismanagement (Re William Brooks) (Re Trivoli Freeholds- the list under 218 is not
exhaustive)
(6) Section 20(3) remedy for ultra vires act- if the Court deems it to be just and equitable, set aside and
restrain the performance of the contract and compensation for the loss or damage sustained
(7) Section 144(5) A meeting at which a special resolution is to be proposed shall be deemed not to be
duly convened by the directors if they do not give such notice.

SACKING OF DIRECTORS
1. Disqualification under section 130
The disqualified person under section 130 is not allowed to be appointed as director or remains as
director, without the leave of the Court. The persons who are disqualified are:
A person who is convicted for any offence in connection with the promotion, formation or
management of a corporation
A person who is convicted for any fraud or dishonesty punishable on conviction with imprisonment
for three months or more
A person who is convicted of any offence involving
o Section 132 - breach of duty and making improper use of company's information
o Section 132A - dealing by officers in securities
o Section 303 - not keeping proper accounts
The disqualification period will be for a period of five years after conviction or after release from prison.
The person must apply to the court if he wishes to be appointed as director or remain as a director of a
company. Failure to obtain leave of court is an offence. There is no automatic vacation from office unless
the company's Articles of Association provides so [Table A, 4TH Schedule, Art 72].

2. Disqualification for being a bankrupt

A person may also be disqualified if he is an undischarged bankrupt [section 125], except where the Court
grants leave.
3. Disqualification for being a director of insolvent companies
A person may be disqualified, where the court is satisfied that he has been a director of a company which
has become insolvent and a director of some other companies that have gone into liquidation within five
years of the insolvency of the first company. Also, that his conduct as a director of any of those companies
makes him unfit to be concerned with the management of a company [section130A].
Before a director's conduct may be considered unfit, he must be a director or has been a director
of two insolvent companies and that the second company becomes insolvent within five years of
the first company going into liquidation. The disqualification must not be more than 5 years.

4. Failure to obtain shareholding qualification

Sometimes directors are required to hold qualification shares. If he does not, or if after so
obtaining it he ceases at any time to hold his qualification, his office is automatically be vacated
[section 124(3)].
A director who vacates his office by virtue of failing to obtain his qualification shares shall not be
capable of being appointed until he has obtained his qualification [section 124(4)].

5. Disqualification due to Articles of Association

The company's Articles of Association may provide for automatic disqualification from office.
The provisions may be found in Table A, Fourth Schedule, Art 72, as follows:
Becomes bankrupt or makes any arrangement or composition with his creditors generally
Becomes prohibited from being a director by reason of any order made under the Act
Becomes of unsound mind or a person whose person or estate is liable to be dealt with in any
away under the law relating to mental disorder
Resigns his office by notice in writing to the company
For more than six months is absent without permission of the directors from meetings of the
directors held during that period
Without consent of the company in general meeting holds any other office of profit under the
company except that of managing director or manager
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.

WINDING UP

Winding-up is synonymous with liquidation. One of the ways to bring to an end a cos existence. As a
co. is a creation of the law, it can only be dissolved and have its name removed from the Register of
Companies when the proper legal procedure has been complied with.

PROCESS OF WINDING UP:

Company asset are collected and realized debts are paid surplus, if any, are distributed among
members company name removed from register.
REASONS FOR WINDING UP
Most common insolvency co is not able to pay debts. co will be liquidated; its assets will be realized
and distributed to creditors to pay off the cos debts. Solvent companies may also wind up voluntarily,
such as in cases where their members may want to realize their investment, failure of the substratum, or
a deadlock; or sometimes in cases of oppression of members where the court orders a winding up as
under s.181(2)(e)
(1)where the main object has failed
In the case of Re German Date Coffee Co (1882) 20CH 169, it was stated that the company was formed
with the main object manufacturing coffee from dates by using a German pattern. The company never
obtained the German pattern, but decided to carry on using some other pattern. The issue arise is
whether there is ultra vires? The court held that there is ultra vires and at the same time the
companys bottom had falling off so equitable to wind up the company.
(2)where there is no bona fide intention on the part of the directors to carry on business in proper
manner
In the case of South Sea Co (South Sea Bubble), the purpose of the company is to go to the East and
make profit as much as possible. The director was asked by the company to sail and to make many
trades around the world. Many investors invest in the company. The prices going up but actually they
do not doing their work. Unfortunately one day the truth comes up (bubble burst) thus the share price
decrease.
(3)where the purpose of setting up the company is to perpetrate a fraud
In the case of Re Thomas Edward Brinsmead & Sons (1897) 1 CH 406, where there was a company
called John Brinsmead & Sons, a famous piano maker. Mr Thomas Edward Brinsmead was the
employee working there and they are not related. Thomas then resigned and set up his own company
named Thomas Edward Brinsmead & Sons and also selling piano. People thought the new company
was as good as former company. John Brinsmead & Sons suffer lost. The issue arise is whether Thomas
guilty of tort of passing off? The court held that Thomas is guilty as the company is set up to perpetrate
a fraud.
(4)where mutual trust and confidence which was the basis of the membership has gone
In the case of Ebrahimi v. Westbourne Galleries Ltd (1773) AC 360, Ebrahimi & Naza were originally
partners in a carpet business in London. The business was doing well. After sometime, they decided
to incorporate the business and Westbourne Galleries Ltd was born. The company was run in the
same way of partnership. Then Naza requested Ebrahimi to allow his son to get into the business.
Ebrahimi allowed and transferred 100 shares to the son so did Naza to his son. Unfortunately, the
father and son becomes the majority shareholder and Ebrahimi become the minority. Then there is
misunderstanding between them and later called for General Meeting and removed Ebrahimi as
director. Ebrahimi want the remedy for oppression but the court said no because Ebrahimi must be
effected in capacity as member. Then he applied for remedy of wound up. The court granted.
(5) removed from management or as director
(6)Deadlock. The company may be unable to operate because the members are equally divided and
decision cannot be made.
In the case of Tahanson SB v. Tay Bok Choon, there were 4 directors and shareholders. A has 25%
and want to sell to T on condition he become the director and managing director. B C D subsequently
decided to remove T as director and appoint someone else. T wanted to winding up. The Privy Council
allowed the winding up as there is breach of agreement because it was injustice for him

MODES OF WINDING UP
COMPULSARY WINDING UP
 VOLUNTARY WINDING UP

COMPULSORY WINDING UP-INTRODUCTION

A company may be wound up either by court (compulsory) or voluntarily. The difference between a
winding up by a court and voluntary winding up lies in the manner in which the winding up is initiated. To
initiate voluntary winding up, a resolution of the members must be passed, even in the case of creditors
voluntary winding up. A winding up by the court is initiated by the presentation of a petition to the court
by a party who is entitled to do so, based upon one of the grounds set out in the Act.

Definition of compulsory winding up

It is a winding up order of the court which is initiated by the presentation of a petition by a person who is
entitled to do so. The petition can be presented in the High Court of Malaysia. Two things must be shown
before the court will make a winding up order on a petition:
That the petitioner had the right to present the petition and;
That one of the grounds set out in the Act as justifying a winding up has been made out.
The court may not make a winding up order unless it is satisfied that the voluntary winding up cannot be
continued with due regard to the interest of the creditors or contributories.

Grounds for compulsory winding up

Section 218 Circumstances in which company may be wound up by the court
The court may order winding up if:
The company has by special resolution resolved that it be wound up by the court;
a) The company has defaulted in lodging the statutory report or in holding the statutory meeting;
b) The company does not commence business within a year from its incorporation or suspends its
business for a whole year;
c) The number of members is reduced below two (other than wholly-owned subsidiary)
d) The company is unable to pay its debts;
e) The directors have acted in their own interests rather than in the interest of the members as a
whole, or in any other manner whatsoever which appears to be unfair or unjust to other
members;
f) An inspector appointed under Part IX investigations has reported that he is of opinion that the
company cannot pay its debts or it is in the interest of the public or shareholders or creditors that
the company be wound up;
g) When the period (if any) fixed for the duration of the company by the MOA expires;
h) The court is of the opinion that it is just and equitable that the company should be wound up;
i) The company has held a license under the Banking and Financial Institution Act 1989 or the Islamic
Banking Act 1983, and that the license has been revoked or surrendered;
j) The company has carried on Islamic banking business, licensed business, or scheduled business,
or it has accepted, received or taken deposits in Malaysia, in contravention of the Islamic Banking
Act 1983 or the banking and Financial Institution Act 1989 as the case maybe;
k) The company has held license under Insurance Act 1996 and the license has been revoked or Bank
Negara has petitioned for its winding up;
l) The company is being used for unlawful purposes or any purposes prejudicial to or incompatible
with peace, welfare, security, public order, good order or morality in Malaysia;
m) The company is being used for any purpose prejudicial to national security or public interest.

When is a company said to be unable to pay its debts? Section 218 (2)
A company is deemed to be unable to pay its debts if any of the following three circumstances is shown
to exist:
a) The petitioner has delivered to the company at its registered office, a written demand for
payment of all debt owing to him of at least RM500 and within the ensuing three weeks, the
company has neither paid the debt nor given security for the payment; or
b) A judgment has been obtained against the company for the debt and an attempt to obtain
payment out of the companys assets remain unsatisfied; or
c) The court is satisfied that the company is unable to pay its debt.

Who may petition for compulsory winding up of the company?

Section 217(1) provides that the following persons may petition for the winding up of a company:
a) The company itself;
b) Any creditor, including a contingent or prospective creditor of the company;
c) A contributory or any person who is the personal representative of a deceased contributory or
the trustee in bankruptcy or the Official Assignee of the estate of a bankrupt contributory;
d) The liquidator;
e) The minister pursuant to Section 205 or on the ground specified in Section 218(1)(d);
f) Bank Negara Malaysia;
g) The Registrar on the grounds specified in Section 218(1)(m) or (n);
The term contributory include every person liable to contribute to the assets of the company in the event
of its being wound up. It includes the present members and certain past members of the company. It has
been held that a holder of fully paid up share is a contributory and entitled to present the petition.
Section 217 (2) provides exceptions whereby contributory may not present a petition on any of the
grounds specified in Section 218(1)(a),(b),(c),(e) or (l) unless:

o The number of members is reduced below two; or

o The shares allotted to the contributor, or have been held by him and registered in his name at
least 6 months during the 18 months before the presentation of the petition or have developed
on him through the death or bankruptcy of a former holder.

Application by the company

Section 217(1)(a) allows the company to apply to have itself compulsorily wound up. The general meeting
is the appropriate organ to determine that the company be wound up. Application by a company for its
compulsory winding up is quite rare. Usually, if the members wish to wind up their company, they will do
so by a voluntary winding up. A voluntary winding up does not involve a court hearing and so is cheaper.
Furthermore, the members get to appoint the liquidator and have greater supervisory power over the
conduct of the liquidation. Compulsory winding up only requires an ordinary resolution. In some
circumstances, the members may desire to place the company into liquidation as quickly as possible. If
this is the case, a compulsory winding up may be preferred over a voluntary winding up, because meetings
at which ordinary resolutions are to be proposed requires less time of notice than meeting to pass special
resolution.

Application by creditor as a compulsory ground of winding up

Usually, the vast majority of application for compulsory winding up are presented by creditors on the
grounds contained in Section 218(1)(e); i.e the company is unable to pay its debts.
Section 217(1)(b) permits a creditor, a contingent or a prospective creditor to apply for a company
winding up. This section enables the creditors to apply for a winding up even though their debts are not
immediately due and payable at the date of the application.
Re William hockey ltd
Held that a person who is owed a debt by the company, which is still unpaid at the date of the application
for winding up, is a creditor.
Jurupakat Sdn Bhd v Kumpulan Good Earth Sdn Bhd
The essential element here is that there must be a valid debt otherwise the fundamental requirement of
a debtor-creditor relationship would not be fulfilled. Without a valid debt, the petition will be
accordingly dismissed

A contingent creditor is a person to whom a debt is owed, payment of which is only due on the
occurrence of some future event.
A prospective creditor is a creditor to whom a debt is due but not immediately payable. For
example, a person who sells goods on the basis of payment within 30 days after delivery is a
prospective creditor of the buyer for the debt due during the 30 days period.
Community development pte ltd v Engwirda construction co
the High Court of Australia held that a builder whose debt only became payable on the outcome of
arbitration proceedings is a contingent creditor and is therefore capable of filing a winding up
application. This is so even though it was uncertain whether the builder would be successful in the
arbitration.

The question of a persons standing as a creditor usually arises when the company disputes the existence
of the debt. The question of disputed debts also arises in the context of determining whether a company
is deemed to be unable to pay its debt or whether it has failed to meet a statutory demand made pursuant
to section 218 (2)(a).

Application by the contributories as a ground for liquidation-section 217(1)(c)

Section 4(1) defines contributory to include:
i. A person liable as a member or past member to contribute to the assets of the company in the
event of winding up; and
ii. A holder of a fully paid shares of the company.
This definition of a contributory, in the case of a company limited by shares, includes a persons who at
the commencement of the winding up, held either fully paid or partly paid shares, even though strictly
speaking, only a holder of partly paid shares is liable to contribute an amount on the winding up. Not only
the contributories must hold the shares, their name must also appear in the register of membership.

Under Section 214, past members may also be liable to contribute to the assets of a company if they were
members within one year of the commencement of winding up and the present members are unable to
satisfy the full extent of their liabilities. Exceptions to this rule are set out in Section 214(1). E.g past
member ceased to be a member for one or more years before the commencement of the winding up [(a)
till (g)]

A deceased contributorys personal representative is by virtue of Section 216 also liable to contribute to
the assets of the company on a winding up. Accordingly, the personal representative is also included
within the definition of contributory even though not registered as a member.
Section 215 states that a contributorys liability is that of a specialty debt. This diminishes the effect of
the statute of Limitations as a specialty debt can be enforced within 20 years of the liquidator making the
call. The debt accrues from the contributory at the time that he or she is liable and becomes payable at
the time when calls are made to enforce that liability.

Just And Equitable Grounds /Circumstances For a Company To Be Wound Up

The ground most often used by members. Creditors may present a petition using this ground too. A
petitioner who wishes to use this ground should do so expeditiously because undue delay may indicate
that he has acquiesced in the conduct complained of. Below are examples of situations where the court
held that it is just and equitable to wind up the company.
Where the main object of the company has failed Re German Date Coffee
Where the business is carried on in a fraudulent manner Re Thomas Edward Brinsmead &
Sons Ltd
Where there is deadlock in the management Re Yenidje Tobacco Co Ltd
Where members have justifiable lost confidence in the management Loch & Anor v John
Blackwood Ltd
Where there is no bona fide intention on the part of the controllers to mange the company in
proper manner Re London Country & Coal Co.
Where the mutual trust and confidence which is the basis of the company is gone Ebrahimi v
Westbourne Galleries
Exclusion of management Tay Book Choon v Tahansan Sdn Bhd

Effect of an order compulsory winding up

If an order is made , it is retrospective in effect to the date on which the petition was presented
to the court which becomes the date of commencement of liquidation Section 219(2)
Among the legal consequences of an order by the court for compulsory winding up are:
The effective dismissal of all directors, officers and employees of the company;
A stay of any execution of a judgment against the company and of any legal proceeding in which
it is either plaintiff or defendant;
A standstill on any disposition of assets or transfer of shares (unless approved by court) from the
date of commencement of liquidation Section 226

VOLUNTARY WINDING UP
Section 254 provides circumstances where a company may be wound up voluntarily.
Under the section, a company may be wound up voluntarily if:
1) The period (if any) for the duration of the company in MOA or AOA expires( through ordinary
resolution); or The event (if any) occurs, on the occurrence of which the MOA or AOA provide that
the company is to be dissolve; If the company so resolves by special resolution.
2) The w/up must be lodged w the Registrar

A voluntary winding up shall commence:

Where a provisional liquidator has been appointed before the resolution for voluntary winding up was
passed, and in any other case, at the time of passing of the resolution for voluntary winding up section
255(6)

The resolution may be of two types Section 254(1):

 Ordinary resolution it is passed when the articles provide that the company is to be wound up
when a specified purpose has been achieved or a specified period has elapsed.
Special resolution it requires no ground for winding up and is used in any other case such as a
solvent liquidation.

Two types of voluntary winding up:

Members voluntary winding up where the company is solvent;
Creditors voluntary winding up where the company is insolvent

Members voluntary winding up

It is initiated by special resolution of the company;
Can only proceed if the company is solvent;
Before it can proceed, the directors must make a written declaration under Form 66 to declare that
the company is able to meet its debt Section 257(1)& 257(2)
Must lodge the w/up resolution with the registrar within 5 weeks before the general meeting along
w Form 66 Section 257(3)
Include a reasonable ground- Section 257(4)
Members will then cast a vote in the GM- Section 254(1)

The GM then will appoint a liquidator for the purpose of winding up the affairs and distributing the
companys assets and may fix the liquidators remuneration & the members shall have supervisory powers
over the liquidators conduct of the liquidation. Section 258(1) . if it is solvent the company will wind
up. If the liquidators discover the company to be insolvent, section 259(1) will ensue where the members
winding up will be cnverted into the creditors winding up. Form 65A will be lodged as under Section 255(1)
by way of statutory declaration, signed by a magistrate or a comissioner of oath and provisional liquidator
is to be appointed (Section 255(6)A)
When F65A is lodged, a creditors meeting will be called under (s.260) and the company has 7 days to call
the creditors (S.260(2)(a))

Creditors voluntary winding up

It is only appropriate when the company is insolvent.
The creditors have a legitimate interest in the conduct of the liquidation, e.g the creditors may appoint
the liquidator Section 259(2) & Section 261(1), fix the liquidators remuneration Section 261(3)
However, it cannot be initiated by the creditors.
A members voluntary winding up is converted into creditors voluntary winding up if the company is
insolvent. This occurs in two way:
No declaration of solvency; or
After the appointment of liquidator by members.

No declaration of solvency
If the members have taken steps to wind up the company voluntarily, but the directors do not make
and lodge declaration of solvency, the liquidation proceed as creditors voluntary winding up.
The company is required to convene a meeting of its creditors for the day, or the next day, on which
the resolution for voluntary winding up is proposed.

After appointment of liquidator by members

A members voluntary winding up may be converted to a creditors voluntary winding up even after the
directors have made and lodged a declaration of solvency.
If the liquidator appointed by the members, during the course of liquidation, forms the opinion that the
company is unable to pay its debts in full within the period stated in the declaration of solvency, the
liquidator is required to convene a meeting of creditors under Section 259(1).
The liquidator is then required to lay before the creditors meeting, a statement of the assets and liabilities
of the company and draw their attention to their right under Section 259(2) to appoint a new liquidator.
From the date of the creditors meeting, the liquidation proceed as creditors voluntary winding up.
s.256(1)- any transaction after w/up is void

LIQUIDATOR DUTIES Section 269-236

Qualification:
an Official Receiver or
an approved liquidator,
a person of good character and is a fit and proper person competent to perform the duties of an
auditor can apply to the Minister of Finance. s.8(3) Such persons will remain as approved liquidators
for 2 years or until the Minister of Finance cancels their registration.
In members or creditors voluntary winding up, a director or secretary can be appointed as
liquidator. Such person, however, must be approved by a simple majority of creditors if it is a
creditors winding up.
Disqualification:
A person is not qualified to be a liquidator of a company under s.10(1) if;
Is not an approved liquidator.
Owes the co. that is being wound up or its related co, a sum of more than RM2,500.
Is an officer or auditor of the co.or had occupied such position within the past 24 months.
Is an undischarged bankrupt, and
Has been convicted of fraud or dishonesty where the sanction includes a term of imprisonment
exceeding three months.
These disqualifications would not be applicable to a liquidator in a members or creditors winding up if
the members or creditors pass a resolution to approve him & remove these disqualifications.

Appointment
Members voluntary winding up, the liquidator is appointed:
At the GM of the co where the decision to wind up the co up is resolved - s.258,
Members appoint the liquidator after he had given his consent in writing before that GM. - s.10(4).
Creditors Voluntary Winding Up, a liquidator appointed depending on the circumstances as to how
the liquidation takes place:
When the liquidator appointed by the members MVWU forms the opinion that the co. is not capable
of paying their debts, he will call for a meeting of the creditors s.259. or
Where the directors do not file a declaration of solvency, the company convenes a creditors meeting
s.260

DISSOLUTION
Winding up : s.218 & s. 254
s.178 : court empowered to make order in reconstruction and amalgamation scheme:
-dissolve transferor comp.
-transfer property/liability from one comp to another.
s.308 : registrar strike off comp register-dysfunctional company.

ARRANGEMENT, RECONSTRUCTION, TAKE OVERS AND MERGERS

These are actually procedures or main methods of acquiring control of a public company. Technically it
means the end of certain corporations, leading to the existence and growth of another.

The main methods are:

Takeover offer. The shareholders of the target are asked to accept an offer that has been made by a
bidder. This is the most common method of obtaining control. There are two types of offer:
Mandatory offer. when an acquirer is entitled to exercise control or meets certain takeover;
Voluntary offer. This is a takeover that is not a mandatory offer. Typically the bidder signs a share
purchase agreement to purchase a block of shares which in turn triggers the general requirement for
an announcement. It generally denotes an offer by one co (A) to acquire shares in another co (B).
Scheme of arrangement. The co enters into collaboration with the bidder for the bidder to take over
the target. The target's shareholders will then vote on a takeover proposal put to them by the
collaborating parties. The target's assets and shares are transferred to the bidder under the statutory
court process (s.176, Co. Act 1965).This method is commonly used by financial institutions and
insurance companies to transfer obligations owed to account and policyholders. The new Malaysian
Code on Take-Overs and Mergers 2010 (Code), effective as of 15 December 2010, replaces the
Malaysian Code on Take-Overs and Mergers 1998. A scheme of arrangement is now included within
the definition of a takeover.
Acquisition of assets and liabilities. The target sells its assets and liabilities to the bidder through an
ordinary resolution of the target's shareholders (requiring an approval of over 50%). This controversial
method has led to certain public listed entities being taken over and privatised.

TAKEOVERS
Assets of a target co will come under the control of the bidder or offeror co.
The consideration for the shares would be cash, shares or debentures of co A. Where a takeover bid
is made by one co (A) for some or all of the shares of co (B), the standard and normal procedure is
to get 90% acceptance, which is essential. Then they have to go on and acquire the shares of the
non-accepting minority merely by serving on them a notice as provided under s.180(1).

MERGERS
Where the assets and liabilities of one co are acquired by another co.
Reconstruction generally entails some change of the companys structure or of the classes and rights of
the share or loan capital of one or more companies. It is usually a merger of undertakings or businesses
rather than companies.
Often assets and liabilities of one company within a group are transferred to another company within the
same group. This will often result in one company taking over another company and their operations are
merged.
The court has powers to facilitate reconsideration under s.176(10).

SECURITIES AND DEBENTURES

What are debentures?

Sec 4 CA states debentures includes any debenture stock, bonds, notes and other securities of a
corporation whether constituting a charge on the assets of the corporation or not.
 Levy v Abercorris Slate and Slab Co (1887); the common law definition of debenture is any document
which evidences a debt. When a co loan the other co and if it is acknowledge the debt this can be
considered as debenture.
Bensa Sdn Bhd v MBB: There was a memorandum of deposit of guarantee which the authority
registered as a charge under s.108(3)(a) thus was deemed as a debenture since it has elements to pay.

FIXED CHARGE
Definition: is one that is intended by the parties to attach to a particular or specific item of property (such
as land or a piece of equipment) in such a way that a co cannot dispose of the property without the
consent of the lender. A fixed charge creates an immediate interest in the charge or in the case of future
property at the point of acquisition of the property by the co.
Re Keenan Bros Ltd
Every time consent of charge is needed, it is a fixed charge
UMB Bhd v Aluminex
Subsequent fixed charge took precedence over prior floating charges

FLOATING CHARGE
Definition: Charge made on assests present/future that can change from time to time in the ordinary
course of business which the company can deal w until some future step is taken by those w interest over
the charge (Re Yorkshire Woolcombers)
Gove Stock Investment v Manila Railway
Floating charge is an equitable charge of a going concern which attaches to the assets charged and
remains dormant until the charge intervenes.
Stein v Saywell
The company may dispose feely the assets subject to a floating charge in the ordinary course of
business

The Crystallization of floating charge will convert the floating charge into a fixed charge.
Types of crystallization;
1. Automatic/ self-generating
2. Semi-automatic
3. Implied

Automatic crystallization
The charge instrument contains a clause which specifies an event that crystallizes the floating charge upon
occurrence of that event- no further action is required on the part of the chargee.
Silverstone Marketing v Hock Ban Hin
The concept of automatic crystallization is accepted in Malaysia.
Fire Nymph Products v The Heating Centre
The essence of crystallization is tht the charge fixes on a certain property and the right of th charger to
deal with the property ends
Implied crystallization
Occurs when the company is wound up,
the creditor takes possession of the assets subject to the charge,
the charger ceases to carry on business,
the charger disposes the assets/ undertaking of the company with the intention to stop business, or
a receiver is appointed by the ct/creditor to tender the floating charge

Semi-Automatic crystallization
The charge instrument contains a semi-automatic clause where upon the happening of a specified even
or at will, the charge can give notice to crystallize the charge. (Re Woodroffes Musical Instrument ltd)

Registrable or Non-Registrable of Charge

Where a co creates a registrable charge, it must provide certain information to the CCM. The information
will be entered in the register of charges maintained under Sec 111, Part VI of CA.
Functions to register the charge are to inform a person dealing with the co that there is a creditor who
has rights in respect of the cos property. Secondly, it establishes the order of priority among registrable
charge and the validity of registrable charges as against the liquidator or administrator of the co.
Effect of non-registration
Sec 108(1) provides the registration shall be lodge within 30 days after the creation of the charge.
Sec 108(3) list the charges which are registrable under CA such as the whole or part of the cos
property, business or undertaking, and other charges such as charge over personal chattels, book
debts, goodwill, patents and trademarks are registrable. Charges over the land also registrable under
NLC 1965
Luckins v Highway Motel (Carvanon)-floating charges must be resigtered if the co wishes to carry on
business even if it has no other assets w/in the state
Registration is affected by lodging a notice in the prescribed form and providing a copy of the charge
to the CCM as provided in Sec 108(5). A charge cannot be registered unless a stamp duty is paid.
If the charge is not registered under Sec 108(1), the charge will be void against the liquidator or any
creditor of the co.
Sec 108(2) provides if the charge become void because of non-registration under Sec 108(1), money
secured become immediately recoverable. For instance the bank may claim back the money despite
the term of agreement.
Sec 109- duty to reg lies w the company/charge. provides a charge may be registered by co or by any
person interested in the document. If the charge is not registered, the charge may lose its priority as
against later charges, or finds its charge is not enforceable as against the liquidator or administrator.
This means the charge becomes unsecured creditor. Registration gives priority to charge over other
chargee. Ccm will issue certificate if registration and it is not conclusive as to the contents of the
charge.
As provided under Sec 370, the chargee can take steps to register the charge if co fails to do so. Failure
to register charge by co, every officer in default is guilty of offence. The default penalty is a fine
RM1000.
PROCEDURE OF REGISTRATION
Lodgement with ROC F34 + copy of instrument of charge (eg;debenture in writing vertifying the
signing of the first debenture (s108(5))
If more than 30days, the ct may extend subject to s114 via application of the co or party interested
All charges lodged will be recorded by the registrar in the register- s111(1)
Registrar will issue F40 to prove charge is registered- s111(2)
Any variation of charges and assignment of charges shall be lodged to the ROC w/in 30 days-
F40B,F40A,S112A
Every company must keep instrument of charge and enter every charge in the register of charge
which is open for inspection by creditor- S115
When the charge is paid in part or whole the company shall w/in 1days of payment lodge a
memorandum of release acknowledging payment of debt S113
A charge made 6m prior to the proceding of a winding up is invalid- S 293
Registration is satisfied upon lodgement of F34 of the ROC and not the date of cert by the registrar

PIORITY OF CHARGES
Registration of a charge protects chargees priority over later registrable charges. Generally speaking, a
charge that is registered earlier than another charge will have priority over it, even if the 2nd mentioned
charge was created before it.
CA does not have any provisions on the priority of charge. Thus, the common law principles on priorities
of competing charges are applicable in Malaysia.
To determine the priority of charges, the following issues should be considered:
Whether the charges was registered
Whether the charge is fixed charge or floating charge
Where the charge is a floating, whether it crystallized on commencement of winding up or prior to
that
Whether there are any preferential creditors

The following is a summary of priority among registrable charges, based on registration:

Unregistered charges- first in time prevails
A registered charge has priority over a charge created later and which is registrable but not
registered.
A registered charge has priority over the unregistered charge unless the unregistered charge was
created first and the holder of the registered charge had actual notice or constructive notice at
the time of the creation of the registered charge of the existence of the unregistered charge; and
The following is a summary of priority among registrable charges based on types of charges;
A fixed charge will ranked above a floating charge, assuming that both were registered even
though the floating charge was registered earlier. (assuming there was no pledge clause and
crystallization (UMBC v Aluminex)
 A floating charge (an equitable charge) has no priority over a legal charge unless it was created
earlier and it has a clause prohibiting the creation of a subsequent charge without the holder of
the floating charges consent and the legal charge having knowledge of it.

Re Benjamin Cope & Co (1911);it was held that a co cant create a subsequent floating charge making in
paripassu with an earlier floating charge unless the earlier floating charge permitted it.
Re Automatic Bottlemakers (1926); it was held that the principle in Re Benjamin Cope will only apply
where the asset comprise in both the charges are the same. However the asset comprise in the
subsequent floating charge form only a smaller part of the asset comprise in the earlier floating charge
then the 2nd floating charge can be given that priority.

NEGATIVE PLEDGE CLAUSE

Sometimes the lender was attempting to prevent the co from creating subsequent charges ranking in
paripassu or priority to his charge. They insert a clause known as negative pledges. It is a contractual
promise given by the chargor(borrower) company that it would not grant charges subsequently in favour
of other creditor without prior consent of the chargee (lender) of the first charge. This agreement is
binding between the co and debenture holder as it is a contract. If the negative pledge is breached, the
co(borrower) required contractual to repay the principle sum and other enforcement procedure.

Wilson v Kelland (1910);if the co(borrower) still give the charge over its asset, subsequent charge will be
able to enforce the charge if took the charge without the notice of pledge and for value. However, if
subsequent charge had actual notice, he will be bound by the restrictions of the prior charge. Mere notice
of the existence of floating charge is not sufficient to constitute requisite knowledge.

In Malaysia position, United Malayan Banking Corp Bhd v Aluminex (M) Sdn Bhd [1993] 2 AMR laid down
that there the first respondent, Aluminex had between 1982 and 1984 issued two debentures to the
second respondent, United Asia Bank, creating floating charges over all Aluminexs property, present and
future. Both debentures contained a restrictive clause. The debentures were duly registered. Later in1986,
Aluminex executed another assignment with UMBC and the assignment was registered. Aluminex
defaulted on the debentures and AUB appointed receiver and manager under the debenture, thereby
causing the floating charges to crystallize. The court held that notice of debenture creating a floating
charge does not constitute notice of the term thereof, including restrictive clauses forbidding the creation
of later charges ranking in priority with the charge containing the clause.